SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
October 4, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10182
-------
Scotsman Industries, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3635892
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
820 Forest Edge Drive, Vernon Hills, Illinois 60061
-----------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (847) 215-4500
--------------
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
---- ----
At November 16, 1998 there were 10,595,915 shares of registrant's
common stock outstanding.<PAGE>
SCOTSMAN INDUSTRIES, INC.
-------------------------
FORM 10-Q
---------
OCTOBER 4, 1998
INDEX
PART I--FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS-
HISTORICAL-
Condensed Statement of Income
Condensed Balance Sheet
Condensed Statement of Cash Flows
Notes to Condensed Financial Statements
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PART II--OTHER INFORMATION:
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE
2<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCOTSMAN INDUSTRIES, INC.
CONDENSED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
FOR THE THREE
MONTHS ENDED
Oct. 4, Sept. 28,
1998 1997
-------- --------
Net sales $164,421 $159,675
Cost of sales 122,857 119,527
-------- --------
Gross profit $ 41,564 $ 40,148
Selling and administrative expenses 21,673 20,572
Amortization expense 1,907 1,774
-------- --------
Income from operations $ 17,984 $ 17,802
Interest expense, net 6,516 6,426
-------- --------
Income before income taxes $ 11,468 $ 11,376
Income taxes 5,436 5,343
--------- --------
Net income $ 6,032 $ 6,033
======== ========
Basic EPS (i):
Net income per common share $ 0.57 $ 0.57
======== ========
Diluted EPS (ii):
Net income per common share $ 0.56 $ 0.56
======== ========
3<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED STATEMENT OF INCOME - continued
(i) BASIC: 'Basic' earnings per common share are computed by
dividing net income available to common shareholders by the
weighted average number of common shares outstanding:
10,595,915 and 10,558,231 for the three months ended October
4, 1998, and September 28, 1997, respectively. This
replaces 'primary' earnings per share, which included common
stock equivalents in the calculation. The prior year per
share amounts are restated to reflect the current
presentation.
(ii) DILUTED: 'Diluted' net income per share includes options,
warrants and convertible securities in the calculation. The
total number of shares used in the fully-diluted calculation
for the three months ended October 4, 1998, and September
28, 1997, were 10,771,692 and 10,813,359, respectively.
See notes to unaudited condensed financial statements.
4<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCOTSMAN INDUSTRIES, INC.
CONDENSED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
FOR THE NINE
MONTHS ENDED
----------------------------
Oct. 4, Sept. 28,
1998 1997
-------- ---------
Net sales $493,191 $431,529
Cost of sales 369,067 320,284
-------- --------
Gross profit $124,124 $111,245
Selling and administrative expenses 66,507 58,857
Amortization expense 5,634 4,592
-------- --------
Income from operations $ 51,983 $ 47,796
Interest expense, net 20,435 15,207
-------- --------
Income before income taxes $ 31,548 $ 32,589
Income taxes 15,267 15,605
Income before extraordinary loss $ 16,281 $ 16,984
Extraordinary loss (net of
income taxes of $422) - (633)
-------- --------
Net income $ 16,281 $ 16,351
======== ========
Basic EPS (i):
Income before extraordinary loss $ 1.54 $ 1.61
Extraordinary loss - (0.06)
-------- --------
Net income per common share $ 1.54 $ 1.55
======== ========
Diluted EPS (ii):
Income before extraordinary loss $ 1.51 $ 1.57
Extraordinary loss - (0.06)
-------- --------
Net income per common share $ 1.51 $ 1.51
======== ========
5<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED STATEMENT OF INCOME - continued
(i) BASIC: 'Basic' earnings per common share are computed by
dividing net income available to common shareholders by the
weighted average number of common shares outstanding:
10,588,124 and 10,551,102 for the nine months ended October
4, 1998, and September 28, 1997, respectively. This
replaces 'primary' earnings per share, which included common
stock equivalents in the calculation. The prior year per
share amounts are restated to reflect the current
presentation.
(ii) DILUTED: 'Diluted' net income per share includes options,
warrants and convertible securities in the calculation. The
total number of shares used in the fully-diluted calculation
for the nine months ended October 4, 1998, and September 28,
1997, were 10,776,165 and 10,803,978, respectively.
See notes to unaudited condensed financial statements.
