- Quarterly Report (10-Q)
November 10 2011 - 3:17PM
Edgar (US Regulatory)
Use these links to rapidly review the document
TABLE OF CONTENTS
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
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ý
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2011
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file numbers:
Reddy Ice Holdings, Inc. 001-32596
Reddy Ice Corporation 333-168190
REDDY ICE HOLDINGS, INC.
REDDY ICE CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE
NEVADA
(State or other jurisdiction of
incorporation or organization)
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56-2381368
75-2244985
(I.R.S. Employer
Identification No.)
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8750 N. CENTRAL EXPRESSWAY, SUITE 1800
DALLAS, TEXAS 75231
(Address of principal executive offices)
(214) 526-6740
(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 Exchange Act 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.
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Reddy Ice Holdings, Inc.
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Yes
ý
No
o
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Reddy Ice Corporation
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Yes
ý
No
o
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Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). *The Registrants are not subject to the requirements of Rule 405 of Regulation S-T at this time.
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Reddy Ice Holdings, Inc.
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Yes
ý
No
o
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Reddy Ice Corporation
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Yes
ý
No
o
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Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions
of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Reddy
Ice Holdings, Inc.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
ý
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Reddy
Ice Corporation
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
ý
(Do not check if a
smaller reporting company)
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Smaller reporting company
o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Reddy Ice Holdings, Inc.
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Yes
o
No
ý
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Reddy Ice Corporation
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Yes
o
No
ý
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The
number of shares of registrant's common stock outstanding as of November 8, 2011 was:
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Reddy Ice Holdings, Inc.
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23,402,706 shares of common stock
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Reddy Ice Corporation
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100 shares of common stock
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Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
REDDY ICE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2011
TABLE OF CONTENTS
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Page
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PART IFINANCIAL INFORMATION
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Item 1.
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Reddy Ice Holdings, Inc. Condensed Consolidated and Reddy Ice Corporation Condensed Financial Statements
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2
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Reddy Ice Holdings, Inc. Condensed Consolidated Balance Sheets as of September 30,
2011 and December 31, 2010 (unaudited)
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2
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Reddy Ice Holdings, Inc. Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2011 and 2010 (unaudited)
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3
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Reddy Ice Holdings, Inc. Condensed Consolidated Statement of Stockholders' Deficit for the nine months
ended September 30, 2011 (unaudited)
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4
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Reddy Ice Holdings, Inc. Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2011 and 2010 (unaudited)
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5
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Reddy Ice Corporation Condensed Balance Sheets as of September 30, 2011 and December 31, 2010
(unaudited)
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6
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Reddy Ice Corporation Condensed Statements of Operations for the three and nine months ended September 30, 2011 and
2010 (unaudited)
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7
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Reddy Ice Corporation Condensed Statement of Stockholder's Deficit for the nine months ended
September 30, 2011 (unaudited)
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8
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Reddy Ice Corporation Condensed Statements of Cash Flows for the nine months ended September 30, 2011 and 2010
(unaudited)
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9
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Notes to condensed consolidated and Reddy Ice Corporation condensed financial statements for the three and nine months ended
September 30, 2011 and 2010 (unaudited)
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10
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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32
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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51
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Item 4.
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Controls and Procedures
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52
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PART IIOTHER INFORMATION
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Item 1.
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Legal Proceedings
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54
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Item 1A.
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Risk Factors
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56
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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56
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Item 3.
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Defaults Upon Senior Securities
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57
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Item 4.
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(Removed and Reserved)
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57
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Item 5.
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Other Information
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57
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Item 6.
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Exhibits
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57
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SIGNATURES
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58
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INDEX TO EXHIBITS
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59
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1
Table of Contents
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30,
2011
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December 31,
2010
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(in thousands, except
share data)
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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10,802
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$
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42,173
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Accounts receivable, net
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44,416
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21,432
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Notes receivable from affiliate
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1,999
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Inventories, parts and supplies
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12,943
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12,549
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Prepaid expenses and other current assets
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5,214
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3,849
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Assets held for sale
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2,201
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1,056
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Deferred tax assets
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1,395
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716
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Total current assets
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78,970
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81,775
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RESTRICTED CASH
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13,107
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10,110
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PROPERTY AND EQUIPMENT, net
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189,817
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204,898
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GOODWILL
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86,876
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83,368
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OTHER INTANGIBLES, net
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73,448
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72,204
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INVESTMENTS
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7,357
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6,318
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OTHER ASSETS, net
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11,372
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12,252
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TOTAL
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$
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460,947
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$
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470,925
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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CURRENT LIABILITIES:
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Current portion of long-term obligations
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$
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1
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$
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1
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Revolving credit facility
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14,500
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Accounts payable
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21,427
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15,290
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Accrued expenses
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24,949
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24,177
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Total current liabilities
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60,877
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39,468
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LONG-TERM OBLIGATIONS
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450,775
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450,690
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DEFERRED TAXES AND OTHER LIABILITIES, net
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13,615
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10,560
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COMMITMENTS AND CONTINGENCIES (Note 13)
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STOCKHOLDERS' DEFICIT:
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Preferred stock: 25,000,000 share authorized; no shares issued or outstanding
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Common stock, $0.01 par value; 75,000,000 shares authorized; 23,402,706 and 22,962,000 shares issued and outstanding at September 30, 2011 and
December 31, 2010, respectively
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234
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230
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Additional paid-in capital
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226,832
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225,208
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Accumulated deficit
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(291,386
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)
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(255,231
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)
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Total stockholders' deficit
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(64,320
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)
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(29,793
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)
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TOTAL
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$
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460,947
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$
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470,925
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See
notes to condensed consolidated financial statements.
2
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2011
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2010
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2011
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2010
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(in thousands, except per share amounts)
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Revenues
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$
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126,330
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$
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120,147
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$
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273,575
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$
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260,204
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Cost of sales (excluding depreciation)
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77,800
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71,770
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181,793
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168,787
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Depreciation expense related to cost of sales
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7,819
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5,694
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23,007
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16,655
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Gross profit
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40,711
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42,683
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68,775
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74,762
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Operating expenses
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14,725
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14,358
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41,839
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41,850
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Depreciation and amortization expense
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2,249
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2,435
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7,233
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6,484
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Loss on dispositions of assets
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629
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1,035
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461
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2,432
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Impairment of long-lived assets
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1,971
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514
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2,741
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750
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Acquisition expenses
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1,664
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|
414
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4,111
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624
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Gain on contingent acquisition consideration
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(202
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)
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(202
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)
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Cost (insurance recoveries) related to antitrust investigations and related litigation (Note 13)
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785
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(3,867
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)
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2,937
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(1,824
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)
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Income from operations
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18,890
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27,794
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9,655
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24,446
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Interest expense
|
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(14,698
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)
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(14,099
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)
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(43,873
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)
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(35,678
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)
