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
April 4, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10182
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Scotsman Industries, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 36-3635892
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(State of Incorporation) (I.R.S. Employer Identification No.)
820 Forest Edge Drive, Vernon Hills, Illinois 60061
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (847) 215-4500
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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 MAY 14, 1999 there were 10,627,875 shares of registrant's common
stock outstanding.<PAGE>
SCOTSMAN INDUSTRIES, INC.
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FORM 10-Q
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April 4, 1999
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INDEX
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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
Item 3. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
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
---------------------------
Apr. 4, Apr. 5,
1999 (I) 1998 (I)
--------- ---------
Net sales $159,811 $152,215
Cost of sales 121,659 115,094
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Gross profit $ 38,152 $ 37,121
Selling and administrative expenses 24,246 22,392
Amortization expense 2,092 1,841
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Income from operations $ 11,814 $ 12,888
Interest expense, net 6,675 7,206
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Income before income taxes $ 5,139 $ 5,682
Income taxes 2,806 3,342
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Income before minority interest $ 2,333 $ 2,340
Minority interest (23) -
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Net income $ 2,310 $ 2,340
======= =======
Basic EPS (i):
Earnings per common share $ 0.22 $ 0.22
======= =======
Diluted EPS (ii):
Earnings per common share $ 0.22 $ 0.22
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3<PAGE>
PART I--FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements
-----------------------------
CONDENSED STATEMENT OF INCOME - continued
-----------------------------
(I) The Company reports on a 52-53 week fiscal year ending on
the Sunday nearest to December 31. Fiscal year 1999 will
have 52 weeks and the quarter ended April 4, 1999 is a 13
week period. Fiscal year 1998 had 53 weeks and the quarter
ended April 5, 1998 was a 14 week period.
(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:
10,601,516 and 10,575,923 for the three months ended April
4, 1999 and April 5, 1998, respectively.
(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 April 4, 1999, and April 5, 1998,
were 10,722,866 and 10,831,973, respectively.
See notes to unaudited condensed financial statements.
4<PAGE>
<TABLE>
<CAPTION>
SCOTSMAN INDUSTRIES, INC.
--------------------------
CONDENSED BALANCE SHEET
-----------------------
(In thousands)
-------------------
<S> <C> <C>
Apr. 4, Jan. 3,
A S S E T S 1999 1999
----------- ------- --------
(unaudited)
CURRENT ASSETS:
Cash and temporary cash investments $ 19,580 $ 22,429
Trade accounts receivable, net of
reserves of $5,295 and $5,214 112,285 119,210
Inventories 90,712 90,908
Deferred income taxes 15,100 14,981
Other current assets 4,724 10,799
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Total current assets $242,401 $258,327
PROPERTIES AND EQUIPMENT, net of
accumulated depreciation of $64,391
and $62,932 98,568 99,463
GOODWILL, net 307,013 309,743
DEFERRED INCOME TAXES 8,024 7,903
OTHER NONCURRENT ASSETS 31,761 32,214
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$687,767 $707,650
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term debt and current maturities
of long-term debt and capitalized
lease obligations $ 24,133 $ 24,801
Trade accounts payable 47,915 54,985
Accrued income taxes 16,674 17,052
Accrued expenses 61,914 68,184
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Total current liabilities $150,636 $165,022
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS 328,130 330,531
DEFERRED INCOME TAXES 2,324 2,368
OTHER NONCURRENT LIABILITIES 40,995 41,858
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Total liabilities $522,085 $539,779
======= =======
5<PAGE>
MINORITY INTEREST 6,666 7,338
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value $ 1,080 $ 1,078
Additional paid in capital 74,376 74,200
Retained earnings 99,179 97,134
Accumulated other comprehensive income (13,813) (10,167)
Less: Common stock held in treasury (1,806) (1,712)
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Total Shareholders' Equity $159,016 $160,533
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$687,767 $707,650
======== ========
See notes to unaudited condensed financial statements.
</TABLE>
6<PAGE>
<TABLE>
<CAPTION>
SCOTSMAN INDUSTRIES, INC.