6<PAGE>
<TABLE>
<CAPTION>
SCOTSMAN INDUSTRIES, INC.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<S> <C> <C>
Oct. 4, Dec. 28,
A S S E T S 1998 1997
(unaudited) -------- ---------
CURRENT ASSETS:
Cash and temporary cash investments $ 18,829 $ 24,085
Trade accounts receivable, net of
reserves of $5,619 and $5,371 130,022 102,880
Inventories 75,848 75,350
Deferred income taxes 12,516 12,515
Other current assets 8,101 12,266
------- --------
Total current assets $245,316 $227,096
PROPERTIES AND EQUIPMENT, net of
accumulated depreciation of $61,238
and $50,866 85,947 86,762
GOODWILL, net 285,677 281,855
DEFERRED INCOME TAXES 11,999 11,653
OTHER NONCURRENT ASSETS 45,092 52,758
------- -------
$674,031 $660,124
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities
of long-term debt and capitalized
lease obligations $ 18,614 $ 29,519
Trade accounts payable 53,382 44,889
Accrued income taxes 22,030 4,002
Accrued expenses 67,365 69,537
------- -------
Total current liabilities $161,391 $147,947
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS 311,529 321,132
DEFERRED INCOME TAXES 2,202 2,305
OTHER NONCURRENT LIABILITIES 41,516 46,086
------- -------
Total liabilities $516,638 $517,470
======= =======
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value $ 1,078 $ 1,076
Additional paid in capital 74,181 73,639
Retained earnings 94,752 79,266
Accumulated other comprehensive income (10,907) (9,615)
Less: Common stock held in treasury (1,711) (1,712)
------- -------
Total Shareholders' Equity $157,393 $142,654
------- --------
$674,031 $660,124
======== ========
See notes to unaudited condensed financial statements.
</TABLE>
7<PAGE>
<TABLE>
<CAPTION>
SCOTSMAN INDUSTRIES, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE NINE
MONTHS ENDED
<S> <C> <C>
Oct. 4, Sept. 28,
1998 1997
------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 16,281 $ 16,351
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 14,734 12,048
Change in assets and liabilities-
Trade accounts receivable (24,010) (27,756)
Inventories 1,623 6,272
Trade accounts payable and other
liabilities 10,410 6,296
Other, net 8,129 (4,433)
Net cash provided by operating ------- -------
activities $ 27,167 $ 8,778
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in properties and equipment $ (6,429) $ (9,427)
Proceeds from disposal of property,
plant and equipment 97 113
Investment in subsidiaries (999) (635)
Acquisition of Kysor Industrial Corp. - (268,540)
------- --------
Net cash used in investing activities $( 7,331) $(278,489)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt
and capitalized lease obligations $(51,574) $ (73,278)
Issuance of long-term debt 30,728 353,749
Dividends paid to shareholders (795) (791)
Short-term debt, net (470) (1,873)
Net cash (used in) provided by -------- ---------
financing activities $(22,111) $ 277,807
Effect of exchange rate changes on cash ------- --------
and temporary cash investments (2,981) (1,406)
NET (DECREASE) INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS $ (5,256) $ 6,690
CASH AND TEMPORARY CASH INVESTMENTS, beginning
of period 24,085 16,501
CASH AND TEMPORARY CASH INVESTMENTS, ------- -------
end of period $ 18,829 $ 23,191
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 20,437 $ 15,193
======= ========
Income taxes $ 5,768 $ 18,034
======= ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Investment in properties and equipment through
issuance of capitalized lease obligations $ (171) $ (440)
======= =======
See notes to unaudited condensed financial statements.
</TABLE>
8<PAGE>
SCOTSMAN INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts
of Scotsman Industries, Inc. and its consolidated subsidiaries (the
"Company").
All accounting policies used in the preparation of the quarterly
condensed financial statements are consistent with the accounting
policies described in the notes to financial statements for the year
ended December 28, 1997, appearing in the Company's 1997 Annual Report
to Shareholders ("Annual Report"). In the opinion of management, the
interim financial statements reflect all adjustments which are
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows for the interim periods
presented. The results for such interim periods are not necessarily
indicative of results for the full year. These financial statements
should be read in conjunction with the consolidated financial
statements and the accompanying notes to consolidated financial
statements included in the Annual Report.
(2) INVENTORIES:
----------------
Inventories consisted of the following (in thousands):
Oct. 4, Dec. 28,
1998 1997
------- --------
Finished goods $29,534 $28,564
Work-in-process 13,398 13,891
Raw materials 32,916 32,895
------- -------
Total inventories $75,848 $75,350
======= =======
9<PAGE>
(3) ACQUISITION OF KYSOR:
In March of 1997, the Company acquired Kysor Industrial Corporation
("Kysor"), a major manufacturer and marketer of refrigerated display
cases, commercial refrigeration systems and insulated panels primarily
serving the supermarket industry. The Company purchased Kysor's
common and preferred stock for an aggregate purchase price of $311
million. Concurrent with the purchase, the Company sold Kysor's
Transportation Products Group to a third party for an aggregate
purchase price of $86 million plus assumption of certain liabilities.