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Interest income
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4
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3
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12
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15
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Gain on bargain purchase
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264
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264
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Debt refinance costs
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(310
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)
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(6,478
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)
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Income (loss) before income taxes
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4,196
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13,652
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(34,206
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)
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(17,431
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)
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Income tax benefit (expense)
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|
696
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|
(4,662
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)
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(1,949
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)
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5,956
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Net income (loss)
|
|
$
|
4,892
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$
|
8,990
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$
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(36,155
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)
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$
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(11,475
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)
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Basic net income (loss) per share:
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Net income (loss)
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$
|
0.21
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$
|
0.39
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$
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(1.59
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)
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$
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(0.51
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)
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Weighted average common shares outstanding
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23,394
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22,949
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|
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22,742
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22,450
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Diluted net income (loss) per share:
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Net income (loss)
|
|
$
|
0.21
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|
$
|
0.39
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|
$
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(1.59
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)
|
$
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(0.51
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)
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|
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Weighted average common shares outstanding
|
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|
23,466
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|
|
23,058
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|
|
22,742
|
|
|
22,450
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|
|
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|
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See
notes to condensed consolidated financial statements.
3
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Unaudited)
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Common Stock
|
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Number
of
Shares
|
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Par
Value
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
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Total
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(in thousands)
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Balance at January 1, 2011
|
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22,962
|
|
$
|
230
|
|
$
|
225,208
|
|
$
|
(255,231
|
)
|
$
|
(29,793
|
)
|
Compensation expense related to stock-based awards
|
|
|
|
|
|
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|
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1,612
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|
|
|
|
|
1,612
|
|
Issuance of restricted stock
|
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|
344
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|
|
3
|
|
|
(3
|
)
|
|
|
|
|
|
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Forfeiture of restricted stock
|
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|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
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Vesting of restricted stock units
|
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|
20
|
|
|
|
|
|
|
|
|
|
|
|
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Issuance of vested shares to directors
|
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|
96
|
|
|
1
|
|
|
(1
|
)
|
|
|
|
|
|
|
Common stock issued upon exercise of stock options
|
|
|
7
|
|
|
|
|
|
16
|
|
|
|
|
|
16
|
|
Comprehensive loss:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(36,155
|
)
|
|
(36,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011
|
|
|
23,403
|
|
$
|
234
|
|
$
|
226,832
|
|
$
|
(291,386
|
)
|
$
|
(64,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
4
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(36,155
|
)
|
$
|
(11,475
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities (excluding working capital from acquisitions):
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
30,240
|
|
|
23,139
|
|
|
|
Amortization of debt issue costs and accretion of tender premium
|
|
|
2,281
|
|
|
1,946
|
|
|
|
Gain on bargain purchase
|
|
|
|
|
|
(264
|
)
|
|
|
Debt refinance costs
|
|
|
|
|
|
6,478
|
|
|
|
Deferred tax expense (benefit)
|
|
|
1,545
|
|
|
(6,153
|
)
|
|
|
Loss on dispositions of assets
|
|
|
461
|
|
|
2,432
|
|
|
|
Decrease in fair value of diesel hedge
|
|
|
245
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
2,741
|
|
|
750
|
|
|
|
Stock-based compensation expense
|
|
|
1,804
|
|
|
1,423
|
|
|
|
Gain on contingent acquisition consideration
|
|
|
(202
|
)
|
|
|
|
|
|
Change in working capital:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(23,027
|
)
|
|
(14,476
|
)
|
|
|
|
Inventory, parts and supplies
|
|
|
298
|
|
|
(452
|
)
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(2,150
|
)
|
|
(1,358
|
)
|
|
|
|
Accounts payable, accrued expenses and other
|
|
|
4,589
|
|
|
16,515
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(17,330
|
)
|
|
18,505
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Property and equipment additions
|
|
|
(13,163
|
)
|
|
(28,190
|
)
|
|
Proceeds from dispositions of property and equipment
|
|
|
687
|
|
|
490
|
|
|
Cost of equipment placed under operating leases
|
|
|
(1,766
|
)
|
|
(4,002
|
)
|
|
Reimbursement of the cost of equipment placed under operating leases
|
|
|
3,074
|
|
|
6,002
|
|
|
Cost of equipment sold to affiliate
|
|
|
(639
|
)
|
|
|
|
|
Reimbursement of the cost of equipment sold to affiliate
|
|
|
639
|
|
|
|
|
|
Cost of acquisitions, net of cash acquired
|
|
|
(13,339
|
)
|
|
(12,637
|
)
|
|
Other intangible assets additions
|
|
|
(14
|
)
|
|
(189
|
)
|
|
Increase in restricted cash
|
|
|
(2,997
|
)
|
|
(10,340
|
)
|
|
Purchase of investments
|
|
|
(1,039
|
)
|
|
(3,225
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(28,557
|
)
|
|
(52,091
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of employee stock options
|
|
|
16
|
|
|
17
|
|
|
Borrowings under the credit facility
|
|
|
115,425
|
|
|
|
|
|
Repayments under the credit facility
|
|
|
(100,925
|
)
|
|
|
|
|
Issuance of debt
|
|
|
|
|
|
300,000
|
|
|
Debt issuance costs
|
|
|
|
|
|
(18,281
|
)
|
|
Repayment of long-term obligations
|
|
|
|
|
|
(240,001
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
14,516
|
|
|
41,735
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(31,371
|
)
|
|
8,149
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
42,173
|
|
|
44,649
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
10,802
|
|
$
|
52,798
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
44,673
|
|
$
|
24,327
|
|
|
|
|
|
|
|
|
Cash receipts of interest income
|
|
$
|
12
|
|
$
|
15
|
|
|
|
|
|
|
|
|
Cash payments for income taxes, net
|
|
$
|
458
|
|
$
|
543
|
|
|
|
|
|
|
|
|
Issuance of notes receivableaffiliate
|
|
$
|
(1,999
|
)
|
|
|
|
|
|
|
|
|
|
|
Noncash short-term financing
|
|
$
|
1,999
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment included in accounts payable
|
|
$
|
2,860
|
|
$
|
663
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
Table of Contents
REDDY ICE CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
December 31,
2010
|
|
|
|
(in thousands, except
share data)
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,158
|
|
$
|
30,153
|
|
|
Accounts receivable, net
|
|
|
44,416
|
|
|
21,432
|
|
|
Accounts receivable from Parent
|
|
|
41
|
|
|
19
|
|
|
Notes receivable from affiliate
|
|
|
1,999
|
|
|
|
|
|
Inventories, parts and supplies
|
|
|
12,943
|
|
|
12,549
|
|
|
Prepaid expenses and other current assets
|
|
|
5,214
|
|
|
3,849
|
|
|
Assets held for sale
|
|
|
2,201
|
|
|
1,056
|
|
|
Deferred tax assets
|
|
|
1,395
|
|
|
716
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
70,367
|
|
|
69,774
|
|
RESTRICTED CASH
|
|
|
13,107
|
|
|
10,110
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
189,817
|
|
|
204,898
|
|
GOODWILL
|
|
|
86,876
|
|
|
83,368
|
|
OTHER INTANGIBLES, net
|
|
|
73,448
|
|
|
72,204
|
|
INVESTMENTS
|
|
|
7,357
|
|
|
6,318
|
|
OTHER ASSETS, net
|
|
|
11,310
|
|
|
12,149
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
452,282
|
|
$
|
458,821
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDER'S DEFICIT
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Current portion of long-term obligations
|
|
$
|
1
|
|
$
|
1
|
|
|
Revolving credit facility
|
|
|
14,500
|
|
|
|
|
|
Accounts payable
|
|
|
20,990
|
|
|
14,375
|
|
|
Accrued expenses
|
|
|
25,128
|
|
|
24,665
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
60,619
|
|
|
39,041
|
|
LONG-TERM OBLIGATIONS
|
|
|
439,039
|
|
|
438,954
|
|
DEFERRED TAXES AND OTHER LIABILITIES, net
|
|
|
22,351
|
|
|
32,344
|
|
COMMITMENTS AND CONTINGENCIES (Note 13)
|
|
|
|
|
|
|
|
STOCKHOLDER'S DEFICIT:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 1,000 shares authorized; 100 shares issued and outstanding at September 30, 2011 and December 31, 2010
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
308,032
|
|
|
306,420
|
|
|
Accumulated deficit
|
|
|
(377,759
|
)
|
|
(357,938
|
)
|
|
|
|
|
|
|
|
|
Total stockholder's deficit
|
|
|
(69,727
|
)
|
|
(51,518
|
)
|
|
|
|
|
|
|
TOTAL
|
|
$
|
452,282
|
|
$
|
458,821
|
|
|
|
|
|
|
|
See
notes to condensed financial statements.
6
Table of Contents
REDDY ICE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
126,330
|
|
$
|
120,147
|
|
$
|
273,575
|
|
$
|
260,204
|
|
Cost of sales (excluding depreciation)
|
|
|
77,800
|
|
|
71,770
|
|
|
181,793
|
|
|
168,787
|
|
Depreciation expense related to cost of sales
|
|
|
7,819
|
|
|
5,694
|
|
|
23,007
|
|
|
16,655
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,711
|
|
|
42,683
|
|
|
68,775
|
|
|
74,762
|
|
Operating expenses
|
|
|
14,725
|
|
|
14,358
|
|
|
41,839
|
|
|
41,850
|
|
Depreciation and amortization expense
|
|
|
2,249
|
|
|
2,435
|
|
|
7,233
|
|
|
6,484
|
|
Loss on dispositions of assets
|
|
|
629
|
|
|
1,035
|
|
|
461
|
|
|
2,432
|
|
Impairment of long-lived assets
|
|
|
1,971
|
|
|
514
|
|
|
2,741
|
|
|
750
|
|
Acquisition expenses
|
|
|
1,664
|
|
|
414
|
|
|
4,111
|
|
|
624
|
|
Gain on contingent acquisition consideration
|
|
|
(202
|
)
|
|
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19,675
|
|
|
23,927
|
|
|
12,592
|
|
|
22,622
|
|
Interest expense
|
|
|
(14,377
|
)
|
|
(13,776
|
)
|
|
(42,907
|
)
|
|
(31,582
|
)
|
Interest income
|
|
|
4
|
|
|
3
|
|
|
12
|
|
|
14
|
|
Gain on bargain purchase
|
|
|
|
|
|
264
|
|
|
|
|
|
264
|
|
Debt refinance costs
|
|
|
|
|
|
(310
|
)
|
|
|
|
|
(6,478
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
5,302
|
|
|
10,108
|
|
|
(30,303
|
)
|
|
(15,160
|
)
|
Income tax (expense) benefit
|
|
|
(2,014
|
)
|
|
(3,511
|
)
|
|
11,100
|
|
|
4,991
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,288
|
|
$
|
6,597
|
|
$
|
(19,203
|
)
|
$
|
(10,169
|
)
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed financial statements.
7
Table of Contents
REDDY ICE CORPORATION
CONDENSED STATEMENT OF STOCKHOLDER'S DEFICIT
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Par
Value
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Balance at January 1, 2011
|
|
|
|
|
$
|
|
|
$
|
306,420
|
|
$
|
(357,938
|
)
|
$
|
(51,518
|
)
|
Compensation expense related to stock-based awards
|
|
|
|
|
|
|
|
|
1,612
|
|
|
|
|
|
1,612
|
|
Dividend to Parent
|
|
|
|
|
|
|
|
|
|
|
|
(618
|
)
|
|
(618
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(19,203
|
)
|
|
(19,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011
|
|
|
|
|
$
|
|
|
$
|
308,032
|
|
$
|
(377,759
|
)
|
$
|
(69,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed financial statements.
8
Table of Contents
REDDY ICE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,203
|
)
|
$
|
(10,169
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities (excluding working capital from acquisitions):
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
30,240
|
|
|
23,139
|
|
|
|
Amortization of debt issue costs and accretion of tender premium
|
|
|
1,272
|
|
|
1,768
|
|
|
|
Gain on bargain purchase
|
|
|
|
|
|
(264
|
)
|
|
|
Debt refinance costs
|
|
|
|
|
|
6,478
|
|
|
|
Deferred tax benefit
|
|
|
(11,503
|
)
|
|
(5,189
|
)
|
|
|
Loss on dispositions of assets
|
|
|
461
|
|
|
2,432
|
|
|
|
Decrease in fair value of diesel hedge
|
|
|
245
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
2,741
|
|
|
750
|
|
|
|
Stock-based compensation expense
|
|
|
1,804
|
|
|
1,423
|
|
|
|
Gain on contingent acquisition consideration
|
|
|
(202
|
)
|
|
|
|
|
|
Change in working capital:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(23,027
|
)
|
|
(21,076
|
)
|
|
|
|
Inventory, parts and supplies
|
|
|
298
|
|
|
(452
|
)
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(2,150
|
)
|
|
(1,358
|
)
|
|
|
|
Accounts payable, accrued expenses and other
|
|
|
5,704
|
|
|
18,390
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(13,320
|
)
|
|
15,872
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Property and equipment additions
|
|
|
(13,163
|
)
|
|
(28,190
|
)
|
|
Proceeds from dispositions of property and equipment
|
|
|
687
|
|
|
490
|
|
|
Cost of equipment placed under operating leases
|
|
|
(1,766
|
)
|
|
(4,002
|
)
|
|
Reimbursement of the cost of equipment placed under operating leases
|
|
|
3,074
|
|
|
6,002
|
|
|
Cost of equipment sold to affiliate
|
|
|
(639
|
)
|
|
|
|
|
Reimbursement of the cost of equipment sold to affiliate
|
|
|
639
|
|
|
|
|
|
Cost of acquisitions, net of cash acquired
|
|
|
(13,339
|
)
|
|
(12,637
|
)
|
|
Other intangible assets additions
|
|
|
(14
|
)
|
|
(189
|
)
|
|
Increase in restricted cash
|
|
|
(2,997
|
)
|
|
(10,340
|
)
|
|
Purchase of investments
|
|
|
(1,039
|
)
|
|
(3,225
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(28,557
|
)
|
|
(52,091
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Dividends to Parent
|
|
|
(618
|
)
|
|
(6,038
|
)
|
|
Borrowings under the credit facility
|
|
|
115,425
|
|
|
|
|
|
Repayments under the credit facility
|
|
|
(100,925
|
)
|
|
|
|
|
Issuance of debt
|
|
|
|
|
|
300,000
|
|
|
Debt issuance costs
|
|
|
|
|
|
(18,281
|
)
|
|
Repayment of long-term obligations
|
|
|
|
|
|
(240,001
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
13,882
|
|
|
35,680
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(27,995
|
)
|
|
(539
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
30,153
|
|
|
40,440
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
2,158
|
|
$
|
39,901
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
44,057
|
|
$
|
18,377
|
|
|
|
|
|
|
|
|
Cash receipts of interest income
|
|
$
|
12
|
|
$
|
13
|
|
|
|
|
|
|
|
|
Cash payments for income taxes, net
|
|
$
|
458
|
|
$
|
543
|
|
|
|
|
|
|
|
|
Issuance of notes receivableaffiliate
|
|
$
|
(1,999
|
)
|
|
|
|
|
|
|
|
|
|
|
Noncash short-term financing
|
|
$
|
1,999
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment included in accounts payable
|
|
$
|
2,860
|
|
$
|
663
|
|
|
|
|
|
|
|
See notes to condensed financial statements.
9
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
1. General
Reddy Ice Holdings, Inc. ("Reddy Holdings"), and its wholly-owned subsidiary, Reddy Ice Corporation ("Reddy Corp"), referred to collectively as the "Company", manufacture and
distribute packaged ice products. The Company consists of a single operating segment. The common stock of Reddy Holdings is publicly traded on the New York Stock Exchange under the ticker symbol
"FRZ".
This
Quarterly Report on Form 10-Q is a combined report of the Company and Reddy Corp. The condensed consolidated financial statements of the Company and the condensed
financial statements of Reddy Corp included herein are unaudited; however, balance sheets as of December 31, 2010 have been derived from the audited financial statements for that date, but do
not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements have been prepared by the Company pursuant to the
applicable rules and regulations of the Securities and Exchange Commission ("SEC"). Under the SEC's regulations, certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. All significant intercompany balances and transactions have been
eliminated upon consolidation, and all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the
periods presented have been made and are of a normal and recurring nature. The financial statements included herein should be read in conjunction with the consolidated and Reddy Corp financial
statements and the related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010. The notes to the condensed consolidated
financial statements apply to both the Company and Reddy Corp. Reddy Corp comprises all or substantially all of the Company's consolidated balances or activities unless otherwise noted. Operating
results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results to be achieved for the full year.
2. Recently Adopted Accounting Pronouncements
In September of 2011, the FASB issued ASU 2011-08,
IntangiblesGoodwill and Other.