-------------------------
CONDENSED STATEMENT OF CASH FLOWS
--------------------------------
(Unaudited)
-----------
(In Thousands)
------------
For the Three
Months Ended
----------------
Apr. 4, Apr. 5,
1999 1998
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 2,310 $ 2,340
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 5,398 4,901
Minority interest (513) -
Change in assets and liabilities-
Trade accounts receivable 4,891 (4,829)
Inventories (775) (6,414)
Trade accounts payable and other
liabilities (12,241) 213
Other, net 6,174 901
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Net cash provided by (used in) operating
activities $ 5,244 $ (2,888)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in properties and equipment $ (3,206) $ (2,200)
Proceeds from disposal of property,
plant and equipment 33 42
Acquisitions of ComCool and QAL (SA) (1,500) -
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Net cash used in investing activities $( 4,673) $ (2,158)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt
and capitalized lease obligations $ (6,758) $(24,217)
Issuance of long-term debt 4,631 15,228
Dividends paid to shareholders (265) (265)
Short-term debt, net 102 4,290
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Net cash used in financing activities $ (2,290) $ (4,964)
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Effect of exchange rate changes on cash
and temporary cash investments (1,130) (970)
NET (DECREASE) INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS $ (2,849) $(10,980)
7<PAGE>
CASH AND TEMPORARY CASH INVESTMENTS, beginning
of period 22,429 24,085
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CASH AND TEMPORARY CASH INVESTMENTS,
end of period $ 19,580 $ 13,105
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4,411 $ 7,410
======== =========
Income taxes $ 794 $ 1,703
======== =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Investment in properties and equipment through
issuance of capitalized lease obligations $ (52) $ (163)
======== =========
See notes to unaudited condensed financial statements.
</TABLE>
8<PAGE>
SCOTSMAN INDUSTRIES, INC.
---------------------------
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
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(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 January 3, 1999, appearing in the Company's 1998 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):
Apr. 4, Jan. 3,
1999 1999
------ -------
Finished goods $40,736 $36,154
Work-in-process 18,072 20,375
Raw materials 31,904 34,379
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Total inventories $90,712 $90,908
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9<PAGE>
(3) ACQUISITION OF AUSTRAL AND OTHER INVESTMENTS:
------------------------------------------------
The Company's subsidiary, Kysor Industrial Corporation, acquired 24
percent of the outstanding stock of Austral Refrigeration Pty. Limited
("Austral") on November 16, 1998, and thereby increased its ownership
of Austral to a 53 percent controlling interest. The Company had
first acquired a 24 percent interest in Austral as part of its 1997
acquisition of Kysor Industrial Corporation. The Company's ownership
percentage in Austral prior to the November 1998 purchase had grown to
30 percent due to the repurchase by Austral of certain outstanding
shares during 1998. 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. Austral
reported sales for its fiscal year ended June 30, 1998, of
approximately U.S. $91 million. With the November 1998 purchase, the
Company recorded a preliminary amount of goodwill of $14.7 million,
bringing the total amount of goodwill related to Austral to $26.4
million. Prior to the acquisition of a controlling interest in
Austral, goodwill related to the investment in Austral was recorded in
other non-current assets in the balance sheet, and earnings from this
investment were accounted for as other income, which was classified
with selling and administrative expenses. The goodwill amount related
to Austral is preliminary and will be finalized within 12 months of
the November 1998 acquisition date. The amount of goodwill from this
acquisition is being amortized for book purposes over 40 years using
the straight-line method.
In connection with its acquisition of a controlling interest in
Austral, the Company, through Kysor, also entered into a put option
agreement with the minority shareholders of Austral under which the
minority shareholders have the right to require Kysor to acquire some
or all of the remaining Austral shares at a purchase price per share
equal to a multiple of Austral's net after tax income for the
preceding one or two fiscal year period, depending on the date of
exercise, divided by the number of Austral shares outstanding on the
date of exercise. The put is exercisable between October 1 and
October 31 of each year, beginning October 1999. Kysor's obligation
to purchase Austral shares in 1999 and 2000 is capped at an aggregate
amount equal to Austral's net after-tax income in its fiscal year
immediately preceding the date on which the put option is exercised
and is at all times subject to Kysor's ability to complete the
purchase in compliance with all covenants governing any then
outstanding Scotsman Group Inc. debt or financing arrangements.
