UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

OR

o                                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to              

Commission file number 001-32596

REDDY ICE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

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.   Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No x

The number of shares of registrant’s common stock outstanding as of July 24, 2007 was 21,809,395.

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2007

TABLE OF CONTENTS

 

1

PART I - FINANCIAL INFORMATION

Item 1.                        Financial Statements

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

ASSETS

		June 30, 2007			December 31, 2006
		(in thousands, except share data)
CURRENT ASSETS:
Cash and cash equivalents		$	11,995			$	39,434
Accounts receivable, net		49,706				25,723
Inventories		13,813				11,455
Prepaid expenses and other current assets		3,090				2,719
Deferred tax assets		1,879				1,620
Total current assets		80,483				80,951
PROPERTY AND EQUIPMENT, net		240,131				230,242
GOODWILL		223,758				216,370
OTHER INTANGIBLES, net		82,330				79,889
OTHER ASSETS		3,020				2,820
TOTAL		$	629,722			$	610,272
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations		$	49			$	51
Revolving credit facility		21,200				—
Accounts payable		21,984				14,090
Accrued expenses		18,251				18,659
Dividends payable		9,268				8,828
Total current liabilities		70,752				41,628
LONG-TERM OBLIGATIONS		371,370				364,844
DEFERRED TAXES AND OTHER LIABILITIES, net		38,187				36,152
COMMITMENTS AND CONTINGENCIES (Note 10)		—				—
STOCKHOLDERS’ EQUITY:
Common stock: $0.01 par value; 75,000,000 shares authorized; 21,809,395 shares issued and outstanding at June 30, 2007 and December 31, 2006		218				218
Additional paid-in capital		219,019				216,802
Accumulated deficit		(71,506		)		(51,990		)
Accumulated other comprehensive income		1,682				2,618
Total stockholders’ equity		149,413				167,648
TOTAL		$	629,722			$	610,272

See notes to condensed consolidated financial statements.

2

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

See notes to condensed consolidated financial statements.

3

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)

 

See notes to condensed consolidated financial statements.

4

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

See notes to condensed consolidated financial statements.

5

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

1. General

The condensed consolidated financial statements of Reddy Ice Holdings, Inc. included herein are unaudited; however, the balance sheet as of December 31, 2006 has been derived from the audited financial statements for that date. 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 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 covered have been made and are of a normal and recurring nature. The financial statements included herein should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2006. Operating results for the six months ended June 30, 2007 are not necessarily indicative of the results to be achieved for the full year.

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 and bottled water and own and operate refrigerated warehouses. The Company is the largest manufacturer of packaged ice products in the United States. The Company serves approximately 82,000 customer locations in 31 states and the District of Columbia.

On July 2, 2007, Reddy Holdings announced that it had entered into an Agreement and Plan of Merger, dated as of July 2, 2007 (the “Merger Agreement”), by and among Reddy Holdings, Frozen, LLC, a Delaware limited liability company, Hockey Parent Inc., a Delaware corporation (together with Frozen, LLC, the “Parents”) and Hockey MergerSub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Parents (“Merger Sub”). The Parents are entities formed by GSO Capital Partners LP (“GSO”). The Merger Agreement provides for the merger (the “Merger”) of Merger Sub with and into Reddy Holdings, with Reddy Holdings being the surviving corporation in the Merger. Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Reddy Holdings’ common stock, par value $0.01 per share, other than any shares owned by Reddy Holdings, the Parents or Merger Sub, or by any stockholders who are entitled to and who properly exercise appraisal rights under Delaware law, will be canceled and will be automatically converted into the right to receive $31.25 in cash, without interest.

2. Acquisitions

During the six months ended June 30, 2007, the Company purchased 13 ice companies. Including direct acquisition costs, the total acquisition consideration was $18.8 million. The total purchase price was allocated to the acquired assets and assumed liabilities based upon estimates of their respective fair values as of the respective closing dates using valuations and other studies. The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition (dollars in millions):

 

6

---

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

2. Acquisitions (Continued)

The excess of the aggregate purchase price over the net assets acquired of $12.9 million was allocated to goodwill ($7.4 million) and other intangible assets ($5.5 million). Other intangible assets are comprised of customer lists and patents, which are being amortized on a straight line basis over useful lives of 11 to 30 years.