ASU 2011-08
modifies the goodwill impairment test by allowing for an assessment of qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on this assessment, the entity
determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity may bypass performing the two-step goodwill impairment test.
However, if the entity concludes otherwise, it is required to perform Step 1 of the two-step goodwill impairment test. ASU 2011-08 will be effective for fiscal years beginning
after December 15, 2011. The adoption of ASU 2011-08 is not expected to have a material effect on the Company's consolidated financial statements.
In
June of 2011, the FASB issue ASU 2011-05,
Comprehensive Income
. ASU 2011-05 requires that all
non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the
two-statement approach, the first statement should present total net income and its components followed by a second statement that should present total other comprehensive income, the
components of other comprehensive income, and the total of comprehensive income. ASU 2011-05 will be effective for fiscal years, and interim
10
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
2. Recently Adopted Accounting Pronouncements (Continued)
periods
within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 is not expected to have a material effect on the Company's consolidated financial
statements.
In
December 2010, the FASB issued ASU 2010-28,
IntangiblesGoodwill and Other
. ASU 2010-28 modifies
Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts and offers guidance on when to perform Step 2 of the testing. For those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it i
s
more likely than not that a goodwill impairment exists based upon factors such as
unanticipated competition, the loss of key personnel and adverse regulatory changes. ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2010. The adoption of ASU 2010-28 did not have a material effect on the Company's consolidated financial statements.
In
December 2010, the FASB issued ASU 2010-29, which updates the guidance in ASC 805,
Business Combinations
, to clarify that
pro forma disclosures should be presented as if a business combination occurred at the beginning of the prior annual period for purposes of preparing both the current reporting period and the prior
reporting period pro forma financial information. These disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments. ASU
2010-29 is effective for business combinations consummated in periods beginning after December 15, 2010, and is required to be applied prospectively as of the date of adoption. The
Company has reflected the adoption of ASU 2010-29 in the disclosures accompanying the consolidated financial statements.
3. Acquisitions
No acquisitions were completed during the three months ended September 30, 2011. Three acquisitions were completed during the three months ended September 30, 2010. During
the nine months ended September 30, 2011 and 2010, the Company completed nine and eleven acquisitions, respectively. The total purchase price was allocated to the acquired assets and assumed
liabilities based upon estimates of their respective fair values as of the closing dates using valuations and other studies.
11
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
3. Acquisitions (Continued)
The
following table summarizes the aggregate purchase prices, estimated aggregate fair values of the assets acquired and the liabilities assumed and direct acquisition costs expensed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
September 30,
|
|
Nine months
ended
September 30,
|
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
(in millions)
|
|
Purchase price
|
|
$
|
|
|
$
|
3.5
|
|
$
|
13.3
|
|
$
|
12.6
|
|
Assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
0.1
|
|
|
0.7
|
|
|
0.4
|
|
|
Property and equipment
|
|
|
|
|
|
1.6
|
|
|
3.8
|
|
|
4.1
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
0.5
|
|
|
3.8
|
|
|
1.7
|
|
|
Other intangible assets
|
|
|
|
|
|
1.6
|
|
|
6.1
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
|
|
|
3.8
|
|
|
14.6
|
|
|
12.9
|
|
Total liabilities assumed
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on bargain purchase
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Direct acquisition costs expensed
|
|
$
|
1.7
|
|
$
|
0.4
|
|
$
|
4.1
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
During
the nine months ended September 30, 2011, the Company recognized approximately $10.1 million of revenue from the businesses acquired in 2011.
The
recorded purchase price allocation related to the acquisition completed during the three months ended June 30, 2011 is preliminary at September 30, 2011, pending
further evaluation of market participant data and the fair values of certain equipment acquired. The Company recorded approximately $0.7 million of deferred tax liabilities in connection with
this acquisition. In addition, as a result of the acquisition made during the three months ended June 30, 2011, the Company entered into an earn-out agreement, pursuant to which the
Company is obligated to pay the former stockholder of the acquired entity up to $0.8 million in additional consideration if certain revenue
targets are achieved by the purchased entity during the twelve months immediately following the acquisition. As a result, the Company recorded a $0.4 million contingent liability during the six
months ended June 30, 2011. The earn-out agreement is recorded at its fair value of $0.2 million at September 30, 2011. The fair value of the earn-out
liability is estimated based on management's assessment of the weighted average probability that certain revenue targets will be achieved by the acquired entity.
The
Company recorded $1.9 million of tax deductible goodwill recognized in connection with the acquisitions completed during the nine months ended September 30, 2011. Other
intangible assets were comprised of customer lists and non-compete agreements, which are being amortized over useful lives of 2 to 30 years, with a weighted average useful life of
21.4 years. The acquisitions were funded out of the Company's operating cash flows, proceeds from debt offerings and borrowings under the revolving credit facility.
12
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
3. Acquisitions (Continued)
The
following unaudited pro forma information presents the Reddy Holdings' consolidated results of operations for the three and nine months ended September 30, 2011 and
September 30, 2010 as if the 2011 and 2010 acquisitions had all occurred on January 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
(in thousands, except per share amounts)
|
|
Pro forma revenues
|
|
$
|
126,330
|
|
$
|
128,660
|
|
$
|
274,838
|
|
$
|
279,703
|
|
Pro forma net income (loss)
|
|
$
|
4,892
|
|
$
|
11,214
|
|
$
|
(36,895
|
)
|
$
|
(8,551
|
)
|
Pro forma basic net income (loss) per share
|
|
$
|
0.21
|
|
$
|
0.49
|
|
$
|
(1.62
|
)
|
$
|
(0.38
|
)
|
Pro forma diluted net income (loss) per share
|
|
$
|
0.21
|
|
$
|
0.49
|
|
$
|
(1.62
|
)
|
$
|
(0.38
|
)
|
The
following unaudited pro forma information presents Reddy Corp's results of operations for the three and nine months ended September 30, 2011 and September 30, 2010 as
if the 2011 and 2010 acquisitions had all occurred on January 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
Pro forma revenues
|
|
$
|
126,330
|
|
$
|
128,660
|
|
$
|
274,838
|
|
$
|
279,703
|
|
Pro forma net income (loss)
|
|
$
|
3,288
|
|
$
|
8,821
|
|
$
|
(19,943
|
)
|
$
|
(7,245
|
)
|
4. Inventories, Parts and Supplies
Inventories consist of raw materials, finished goods and parts and supplies. Raw materials represent ice packaging material. Finished goods consist of packaged ice. Parts and supplies
consist of spare parts for production equipment and ice merchandisers and miscellaneous supplies. Inventories are valued at the lower of cost or market and include overhead allocations. Cost is
determined using the first-in, first-out method.
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
December 31,
2010
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
6,198
|
|
$
|
6,133
|
|
Finished goods
|
|
|
1,992
|
|
|
2,505
|
|
Parts and supplies
|
|
|
4,753
|
|
|
3,911
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,943
|
|
$
|
12,549
|
|
|
|
|
|
|
|
13
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
5. Accrued Expenses
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
December 31,
2010
|
|
|
|
(in thousands)
|
|
Accrued interest
|
|
$
|
10,198
|
|
$
|
13,336
|
|
Accrued compensation and employee benefits, including payroll taxes and workers compensation insurance
|
|
|
5,932
|
|
|
4,484
|
|
Accrued utilities
|
|
|
2,101
|
|
|
1,343
|
|
Accrued property, sales and other taxes
|
|
|
3,770
|
|
|
1,555
|
|
Other accrued insurance
|
|
|
1,653
|
|
|
2,169
|
|
Other
|
|
|
1,295
|
|
|
1,290
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,949
|
|
$
|
24,177
|
|
|
|
|
|
|
|
Included
in "accrued interest" above is $0.5 million and $0.2 million related to Reddy Holdings as of September 30, 2011 and December 31, 2010, respectively.
6. Revolving Credit Facility and Long-Term Obligations
At September 30, 2011 and December 31, 2010, long-term obligations of the Company consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
December 31,
2010
|
|
|
|
(in thousands)
|
|
11.25% Senior Secured Notes
|
|
$
|
300,000
|
|
$
|
300,000
|
|
13.25% Senior Secured Notes
|
|
|
139,407
|
|
|
139,407
|
|
Less: Unamortized early tender premium on 13.25% Senior Secured Notes
|
|
|
(467
|
)
|
|
(553
|
)
|
10
1
/
2
% Senior Discount Notes
|
|
|
11,736
|
|
|
11,736
|
|
Other notes payable
|
|
|
100
|
|
|
101
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
450,776
|
|
|
450,691
|
|
Less: Current maturities
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
Long-term obligations, net
|
|
$
|
450,775
|
|
$
|
450,690
|
|
|
|
|
|
|
|
In
addition, the Company had $14.5 million outstanding under the revolving credit facility as of September 30, 2011.
14
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
6. Revolving Credit Facility and Long-Term Obligations (Continued)
At
September 30, 2011 and December 31, 2010, long-term obligations of Reddy Corp consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
December 31,
2010
|
|
|
|
(in thousands)
|
|
11.25% Senior Secured Notes
|
|
$
|
300,000
|
|
$
|
300,000
|
|
13.25% Senior Secured Notes
|
|
|
139,407
|
|
|
139,407
|
|
Less: Unamortized early tender premium on 13.25% Senior Secured Notes
|
|
|
(467
|
)
|
|
(553
|
)
|
Other notes payable
|
|
|
100
|
|
|
101
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
439,040
|
|
|
438,955
|
|
Less: Current maturities
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
Long-term obligations, net
|
|
$
|
439,039
|
|
$
|
438,954
|
|
|
|
|
|
|
|
In
addition, Reddy Corp had $14.5 million outstanding under the revolving credit facility as of September 30, 2011.
11.25% Senior Secured Notes.
On March 15, 2010, Reddy Corp issued $300.0 million in aggregate principal
amount of 11.25% Senior Secured Notes due 2015 (the "First Lien Notes") in a private placement offering. The First Lien Notes were subsequently registered with the SEC effective August 2, 2010.
Cash interest accrues on the First Lien Notes at a rate of 11.25% per annum and is payable semi-annually in arrears on March 15 and September 15. The First Lien Notes mature
on March 15, 2015. The proceeds of the offering were used to repay certain of Reddy Corp's preexisting debt (see "Old Senior Credit Facilities" below), pay fees and expenses related to the
transactions and provide the Company with cash for future use.
The
First Lien Notes are senior secured obligations of Reddy Corp and are:
-
-
guaranteed by Reddy Holdings;
-
-
secured on a first-priority basis by liens on substantially all of the assets of Reddy Corp and Reddy Holdings;
-
-
senior in right of payment to all of Reddy Corp's and Reddy Holdings' future subordinated indebtedness; and
-
-
effectively senior to all of Reddy Corp's and Reddy Holdings' existing and future unsecured senior indebtedness.
The
First Lien Notes include customary covenants that restrict, among other things, Reddy Corp's and its future subsidiaries' ability to incur additional debt or issue certain preferred
stock, pay dividends or redeem, repurchase or retire its capital stock or subordinated indebtedness, make certain investments, create liens, enter into arrangements that restrict dividends from its
subsidiaries, merge or sell all or substantially all of its assets or enter into various transactions with affiliates. From and after March 15, 2013, Reddy Corp may redeem any or all of the
First Lien Notes by paying a redemption premium, which is initially 5.625% of the principal amount of the First Lien Notes and declines to 0%
15
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
6. Revolving Credit Facility and Long-Term Obligations (Continued)
for
the period commencing on March 15, 2014 and thereafter. Prior to March 15, 2013, Reddy Corp may redeem any or all of the First Lien Notes by paying a "make-whole"
redemption
premium. If Reddy Corp experiences a change of control, Reddy Corp will be required to make an offer to repurchase the First Lien Notes at a price equal to 101% of their accreted value, plus accrued
and unpaid interest, if any, to the date of purchase. Reddy Corp may also be required to make an offer to purchase the First Lien Notes with proceeds of asset sales that are not reinvested in the
Company's business or used to repay other indebtedness.