The Company retained possession of Kysor's Commercial Products Group.
Goodwill relating to the acquisition of Kysor was $196.8 million,
which is being amortized for book purposes over 40 years using the
straight-line method. In addition, there was a goodwill amount of
$12.6 million related to an investment which was recorded in other
noncurrent assets in the balance sheet.
The purchase price was allocated principally to goodwill of $196.8
million, working capital of $44.8 million, property, plant and
equipment of $36.4 million, severance and other Kysor employee related
liabilities of $43.7 million, and deferred tax impacts of $17.5
million.
Kysor reported total sales in 1996 of $381 million, of which $245
million related to commercial refrigeration products.
The accompanying unaudited condensed pro forma income statement
information is presented to illustrate the effect of certain events on
the historical income statement information of the Company as if the
acquisition of Kysor had occurred as of the first day of the period
presented. The pro forma information includes assumptions and
estimates and is not necessarily indicative of the results of
operations of the Company as they may be in the future or as they
might have been had the transaction occurred as discussed above. The
pro forma results of operations for the year-to-date period ended
September 28, 1997, include certain adjustments made by Kysor prior to
acquisition anticipating the completion of the transaction. These
adjustments related to changes in the accounting estimates for the
carrying values of certain assets and liabilities and the combining of
four of Kysor's business units into two business units. Management
does not expect these adjustments to occur in the future.
The unaudited condensed pro forma income statement information should
be read in conjunction with the historical condensed financial
statements and notes thereto of the Company appearing elsewhere
herein.
10<PAGE>
(Amounts in thousands, except per-share data)
PRO FORMA (Unaudited)
Nine Months Ended Oct. 4, Sept. 28,
1998 1997
------- --------
Net sales $493,191 $470,363
Net income before
extraordinary loss $ 16,281 $ 14,958
Net income per common share before
extraordinary loss $ 1.51 $ 1.38
Average number of common shares
outstanding - diluted 10,776 10,804
(4) SUMMARY FINANCIAL INFORMATION:
---------------------------------
The following is summarized financial information of Scotsman Group
Inc., the Company's direct wholly-owned subsidiary, which issued $100
million aggregate principal amount of Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes"). The Company has fully and
unconditionally guaranteed the Senior Subordinated Notes.
Summarized Financial Information (in thousands):
Oct. 4, Dec. 28,
1998 1997
-------- --------
Current Assets $245,316 $227,096
Noncurrent Assets 428,715 433,028
-------- --------
Total Assets $674,031 $660,124
Current Liabilities $163,643 $149,690
Noncurrent Liabilities 355,247 369,523
-------- --------
Total Liabilities $518,890 $519,213
For the Nine Months Ended Oct. 4, Sept.28,
1998 1997
-------- --------
Net Sales $493,191 $431,529
Gross Profit 124,124 111,245
Income Before Extraordinary Loss 16,363 17,070
Net Income $ 16,363 $ 16,437
The Company has not presented separate financial statements and other
disclosure concerning Scotsman Group Inc. because the Company's
management has determined that such information is not material to the
holders of the Senior Subordinated Notes.
11<PAGE>
(5) LONG-TERM DEBT COVENANTS AND RESTRICTIONS ON DIVIDENDS
-----------------------------------------------------------
In March of 1997, the Company financed the acquisition of Kysor, after
giving effect to the divestiture of Kysor's Transportation Products
Group and other acquisition related transactions, through a $415
million loan facility established between the Company, Scotsman Group
Inc. and certain other subsidiaries and The First National Bank of
Chicago as agent for the lenders (the "FNBC Facility"). The agreement
governing the FNBC Facility and other debt agreements include various
financial covenants. The Company was in compliance with these
covenants as of October 4, 1998. One of the covenants in the FNBC
Facility has the effect of restricting the amount of the Company's
dividends to its shareholders by requiring the Company to maintain
consolidated stockholders' equity of at least $120 million (without
giving effect to future changes in accumulated translation
adjustments), plus 60 percent of (i) the cumulative net income of the
Company from December 30, 1996, forward and (ii) the net cash proceeds
from any future issuance of equity securities by the Company after the
closing of the FNBC Facility. At October 4, 1998, consolidated
stockholders' equity of the Company was $157.4 million. Under this
covenant the amount of retained earnings that was restricted as of
October 4, 1998 was $67.1 million. The Company is also precluded from
paying dividends to its shareholders (other than dividends payable in
its own capital stock) if a default or an unmatured default under the
agreement has occurred and is continuing or would occur after giving
effect to the payment of such dividends. Also, under a covenant in
the indenture under which the Senior Subordinated Notes were issued,
$77.0 million of retained earnings of the Company and its wholly-owned
subsidiary Scotsman Group Inc. were restricted as of October 4, 1998.