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 Austral 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 unaudited condensed pro forma income statement information should
be read in conjunction with the historical condensed financial
10<PAGE>
statements and notes thereto of the Company appearing elsewhere
herein.
(Amounts in thousands, except per-share data)
Pro Forma (unaudited)
Three months ended
April 5, 1998
-----------------
Net sales $166,690
Net income 2,312
Net income per share, diluted $ 0.21
On December 1, 1998, Austral acquired 100 percent of the assets and
liabilities of ComCool, an Australian based importer of refrigerated
display cases, for approximately $1.0 million. Also on December 1,
1998, Austral acquired 49 percent of QAL Refrigeration (SA), an
installer/contractor of refrigerated equipment, for approximately $0.5
million, bringing its ownership interest to 100 percent of the
outstanding QAL shares. Austral's results are consolidated into the
Company's results on a one-month lag.
(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").
Summarized Financial Information (in thousands):
Apr. 4, Jan. 3,
1999 1999
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Current Assets $242,401 $258,327
Noncurrent Assets 445,366 449,323
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Total Assets $687,767 $707,650
Current Liabilities $153,055 $167,325
Noncurrent Liabilities 371,449 374,757
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Total Liabilities $524,504 $542,082
For the Three Months Ended Apr. 4, Apr. 5,
1999 1998
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Net Sales $159,811 $152,215
Gross Profit 38,152 37,121
Net Income $ 2,341 $ 2,367
The Company has fully and unconditionally guaranteed the Senior
Subordinated Notes. 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 April 4, 1999. 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 April 4, 1999, consolidated
stockholders' equity of the Company was $159.0 million. Under this
covenant the amount of retained earnings that was restricted as of
April 4, 1999 was $72.3 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,
$80.2 million of retained earnings of the Company and its wholly-owned
subsidiary Scotsman Group Inc. were restricted as of April 4, 1999.
12<PAGE>
(6) COMPREHENSIVE INCOME (LOSS)
-------------------------------
The components of comprehensive income (loss) are as follows (in
thousands):
Three Months Ended
-------------------
Apr. 4, Apr. 5,
1999 1998
------ -------
Net income $ 2,310 $ 2,340
Foreign currency translation adjustments (3,679) (2,435)
Amortization of deferred compensation 33 31
------ -----
Total comprehensive income (loss) $(1,336) $( 64)
====== ======
The components of accumulated other comprehensive income included in
shareholder's equity on the Company's Condensed Balance Sheet
appearing elsewhere herein are as follows (in thousands):
Apr. 4, Jan. 3,
1999 1999
------ ------
Foreign currency translation adjustments $(13,607) $ (9,928)
Unrecognized pension cost (196) (196)
Deferred compensation (10) (43)
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Accumulated other comprehensive income $(13,813) $(10,167)
======= =======
13<PAGE>
(7) BUSINESS SEGMENTS
The Company's principal business is the design, manufacture, and sale
of a diversified line of commercial refrigeration products. The
Company sells the products it manufactures to customers in the
foodservice industry ("foodservice") and the food retail industry.
The foodservice industry is defined as worldwide restaurants
(including fast-food chains), hotels, motels, soft-drink bottlers,
brewers and the Company's distribution network to reach these
customers. Products manufactured and sold to foodservice customers
include commercial ice machines, food preparation workstations and
commercial up-right and under-the-counter refrigerators and freezers,
beverage systems, and walk-in coolers and freezers. The food retail
industry is defined as worldwide supermarkets and convenience stores,
and products manufactured and sold to these customers include
refrigerated display cases, mechanical refrigeration systems, walk-in
coolers and freezers, and commercial ice machines.