During 2006, the Company purchased ten ice companies for total acquisition consideration of $12.9 million. The results of operations of the 2006 and 2007 acquisitions are included in the Company’s consolidated results of operations from the date of each acquisition, ranging from January 6, 2006 to December 22, 2006 and from January 2, 2007 to June 29, 2007.

The following unaudited pro forma financial information presents the Company’s consolidated results of operations (i) for the three months and six months ended June 30, 2007 as if the 2007 acquisitions had all occurred on January 1, 2007 and (ii) for the three months and six months ended June 30, 2006 as if the 2007 and 2006 acquisitions had all occurred on January 1, 2006:

 

3. Inventories

Inventories consist of raw materials, supplies and finished goods. Raw materials and supplies consist of ice packaging materials, spare parts, bottled water supplies and merchandiser parts. Finished goods consist of packaged ice and bottled water. Inventories are valued at the lower of cost or market and include overhead allocations. Cost is determined using the first-in, first-out and average cost methods.

 

7

---

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

4. Accrued Expenses

 

5. Revolving Credit Facility and Long-Term Obligations

101¤2% Senior Discount Notes.   On October 27, 2004, Reddy Holdings issued $151 million at maturity of 101¤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 will increase from the date of issuance until November 1, 2008 at a rate of 101¤2% per annum such that the accreted value will equal the stated principal amount at maturity on November 1, 2008. Thereafter, cash interest will accrue and be payable semi-annually at a rate of 101¤2% per annum.

The Discount Notes are unsecured obligations of Reddy Holdings and are:

     not guaranteed by any of Reddy Holdings’ subsidiaries;

     senior in right of payment to all of Reddy Holdings’ future subordinated indebtedness;

     equal in right of payment with Reddy Holdings’ existing and future unsecured senior indebtedness;

     effectively subordinated to Reddy Holdings’ existing and future secured debt, including debt under the Company’s credit facilities that is guaranteed by Reddy Holdings; and

     structurally subordinated to all obligations and preferred equity of Reddy Holdings’ subsidiaries.

The Discount Notes include customary covenants that restrict, among other things, Reddy Holdings’ 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. Prior to November 1, 2007, Reddy Holdings may redeem up to 35% of the principal amount of the Discount Notes at a redemption price of 110.5% of the accreted value thereof, plus accrued and unpaid interest to the date of redemption, with funds raised in equity offerings that are specified in the indenture governing the Discount Notes. From and after November 1, 2008, Reddy Holdings may redeem any or all of the Discount Notes by paying a redemption premium, which is initially 5.25% of the principal amount at maturity of the notes and declines annually to 0% for the period commencing on November 1, 2010 and thereafter. If a change of control occurs prior to November 1, 2007, Reddy Holdings may, at its option, redeem all, but not less than all, of the Discount Notes at a redemption price equal to the sum of (i) the accreted value of the notes as of the redemption date, (ii) a premium equal to 125% of one year’s coupon payment and (iii) any accrued and unpaid interest

8

---

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

5. Revolving Credit Facility and Long-Term Obligations (Continued)

to the date of redemption. If Reddy Holdings experiences a change of control and does not elect to make the optional redemption described in the previous sentence, Reddy Holdings will be required to make an offer to repurchase the Discount Notes at a price equal to 101% of their accreted value, plus accrued and unpaid interest, if any, to the date of purchase. Reddy Holdings may also be required to make an offer to purchase the senior discount notes with proceeds of asset sales that are not reinvested in the Company’s business or used to repay other indebtedness.

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, CIBC World Markets Corp., Bear Stearns Corporate Lending Inc. and Lehman Commercial Paper, Inc. (the “Credit Facilities”). The Credit Facilities provide for a $60 million revolving credit facility (the “Revolving Credit Facility”) and a $240 million term loan (the “Term Loan”). The Revolving Credit Facility and Term Loan mature on August 12, 2010 and August 12, 2012, respectively.

At June 30, 2007, the Company had $31.9 million of availability under the Revolving Credit Facility, which was net of an outstanding balance of $21.2 million and standby letters of credit of $6.9 million. The standby letters of credit are used primarily to secure certain insurance obligations.

Principal balances outstanding under the Credit Facilities bear 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 is 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%. At June 30, 2007, the weighted average interest rate of borrowings outstanding under the Credit Facility was 7.2%. Interest on base rate loans is payable on the last day of each quarter. 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. The Company also pays a quarterly fee on the average availability under the Revolving Credit Facility at an annual rate of 0.5%. The terms of the Credit Facilities prohibit Reddy Corp. from paying dividends and otherwise transferring assets to Reddy Holdings, except for certain limited dividends, the proceeds of which must be used to maintain Reddy Holdings’ corporate existence.