(6) COMPREHENSIVE INCOME (LOSS)
-------------------------------
As of January 1, 1998, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 130, "Reporting Comprehensive
Income." Statement No. 130 requires reporting certain transactions
that result in a change in equity, such as currency translation,
unrealized gains and losses and minimum pension liability adjustments,
as components of comprehensive income. The adoption of this Statement
had no impact on the Company's net income or shareholders' equity.
During the first nine months of 1998 and 1997, total comprehensive
income amounted to $15.0 million and $11.1 million, respectively.
Total comprehensive income for the Company includes net income,
foreign currency translation adjustments and deferred compensation
adjustments.
12<PAGE>
(7) CURRENT AND PENDING ACCOUNTING CHANGES
------------------------------------------
In July, 1997, FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement
expands certain reporting and disclosure requirements for segments
from current standards. In February, 1998, FASB issued Statement No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This Statement revised employer's disclosures about
pension and other postretirement benefit plans. It does not change
the measurement or recognition of obligations under those plans. The
Company is not required to adopt these Statements until December, 1998
and does not expect the adoption of these standards to result in
material changes to previously reported amounts.
In January, 1998, Statement of Position (SOP) No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use," was issued. This SOP provides guidance on the accounting for
computer software costs. In April, 1998, SOP No. 98-5, "Reporting on
the Costs of Start-Up Activities," was issued. This SOP provides
guidance on accounting for the cost of start-up activities. The
Company is not required to adopt these Statements until January, 1999
and does not expect the adoption of these standards to result in
material changes to previously reported amounts or disclosures.
In June, 1998, FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement
requires that all derivative instruments, including certain derivative
instruments embedded in other contracts, be recorded on the balance
sheet as either an asset or liability measured at its fair value.
This Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. The Company is not required to adopt this Statement
until January, 2000. The Company is currently evaluating the extent
to which its financial statements will be affected by this Statement.
(8) SUBSEQUENT EVENT
--------------------
On November 16, 1998, the Company announced that it acquired a 53
percent controlling interest of Austral Refrigeration Pty. Limited.
Austral, a privately-held company based in Australia, is a licensee of
the Company's Kysor//Warren product line and the largest manufacturer
and installer of supermarket display cases and refrigeration systems
in Australia and New Zealand. The Company had previously acquired a 24
percent interest in Austral as part of its 1997 acquisition of Kysor
Industrial Corporation, which had increased to 30 percent prior to
this latest acquisition. Austral reported sales for its fiscal year
ended June 30, 1998 of approximately U.S. $90 million.
13<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Forward-Looking Information
---------------------------
The following discussion and analysis of the Company's financial
condition and results of operations contains forward looking
statements that involve risks and uncertainties. Such statements
include references to the Company's expectations, beliefs, goals, or
anticipated results. The Company's results could differ significantly
from those anticipated as a result of unforeseen factors. Factors
that could cause actual results to differ from those anticipated
include (i) the strength or weakness of the various economies in which
the Company markets its products, (ii) weather conditions, (iii) the
utilization rates of the Company's facilities, (iv) labor
difficulties, (v) increased prices of raw materials and purchased
components, (vi) scheduling and transportation dislocations, (vii)
delays in development of new products or construction of new
facilities, (viii) product liability or other lawsuits, warranty
claims or return of goods, (ix) foreign currency fluctuations, (x)
changes in buying patterns of certain large customers as a result of
internal cost-control measures adopted by, or changes in the strategic
plans of, those customers, (xi) changes in environmental, health,
safety or refrigerant regulations or standards, (xii) the level of the
Company's leverage, (xiii) the Company's ability or inability to
manage growth, (xiv) the Company's loss of key personnel, and (xv) the
failure of the Company or its suppliers to achieve Year 2000
compliance in a timely manner. See the Cautionary Statements included
as Exhibit 99 to the Company's most recent Form 10-K filed with the
Securities and Exchange Commission for a more detailed discussion of
the foregoing and other factors.