The
indenture governing the First Lien Notes restricts the amount of dividends, distributions and other restricted payments Reddy Corp may make. Under the indenture, Reddy Corp is
restricted from paying dividends to Reddy Holdings unless, at the time of such payment:
-
-
no default or event of default has occurred and is continuing or would occur as a consequence thereof;
-
-
the first lien leverage ratio set forth in the indenture governing the First Lien Notes is less than or equal to 3.5 to
1.0; and
-
-
there is sufficient capacity under the buildup amount under the indenture governing the First Lien Notes.
The
first lien leverage ratio under the indenture governing the First Lien Notes means the ratio of first lien indebtedness (as defined in the indenture) to EBITDA (as defined in the
indenture) for the most recent four fiscal quarters. Reddy Corp is generally required to calculate its first lien leverage ratio on a pro forma basis to give effect to the incurrence and repayment of
indebtedness as well as acquisitions and dispositions. As of September 30, 2011, the first lien leverage ratio was 6.0 to 1.0.
The
buildup amount equals 50% of the consolidated net income of Reddy Corp accrued during the period (treated as one accounting period) from April 1, 2010 to the end of the most
recent fiscal quarter for which internal financial statements are available (or, if such consolidated net income is a deficit, minus 100% of such deficit), plus, the net cash proceeds to Reddy Corp of
the issuance of capital stock, subject to certain exceptions, and any cash capital contribution received by Reddy Corp from its stockholder, in each case after April 1, 2010, plus the amount by
which Reddy Corp indebtedness is reduced on its balance sheet as a result of the conversion or exchange of such indebtedness for capital stock, plus the net reduction in certain restricted investments
made by Reddy Corp, less the amount of certain restricted payments made from time to time, including, among other things, the payment of cash dividends. Reddy Corp is not currently permitted to pay
dividends under this provision.
In
addition, regardless of the leverage ratio or whether Reddy Corp could make any restricted payments under the buildup amount provision referred to above, Reddy Corp is permitted to
make certain restricted payments including (1) dividend payments at any time in an aggregate amount of up to $25.0 million if no default has occurred and is continuing under the
indenture, (2) the payment of interest when due on the remaining 10
1
/
2
% Senior Discount Notes and the repayment, redemption or retirement of the remaining 10
1
/
2
%
Senior Discount Notes from the proceeds of certain indebtedness of Reddy Corp incurred after the date of issuance of the First Lien Notes, (3) the payment of dividends to Reddy Holdings in an
amount per year not to exceed $1.0 million to pay franchise taxes and
16
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
6. Revolving Credit Facility and Long-Term Obligations (Continued)
overhead
expenses of Reddy Holdings and (4) the payment of dividends to Reddy Holdings in an amount per year not to exceed 6.0% of the aggregate net cash proceeds received by Reddy Corp from
all public equity offerings after the date of issuance of the First Lien Notes subject to specified conditions. However, the amount of dividend payments permitted under this 6.0% provision will
correspondingly reduce the amount otherwise available under the buildup amount for restricted payments, including dividends.
13.25% Senior Secured Notes.
On March 15, 2010, Reddy Corp issued $137.6 million in aggregate principal amount of
13.25% Senior Secured
Notes due 2015 (the "Second Lien Notes") in the initial settlement of a private placement exchange offer for the outstanding Discount Notes (the "Exchange Offer"). The Second Lien Notes were
subsequently registered with the SEC effective August 2, 2010. On March 24, 2010, Reddy Corp issued an additional $1.8 million in aggregate principal amount of Second Lien Notes
in the final settlement of the Exchange Offer. Reddy Corp received no cash proceeds from the issuance of the Second Lien Notes. Cash interest accrues on the Second Lien Notes at a rate of 13.25% per
annum and is payable semi-annually in arrears on May 1 and November 1, with the first payment occurring on November 1, 2010. The Second Lien Notes mature on
November 1, 2015. In connection with the Exchange Offer, the Company issued $0.6 million of Second Lien Notes to certain bondholders as an early tender premium (see
"10
1
/
2
% Senior Discount Notes" below for further information). These additional Second Lien Notes were not reflected in the Company's condensed consolidated balance sheet upon issuance,
but will be recognized as additional debt through interest expense over the term of the Second Lien Notes.
The
Second Lien Notes are senior secured obligations of Reddy Corp and are:
-
-
guaranteed by Reddy Holdings;
-
-
secured on a second-priority basis by liens on substantially all of the assets of Reddy Corp and Reddy Holdings;
-
-
senior in right of payment to all of Reddy Corp's and Reddy Holdings' future subordinated indebtedness; and
-
-
effectively senior to all of Reddy Corp's and Reddy Holdings' existing and future unsecured senior indebtedness.
The
Second Lien Notes include customary covenants that restrict, among other things, Reddy Corp's and its future subsidiaries' ability to incur additional debt or issue certain preferred
stock, pay dividends or redeem, repurchase or retire its capital stock or subordinated indebtedness, make certain investments, create liens, enter into arrangements that restrict dividends from its
subsidiaries, merge or sell all or substantially all of its assets or enter into various transactions with affiliates. From and after March 1, 2013, Reddy Corp may redeem any or all of the
Second Lien Notes by paying a redemption premium, which is initially 6.625% of the principal amount of the Second Lien Notes and declines to 0% for the period commencing on March 1, 2014 and
thereafter. Prior to March 1, 2013, Reddy Corp may redeem any or all of the Second Lien Notes by paying a "make-whole" redemption premium. If Reddy Corp experiences a change of
control, Reddy Corp will be required to make an offer to repurchase the Second Lien Notes at a price equal to 101% of their accreted value, plus accrued and unpaid interest, if any, to the date of
purchase. Reddy Corp may also be required to make an offer to
17
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
6. Revolving Credit Facility and Long-Term Obligations (Continued)
purchase
the Second Lien Notes with proceeds of asset sales that are not reinvested in the Company's business or used to repay other indebtedness.
The
indenture governing the Second Lien Notes restricts the amount of dividends, distributions and other restricted payments Reddy Corp may make. Under the indenture, Reddy Corp is
restricted from paying dividends to Reddy Holdings unless, at the time of such payment:
-
-
no default or event of default has occurred and is continuing or would occur as a consequence thereof;
-
-
the secured leverage ratio set forth in the indenture governing the Second Lien Notes is less than or equal to 6.0 to 1.0;
and
-
-
there is sufficient capacity under the buildup amount under the indenture governing the Second Lien Notes.
The
secured leverage ratio under the indenture governing the Second Lien Notes means the ratio of secured indebtedness (as defined in the indenture) to EBITDA (as defined in the
indenture) for the most recent four fiscal quarters. Reddy Corp is generally required to calculate its secured leverage ratio on a pro forma basis to give effect to the incurrence and repayment of
indebtedness as well as acquisitions and dispositions. As of September 30, 2011, the second lien leverage ratio was 8.7 to 1.0.
The
buildup amount equals 50% of the consolidated net income of Reddy Corp accrued during the period (treated as one accounting period) from April 1, 2010 to the end of the most
recent fiscal quarter for which internal financial statements are available (or, if such consolidated net income is a deficit, minus 100% of such deficit), plus, the net cash proceeds to Reddy Corp of
the issuance of capital stock, subject to certain exceptions, and any cash capital contribution received by Reddy Corp from its stockholder, in each case after April 1, 2010, plus the amount by
which Reddy Corp indebtedness is reduced on its balance sheet as a result of the conversion or exchange of such indebtedness for capital stock, plus the net reduction in certain restricted investments
made by Reddy Corp, less the amount of certain restricted payments made from time to time, including, among other things, the payment of cash dividends. Reddy Corp is not currently permitted to pay
dividends under this provision.
In
addition, regardless of the leverage ratio or whether Reddy Corp could make any restricted payments under the buildup amount provision referred to above, Reddy Corp is permitted to
make certain restricted payments including (1) dividend payments at any time in an aggregate amount of up to $25.0 million if no default has occurred and is continuing under the
indenture, (2) the payment of interest when due on the remaining 10
1
/
2
% Discount Notes and the repayment, redemption or retirement of remaining 10
1
/
2
% Discount
Notes from the proceeds of certain indebtedness of Reddy Corp incurred after the date of issuance of the Second Lien Notes, (3) the payment of dividends to Reddy Holdings in an amount per year
not to exceed $1.0 million to pay franchise taxes and overhead expenses of Reddy Holdings and (4) the payment of dividends to Reddy Holdings in an amount per year not to exceed 6.0% of
the aggregate net cash proceeds received by Reddy Corp from all public equity offerings after the date of issuance of the Second Lien Notes subject to specified conditions. However, the amount of
dividend payments permitted under this 6.0% provision will correspondingly reduce the amount otherwise available under the buildup amount for restricted payments, including dividends.
18
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
6. Revolving Credit Facility and Long-Term Obligations (Continued)
10
1
/
2
% Senior Discount Notes.
On October 27, 2004, Reddy Holdings issued $151 million in
aggregate principal amount at
maturity of 10
1
/
2
% Senior Discount Notes due 2012 (the "Discount Notes") in a private placement offering. The Discount Notes were subsequently registered with the SEC, effective
August 26, 2005. Each Discount Note had an initial accreted value of $663.33 per $1,000 principal amount at maturity. The accreted value of each Discount Note increased from the date of
issuance until November 1, 2008 at a rate of 10
1
/
2
% per annum such that the accreted value equaled the stated principal amount on November 1, 2008. Thereafter, cash
interest began accruing November 1, 2008 and is payable semi-annually in arrears on May 1 and November 1 at a rate of 10
1
/
2
% per annum. The Discount
Notes mature and are payable on November 1, 2012. During the years ended December 31, 2010 and 2009, Reddy Corp paid cash dividends to Reddy Holdings in the amount of $6.7 million
and $15.8 million, respectively, to fund the semi-annual interest payments on the Discount Notes. During the nine month period ended September 30, 2011 and 2010, Reddy Corp
paid cash dividends to Reddy Holdings in the amount of $0.6 million and $6.0 million, respectively, to fund the semi-annual interest payments on the Discount Notes.
On
February 22, 2010, Reddy Corp launched the Exchange Offer, offering $1,000 in aggregate principal amount of Second Lien Notes for each $1,000 of Discount Notes exchanged. In
addition, for Discount Notes exchanged on or prior to March 5, 2010, Reddy Corp offered an early tender premium of $5 in aggregate principal amount of Second Lien Notes for each $1,000 of
Discount Notes exchanged. In conjunction with the Exchange Offer, Reddy Corp solicited consents to eliminate substantially all of the restrictive covenants from the indenture governing the Discount
Notes. At the expiration of the Exchange Offer on March 19, 2010, approximately 92.2% of the aggregate principal amount of the Discount Notes had been tendered into the Exchange Offer.
Following the final settlement of the Exchange Offer, $11.7 million in aggregate principal amount of the Discount Notes remain outstanding.
The
Discount Notes are unsecured obligations of Reddy Holdings and are:
-
-
not guaranteed by Reddy Corp;
-
-
senior in right of payment to all of Reddy Holdings' future subordinated indebtedness;
-
-
equal in right of payment with any of Reddy Holdings' existing and future unsecured senior indebtedness;
-
-
effectively subordinated to Reddy Holdings' existing and future secured debt, including the debt under the First Lien
Notes, the Second Lien Notes and the credit facility, which are guaranteed on a secured basis by Reddy Holdings; and
-
-
structurally subordinated to all obligations and preferred equity of Reddy Corp.
As
of November 1, 2010, Reddy Holdings may redeem any or all of the Discount Notes without paying any redemption premium.
Senior Credit Facilities.