The Revolving Credit Facility and Term Loan do not require any scheduled principal payments prior to their stated maturity dates. Subject to certain conditions, mandatory repayments of the Revolving Credit Facility and Term Loan (and if the Term Loan is no longer outstanding, mandatory commitment reductions of the Revolving 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 Credit Facilities, an event of default will occur under the Credit Facilities. Under the Credit Facilities, Reddy Corp. may only pay dividends to Reddy Holdings if Reddy Corp.’s leverage ratio for the most recently ended fiscal quarter is less than or equal to 3.75 to 1.0. In addition, the Credit Facilities preclude Reddy Corp. from declaring any dividends if an event of default under the Credit Facilities has occurred and is continuing. In particular, it

will be an event of default if Reddy Corp.’s leverage ratio exceeds 4.0 to 1.0 or Reddy Corp.’s interest coverage ratio is less than 3.25 to 1.0.

9

---

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

5. Revolving Credit Facility and Long-Term Obligations (Continued)

The Credit Facilities contain financial covenants, which include the maintenance of certain financial ratios, as defined in the Credit Facilities, and are collateralized by substantially all of the Company’s assets and the capital stock of its subsidiaries. Reddy Holdings guarantees the Credit Facilities and such guarantee is secured by the capital stock of Reddy Corp. At June 30, 2007, Reddy Corp. was in compliance with these covenants.

On January 1, 2007, Reddy Corp. merged with its parent, Reddy Ice Group, Inc., with Reddy Corp. being the surviving entity. The Credit Facilities were amended on that date to allow the merger and to provide for the assumption of the Credit Facilities by Reddy Corp.

Interest Rate Hedging Agreement.   Effective September 12, 2005, the Company entered into an interest rate hedging agreement (the “Hedge”) to fix the interest rate on a portion of its Term Loan. The Hedge has a term of three years and ten months and an initial notional balance of $220 million. The notional balance decreases by $20 million on October 12 of each of the next three years, beginning on October 12, 2006. The Company pays a fixed rate of 4.431% on the notional balance outstanding and receives an amount equal to 3-month LIBOR. Any net payable or receivable amount is settled quarterly. If the Company had been required to settle the Hedge as of June 30, 2007, it would have received $2.8 million. In accordance with hedge accounting rules, the fair value of the Hedge is included in the caption “Other Assets” in the consolidated balance sheet. Changes in the fair value of the Hedge are recorded as “Other Comprehensive Income” in the consolidated statement of stockholders’ equity. No gain or loss was recognized in any periods presented in the consolidated statement of operations. In the event that the Merger is completed (see Note 1), the existing Credit Facilities will be repaid.  Management is currently evaluating whether the Hedge will be terminated or redesignated as a hedge of the anticipated future cash flows of the variable rate debt that is anticipated to be incurred in connection with the Merger.  In the event the Credit Facilities are repaid and the Hedge is terminated, the amount reported in “Other Comprehensive Income” will be reclassified to a gain or loss in the consolidated statement of operations.  As of June 30, 2006, such a reclassification would result in a gain of $1.7 million, net of tax. The Company is exposed to risk of loss in the event of non-performance by the counterparty to the Hedge; however, it does not anticipate non-performance by the counterparty.

At June 30, 2007 and December 31, 2006, long-term obligations consisted of the following:

 

10

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

6. Capital Stock

Common Stock.   Reddy Holdings is authorized to issue up to 75,000,000 shares of common stock, par value $0.01 per share. Holders of Reddy Holdings’ common stock are entitled to one vote per share on all matters to be voted on by stockholders and are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors of Reddy Holdings. Upon any liquidation or dissolution of Reddy Holdings, the holders of common stock are entitled, subject to any preferential rights of the holders of preferred stock, to receive a pro rata share of all of the assets remaining available for distribution to stockholders after payment of all liabilities.

Since August 1, 2005, the board of directors of Reddy Holdings has declared the following dividends on the Company’s common stock:

 

Preferred Stock.   Reddy Holdings is authorized to issue up to 25,000,000 shares of $0.01 par value preferred stock, all of which is currently undesignated and unissued.