Results of Operations
----------------------
Net sales for the third quarter of 1998 were a record $164.4 million,
up $4.7 million or 3 percent from sales for the third quarter of 1997.
The Company also reported record sales for the nine months ended
October 4, 1998 of $493.2 million, up $61.7 million or 14 percent from
sales for the first nine months of 1997. Nine month 1998 results
included sales of $208.3 million from the Commercial Products Group of
Kysor, which was acquired by the Company in March, 1997. Nine month
1997 results included sales from March 10 through September 28 of
$152.7 million from Kysor.
Sales to the food retail industry, consisting primarily of sales to
supermarkets and convenience stores, represented 43 percent of the
Company's sales in the third quarter and 44 percent of sales in the
14<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
--------------------------------------------------
Results of Operations - continued
---------------------
first nine months of 1998. Products sold to the food retail industry
include refrigerated display cases, mechanical refrigeration systems,
walk-in coolers and freezers, and commercial ice machines. Food
retail sales increased $3.8 million to $71.3 million in the third
quarter of 1998, compared to the third quarter of 1997. Sales to the
food retail industry for the first nine months of 1998 were $214.6
million, an increase of $17.3 million, or 9 percent, over pro forma
nine month 1997 sales of $197.3 million. The 6 percent increase in
food retail sales during the third quarter of 1998 was primarily due
to continuing strong sales of walk-in coolers and freezers. Sales of
refrigerated display cases increased modestly during the third quarter
over the same quarter of 1997, while the Company's backlog of orders
from supermarkets remained ahead of last year's third quarter level.
Sales to the commercial foodservice industry, consisting primarily of
sales to primarily restaurants, hotels, motels, bottlers, brewers and
the Company's distribution network, represented 57 percent of the
Company's sales for the third quarter of 1998 and 56 percent of sales
for the first nine months of 1998. Products sold to the commercial
foodservice industry include commercial ice machines, food
preparation and storage equipment, and beverage systems products.
Sales to foodservice customers were $93.1 million in the third quarter
of 1998, an increase of 1 percent over the prior year period. Sales
to foodservice customers in the first nine months of 1998 were $278.6
million, an increase of 2 percent compared to the same period in 1997.
Worldwide ice machine sales to the foodservice industry were $45.4
million in the third quarter of 1998, an increase of 3 percent over
the same period of 1997. Ice machine sales in the first nine months
of 1998 increased 5 percent over the first nine months of 1997. Ice
machine sales have benefitted from strong growth in the overall
domestic ice machine market during the third quarter and first nine
months of 1998. Sales of ice machines at the Company's foreign
operations have slowed, however, reflecting a recent slowing of demand
in Europe.
Sales of food preparation and storage equipment decreased 8 percent to
$29.6 million in the third quarter of 1998, compared to the third
quarter of 1997. Sales of food preparation and storage equipment
decreased 13 percent in the first nine months of 1998, compared to the
same period of 1997. While sales during the quarter were at the
highest level in the past year, they were below last year's third
15<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
--------------------------------------------------
Results of Operations - continued
---------------------
quarter level due to lower sales to national chain customers. Sales
of food preparation and storage equipment decreased in the first nine
months of 1998 from 1997 levels primarily as a result of substantially
lower sales to Boston Market in the first half of 1998 than in the
same period of 1997 at the Company's Delfield business unit.
Sales of beverage systems increased 8 percent to $20.0 million in the
third quarter of 1998, compared to the third quarter of 1997.
September year-to-date sales increased 21%, compared to the same
period in 1997. Sales gains by the Company's domestic beverage
dispensing business and the addition of Homark, a manufacturer of
equipment serving the U.K. beer industry which was acquired by the
Company in December, 1997, led to the increase in the third quarter.
Third quarter 1998 sales of beverage systems in Europe slowed from the
strong levels of increases reported during the first six months of
1998 as demand in Europe weakened.
The Company's gross profit increased by $1.4 million, or 4 percent, to
$41.6 million in the third quarter of 1998 from $40.1 million in the
third quarter of 1997. Gross profit for the nine months ended October
4, 1998 increased 12 percent to $124.1 million. The Company's gross
profit margin as a percentage of net sales remained virtually constant
in the third quarter of 1998 compared to the third quarter of 1997.
Gross profit and gross profit margin in foodservice increased strongly
in the third quarter of 1998 over 1997 due to increased sales of
beverage systems and ice machines in 1998, and improving operating
margins in food preparation and storage equipment, as the benefits of
ongoing internal process improvements are beginning to be realized .