On March 15, 2010, Reddy Corp entered into a revolving credit facility with a syndicate of banks,
financial
institutions and other entities as lenders, including JPMorgan Chase Bank, N.A., as Administrative Agent (the "March 2010 Credit Facility"). The March 2010 Credit Facility provided for a
$35 million revolving credit facility. Under the March 2010 Credit Facility,
19
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
6. Revolving Credit Facility and Long-Term Obligations (Continued)
Reddy
Corp had the right to request the aggregate commitments to be increased to $50 million provided certain conditions were met. On August 4, 2010, the aggregate commitments under the
March 2010 Credit Facility were increased to $50 million.
The
March 2010 Credit Facility was an obligation of Reddy Corp and was guaranteed by Reddy Holdings. The March 2010 Credit Facility was scheduled to mature on January 31, 2014.
Principal
balances outstanding under the March 2010 Credit Facility bore interest per annum, at Reddy Corp's option, at the sum of the base rate or LIBOR plus the applicable margin. The
applicable margin for base rate loans was initially 3.75% and for LIBOR loans was initially 4.75%, with such applicable margins subject to reduction based upon the Company's net leverage ratio (as
defined in the March 2010 Credit Facility). The Company also paid (i) a quarterly fee on the average availability under the revolving credit facility at an annual rate of 0.875%, with such
availability fee subject to reduction
based upon the Company's net leverage ratio, (ii) a $50,000 annual loan servicing fee, and (iii) an annual commitment fee of $0.2 million to one of the lenders.
On
October 22, 2010, Reddy Corp and the lenders party thereto amended and restated the March 2010 Credit Facility (the "New Credit Facility"). The New Credit Facility provides for
a $50 million revolving credit facility. Macquarie Bank Limited ("Macquarie"), a lender under the March 2010 Credit Facility, is currently the sole lender under the New Credit Facility. On
December 10, 2010, Macquarie became the successor administrative agent under the New Credit Facility.
The
New Credit Facility provides that outstanding loans will bear interest at rates based on LIBOR plus an applicable margin of 7.0% per annum or, at the option of Reddy Corp, the Base
Rate, plus an applicable margin of 6.0% per annum, the relevant margin being the applicable margin. Swing line loans will bear interest at the Base Rate plus the applicable margin. LIBOR and Base
Rates are subject to floors of 1.5% and 2.5%, respectively. Interest on LIBOR loans is payable upon maturity of the LIBOR loan or on the last day of the quarter if the term of the LIBOR loan exceeds
90 days. Reddy Corporation will pay an anniversary fee on each anniversary of the effectiveness of the New Credit Facility equal to 1.0% of the commitments under the New Credit Facility on the
first anniversary and increasing on each subsequent anniversary by 0.5%, as well as a $50,000 quarterly loan servicing fee. Additionally, for each full calendar year beginning with 2011, if the
average balance outstanding under the New Credit Facility is less than $12.5 million for the calendar year, the Borrower shall pay to the Lenders an amount equal to (x) the difference
between the average balance outstanding and $12.5 million multiplied by (y) the average interest rate for LIBOR Loans during that calendar year (determined based on average one month
LIBOR rates as of the end of each quarter during such calendar year). The New Credit Facility will mature on October 22, 2014. At September 30, 2011, the Company had $14.5 million
outstanding and $35.5 million of availability under the New Credit Facility. The weighted average interest rate on borrowings under on the New Credit Facility as of September 30, 2011
was 7.4%.
The
obligations under the New Credit Facility are fully and unconditionally guaranteed by Reddy Holdings and will also be guaranteed by any future domestic subsidiaries of Reddy Corp,
subject to certain exceptions.
The
New Credit Facility does not require any scheduled principal payments prior to its stated maturity date. Subject to certain conditions, mandatory repayments of the New Credit
Facility (and
20
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
6. Revolving Credit Facility and Long-Term Obligations (Continued)
mandatory
commitment reductions of the New Credit Facility) are required to be made with portions of the proceeds from (1) asset sales, (2) the issuance of debt securities and
(3) insurance and condemnation awards, subject to various exceptions. In the event of a change in control, as defined in the New Credit Facility, an event of default will occur under the New
Credit Facility.
The
New Credit Facility also contains affirmative and negative covenants applicable to Reddy Corp and its future subsidiaries, subject to materiality and other qualifications, baskets
and exceptions. The affirmative and negative covenants are substantially consistent with those contained in the March 2010 Credit Facility. The negative covenants, among other things, restrict the
ability of Reddy Corp to:
-
-
incur additional indebtedness or issue certain preferred shares;
-
-
create liens;
-
-
make investments;
-
-
pay dividends or make other restricted payments;
-
-
consolidate or merge or acquire or dispose of assets;
-
-
enter into transactions with affiliates;
-
-
permit consensual encumbrances or restrictions on Reddy Corp's restricted subsidiaries' ability to pay dividends or make
certain other payments to Reddy Corp; and
-
-
prepay certain indebtedness, including the First Lien Notes and the Second Lien Notes.
Under
the restricted payments covenant in the New Credit Facility, Reddy Corp is generally prohibited from paying dividends and otherwise transferring assets to Reddy Holdings. Reddy
Corp. is permitted to pay certain limited dividends to Reddy Holdings, the proceeds of which must be used for specific purposes, such as to maintain Reddy Holdings' corporate existence, repurchase the
Discount Notes and pay interest on the Discount Notes. Reddy Corp may also distribute certain investments to Reddy Holdings.
In
addition, Reddy Corp may also pay dividends to Reddy Holdings for specified purposes, including the payment of cash interest on the Discount Notes. The New Credit Facility (and the
March 2010 Credit Facility, while it was in effect) precludes Reddy Corp from declaring any dividends if an event of default under the credit facility has occurred and is continuing. In particular, it
will be an event of default under the New Credit Facility if Reddy Corp's leverage ratio (defined as the ratio of the outstanding balance of the New Credit Facility on the last day of each quarter to
EBITDA (as defined in the New Credit Facility) over the preceding four quarters) exceeds 2.50:1.00 as of the end of any quarter. The New Credit Facility requires the maintenance of a minimum liquidity
amount of $5 million at all times. Liquidity for purposes of this covenant is defined as the sum of available borrowing capacity under the New Credit Facility and unrestricted cash held by
Reddy Corp. The New Credit Facility is collateralized by substantially all of the Company's assets. Reddy Holdings guarantees the New Credit Facility and such guarantee is collateralized by a pledge
of substantially all of the assets of Reddy Holdings. At September 30, 2011, Reddy Corp was in compliance with the ratio requirements included in the New Credit Facility.
21
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
6. Revolving Credit Facility and Long-Term Obligations (Continued)
Obligations
under the New Credit Facility may be declared immediately due and payable upon the occurrence of certain events of default as defined in the credit agreement, including
failure to pay any principal when due and payable, failure to pay interest within five (5) days after due, failure to comply with any covenant, representation or condition of any loan document,
any change of control, cross-defaults, and certain other events as set forth in the credit agreement, with grace periods in some cases.
An
acceleration of the indebtedness under the New Credit Facility would be an event of default under the First Lien Notes and Second Lien Notes if the outstanding balance of the New
Credit Facility at the time of acceleration is over $10 million.
Old Senior Credit Facilities.
On August 12, 2005, the Company amended and restated its credit facilities with a syndicate of
banks, financial
institutions and other entities as lenders, including Credit Suisse, Cayman Islands Branch, as Administrative Agent, Wachovia Bank, N.A., JP Morgan Chase, N.A.,
CIBC World Markets Corp., Bear Stearns Corporate Lending Inc. and Lehman Commercial Paper, Inc. (the "Old Credit Facilities"). The Old Credit Facilities provided for a
$60 million revolving credit facility (the "Old Revolving Credit Facility") and a $240 million term loan (the "Old Term Loan"). The Old Credit Facilities were obligations of Reddy Corp
and were guaranteed by Reddy Holdings. The Old Revolving Credit Facility and Old Term Loan were scheduled to mature on August 12, 2010 and August 12, 2012, respectively. On
March 15, 2010, the Old Credit Facilities were terminated and all amounts owed thereunder were repaid from the proceeds of the sale of the First Lien Notes.
Principal
balances outstanding under the Old Credit Facility bore interest per annum, at the Company's option, at the sum of the base rate plus 0.75% or LIBOR plus 1.75%. The base rate
was defined as the greater of the prime rate (as announced from time to time by the Administrative Agent) or the federal funds rate plus 0.5%. Interest on base rate loans was payable on the last day
of each quarter. Interest on LIBOR loans was payable upon maturity of the LIBOR loan or on the last day of the quarter if the term of the LIBOR loan exceeded 90 days. Reddy Corp also paid a
quarterly fee on the average availability under the revolving credit facility at an annual rate of 0.5%.
The
Old Revolving Credit Facility and Old Term Loan did not require any scheduled principal payments prior to their stated maturity dates. The Old Credit Facilities contained financial
covenants, which include the maintenance of certain financial ratios, as defined in the Credit Facilities, and were collateralized by substantially all of the Company's assets.
Debt Refinance Costs.
During the three and nine months ended September 30, 2010, the Company recorded expense of
$0.3 million and
$6.5 million, respectively, for costs incurred in connection with refinancing activities related to its debt. Approximately $5.8 million of the expense incurred in the nine months ended
September 30, 2010 related to the exchange of the Discount Notes for the Second Lien Notes. The exchange was accounted for as a modification of debt.
Letters of Credit.
The New Credit Facility does not provide for the issuance of standby letters of credit. In March 2010, Reddy
Corp entered into a
separate letter of credit facility with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association (the "LC Facility"). Letters of credit issued under the LC Facility are cash collateralized
at 102% of the amount of the letter of credit and are used primarily to secure certain insurance and operating lease obligations. The cash collateral
22
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
6. Revolving Credit Facility and Long-Term Obligations (Continued)
provided
under the LC Facility is maintained in a restricted account at JP Morgan Chase Bank, N.A. and is reported as "Restricted Cash" in the consolidated balance sheets.
Fair Value of Debt Instruments.
At September 30, 2011 and December 31, 2010, the fair value of the Company's long-term
debt, was $379.0 million and $437.0 million, respectively, while the book value was $450.8 million and $450.7 million, respectively. The fair value of the Company's debt is
primarily based on quoted market prices for the debt.
7. Financial Derivative Instruments
Diesel Hedging Agreement.
On March 25, 2011, the Company entered into a hedge to fix the price per gallon of a portion of
the Company's diesel
fuel requirements (the "Diesel Hedge"). The Diesel Hedge began April 1, 2011 and expires on December 28, 2011. The notional amount of gallons hedged changes on a monthly basis to match
anticipated utilization and totals 1.2 million gallons. The Company will pay a weighted average fixed price of $3.17 per gallon (wholesale basis) and receive an amount equal to a wholesale
index rate. Net payable or receivable amounts are settled monthly. On May 6, 2011, the Company entered into an additional hedge to fix the price per gallon of a portion of the Company's diesel
fuel requirements (the "Second Diesel Hedge"). The Second Diesel Hedge began June 1, 2011 and expires on December 31, 2012. The notional amount of gallons hedged changes on a monthly
basis to match anticipated utilization and totals 1.1 million gallons. The Company will pay a weighted average fixed price of $3.04 per gallon (wholesale basis) and receive an amount equal to a
wholesale index rate. Net payable or receivable amounts are settled monthly. The Company uses the hedges to minimize the risk of rising fuel prices. The hedges are not for trading purposes and are
accounted for as economic hedges and were not designated as hedging instruments.
The
Company carries the hedges at fair value on its balance sheet and considers its own credit risk in the valuation of the diesel hedges. Changes in the fair value of the hedge are
recorded in "Cost of sales (excluding depreciation)" in the consolidated statements of operations and in the operating activities section of cash flows. Payments made or received under the hedges are
included in the caption "Cost of Sales (excluding depreciation)" on the consolidated statements of operations and
unrealized gains and losses are presented in the operating activities section of the statements of cash flows.