7. Employee Benefit Plans

2005 Equity Incentive Plan.   On August 8, 2005, the board of directors and stockholders of Reddy Holdings approved the 2005 Equity Incentive Plan. Under the 2005 Equity Incentive Plan, up to 750,000 shares of common stock may be issued to employees, directors and certain third parties in connection with various incentive awards, including stock options, restricted shares and restricted share units. On October 18, 2005, Reddy Holdings filed a Registration Statement on Form S-8 with the SEC to cover the reoffer and resale of up to 750,000 shares of Reddy Holdings’ common stock that Reddy Holdings may issue in the future to participants in the 2005 Equity Incentive Plan. On May 17, 2007, the Company’s stockholders approved amendments to the 2005 Equity Incentive Plan that, among other things, increased the maximum number of shares of common stock available for issuance to 1,250,000.

During 2007, restricted share units (“RSUs”) have been granted to certain employees and the independent directors of Reddy Holdings in the following amounts: 4,625 RSUs on February 19, 2007, and 10,000 RSUs on April 10, 2007. Each RSU provides for the grant of one share of unrestricted common stock on the date that the vesting terms of each RSU is satisfied.

Generally, fifty percent of each award of RSUs (the “Time-vested RSUs”) will vest in four equal annual installments beginning on August 12, 2006 and continuing on August 12 of each of the following three years, provided the recipient remains employed with the Company through such vesting dates. The

11

---

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

7. Employee Benefit Plans (Continued)

remaining fifty percent of each award of RSUs (the “Performance-vested RSUs”) will vest in four equal annual installments beginning on August 12, 2006 and continuing on August 12 of each of the following three years, provided the recipient remains employed with the Company through such vesting dates and the applicable performance condition for the applicable vesting period is met. The performance condition for each vesting period will be based on the Company’s earned distributable cash per share (as defined in the related restricted share unit agreement) for such vesting period. Each vesting period will begin on July 1 and end on June 30 of the subsequent year. All RSUs will immediately vest in full, and shares will be distributed, at the time of a Change in Control (as defined in the 2005 Equity Incentive Plan). If in any performance period the performance condition for a subsequent performance period is achieved, Performance-vested RSUs will be entitled to dividend equivalent rights in the subsequent performance period equal to the dividends which would be payable on the shares of common stock represented by the RSUs subject to vesting in that period. Payments of such dividend equivalents will be made in cash to the holders of RSUs at the time of actual dividend payments and will not be subject to vesting. Time-vested RSUs will not be entitled to dividend equivalent rights.

Based on the Company’s financial results for the vesting period ended June 30, 2006, the performance condition for the Performance-vested RSUs eligible for vesting on August 12, 2006 was met. A total of 172,375 Time-vested RSUs and Performance-vested RSUs vested on August 12, 2006. Furthermore, the performance targets for the remaining three vesting periods were met as of June 30, 2006. Therefore, the holders of unvested Performance-based RSUs were entitled to dividend equivalent payments for the period from July 1, 2006 to June 30, 2007. Dividend equivalent payments of $0.1 million were accrued during the three months ended June 30, 2007 and paid in July 2007.

Based on the Company’s financial results for the vesting period ended June 30, 2007, the performance condition for the Performance-vested RSUs eligible for vesting on August 12, 2007 was met. Approximately 180,000 Time-vested RSUs and Performance-vested RSUs are expected to vest on August 12, 2007. The performance targets for the remaining two vesting periods were not met as of June 30, 2007. Therefore, the holders of unvested Performance-based RSUs are not entitled to any dividend equivalent payments after June 30, 2007.

Compensation expense associated with the 2005 Equity Incentive Plan was $0.9 million and $1.7 million during the three and six months ended June 30, 2007, respectively. Expense for the three and six months ended June 30, 2006 was $1.0 and $2.0 million, respectively. Such compensation expense was recorded in “Operating Expenses” in the consolidated statements of operations. Approximately twenty-five percent of the Time-vested RSUs are being expensed during each twelve-month period ending August 12 in 2006 to 2009. Performance-vested RSUs are being expensed on the same basis as the first two annual installments met the performance condition and it is management’s belief that the performance condition for each subsequent period will also be met.

As of June 30, 2007, 545,250 shares were reserved for issuance and 523,075 shares were available for grant under the 2005 Equity Incentive Plan.