This increase was largely offset by a decline in margins in food
retail in the third quarter of 1998 from the same period of 1997 due
to costs and inefficiencies associated with ramp-up of production
levels at a new refrigeration systems plant in Columbus , Ga. which
opened in July, 1997.
The increase in the Company's gross profit for the first nine months
of 1998 is partially attributable to the impact of the Kysor
acquisition. Gross profit margins for the first nine months of 1998
decreased to 25.2 percent in 1998 from 25.8 percent in the same period
of 1997. The reduction in margins in the first nine of 1998 is
attributable to the inclusion, for the full nine-month period, of the
results of Kysor, which historically has reported lower gross profit
margins. Costs and inefficiencies associated with the new
16<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
--------------------------------------------------
Results of Operations - continued
---------------------
refrigeration systems plant also contributed to the decrease in
margins in the 1998.
Selling and administrative expenses of $23.6 million increased by $1.2
million or 6 percent in the third quarter of 1998 as compared to the
third quarter of 1997. Selling and administrative expenses for the
first nine months of 1998 of $72.1 million increased $8.7 million or
14 percent compared to the same period of 1997. The increase in
selling and administrative expenses for the first nine months of 1998
is largely attributable to the inclusion of Kysor results for the full
nine-month period, including amortization of intangibles of $4.2
million, during that period, related to the purchase of Kysor. As a
percentage of net sales, selling and administrative expenses remained
constant in the first nine months of 1998 with the first nine months
of 1997.
Income from operations of $18.0 million for the third quarter of 1998
increased by $0.2 million or 1 percent from the third quarter of 1997,
which reflects increased earnings from gains in sales to foodservice
customers, and improved operating margins in food preparation and
storage equipment. As a percentage of net sales, 1998 third quarter
income from operations decreased to 10.9 percent, from 11.1 percent in
1997.
The Company's overall income tax rate for the third quarter of 1998
was 47.4 percent compared to 47.0 percent for the third quarter of
1997. The income tax rate includes the impact of $1.4 million per
quarter of amortization of intangibles resulting from the Kysor
Acquisition, which is not tax deductible.
Net income for the third quarter of 1998 was $6.0 million, or $0.56
per share diluted, which is equal to third quarter 1997 net income and
net income per share. Net income for the first nine months of 1998
was also essentially equal with 1997 at $16.3 million, or $1.51 per
share diluted. 1998 net income includes amortization and interest
expense related to the 1997 acquisition of Kysor which was incurred
for the full nine-month period in 1998, as compared to the period from
mid-March through September in 1997. Net income for the first nine
months of 1997 included an extraordinary charge of $0.6 million, or
$0.06 per share, incurred for the early retirement of debt.
17<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Year 2000 Compliance
--------------------
The Company uses software and other related technologies throughout
its business that will be affected by the date change in year 2000.
The three areas where year 2000 issues may affect the Company include
(1) information technology (IT) systems, including computer hardware
and software, (2) non-IT systems such as manufacturing or office
equipment and other infrastructure which rely on imbedded computer
chips to operate, and (3) third parties with significant relationships
with the Company, such as suppliers, customers, and service providers.
The Company has substantially completed an assessment of its computer
(IT) systems and is in the process of executing plans to resolve
issues identified in these systems. The resolution of issues involves
converting or modifying systems, replacing systems, and testing of
systems used in various applications throughout the Company to ensure
that information can be accurately processed in the year 2000. The
Company is approximately 50 percent complete in modifying or replacing
IT systems, and expects completion by mid-1999.
The Company is still in the process of assessing non-IT systems and
equipment, consisting primarily of factory production equipment. Based on
information currently available, testing and remediation of issues
identified in non-IT systems is estimated to be completed by mid-1999.
It is currently estimated that the aggregate cost of the Company's
year 2000 efforts will be approximately $3 million, of which
approximately $1.6 million has been incurred to date. All of the
costs are being funded through operating cash flow.
The Company is also taking steps to assess the year 2000 readiness of
significant third parties. These steps include contacting suppliers,
customers and service providers that are believed to be critical to
the business operations after January 1, 2000 to determine their stage
of year 2000 compliance through questionnaires, interviews, on-site
visits, and testing. These activities are currently in process.