The Company's primary measure of segment profit or loss is operating
earnings, which is defined by the Company as earnings before interest
and taxes. The segment disclosures are generally on a basis
consistent with the accounting policies described in the notes to the
financial statements for the year ended January 3, 1999, appearing in
the Company's 1998 Annual Report to Shareholders, with several
exceptions. Intersegment transfers of inventory are recorded at
variable cost, plus a markup. The costs of corporate office activities
are not allocated to the segments. Amortization of goodwill is
included in the operating earnings of the foodservice segment, however
it is not included in the operating earnings of the food retail
segment. Information on the two segments for the three months ended
April 4, 1999 and April 5, 1998 is as follows (in thousands):
Revenues From Operating
External Customers Earnings
------------------ ---------
1999 1998 1999 1998
---- ---- ---- ----
Foodservice $ 78,910 $ 83,658 $ 7,359 $ 8,309
Food Retail (a) 80,901 68,557 6,806 7,258
------ ------ ----- -----
Total $159,811 $152,215 $14,165 $15,567
------- ------- ------ ------
14<PAGE>
1999 1998
---- ----
Total segment operating earnings $14,165 $15,567
Costs not allocated to segments:
Goodwill and intangible amortization
from Kysor acquisition (1,397) (1,442)
Corporate functions (954) (1,237)
Interest expense (6,979) (7,481)
Interest income 304 275
------ ------
Consolidated income before income taxes $5,139 $5,682
------ ------
(a) Beginning in 1999, the income statement of Austral was
consolidated into the Company's results as the Company acquired a
controlling interest in November, 1998. In the first quarter of 1998
Austral was accounted for under the equity method.
There has not been a material change in total assets in either
reportable segment since January 3, 1999.
(8) CURRENT AND PENDING ACCOUNTING CHANGES
------------------------------------------
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's adoption of these new statements in January, 1999 did not
materially affect the Company's financial statements.
In June 1998, the Financial Accounting Standards Board 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 the 2000 fiscal year and is
currently evaluating the extent to which its financial statements will
be affected by this Statement. The Company is unsure at this time
what the impact will be on its financial statements.
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
15<PAGE>
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, or in the strategic plans of certain large
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
---------------------
The Company's net sales for the first quarter ended April 4, 1999 were
a record $159.8 million, up $7.6 million or 5 percent from sales of
$152.2 million in the first quarter of 1998. The first quarter of
1999 was a thirteen week period compared with fourteen weeks in the
first quarter of 1998. Additionally, first quarter 1999 results
included those of Austral Refrigeration Pty. Limited ("Austral"), which
the Company began fully consolidating into its results in 1999.
Austral was accounted for as an equity method investment in 1998, and
the change in treatment to fully consolidate Austral results was made
in connection with the Company increasing its ownership interest from
30 percent to 53 percent in the fourth quarter of 1998.
Sales to the food retail industry, consisting primarily of sales to
supermarkets and convenience stores, represented 51 percent of the
Company's sales in the first quarter of 1999. 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 $12.3 million, or 18
percent, to $80.9 million in the first quarter of 1999, compared to
the first quarter of 1998, as the Company began consolidating the
results of Austral in 1999. First quarter 1999 food retail sales
declined approximately 3 percent when compared to pro forma first
quarter 1998 sales, as if Austral sales of $83.0 million had been
consolidated in 1998. The 3 percent pro forma decrease in food retail
sales during the first quarter of 1999 was primarily due to lower
sales of walk-in coolers and freezers in 1999 versus very strong
first quarter sales in that product line in 1998. Sales of
refrigerated display cases increased modestly during the first quarter
over the same quarter of 1998.
Sales to the commercial foodservice industry, consisting primarily of
sales to restaurants, hotels, motels, soft-drink bottlers, brewers and
the Company's distribution network, represented 49 percent of the
Company's sales for the first quarter of 1999. Products sold to the
commercial foodservice industry include commercial ice machines, food
16<PAGE>
preparation and storage equipment, beverage systems, and walk-in
coolers. Sales to foodservice customers decreased $4.7 million, or 6
percent, to $78.9 million in the first quarter of 1999 from $83.7
million in 1998. The decrease was due primarily to lower sales of
beverage systems, as major soft drink bottlers significantly deferred
capital equipment purchases, particularly in Europe and other
international markets. The Company expects similar conditions to
exist in the second quarter of 1999 for beverage system sales;
however, the Company believes that sales will increase in the second
half of the year, as internal initiatives are expected to generate
activity at new accounts. Sales of ice machines were modestly lower
in the first quarter of 1999 compared to 1998, although they were
higher on an equivalent week basis, despite slowing of many
international economies. Food preparation and storage equipment sales
increased modestly over first quarter 1998 levels.