2003 Stock Option Plan.   During 2003, the board of directors approved the Reddy Ice Holdings, Inc. 2003 Stock Option Plan (the “2003 Stock Option Plan”) that reserved for issuance 1,555,150 shares of common stock, subject to adjustment under certain circumstances. This plan provides for the granting of

12

---

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

7. Employee Benefit Plans (Continued)

incentive awards in the form of stock options to directors, officers and employees of the Company or any of its subsidiaries and affiliates at the discretion of the Compensation Committee of the Board of Directors. On August 12, 2005, all outstanding options under the 2003 Stock Option Plan were exercised in exchange for restricted shares. At June 30, 2007, 57,883 shares of common stock were available for grant under the 2003 Stock Option Plan. On July 23, 2007, the Board of Directors terminated the 2003 Stock Option Plan. Compensation expense associated with the 2003 Stock Option Plan was $0.3 million during the three months ended June 30, 2007 and 2006 and $0.5 million during the six months ended June 30, 2007 and 2006. Such compensation expense was recorded in “Operating Expenses” in the consolidated statements of operations.

8. Earnings Per Share

The computation of net income per share is based on net income divided by the weighted average number of shares outstanding. All shares outstanding for the three and six months ended June 30, 2007 and June 30, 2006 were included in the computation of diluted earnings per share.

 

13

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

9. Income Taxes

The Company’s effective tax rate differs from the federal statutory income tax rate of 35% due to state income taxes and the effect of permanent differences, primarily the non-deductible portion of the interest expense recognized on the 10½% Senior Discount Notes. The effective rate for the six months ended June 30, 2007 includes the effect of the internal merger and consolidation of certain wholly-owned subsidiaries effective January 1, 2007, which resulted in the write-down of certain net state deferred tax assets.

In connection with the vesting of restricted stock on January 16, 2007, the Company realized an excess tax benefit of $3.8 million during the three months ended March 31, 2007. Because the Company is not currently making cash payments for income taxes due to its net operating loss (“NOL”) carryforwards, such excess benefit has not been recognized in the Company’s financial statements and is being reported as a “suspended NOL carryforward” in the footnotes to the consolidated financial statements in accordance with SFAS No. 123(R). In connection with the vesting of restricted stock on February 28, 2006, the Company realized an excess tax benefit of $3.6 million during the three months ended March 31, 2006.

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a return and also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.

FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company was required to record the impact of adopting FIN 48 as an adjustment to the January 1, 2007 beginning balance of retained earnings (deficit). Adoption of this standard had no impact on the consolidated statement of operations. Upon adoption of FIN 48, the Company’s unrecognized tax benefits totaled $3.7 million. As a result of adoption, the Company’s liability for unrecognized tax benefits increased $2.9 million. This also resulted in a $1.8 million increase to the January 1, 2007 balance of retained deficit, a $1.1 million increase in deferred tax benefits related to the federal benefit of unrecognized tax positions and a $0.8 million reclassification of amounts previously reserved at December 31, 2006. If recognized in future periods, the net unrecognized tax benefit would reduce the Company’s effective tax rate.

To the extent penalties and interest would be assessed on any underpayment of  income tax, such amounts have been accrued and classified as a component of income tax expense in the financial statements. As of January 1, 2007, the Company had accrued $1.2 million of interest and penalties relating to unrecognized tax benefits.

As a result of net operating loss carryforwards, the Company’s federal statute of limitations remains open for all years since 1990 with no years currently under examination by the Internal Revenue Service, and U.S. state jurisdictions are generally open to examination for the tax year 1997 and beyond. A $2.6 million reduction in the amount of unrecognized tax benefits is possible in the next 12 months as a result of potential settlements with U.S. state taxing authorities.

14

---

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

10. Commitments and Contingencies

The Company is involved in various claims, lawsuits and proceedings arising in the ordinary course of business. There are uncertainties inherent in the ultimate outcome of such matters and it is impossible to presently determine the ultimate costs that may be incurred. Management believes the resolution of such uncertainties and the incurrence of such costs will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

On July 9, 2007, the Company received notice that a putative derivative complaint was filed by an entity identifying itself as a stockholder of the Company in the District Court of Texas, Collin County, naming the Company as a nominal defendant and naming all of the members of the Company’s Board of Directors and GSO Capital Partners LP as defendants. The complaint alleges that the Company’s board of directors breached its fiduciary duties in connection with their approval of the proposed merger transaction. Based on the facts known to date, management believes that the claims asserted are without merit and intends to defend against the suit vigorously. This lawsuit is still in a preliminary stage and the ultimate outcome is impossible to determine at this time. An unfavorable result in excess of the available insurance coverage could have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

11. Segment Information

The Company has two reportable segments: (1) ice products and (2) non-ice products and services. Ice products include the manufacture and distribution of packaged ice products through traditional ice manufacturing and delivery and The Ice Factory®, which is a proprietary machine that produces, packages, stores and merchandises ice at the point of sale through an automated, self-contained system. Non-ice products and services include refrigerated warehouses and the manufacturing and distribution of bottled water.