While the Company's year 2000 readiness plans are underway, the
consequences of non-compliance by the Company, or its significant
suppliers, customers or service providers could have a material
adverse impact on the Company's operations. Although the Company does
not anticipate any major non-compliance issues, it currently believes
that the greatest risk of disruption in its business exists in the
event of non-compliance by third parties that are significant to it.
18<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
--------------------------------------------------
Year 2000 Compliance - continued
--------------------
Some of the possible consequences of non-compliance by the Company or
the significant third parties include, among other things, temporary
plant closings, delays in the receipt and delivery of raw materials
and products, invoice and collection errors, and obsolescence of
inventory. Given this risk, the Company intends to develop
contingency plans to mitigate possible disruption in business
operations that may result from year 2000 related interruptions.
Contingency plans may include increasing safety stocks of raw
materials, securing alternative suppliers, or other appropriate
measures.
The Company's year 2000 activities are an ongoing process and the
estimates of costs and completion dates for various activities
described above are subject to change.
Liquidity and Capital Resources
-------------------------------
Historically, the Company's liquidity requirements have arisen
primarily from the need to fund its working capital, capital
expenditures, acquisitions, and interest expense, including fixed
obligations associated with debt or lease obligations. The Company
has met these liquidity requirements through use of funds generated
from operations, along with financing from various sources. The
Company expects to continue to generate significant cash flow from
operations, which will be used to run the Company's businesses and
fund further growth. Increased levels of working capital, capital
expenditures and interest expense associated with the Kysor
Acquisition are not expected to adversely impact the Company's
liquidity and access to capital.
In March of 1997, the Company financed the acquisition of Kysor, after
giving effect to the divestiture of Kysor's Transportation Products
Group and other acquisition related transactions, through a $415
million loan facility established between the Company, Scotsman Group
and certain other subsidiaries and The First National Bank of Chicago
as agent for the lenders (the "FNBC Facility"). The FNBC Facility
originally consisted of a $150 million seven-year term loan and a $265
million seven-year reducing revolving loan facility, both with an
initial interest rate of 1.375 percent above Eurocurrency rates. The
interest rates on both facilities adjust based on a leverage ratio as
defined in the FNBC Facility and vary between 0.5 percent to 1.50
percent above Eurocurrency rates. The revolving portion of the FNBC
19<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-------------------------------------------------
Liquidity and Capital Resources - continued
-------------------------------
Facility reduces on December 31 in the respective years as follows:
$10 million in 1998, and $15 million in each of 1999, 2000, 2001,
2002, and 2003, with the remaining amount outstanding payable on the
loan termination date in March 2004. The FNBC Facility is guaranteed
by Scotsman and certain of its subsidiaries and secured by a pledge of
stock of certain subsidiaries of Scotsman, including, but not limited
to, Scotsman Group Inc., The Delfield Company and Kysor Industrial
Corporation.
The FNBC Facility required that a notional amount of $150 million be
hedged to reduce interest rate exposure for three years. Interest-
rate swaps were established in 1997 to comply with the requirement
imposed by the FNBC Facility.
In addition to financing the Kysor acquisition, proceeds of the FNBC
facility were used to pay expenses associated with this acquisition
and were used to repay existing long-term debt, including debt
outstanding under a former $90.0 million reducing revolving credit
agreement and a $20.0 million private placement agreement. This early
repayment resulted in an after-tax loss of $633,000 in the first
quarter of 1997, which is presented in the accompanying income
statement in PART I, ITEM 1 as an extraordinary loss.
In 1997, the Company's wholly-owned subsidiary Scotsman Group Inc.
issued $100 million of 8-5/8% Senior Subordinated Notes (the "Notes")
and used the net proceeds of the Notes to repay $30 million of the
term loan under the FNBC Facility and also to repay amounts
outstanding under the revolving credit portion of the FNBC Facility.
During the first three fiscal quarters of 1998, the Company repaid
$17.5 million of the term loan, as required under the FNBC Facility.
The agreement governing the FNBC Facility and other debt agreements to
which the Company and its subsidiaries are parties include various
financial covenants, including covenants which have the effect of
restricting the amount of the Company's dividends to its shareholders.
The Company was in compliance with these covenants as of October 4,
1998. Under such covenants, $67.1 million of retained earnings of the
Company and $77.0 million of retained earnings of the Company and its
wholly-owned subsidiary, Scotsman Group Inc., were restricted as of
October 4, 1998. See Note 5 to the financial statements included in
this report for a more detailed description of the covenants
restricting payments of dividends.
20<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
--------------------------------------------------
Liquidity and Capital Resources - continued
-------------------------------
The Company generated cash flow from operations of $27.2 million for
the first nine months of 1998 compared to cash flow provided by
operating activities of $8.8 million for the first nine months of
1997.