The
Fair Value Measurements and Disclosures Topic of the Codification establishes a hierarchy for ranking the quality and reliability of the information used to determine fair values.
The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
|
|
|
Level 1:
|
|
Unadjusted quoted market prices in active markets for identical assets or liabilities.
|
Level 2:
|
|
Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices
that are observable for the asset or liability.
|
Level 3:
|
|
Unobservable inputs for the asset or liability.
|
23
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
7. Financial Derivative Instruments (Continued)
The
Diesel Hedges are a Level 2 fair value measure and are valued using the income approach to calculate the present value of the future cash flows expected to be paid under the
hedge. The value of the fixed leg is the present value of the known fixed payments discounted at a market interest rate. The value of the floating leg is the present value of the projected floating
payments based on the forward diesel prices discounted at a market interest rate.
The
following table presents the location of all liabilities associated with the Company's derivative instruments within the Condensed Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
Balance Sheet location
|
|
September 30, 2011
|
|
December 31, 2010
|
|
|
|
|
|
(in thousands)
|
|
Diesel hedges
|
|
Accrued Expenses
|
|
$
|
(245
|
)
|
$
|
|
|
The
following tables present the impact of derivative instruments and their location within the condensed consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as Hedging Instruments under ASC 718
|
|
|
Amount of Loss
Recognized in
Condensed
Consolidated
Statements of
Operations
|
|
Amount of Loss
Recognized in
Condensed
Consolidated
Statements of
Operations
|
|
|
|
|
Three months
ended
September 30,
|
|
Nine months
ended
September 30,
|
|
|
|
|
Location of Loss Recognized
in Condensed Consolidated
Statements of Operations
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
(in thousands)
|
|
|
Diesel hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash change in fair value
|
|
$
|
(83
|
)
|
$
|
|
|
$
|
(245
|
)
|
$
|
|
|
|
Cash settlements
|
|
|
(87
|
)
|
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized loss
|
|
$
|
(170
|
)
|
$
|
|
|
$
|
(362
|
)
|
$
|
|
|
Cost of sales
(excluding depreciation)
|
|
|
|
|
|
|
|
|
|
|
|
Collateral Requirements and Counterparty Risk.
The diesel hedges required the Company to provide cash collateral in the amount
of
$0.6 million, which remained outstanding as of September 30, 2011. In addition, the Company is required to provide collateral if the market prices fall below the average hedge prices. As
of September 30, 2011, the Company has provided cash collateral of $0.3 million related to this requirement.
There
were no derivative instruments outstanding during the three and nine months ended September 30, 2010.
The
Company is exposed to risk of loss in the event of non-performance by the counterparty to the diesel hedges. The Company does not anticipate non-performance
by the counterparty.
24
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
8. Stock-based Compensation
On August 8, 2005, the Board of Directors and stockholders of Reddy Holdings approved the Reddy Ice Holdings, Inc. Long-Term Incentive and Share Award Plan (the
"Plan"). On April 29, 2010 the stockholders of Reddy Holdings approved an amendment to the Plan, which increased the number of shares of common stock available to be issued to employees,
directors and certain third parties in connection with various incentive awards, including stock options, restricted shares and restricted share units to 4,750,000 shares.
The
Plan provides for awards of restricted shares subject to restrictions on transferability and other restrictions, if any, imposed by the Compensation Committee. Such restrictions
lapse under circumstances as determined by the Compensation Committee, including based upon a specified period of continued employment or upon the achievement of established performance criteria.
Restricted shares have all of the rights of a stockholder, including the right to vote restricted shares and to receive dividends. Unvested restricted shares are generally forfeited upon termination
of employment during the applicable restriction period as provided for in the related grant documents. During the nine month period ended September 30, 2011, the Company granted 343,750
restricted shares to employees with a weighted average grant date fair value of $2.75. One-third of the restricted shares vest, contingent on the employee's continuous service to the
Company, on each of the following dates: January 1, 2012, January 1, 2013, and January 1, 2014. No grants were made to employees during the three month period ended
September 30, 2011. The fair value of each restricted share is equal the closing price of the Company's common stock on the grant date. The aggregate grant date fair value is recognized as
compensation expense using the straight-line method over the vesting period, adjusted for estimated forfeitures.
The
Plan provides for option grants with terms, including exercise price and the time and method of exercise, set by the Compensation Committee. However, the exercise price of options is
not permitted to be less than the fair market value of the shares at the time of grant and the term is not permitted to be longer than ten years from the date of grant of the options. Stock options
for 573,300 shares of common stock were granted during the nine month period ended September 30, 2011. The options have seven-year terms and one-third of the options
vest, contingent on the employee's continuous service to the Company, on each of the following dates: January 1, 2012, January 1, 2013, and January 1, 2014. The options granted
during the nine month period ended
September 30, 2011 had weighted average exercise prices of $2.75 per share. No grants were made to employees during the three month period ended September 30, 2011.
25
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
8. Stock-based Compensation (Continued)
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized using a straight-line
method over the shorter of the vesting period or required service period adjusted for estimated forfeitures. The following table sets forth the information about the weighted average grant date fair
value of options granted during the nine months ended September 30, 2011 and the weighted average assumptions used for such grants.
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2011
|
|
Weighted average grant date fair value
|
|
|
$1.81
|
|
Weighted average assumptions used:
|
|
|
|
|
|
Expected volatility
|
|
|
110.3%
|
|
|
Expected lives
|
|
|
3 years
|
|
|
Risk-free interest rates
|
|
|
1.21%
|
|
|
Expected dividend yield
|
|
|
0.00%
|
|
Expected
volatility is based on an analysis of historical volatility of the Company's common stock. Expected lives of options are determined based on projections of option exercise
patterns. Risk-free interest rates are determined using the implied yield currently available for zero coupon U.S. treasury issues with a remaining term equal to the expected life of the
options. The expected dividend yield is based on the September 15, 2008 announcement that the Company's quarterly cash dividends had been suspended indefinitely and the Company does not
currently anticipate paying dividends in the future.
Total
compensation expense associated with the Plan was $0.6 million and $0.4 million during the three months ended September 30, 2011 and 2010, and
$1.8 million and $1.4 million during the nine months ended September 30, 2011 and 2010, respectively. Such compensation expense was recorded in "Operating expenses" in the
consolidated statements of operations. Compensation expense for the nine months ended September 30, 2011 includes a $0.2 million expense for stock awards to non-employee
members of the Board of Directors. As of September 30, 2011, 743,708 shares were available for grant under the Plan.
9. Net Income (Loss) Per Share
The computation of net income (loss) per share is based on net income (loss) divided by the weighted average number of shares outstanding. Restricted shares include rights to receive
dividends that are not subject to the risk of forfeiture even if the underlying restricted shares on which the dividends were paid do not vest. Since restricted shares do not include an obligation to
share in losses, they are excluded from the basic net income (loss) per share calculation for loss periods. Accordingly, 604,642 and 407,613 shares were excluded from the computation of basic net loss
per share for the nine months ended September 30, 2011 and 2010, respectively. However, these restricted shares were included in the computation of basic net income per share for the three
months ended September 30, 2011 and 2010, respectively.
26
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REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
9. Net Income (Loss) Per Share (Continued)
For
the purpose of computing diluted earnings per share, options to purchase 1.5 million and 1.0 million shares of common stock were not included in the computation of
diluted earnings per share for the three months ended September 30, 2011 and 2010, because their effect was anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
(in thousands, except per share amounts)
|
|
Net income (loss) for basic and diluted computation
|
|
$
|
4,892
|
|
$
|
8,990
|
|
$
|
(36,155
|
)
|
$
|
(11,475
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
23,394
|
|
|
22,949
|
|
|
22,742
|
|
|
22,450
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.21
|
|
$
|
0.39
|
|
$
|
(1.59
|
)
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
23,394
|
|
|
22,949
|
|
|
22,742
|
|
|
22,450
|
|
|
Shares issuable from assumed conversion of restricted stock units and options
|
|
|
72
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, as adjusted
|
|
|
23,466
|
|
|
23,058
|
|
|
22,742
|
|
|
22,450
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.21
|
|
$
|
0.39
|
|
$
|
(1.59
|
)
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
10. Income Taxes
The Company's effective tax rate of (5.7%) for the nine months ended September 30, 2011 differs from the Federal statutory income tax rate of 35% due to state income and margin
taxes, the effect of permanent differences and a change in the Company's valuation allowance recorded against certain federal and state deferred tax assets. In the nine months ended
September 30, 2011, the Company recorded an additional valuation allowance totaling $21.7 million relating to federal and state deferred assets. The total valuation allowance of
$25.6 million is comprised of a $0.3 million of allowance against certain state NOL carryforwards and a $25.3 million allowance against the remaining federal and state deferred
tax assets. The valuation allowance is necessary to reduce the recorded deferred tax assets to
the amount management believes the Company is more-likely-than-not to realize.
Reddy
Corp's effective tax rate of 35.7%, calculated on a stand-alone basis, differs from the Federal statutory tax rate of 35% due to state income and margin taxes and the effect of
permanent differences.
The
amount of gross unrecognized tax benefits related to uncertain tax positions was $1.3 million at September 30, 2011 and December 31, 2010, and included accrued
interest and penalties of $0.3 million as of September 30, 2011 and December 31, 2010. The total amount of interest and penalties, net of federal benefit, recognized in the
statement of operations for the nine months ended September 30, 2011 and 2010 was immaterial.
As
a result of net operating loss carryforwards, the Company's tax years from 1998 through 2010 remain open and subject to examination by the Internal Revenue Service and/or certain
state taxing authorities.
27
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
11. Other Charges
In connection with the Company's ongoing remediation efforts related to the material weakness in internal control over financial reporting identified in 2010, we determined during the
third quarter of 2011 that the recorded net book value of our equipment and machinery was overstated by approximately $1.9 million.
We
have considered the impact of this error, including the assessment of any potential impact on prior periods and loan covenants and concluded that the error was not material to our
financial statements for any prior period. As the amounts involved are not material to the Company's projected annual results for the year ending December 31, 2011, or to the trend of earnings,
the Company recorded the $1.9 million cumulative effect of this error as an out of period charge in the quarter ended September 30, 2011 as "Impairment of long-lived assets".
12. Related Parties
The Company has entered into an agreement with an affiliate in which the Company has a cost method investment. Under the agreement the Company purchases equipment from a third party
vendor on behalf of its affiliate and extends payment terms to the affiliate that are comparable to those the Company receives from its vendor. The Company has financed the purchase of approximately
$2.6 million of equipment under this agreement, of which approximately $0.6 million has been repaid through September 30, 2011.
13. Commitments and Contingencies
The following is a discussion of the Company's significant legal matters. The Company is involved in various claims, suits, investigations, and legal proceedings. The Company accrues a
liability when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. At September 30, 2011 and December 31,
2010, no accruals had been made in connection with the matters discussed below.
Antitrust Matters
In March 2008, the Company and certain of its employees, including members of its management, received subpoenas issued by a federal
grand jury sitting in the Eastern District of Michigan seeking documents and information in connection with an investigation by the Antitrust Division of the United States Department of Justice
("DOJ") into possible antitrust violations in the packaged ice industry. In addition, on March 5, 2008, federal officials executed a search warrant at the Company's corporate office in Dallas,
Texas. Current and former employees were also subpoenaed to testify and testified before a federal grand jury in the Eastern District of Michigan and before a federal grand jury in the Southern
District of Ohio. On October 29, 2010, the Company was informed that the Antitrust Division of the DOJ would take no action against the Company or any of its employees in connection with its
investigation of the packaged ice industry. In January 2011, counsel for the Company confirmed that the Antitrust Division of the DOJ has formally closed its investigation of the packaged ice
industry.