The Company evaluates the performance of each segment based on earnings before interest, taxes, depreciation, amortization, gain or loss on disposition of assets, impairment of assets, loss on extinguishment of debt and management agreement termination fees and transaction bonuses and expenses (“Segment EBITDA”). Segment assets are not a factor in the evaluation of performance. There were no intersegment sales during the three and six months ended June 30, 2007 and 2006.

Segment information for the three months ended June 30, 2007 and 2006 was as follows:

 

15

---

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 and 2006

Segment information for the six months ended June 30, 2007 and 2006 was as follows:

 

The reconciliation of Segment EBITDA to net income for the three and six month periods ended  June 30, 2007 and 2006 was as follows:

 

16

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, 2006, previously filed with the SEC. Reddy Ice Holdings, Inc. (“Reddy Holdings”) acquired Packaged Ice, Inc. on August 15, 2003 and renamed it Reddy Ice Group, Inc. (“Reddy Group”). On January 1, 2007, Reddy Group merged with its wholly-owned subsidiary, Reddy Ice Corporation (“Reddy Corp.”), with Reddy Corp. being the surviving entity.

On July 2, 2007, Reddy Holdings announced that it had entered into an Agreement and Plan of Merger, dated as of July 2, 2007 (the “Merger Agreement”), by and among Reddy Holdings, Frozen, LLC, a Delaware limited liability company, Hockey Parent Inc., a Delaware corporation (together with Frozen, LLC, the “Parents”) and Hockey MergerSub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Parents (“Merger Sub”). The Parents are entities formed by GSO Capital Partners LP (“GSO”). The Merger Agreement provides for the merger (the “Merger”) of Merger Sub with and into Reddy Holdings, with Reddy Holdings being the surviving corporation in the Merger. Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Reddy Holdings common stock, par value $0.01 per share, other than any shares owned by us, the Parents or Merger Sub, or by any stockholders who are entitled to and who properly exercise appraisal rights under Delaware law, will be canceled and will be automatically converted into the right to receive $31.25 in cash, without interest. We will file a definitive proxy statement with the Securities and Exchange Commission with respect to the Merger. Stockholders are advised to read the proxy statement when it becomes available.

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 subsidiaries to make distributions to us in amounts sufficient to make dividend payments to our stockholders in accordance with our dividend policy;

·       our substantial leverage and ability to service our debt and pay dividends;

·       the restrictive covenants under our indebtedness;

·       the availability of capital sources;

·       the amount of the costs, fees, expenses and charges related to the Merger;

·       the occurrence of any event, change or other circumstance that could give rise to a failure to satisfy any of the conditions to completion of the Merger, including the receipt of the required stockholder approval, or could give rise to the termination of the Merger Agreement;

17

---

·       the outcome of any legal proceedings instituted against us and others in connection with the proposed Merger;

·       business uncertainty and contractual restrictions during the pendency of the Merger;

·       fluctuations in our operating costs, including in 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;

·       costs associated with potential product liability claims or liabilities under environmental laws;

·       legislative or regulatory requirements; and

·       all the other factors described herein under Item 1A of Part II.

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 approximately 82,000 customer locations in 31 states and the District of Columbia. We operate in two business segments—ice products and non-ice products and operations. Ice products accounted for approximately 97% of our revenues in the six months ended June 30, 2007 and 96% of revenues in the six months ended June 30, 2006. Our ice products 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 equipment located in our customers’ high volume locations that produces, packages and stores ice through an automated, self-contained system.

Our other business segment, non-ice products and operations, consists of refrigerated warehousing for third parties and the manufacture and sale of bottled water.

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 69%, 69% and 68% of our annual revenues occurred during the second and third calendar quarters in each of 2006, 2005 and 2004. Approximately 66% of our annual revenues occurred during the second and third calendar quarters of 2003 and 68% occurred during the second and third calendar quarters of 2002, 2001 and 2000. The decrease in 2003 was primarily due to the timing of our acquisitions, which occurred in the fourth quarter of that year. 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.