The Company's gross profit increased by $1.0 million, or 3 percent, to
$38.2 million in the first quarter of 1999 from $37.1 million in the
first quarter of 1998. The Company's gross profit margin as a
percentage of net sales was approximately 24 percent in the first
quarter of 1999, which is a one-half point decline from the margin
levels in the first quarter of 1998, due to the consolidation of
Austral results in 1999. Austral historically has lower gross profit
margins than other operating units of the Company. Excluding Austral,
the first quarter 1999 gross profit margin of the Company increased
one full point over first quarter 1999. The gross profit margin in
foodservice increased 1.3 points in the first quarter of 1999 over
1998 as margins in ice machines improved, benefitting from the
introduction of new products and reductions in warranty costs. Food
retail gross profit margins also increased over first quarter 1998 as
the new refrigeration systems plant in Columbus, Georgia generated
higher sales and improved operating efficiencies.
Selling and administrative expenses of $24.2 million increased by $1.9
million or 8 percent in the first quarter of 1999 as compared to the
first quarter of 1998, largely due to the consolidation of Austral
results into the Company's results in 1999. Additionally, during 1998
Austral was accounted for under the equity method, and the earnings
from this investment were classified with selling and administrative
expenses.
Income from operations decreased by $1.1 million, or approximately 8
percent, to $11.8 million for the first quarter of 1999 from $12.9
million in the first quarter of 1998. Operating income from sales to
foodservice customers decreased to $7.4 million in 1999 from $8.3
million in 1998, due to the lower sales of beverage systems.
Operating income from sales to food retail customers decreased to $6.8
million due to lower sales of walk-in coolers and freezers during the
first quarter of 1999 compared to the same period of the prior year.
Net interest expense of $6.7 million for the first quarter of 1999
decreased by $0.5 million when compared to the first quarter of 1998.
The reduction in interest expense is primarily due the first quarter
of 1999 being a thirteen week period while the first quarter of 1998
was a fourteen week period. As such, the Company's borrowings were
outstanding for one less week in 1999 for purposes of calculating
interest expense.
17<PAGE>
The Company's overall income tax rate for the first quarter of 1999
was 54.6 percent compared to 58.8 percent for the first quarter of
1998. 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. The 1999 income tax rate is
lower than the 1998 rate primarily due to an increased Foreign Sales
Corporation benefit being recognized in the current year.
Net income for the first quarter of 1999 was $2.3 million, or $0.22
per share diluted, which is equal to first quarter 1998 net income and
net income per share. Net income includes $2.1 million of non-tax
deductible amortization, the majority of which is attributable to the
Company's March, 1997 purchase of Kysor Industrial Corporation.
Year 2000
---------
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 65 percent complete in modifying or replacing
IT systems, and expects completion by third quarter 1999.
The Company is still in the process of assessing non-IT systems and
equipment, which is primarily 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 $4.3 million, of which
approximately $2.9 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
18<PAGE>
event of non-compliance by third parties that are significant to it.
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 is developing contingency
plans to mitigate possible disruption in business operations that may
result from year 2000 related interruptions, which are estimated to be
completed in the third quarter. 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.
Euro Currency Conversion
------------------------
The Company has prepared for the conversion to the Euro currency and
has begun handling transactions in the Euro as of the beginning of
1999. The Company's business systems are multi-currency functional
and the Company's European operations transact business today in
various European currencies, including the Euro. The Company does not
believe the costs related to handling Euro-based transactions will
have a material effect on the Company's financial condition or results
of operations.
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 in combination with available borrowing capacity
will be used to run the Company's businesses and fund further growth.
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
Facility reduces (or has reduced) 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
19<PAGE>
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.
In 1997, the Company's wholly-owned subsidiary Scotsman Group Inc.
issued $100 million of 8-5/8% Senior Subordinated Notes (the "Notes")
which mature on December 15, 2007. The net proceeds of the Notes were
used to repay $30 million of the term loan under the FNBC Facility and
also to repay amounts owed under the revolving credit portion of the
FNBC Facility. The Company has issued a guaranty of the Notes under
which the Company, as primary obligor and not merely as a surety, has
fully and unconditionally guaranteed on a senior subordinated basis
the payment of the Notes when due and the due performance by Scotsman
Group Inc. of its other obligations under the Indenture. Since the
date the FNBC facility was established, the Company has also repaid
$25.0 million of the term loan, as required under that 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 April 4,
1999. Under such covenants, $72.3 million of retained earnings of the
Company and $80.2 million of retained earnings of the Company and its
wholly-owned subsidiary, Scotsman Group Inc., were restricted as of
April 4, 1999. See Note 5 to the financial statements included in
this report for a more detailed description of the covenants
restricting payments of dividends.
