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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-43089
The GSI Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 37-0856587
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1004 E. Illinois Street, Assumption, Illinois 62510
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. Common stock, par
value $0.01 per share, 1,775,000 shares outstanding as of August 4, 2000.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets................................ 3
Condensed Consolidated Statements of Operations...................... 4
Condensed Consolidated Statements of Cash Flows...................... 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk............... 17
PART II - Other Information
Item 1. Legal Proceedings....................................................... 18
Item 2. Changes in Securities and Use of Proceeds............................... *
Item 3. Defaults Upon Senior Securities......................................... *
Item 4. Submission of Matters to a Vote of Security Holders..................... *
Item 5. Other Information....................................................... *
Item 6. Exhibits and Reports on Form 8-K........................................ 18
</TABLE>
-------------------------
* No response to this item is included herein for the reason that it is
inapplicable.
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 2000 1999
------------------------------------------------------------------------------- -------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................................................... $ 2,861 $ 3,240
Accounts receivable, net...................................................... 35,738 26,433
Inventories, net.............................................................. 56,163 47,156
Prepaids...................................................................... 1,320 3,370
Other......................................................................... 2,429 2,795
-------- --------
Total current assets........................................................ 98,511 82,994
-------- --------
Notes Receivable............................................................... 59 59
-------- --------
Property, Plant and Equipment, net............................................. 49,159 48,808
-------- --------
Other Assets:
Goodwill and other intangible assets, net..................................... 20,156 21,126
Other......................................................................... 4,528 5,063
-------- --------
Total other assets.......................................................... 24,684 26,189
-------- --------
Total assets................................................................ $172,413 $158,050
======== ========
Liabilities and Stockholders' Deficit
-------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term debt.......................................... $ 5,458 $ 4,305
Accounts payable.............................................................. 15,799 11,012
Current portion of deferred income taxes...................................... 1,011 1,011
Accrued expenses.............................................................. 13,614 13,987
Customer deposits............................................................. 5,121 6,667
-------- --------
Total current liabilities................................................... 41,003 36,982
-------- --------
Long-Term Debt, less current maturities........................................ 145,582 133,315
-------- --------
Deferred Income Taxes, less current portion.................................... 1,248 1,387
-------- --------
Commitments and Contingencies
Stockholders' Deficit:
Common stock, $.01 par value, voting (authorized 6,900,000 shares;
issued 6,633,652 shares; outstanding 1,575,000 shares as of June 30,
2000 and 1,800,000 shares as of December 31, 1999)........................... 16 18
Common stock, $.01 par value, nonvoting (authorized 1,100,000 shares;
issued 1,059,316 shares; outstanding 200,000 shares)......................... 2 2
Paid-in capital............................................................... 3,006 2,939
Accumulated other comprehensive loss (cumulative currency
adjustment).................................................................. (7,185) (6,996)
Retained earnings............................................................. 15,700 15,936
Treasury stock, at cost, voting (5,058,652 shares as of June 30, 2000 and
4,833,652 as of December 31, 1999)........................................... (26,950) (25,524)
Treasury stock, at cost, nonvoting (859,316 shares)........................... (9) (9)
-------- --------
Total stockholders' deficit................................................. (15,420) (13,634)
-------- --------
Total liabilities and stockholders' deficit................................. $172,413 $158,050
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
3
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Fiscal Months Six Fiscal Months
Ended Ended
-----------------------------------------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales...................................................... $ 63,835 $ 58,248 $ 111,202 $ 102,999
Cost of sales.................................................. 48,737 45,707 85,754 81,894
Cost of sales - restructuring charges.......................... -- (100) -- 248
---------- ---------- ---------- ----------
Total cost of sales......................................... 48,737 45,607 85,754 82,142
Gross profit............................................. 15,098 12,641 25,448 20,857
Selling, general and administrative expenses................... 9,000 7,293 17,790 18,167
Amortization expense........................................... 392 304 727 634
Restructuring charges.......................................... -- -- -- 669
---------- ---------- ---------- ----------
Total operating expenses.................................... 9,392 7,597 18,517 19,470
Operating income............................................... 5,706 5,044 6,931 1,387
Other income (expense):
Interest expense............................................ (3,819) (3,854) (7,399) (7,535)
Other, net.................................................. 29 (99) 123 54
---------- ---------- ---------- ----------
Income (loss) before income taxes........................ 1,916 1,091 (345) (6,094)
---------- ---------- ---------- ----------
Income tax expense (benefit)................................... 2 (37) (109) (278)
---------- ---------- ---------- ----------
Net income (loss)........................................ $ 1,914 $ 1,128 $ (236) $ (5,816)