18

---

Revenues.   Our revenues primarily represent sales of packaged ice, packaged ice bags for use in our Ice Factory equipment, bottled water and cold storage services. There is no right of return with respect to these products or services. A portion of our revenues also represents fees earned under management agreements for Ice Factories 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 manufacture and distribution of our products, including, in particular:

·       manufacturing and distribution labor costs;

·       raw materials (primarily of 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

·       Ice Factory-related costs associated with customer service representatives and machine technicians (note, however, that Ice Factories generally do not increase our plant occupancy, delivery or utility costs).

Depreciation Expense Related to Cost of Sales and Depreciation and Amortization Expense.   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.

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 7% and 8% of revenues in the six months ended June 30, 2007 and 2006, respectively.

Facilities.   At June 30, 2007, we owned or operated 64 ice manufacturing facilities, 60 distribution centers, approximately 79,000 merchandisers (cold storage units installed at customer locations), approximately 3,000 Ice Factories, five refrigerated warehouses and one bottled water plant. As of the same date, we had an aggregate daily ice manufacturing capacity of approximately 17,000 tons.

19

---

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

 

Revenues:   Revenues decreased $7.6 million from the three months ended June 30, 2006 to the three months ended June 30, 2007. This decrease is primarily due to reduced volume sales of ice related to cooler and wetter average weather conditions in many of our markets and a $1.1 million reduction in revenues in our non-ice operations, resulting from a general decline in the poultry industry, which is a significant portion of the customer base for our cold storage warehouses. Offsetting these decreases was higher average pricing, the effects of acquisitions and the continuing positive effects of package sizing initiatives, which consists primarily of converting a portion of our ice sales from seven to ten pound bags.

Cost of Sales (Excluding Depreciation):   Cost of sales (excluding depreciation) decreased $1.7 million from the three months ended June 30, 2006 to the three months ended June 30, 2007. This decrease in cost of sales is primarily due to lower production and sales volumes related to cooler and wetter average weather in many of our markets as compared to 2006, although we were not able to reduce our costs proportionally to the decrease in sales noted above, especially in the early part of the quarter due to the fixed costs associated with our business. This decrease in cost of sales was partially offset by acquired ice operations and price increases for energy, primarily electricity in Texas.

Labor costs, including associated payroll taxes and benefit costs (including health insurance), accounted for approximately 22% and 20% of revenues in the three months ended June 30, 2007 and 2006,

20

---

respectively. Cost of plastic bags represented approximately 7% of revenues in the three months ended June 30, 2007 and 2006. Fuel expenses represented approximately 4% of revenues in the three months ended June 30, 2007 and 2006. Expenses for independent third party distribution services represented approximately 6% of revenues in the three months ended June 30, 2007 and 2006. Electricity expense represented approximately 5% of revenues in the three months ended June 30, 2007 and 2006.

Depreciation Expense Related to Cost of Sales:   Depreciation expense related to cost of sales increased $0.2 million due to additional depreciation expense associated with production and distribution equipment placed in service during 2006 and early 2007, partially offset by the effect of asset dispositions and assets becoming fully depreciated.

Operating Expenses:   Operating expenses decreased $2.9 million from the three months ended June 30, 2006 to the three months ended June 30, 2007. This decrease is primarily due to a decrease of $2.1 million in incentive compensation expense and a $0.8 million decrease in professional services costs. Professional services for the three months ended June 30, 2006 included $0.6 million related to the secondary stock offering completed in May 2006.

Depreciation and Amortization:   Depreciation and amortization increased $0.1 million from the three months ended June 30, 2006 to the three months ended June 30, 2007. This increase is primarily due to additional amortization expense associated with the intangible assets recorded in connection with the acquisitions completed in 2006 and the six months ended June 30, 2007.

Impairment of assets:   During the three months ended June 30, 2006, we reviewed two pieces of real estate in our ice business segment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, as a result of a pending sale of one property and physical damage to another. As a result of this review, we recorded an impairment charge of $0.4 million.

Interest Expense, net:   Net interest expense increased $0.6 million from the three months ended June 30, 2006 to the three months ended June 30, 2007, primarily due to scheduled increases in the non-cash interest expense associated with our 10½% senior discount notes, higher average balances on our revolving credit facility and an increase in the unhedged balance of our term loan, which is subject to market interest rates in excess of the effective hedge rate.

21