The Company generated cash flow from operations of $5.2 million for
the first three months of 1999 compared to cash flow utilized by
operating activities of $2.9 million for the first quarter of 1998.
The following changes occurred in the following balance sheet
categories from January 3, 1999, until April 4, 1999, excluding the
impact of changes in foreign exchange rates and the acquisitions of
ComCool and QAL (SA) by Austral in 1999, on those categories:
Inventory increased by $0.8 million.
Accounts receivable were $4.9 million lower, primarily as a
result of the sales decline in the first quarter of 1999 compared
to the first quarter of 1998, excluding the impact of Austral.
Trade accounts payable were $5.8 million lower which reflects
little change in inventory and the impact of seasonal volume.
20<PAGE>
Capital expenditures, including those funded through capital leases,
increased $1.0 million, or 46 percent, to $3.2 million for the first
quarter of 1999 from $2.2 million for the first quarter of 1998.
Capital expenditures were higher in the first quarter of 1999, due to
investments in metal fabrication equipment and information systems.
Cash and temporary cash investments of $19.6 million as of April 4,
1999, decreased by $2.8 million from January 3, 1999, reflecting a
$2.0 million reduction of long-term debt.
Shareholders' equity decreased $1.5 million from January 3, 1999, with
the reduction primarily attributable to changes in accumulated foreign
currency translation adjustments of $3.7 million, partially offset by
net income of $2.3 million for the first quarter of 1999.
Short-term debt decreased $0.7 million from January 3, 1999 due to
repayment of short-term domestic borrowings. Total debt, including
capital leases, was $352.3 million as of April 4, 1999 compared to
$355.3 million as of January 3, 1999. The debt to capital ratio was
69 percent at both April 4, 1999, and January 3, 1999.
On February 11, 1999 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, 1999.
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.
Item 3. Qualitative and Quantitative Disclosures
about Market Risk
----------------------------------------
As of April 4, 1999, there were no material changes in the information
relating to market risk included in the Company's Annual Report on
Form 10-K for the fiscal year ended January 3, 1999.
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 April 4, 1999.
21<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 May 19, 1999 By: /s/ Donald D. Holmes
-------------------- ---------------------
Donald D. Holmes
Vice President-Finance
and Secretary
22<PAGE>
EXHIBIT INDEX
Exhibit Page Number
Number Description of Exhibit
------- ----------- -----------
27 Article 5 Financial Data
Schedule for the Period Ended
April 4, 1999.
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from Scotsman
Industries, Inc. Condensed Balance Sheet
(Unaudited) as of April 4, 1999 and
Scotsman Industries, Inc. Condensed
Statement of Income (Unaudited) for the
Three Months Ended April 4, 1999 and is
qualified in its entirety by reference
to such financial statements.
<MULTIPLIER> 1000
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-4-1999
<PERIOD-END> APR-4-1999
<PERIOD-TYPE> 3-MOS
<CASH> 19,580
<SECURITIES> 0
<RECEIVABLES> 112,285
<ALLOWANCES> 5,295
<INVENTORY> 90,712
<CURRENT-ASSETS> 242,401
<PP&E> 98,568
<DEPRECIATION> 64,391
<TOTAL-ASSETS> 687,767
<CURRENT-LIABILITIES> 150,636
<BONDS> 328,130
<COMMON> 1,080
0
0
<OTHER-SE> 157,936
<TOTAL-LIABILITY-AND-EQUITY> 687,767
<SALES> 159,811
<TOTAL-REVENUES> 159,811
<CGS> 121,659
<TOTAL-COSTS> 121,659
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,675
<INCOME-PRETAX> 5,139
<INCOME-TAX> 2,806
<INCOME-CONTINUING> 2,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,310
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