---------- ---------- ---------- ----------
Basic and diluted net income (loss) per share.................. $0.96 $0.56 $(0.12) $(2.91)
---------- ---------- ---------- ----------
Weighted average common shares outstanding..................... 2,000,000 2,000,000 2,000,000 2,000,000
========== ========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
4
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Fiscal Months Ended
-------------------------
June 30, July 2,
2000 1999
------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net cash flows used in operating activities........................... $(7,691) $(3,146)
------- -------
Cash Flows From Investing Activities:
Capital expenditures....................................................... (4,454) (7,024)
Proceeds from sale of fixed assets......................................... 194 398
Payments received on notes receivable...................................... -- 1,025
Other...................................................................... (404) (636)
------- -------
Net cash flows used in investing activities........................... (4,664) (6,237)
------- -------
Cash Flows From Financing Activities:
Proceeds from shareholder loan............................................. 1,000 --
Payments on long-term debt................................................. (2,651) (1,509)
Net borrowings under line-of-credit agreement.............................. 14,838 11,361
Contributed capital........................................................ 65 398
Purchase of treasury stock................................................. (1,426) --
Other...................................................................... 150 333
------- -------
Net cash flows provided by financing activities....................... 11,976 10,583
------- -------
Increase (Decrease) In Cash and Cash Equivalents............................ $ (379) $ 1,200
Cash and Cash Equivalents, beginning of period.............................. 3,240 1,192
------- -------
Cash and Cash Equivalents, end of period.................................... $ 2,861 $ 2,392
======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements
5
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The condensed consolidated financial statements have been prepared by The
GSI Group, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information not misleading. These
financial statements should be read in conjunction with the financial statements
and related notes contained in the Company's 1999 10-K as filed with the
Securities and Exchange Commission. Other than as indicated herein, there have
been no significant changes from the data presented in said 10-K.
In the opinion of management, the financial statements contain all
adjustments necessary to present fairly the financial position of the Company as
of June 30, 2000 and the results of operations for the six fiscal months ended
June 30, 2000 and cash flows for the six months ended June 30, 2000. Certain
prior year amounts have been reclassified to be consistent with the current year
presentation.
The results of operations for the six fiscal month period ended June 30,
2000 are not necessarily indicative of the operating results for the full year.
2. Comprehensive Income
The components of comprehensive income (loss) for the six fiscal months
presented are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, July 2,
2000 1999
--------------- ---------------
<S> <C> <C>
Net income (loss).................................. $(236) $ (5,816)
Cumulative translation adjustment.................. (189) (5,191)
--------------- ---------------
Comprehensive loss............................... $(425) $(11,007)
=============== ===============
</TABLE>
3. Inventory
The components of inventory for the periods presented are as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
<S> ------------- --------------
<C> <C>
Raw materials................................ $15,950 $18,751
Work-in-process.............................. 12,508 10,500
Finished goods............................... 27,705 17,905
------------- --------------
Total........................................ $56,163 $47,156
============= ==============
</TABLE>
6
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4. Supplemental Cash Flow Information
The Company paid approximately $6.2 and $6.5 million in interest during the
six fiscal months ended June 30, 2000 and July 2, 1999, respectively. The
Company paid income taxes of $0.1 and $0.1 during the six fiscal months ended
June 30, 2000 and July 2, 1999, respectively.
5. Long-Term Debt
In June 2000, a shareholder of the Company extended a loan to the Company
for $1.0 million. This loan bears interest at the floating prime rate, currently
9.5%, and is payable on demand.
The indenture governing the Company's senior subordinated notes provides
for certain restrictive covenants. The more significant of the covenants
restrict the ability of the Company to dispose of assets, incur additional
indebtedness, pay dividends or make distributions and other payments affecting
subsidiaries. The Company was in compliance with the covenants under the
indenture as of June 30, 2000.
The Credit Facility with LaSalle Bank National Association requires the
Company to maintain certain financial covenants. The Company was in compliance
with the covenants under the Credit Facility as of June 30, 2000.
6. Commitments and Contingencies
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain drying and handling equipment in the
summer and fall in conjunction with the harvesting season, and swine and poultry
producers purchasing equipment during prime construction periods in the spring,
summer and fall. The Company's net sales and net income have historically been
lower during the first and fourth fiscal quarters as compared to the second and
third quarters.
In June 1999, the employment of John Funk, the Company's General Counsel
and Chief Financial Officer, was terminated. In June 2000, the Company entered
into a settlement agreement with Mr. Funk concerning a dispute about the effect
of the termination and his rights as a shareholder under various agreements
between him, the Company and its other shareholders. Pursuant to the settlement
agreement, the Company repurchased all of the shares of the Company held by Mr.
Funk for their original basis of $1.4 million. This purchase is reflected as
treasury stock in the accompanying balance sheet. In addition, Mr. Funk provided
the Company and Messrs. Sloan, Andrade, and Buffett with a release, and the
Company and Messrs. Sloan, Andrade and Buffett provided Mr. Funk with a release.