In
March 2008, June 2008, and June 2009, the Company was served with antitrust civil investigative demands ("CIDs") by the Offices of the Attorneys General of the States of Florida,
Arizona and Michigan, respectively, requesting the production of documents and information relating to an
28
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
13. Commitments and Contingencies (Continued)
investigation
of agreements in restraint of trade and/or price fixing with respect to the market for packaged ice. The Company has been advised that these CIDs are related to a multi-state antitrust
investigation of the packaged ice industry. The Company is cooperating with the investigation and has complied with all requests for documents and information regarding these matters. The Company may
in the future receive additional civil investigative demands or similar information requests from states participating in the multi-state investigation or conducting their own investigations.
At
this time, the Company is unable to predict the outcome of that investigation, the possible loss or possible range of loss, if any, associated with the resolution of that
investigation or any potential effect the investigation may have on the Company, its employees or operations.
Beginning
in 2008 a number of lawsuits, including putative class action lawsuits, were filed against the Company, Reddy Ice Corporation, Home City Ice Company, Arctic Glacier Income
Fund, Arctic Glacier, Inc. and Arctic Glacier International, Inc., in various federal and state courts in multiple jurisdictions alleging violations of federal and state antitrust laws
and related claims and seeking damages and injunctive relief. One of the state court cases filed against the Company was dismissed. Pursuant to an Order from the Judicial Panel on Multidistrict
Litigation, the other civil actions have been transferred and consolidated for pretrial proceedings in the United States District Court for the Eastern District of Michigan. Home City entered into a
settlement agreement with the direct purchaser plaintiffs that was approved by the Court on February 22, 2011. On March 30, 2011, Arctic Glacier announced that it had entered into a
proposed settlement agreement with the direct purchaser plaintiffs. Preliminary approval of that settlement was granted on July 20, 2011, and a final fairness hearing was held on
October 28, 2011. The Court has taken the motion for final approval under advisement. Discovery is ongoing regarding the claims asserted on behalf of direct purchasers against the Company. On
March 11, 2011, the Court entered an Order granting in part and denying in part motions to dismiss the indirect purchaser claims. On May 25, 2011, the indirect purchaser plaintiffs filed
a Consolidated Class Action Complaint asserting violations of the antitrust laws of various states and related claims. The Company and the other defendants filed motions to dismiss the Consolidated
Class Action Complaint. Those motions were heard on October 28, 2011, and were taken under advisement by the Court.
On
March 1, 2010, a putative class action Statement of Claim was filed against the Company in the Ontario Superior Court of Justice in Canada alleging violations of Part VI
of the Competition Act and seeking general damages, punitive and exemplary damages, pre-judgment and post-judgment interest, and costs. On March 8, 2010, a putative
class action Statement of Claim was filed against the Company in the Court of Queen's Bench of Alberta, Judicial District of Calgary, in Canada, alleging violations of Part VI of the
Competition Act and seeking general damages, special and pecuniary damages, punitive and exemplary damages, interest and costs.
An
agreement has been reached to resolve the class actions filed in Canada against Reddy Ice and Arctic Glacier, Inc. The agreement provides that Arctic Glacier will pay CDN
$2,000,000, all claims asserted against Reddy Ice and Arctic Glacier in both Ontario and Alberta will be dismissed, and Reddy Ice and Arctic Glacier will be granted full and final releases with regard
to those claims. Reddy Ice is not making any payment in connection with this settlement. The agreement is subject to the execution of final settlement documents and court approval.
29
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
13. Commitments and Contingencies (Continued)
One
direct action lawsuit was filed against us in the United States District Court for the Eastern District of Michigan asserting claims based on alleged violations of federal and state
antitrust laws, RICO and tortious interference and seeking damages, civil penalties and injunctive relief. The defendants filed motions to dismiss that case. On May 29, 2009, the Court
dismissed all claims against us in that lawsuit. On June 29, 2009, the plaintiff filed a motion for reconsideration, and on July 17, 2009 the Court reversed, in part, its May 29,
2009 order, reinstating only the RICO claim against us. The dismissal of the remaining claims was not affected. On August 10, 2009, the Company filed an answer to the reinstated claim.
Discovery is ongoing in that matter.
On
April 20, 2011, an Order was entered unsealing a Qui Tam complaint filed on June 25, 2008, by Martin McNulty, on behalf of the United States, against Reddy Ice
Holdings, Inc., Reddy Ice Corporation, Arctic Glacier Income Fund, Arctic Glacier, Inc., Arctic Glacier International, Inc., and Home City Ice Company, Inc. The complaint
alleges violations of the federal False Claims Act by presentation of false claims, making or using a false record or statement, and conspiracy to defraud, and seeks damages, civil penalties, attorney
fees and costs. The Government has elected not to intervene in that case and the Company and the other defendants have filed motions to dismiss that complaint. Those motions are set to be heard on
November 16, 2011.
The
Company intends to vigorously defend the pending lawsuits. At this time, the Company is unable to predict the outcome of these lawsuits, the possible loss or possible range of loss,
if any, associated with the resolution of these lawsuits or any potential effect they may have on the Company or its operations.
Stockholder Litigation
Beginning on August 8, 2008, putative class action complaints were filed in the United States District Court for the Eastern
District of Michigan asserting claims under the federal
securities laws against the Company and certain of its current or former senior officers. On July 17, 2009, the Court consolidated the actions and appointed a lead plaintiff and interim lead
plaintiff's counsel. The lead plaintiff filed a consolidated amended complaint on November 2, 2009. That complaint purports to assert claims on behalf of an alleged class of purchasers of the
Company's common stock and alleges that the defendants misrepresented and failed to disclose the existence of, and the Company's alleged participation in, an alleged antitrust conspiracy in the
packaged ice industry. The Company and the other defendants have filed an answer in that case, a briefing schedule relating to class certification has been entered, and discovery is ongoing.
Two
stockholder derivative actions have been filed on the Company's behalf in state district court in Dallas County, Texas, naming as defendants, among others, certain current and former
officers and members of the Company's Board of Directors. Those cases have been consolidated in the 68th Judicial District Court of Dallas County, Texas. On August 1, 2011, the Court
granted in part and denied in part Special Exceptions filed by the defendants. The Company filed a petition with the Court of Appeals seeking a writ of mandamus relating to the denial of certain
Special Exceptions. On September 1, 2011, a Third Amended Consolidated Shareholder Derivative Petition was filed in that matter. That Third Amended Petition asserts claims for breach of
fiduciary duty, unjust enrichment, abuse of control, and gross mismanagement and seeks damages, equitable relief, attorney fees, expenses and costs. On October 10, 2011, the petition for a writ
of mandamus was conditionally granted by the
30
Table of Contents
REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
13. Commitments and Contingencies (Continued)
Court
of Appeals and the trial court was ordered to grant the Special Exception relating to demand futility. The plaintiffs filed a Motion for Rehearing, which was denied on November 7, 2011.
The trial of that case is currently set for March 20, 2012.
The
Company intends to vigorously defend the pending lawsuits. At this time, the Company is unable to predict the outcome of these lawsuits, the possible loss or possible range of loss,
if any, associated with the resolution of these lawsuits or any potential effect they may have on the Company or its operations.
Other Matters
The Company is also involved in various other claims, lawsuits and proceedings arising in the ordinary course of business, including
intellectual property matters. There are uncertainties inherent in the ultimate outcome of such matters and it is difficult to determine the ultimate costs that we may incur. We believe the resolution
of such other ordinary course uncertainties and the incurrence of such costs will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
As
a result of the decline in the Company's stock price and the reduction in its stockholders' equity resulting from its decline in earnings, the Company was notified by the New York
Stock Exchange ("NYSE") in September of 2011 that it was not in compliance with the NYSE continued listing standards. On November 7
th
, 2011, the Company filed a plan with the NYSE
to achieve compliance with the continued listing standards within 18 months. If the plan is accepted by the NYSE, the NYSE will monitor the Company's performance under the plan on a quarterly
basis. To the extent (i) the NYSE does not accept the Company's plan, (ii) the Company cannot meet the applicable standards within the 18 month period if its plan is accepted, or
(iii) the NYSE determines the Company is not satisfying its obligations under the plan to achieve compliance, the Company's stock could be delisted from NYSE.
31
Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
condensed consolidated financial statements and the related notes and other information included elsewhere in this Form 10-Q and our Annual Report on Form 10-K
for the year ended December 31, 2010, previously filed with the Securities and Exchange Commission ("SEC"). Except as otherwise noted, there are no material differences between the consolidated
balances presented herein and the balances of Reddy Ice Corporation.
Reddy
Ice Holdings, Inc. ("Reddy Holdings"), and its wholly-owned subsidiary, Reddy Ice Corporation ("Reddy Corp."), manufacture and distribute packaged ice products. We are the
largest manufacturer of packaged ice products in the United States and serve a variety of customers in 34 states and the District of Columbia under the Reddy Ice® brand name.
Uncertainty of Forward Looking Statements and Information
Other than statements of historical facts, statements made in this Form 10-Q, statements made by us in periodic
press releases, oral statements made by our management to analysts and stockholders and statements made in the course of presentations about our company constitute "forward- looking statements"
intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. We believe the expectations reflected in such forward-looking statements are
accurate. However, we cannot assure you that such expectations will occur. These forward- looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from future results expressed or implied by the forward- looking statements. Factors you should consider that could cause these
differences are:
-
-
general economic trends and seasonality;
-
-
weather conditions;
-
-
the ability of our subsidiary to make distributions to us in amounts sufficient to service our debt and pay our taxes;
-
-
our substantial leverage and ability to service our debt;
-
-
the restrictive covenants and financial covenants under our indebtedness;
-
-
the availability of capital sources;
-
-
fluctuations in our operating costs, including the prices of electricity, fuel, polyethylene and other required expenses;
-
-
competitive practices in the industry in which we compete;
-
-
changes in labor conditions;
-
-
our capital expenditure requirements;
-
-
the risks associated with acquisitions and the failure to integrate acquired businesses;
-
-
technological changes and innovations;
-
-
the costs and effects of legal and administrative proceedings, settlements, investigations and claims;
-
-
legislative or regulatory requirements; and
-
-
all the other factors described herein under Item 1A of Part II and in Item 1A of Part I of
our Annual Report on Form 10-K.
32
Table of Contents
You
should not unduly rely on these forward-looking statements as they speak only as of the date of this report. Except as required by law, we are not obligated to publicly release any
revisions to these forward looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events. Important factors that
could cause our actual results to differ materially from our expectations are discussed elsewhere in this report.
General
Overview.
We are the largest manufacturer and distributor of packaged ice in the United States and currently serve a variety of
customers in 34
states and the District of Columbia. Our business consists of:
-
-
the traditional manufacture and delivery of ice from a central point of production to the point of sale; and
-
-
the installation and operation of The Ice Factory®, our proprietary in-store bagging ("ISB")
equipment located in high volume locations that produces, packages and stores ice through an automated, self-contained system.
Seasonality.
The packaged ice business is highly seasonal, characterized by peak demand during the warmer months of May through
September, with an
extended peak selling season in the southern United States. Approximately 71%, 69% and 69% of our annual revenues occurred during the second and third calendar quarters in each of 2010, 2009 and 2008.
As a result of seasonal revenue declines
and a less than proportional decline in expenses during the first and fourth quarters, we typically experience lower margins resulting in losses during these periods.
Revenues.
Our revenues primarily represent sales of packaged ice and packaged ice bags for use in our ISB equipment. There is no
right of return with
respect to these products. A portion of our revenues also represents fees earned under management agreements for ISB systems located outside our primary territories that are recognized as earned under
contract terms.
Cost of Sales (Excluding Depreciation).