The following changes occurred in the following balance sheet
categories from December 28, 1997, until October 4, 1998, excluding
the impact of changes in foreign exchange rates on those categories:
Inventory decreased by $1.6 million, which reflects improved
effectiveness in utilizing inventory at most of the Company's
businesses.
Accounts receivable were $24.0 million higher, primarily as a
result of the seasonal nature of sales activity both domestically
and in the Company's foreign subsidiaries.
Trade accounts payable were $6.6 million higher which reflects
the impact of seasonal volume.
Capital expenditures, including those funded through capital leases,
decreased $3.3 million, or 33 percent, to $6.6 million for the first
nine months of 1998 from $9.9 million for the first nine months of
1997. Capital expenditures were higher in the first nine months of
1997 than the first nine months of 1998, due to the inclusion of
expenditures incurred in connection with the construction of a new
Kysor facility in Columbus, Georgia.
Cash and temporary cash investments of $18.8 million as of October 4,
1998, decreased by $5.3 million from December 28, 1997, reflecting the
decrease in cash balances at the Company's foreign operations. In
January, 1998, Scotsman Group Inc. received net dividends of $13.7
million from foreign operations which were then used by Scotsman Group
Inc. to reduce borrowing under the FNBC facility.
Shareholders' equity increased $14.7 million from December 28, 1997,
which is primarily attributable to net income of $16.3 million for the
first nine months of 1998, offset by a reduction in shareholders'
equity caused by changes in accumulated foreign currency translation
adjustments of $1.3 million and the impact of dividends.
21<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
--------------------------------------------------
Liquidity and Capital Resources - continued
-------------------------------
Short-term debt decreased $10.9 million from December 28, 1997 due to
repayment of short-term domestic borrowings. Total debt, including
capital leases, was $330.1 million as of October 4, 1998 compared to
$350.7 million as of December 28, 1997. The debt to capital ratio was
68 percent at October 4, 1998, compared to 71 percent at December 28,
1997.
On February 10, 1998, May 14, 1998, and August 13, 1998, the Company's
Board of Directors declared a dividend of 2 1/2 cents per share payable
to common shareholders of record on March 31, 1998, June 30, 1998, and
September 30, 1998, respectively.
Since its first quarter as a publicly-held company, the Company has
paid a quarterly dividend of 2 1/2 cents per share. The continuation,
amount and timing of this dividend will be determined by the Board of
Directors and may change as conditions warrant.
22<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports
on Form 8-K
---------------------
(a) Exhibits
Exhibit 27 Article 5 Financial Data Schedule for
the Period Ended October 4, 1998.
(b) The Registrant filed no Current Reports on Form 8-K
during the quarterly period ended October 4, 1998.
23<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SCOTSMAN INDUSTRIES, INC.
-------------------------
Date November 18, 1998 By: /s/ Donald D. Holmes
----------------- ------------------------
Donald D. Holmes
Vice President-Finance
and Secretary
24<PAGE>
EXHIBIT INDEX
Exhibit Page Number
Number Description of Exhibit
------- ----------- ------------
27 Article 5 Financial Data 26
Schedule for the Period Ended
October 4, 1998.
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from Scotsman
Industries, Inc. Condensed Balance Sheet
(Unaudited) as of October 4, 1998 and
Scotsman Industries, Inc. Condensed
Statement of Income (Unaudited) for the
Nine Months Ended October 4, 1998 and is
qualified in its entirety by reference
to such financial statements.
<MULTIPLIER> 1000
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> OCT-04-1998
<PERIOD-TYPE> 9-MOS
<CASH> 18,829
<SECURITIES> 0
<RECEIVABLES> 130,022
<ALLOWANCES> 5,619
<INVENTORY> 75,848
<CURRENT-ASSETS> 245,316
<PP&E> 85,947
<DEPRECIATION> 61,238
<TOTAL-ASSETS> 674,031
<CURRENT-LIABILITIES> 161,391
<BONDS> 311,529
<COMMON> 1,078
0
0
<OTHER-SE> 156,315
<TOTAL-LIABILITY-AND-EQUITY> 674,031
<SALES> 493,191
<TOTAL-REVENUES> 493,191
<CGS> 369,067
<TOTAL-COSTS> 369,067
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,435
<INCOME-PRETAX> 31,548
<INCOME-TAX> 15,267
<INCOME-CONTINUING> 16,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,281
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.51
</TABLE>