Our cost of sales (excluding depreciation) consists of costs related to the manufacturing
and distribution of
our products, including, in particular:
-
-
manufacturing and distribution labor costs;
-
-
raw materials (primarily polyethylene-based plastic bags);
-
-
product delivery expenses, including fuel and vehicle rental expense related to products delivered by our own distribution
network, as well as fees paid to distributors who deliver ice to our customers on our behalf;
-
-
utility expenses (primarily electricity used in connection with the manufacturing, storage and distribution processes);
and
-
-
ISB system costs associated with customer service representatives and machine technicians (ISB systems generally do not
increase our plant occupancy, delivery or utility costs).
Depreciation Expense Related to Cost of Sales and Depreciation and Amortization.
Depreciation and amortization are divided into
two line items:
depreciation expense related to cost of sales and depreciation and amortization expense. Depreciation expense related to cost of sales consists of depreciation expense for our production and
distribution equipment. Depreciation and amortization expense consists of depreciation and amortization expense for our selling, general and administrative functions.
33
Table of Contents
Operating Expenses.
Our operating expenses are costs associated with selling, general and administrative functions. These costs
include executive
officers' compensation, office and administrative salaries, insurance, legal and other professional services and costs associated with leasing office space. Labor costs, including associated payroll
taxes and benefit costs, but excluding non-cash stock-based compensation expense, included in operating expenses represented approximately 8% and 9% of revenues in the nine months ended
September 30, 2011 and 2010, respectively.
Cost of antitrust investigations and related litigation.
Costs related to the current antitrust investigations and related
litigation, net of
insurance recoveries, are composed primarily of legal fees, document collection costs and the fees of other experts and consultants. These costs have been recognized and paid by Reddy Holdings.
Facilities.
At September 30, 2011, we owned or operated 58 ice manufacturing facilities, 77 distribution centers and
approximately 3,500 Ice
Factories. As of the same date, we had an aggregate daily ice manufacturing capacity of approximately 17,000 tons.
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Change from Last
Year
|
|
|
|
2011
|
|
2010
|
|
Dollars
|
|
%
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
126,330
|
|
$
|
120,147
|
|
$
|
6,183
|
|
|
5.1
|
|
Cost of sales (excluding depreciation)
|
|
|
77,800
|
|
|
71,770
|
|
|
6,030
|
|
|
8.4
|
|
Depreciation expense related to cost of sales
|
|
|
7,819
|
|
|
5,694
|
|
|
2,125
|
|
|
37.3
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,711
|
|
|
42,683
|
|
|
(1,972
|
)
|
|
(4.6
|
)
|
Operating expenses
|
|
|
14,725
|
|
|
14,358
|
|
|
367
|
|
|
2.6
|
|
Depreciation and amortization expense
|
|
|
2,249
|
|
|
2,435
|
|
|
(186
|
)
|
|
(7.6
|
)
|
Loss on dispositions of assets
|
|
|
629
|
|
|
1,035
|
|
|
(406
|
)
|
|
(39.2
|
)
|
Impairment of long-lived assets
|
|
|
1,971
|
|
|
514
|
|
|
1,457
|
|
|
283.5
|
|
Acquisition expenses
|
|
|
1,664
|
|
|
414
|
|
|
1,250
|
|
|
301.9
|
|
Gain on contingent acquisition consideration
|
|
|
(202
|
)
|
|
|
|
|
(202
|
)
|
|
(100.0
|
)
|
Cost (insurance recoveries) related to antitrust investigations and related litigation
|
|
|
785
|
|
|
(3,867
|
)
|
|
4,652
|
|
|
(120.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18,890
|
|
|
27,794
|
|
|
(8,904
|
)
|
|
(32.0
|
)
|
Interest expense, net
|
|
|
(14,694
|
)
|
|
(14,096
|
)
|
|
(598
|
)
|
|
(4.2
|
)
|
Gain on bargain purchase
|
|
|
|
|
|
264
|
|
|
(264
|
)
|
|
(100.0
|
)
|
Debt refinance costs
|
|
|
|
|
|
(310
|
)
|
|
310
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4,196
|
|
|
13,652
|
|
|
(9,456
|
)
|
|
(69.3
|
)
|
Income tax benefit (expense)
|
|
|
696
|
|
|
(4,662
|
)
|
|
5,358
|
|
|
(114.9
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,892
|
|
$
|
8,990
|
|
$
|
(4,098
|
)
|
|
(45.6
|
)
|
|
|
|
|
|
|
|
|
|
|
Revenues:
Revenues for the three months ended September 30, 2011 increased $6.2 million from the three months ended
September 30, 2010. The low single digits percentage increase in packaged ice volume sales is primarily due to acquisitions, as well as improved weather patterns in most of our Western and
Mid-Western markets and the addition of new customers through organic growth, partially offset by adverse weather in our Eastern markets, and weakening economic conditions impacting same
store sales.
Cost of sales (excluding depreciation):
Cost of sales (excluding depreciation) for the three months ended September 30, 2011
increased
$6.0 million from the three months ended September 30, 2010.
34
Table of Contents
This
increase in cost of sales is primarily due to increased volume sales, as well as unit cost increases of fuel and plastic bags.
Significant
expenses included in cost of sales include the following:
|
|
|
|
|
|
|
|
|
|
Percentage of Revenues
|
|
|
|
2011
|
|
2010
|
|
Labor costs, including associated payroll taxes and benefit costs (including health insurance)
|
|
|
19
|
%
|
|
21
|
%
|
Plastic bags
|
|
|
6
|
%
|
|
5
|
%
|
Operating leases (including vehicles, plant equipment and ISB equipment)
|
|
|
5
|
%
|
|
4
|
%
|
Fuel
|
|
|
6
|
%
|
|
4
|
%
|
Independent third party distribution services
|
|
|
5
|
%
|
|
6
|
%
|
Maintenance
|
|
|
4
|
%
|
|
3
|
%
|
Vehicle maintenance and insurance claims
|
|
|
2
|
%
|
|
1
|
%
|
Electricity
|
|
|
5
|
%
|
|
6
|
%
|
Depreciation expense related to cost of sales:
Depreciation expense related to cost of sales increased $2.1 million as a
result of a change in
accounting estimate to eliminate salvage value on certain equipment in the fourth quarter of 2010, as well as new production and distribution equipment placed
in service in 2010 and the first nine months of 2011, partially offset by dispositions and assets becoming fully depreciated.
Operating expenses:
Operating expenses increased $0.4 million from the three months ended September 30, 2010 to the
three months ended
September 30, 2011. This increase is primarily due to a $0.6 million increase in employee labor costs related to acquired operations, $0.2 million increase in non-cash
stock compensation, and $0.1 million increase in bad debt expense, partially offset by a $0.3 million decrease in miscellaneous operating expenses and a $0.3 million decrease in
employee benefits costs.
Depreciation and amortization expense:
Depreciation and amortization expense decreased $0.2 million as a result of
dispositions and assets
becoming fully depreciated, partially offset by new equipment placed in service and the recognition of certain intangible assets in connection with acquisitions in 2010 and the first nine months of
2011.
Loss on dispositions of assets:
A $0.6 million loss on disposition of assets was recognized on the disposition of certain
excess assets during
the three months ended September 30, 2011. A $1.0 million loss on disposition of assets was recognized in the three months ended September 30, 2010. We are continuing to evaluate
our facilities and other equipment assets and expect to make certain disposals in the future. Additional gains or losses on dispositions may occur in future periods.
Impairment of long-lived assets:
Impairment charges of $2.0 million and $0.5 million were recognized in the three
months
ended September 30, 2011 and 2010, respectively. Approximately $1.9 million of the 2011 impairment charge relates to the correction of errors identified through our 2011 fixed asset
inventory counts. Deterioration of current market conditions for our assets or changes in facility operations could trigger additional impairments in future periods.
Acquisition expenses:
We incurred $1.7 million of acquisition expenses during the three months ended September 30,
2011. Substantially
all of these expenses were in connection with the Company's evaluation of a strategic merger opportunity within the packaged ice industry. While this evaluation is ongoing, no agreement has been
reached and there can be no assurance that an agreement will be reached. Acquisition expense for the three months ended September 30, 2010 was $0.4 million.
35
Table of Contents
Cost (insurance recoveries) related to antitrust investigations and related litigation:
During the three months ended
September 30, 2011 and
2010, we incurred $0.8 million and $1.1 million, respectively, of legal fees and other expenses associated with the antitrust investigation conducted by the Antitrust Division of the
United States Department of Justice and the related litigation. We received a $5.0 million settlement in respect of claimed cost reimbursements from one of our insurance carriers during the
three months ended September 30, 2010. We became aware of and began incurring expenses related to the investigation in March of 2008. These costs have been recognized and paid by Reddy
Holdings.
Interest expense, net:
Net interest expense increased $0.6 million from the three months ended September 30, 2010 to
the three months
ended September 30, 2011. This change is related to additional interest associated with borrowings under our revolving credit facility. The amount of net interest expense recognized by Reddy
Holdings was $0.3 million during the three months ended September 30, 2011 and 2010.
Debt refinance costs:
Costs of $0.3 million were incurred in the three months ended September 30, 2010 in connection
with refinancing
activities related to our debt. No such costs were incurred during the three months ended September 30, 2011.
Income tax (expense) benefit:
The effective tax rate decreased from 34.2% during the three months ended September 30, 2010
to (16.6%) during
the three months ended September 30, 2011 primarily as a result of the effects of a valuation allowance recorded against certain federal and state deferred tax assets.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Change from Last
Year
|
|
|
|
2011
|
|
2010
|
|
Dollars
|
|
%
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
273,575
|
|
$
|
260,204
|
|
$
|
13,371
|
|
|
5.1
|
|
Cost of sales (excluding depreciation)
|
|
|
181,793
|
|
|
168,787
|
|
|
13,006
|
|
|
7.7
|
|
Depreciation expense related to cost of sales
|
|
|
23,007
|
|
|
16,655
|
|
|
6,352
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
68,775
|
|
|
74,762
|
|
|
(5,987
|
)
|
|
(8.0
|
)
|
Operating expenses
|
|
|
41,839
|
|
|
41,850
|
|
|
(11
|
)
|
|
(0.0
|
)
|
Depreciation and amortization expense
|
|
|
7,233
|
|
|
6,484
|
|
|
749
|
|
|
11.6
|
|
Loss on dispositions of assets
|
|
|
461
|
|
|
2,432
|
|
|
(1,971
|
)
|
|
(81.0
|
)
|
Impairment of long-lived assets
|
|
|
2,741
|
|
|
750
|
|
|
1,991
|
|
|
265.5
|
|
Acquisition expenses
|
|
|
4,111
|
|
|
624
|
|
|
3,487
|
|
|
558.8
|
|
Gain on contingent acquisition consideration
|
|
|
(202
|
)
|
|
|
|
|
(202
|
)
|
|
(100.0
|
)
|
Cost (insurance recoveries) of antitrust investigations and related litigation
|
|
|
2,937
|
|
|
(1,824
|
)
|
|
4,761
|
|
|
261.0
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,655
|
|
|
24,446
|
|
|
(14,791
|
)
|
|
(60.5
|
)
|
Interest expense, net
|
|
|
(43,861
|
)
|
|
(35,663
|
)
|
|
(8,198
|
)
|
|
23.0
|
|
Gain on bargain purchase
|
|
|
|
|
|
264
|
|
|
(264
|
)
|
|
(100.0
|
)
|
Debt refinance costs
|
|
|
|
|
|
(6,478
|
)
|
|
6,478
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(34,206
|
)
|
|
(17,431
|
)
|
|
(16,775
|
)
|
|
(96.2
|
)
|
Income tax (expense) benefit
|
|
|
(1,949
|
)
|
|
5,956
|
|
|
(7,905
|
)
|
|
(132.7
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(36,155
|
)
|
$
|
(11,475
|
)
|
$
|
(24,680
|
)
|
|
(215.1
|
)
|
|
|
|
|
|
|
|
|
|
|
36
Table of Contents