The Company has two contracts with the Syrian government and one with the
Yemen Company for Industrial Development to manufacture and supervise the
assembly of grain handling systems. Other current assets and other assets
include $4.8 million of retainage withheld until completion of the projects and
the meeting of certain performance criteria. These receivables are secured by
letters of credit totaling $4.8 million and are expected to be collected through
the year 2001.
The Company has an operating lease agreement that requires the Company to
maintain a certain senior debt to EBITDA ratio, tangible net worth and certain
levels of capital expenditures and EBITDA. The Company was in compliance with
these covenants under the operating lease agreement as of June 30, 2000. Certain
lease agreements are collateralized by a letter of credit of $2.0 million that
expires on October 15, 2000.
7
<PAGE>
7. Business Segment
In January 1998, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." The Company has no
separately reportable segments in accordance with this standard. Under the
enterprise wide disclosure requirements of SFAS 131, the Company reports net
sales by each product line. Amounts for the first two quarters of 2000 and 1999
are as shown in the table below (in thousands).
<TABLE>
<CAPTION>
June 30, July 2,
2000 1999
-------- --------
<S> <C> <C>
Grain product line....................... $ 65,606 $ 55,121
Swine product line....................... 18,261 20,264
Poultry product line..................... 27,335 27,614
-------- --------
Net sales........................... $111,202 $102,999
======== ========
</TABLE>
For the first two quarters of 2000 and 1999, sales in Brazil were $10.4 and
$9.0 million, respectively. Long-lived assets in Brazil were $4.4 million at
June 30, 2000.
8. Guarantor Subsidiaries
The Company's payment obligation under the senior subordinated notes are fully
and unconditionally guaranteed on a joint and several basis by David
Manufacturing Company, GSI/Cumberland de Mexico S. de R.L. de C.V.,
GSI/Cumberland BV, GSI/Cumberland SA (Pty) Ltd., GSI/Cumberland Sdn. Bhd. and
Agromarau Industria e Comercio Ltda. (the "Guarantor Subsidiaries"). The
Guarantor Subsidiaries are direct wholly-owned subsidiaries of the Company. The
obligations of the Guarantor Subsidiaries under their guarantees are
subordinated to such subsidiaries' obligations under their guarantee of the
Credit Facility.
Presented below is unaudited condensed consolidating financial information for
The GSI Group, Inc. ("Parent Company") and the Guarantor Subsidiaries. In the
Company's opinion, separate financial statements and other disclosures
concerning the Guarantor Subsidiaries would not provide additional information
that is material to investors.
Investments in subsidiaries are accounted for by the Parent Company using the
equity method of accounting. Earnings of subsidiaries are, therefore, reflected
in the Parent Company's investments in and advances to/from subsidiaries'
accounts and earnings. The elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
8
<PAGE>
8. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 987 $ 1,874 $ -- $ 2,861
Accounts receivable, net..................... 32,074 11,151 (7,487) 35,738
Inventories, net............................. 42,083 18,131 (4,051) 56,163
Other current assets......................... 5,598 1,744 (3,593) 3,749
---------- --------- ---------- ----------
Total current assets......................... 80,742 32,900 (15,131) 98,511
Property, plant and equipment, net.............. 37,033 12,126 -- 49,159
Goodwill and other intangible assets, net....... 4,705 15,451 -- 20,156
Investment in and advances to/from
subsidiaries................................. 54,840 (19,503) (35,337) --
---------- --------- ---------- ----------
Other long-term assets.......................... 4,510 77 -- 4,587
---------- --------- ---------- ----------
Total assets................................. $ 181,830 $ 41,051 $ (50,468) $ 172,413
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............ $ 3,810 $ 1,648 $ -- $ 5,458
Accounts payable............................. 13,749 9,537 (7,487) 15,799
Accrued liabilities.......................... 16,106 3,640 -- 19,746
---------- --------- ---------- ----------
Total current liabilities.................... 33,665 14,825 (7,487) 41,003
Long-term debt.................................. 144,950 13,435 (12,803) 145,582
Other long-term liabilities..................... -- 1,248 -- 1,248
---------- --------- ---------- ----------
Total liabilities............................ 178,615 29,508 (20,290) 187,833
Stockholders' equity:
Common stock................................. 18 23,248 (23,248) 18
Additional paid-in capital................... 3,006 305 (305) 3,006
Accumulated other comprehensive income....... -- (7,185) -- (7,185)
Retained earnings (deficit).................. 27,150 (4,825) (6,625) 15,700
Treasury stock, at cost...................... (26,959) -- -- (26,959)
---------- --------- ---------- ----------
Total stockholders' equity (deficit)......... 3,215 11,543 (30,178) (15,420)
---------- --------- ---------- ----------
Total liabilities and stockholders' equity...... $ 181,830 $ 41,051 $ (50,468) $ 172,413
========== ========== ========== ==========
</TABLE>
9
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8. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE FISCAL MONTHS ENDED JUNE 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales....................................... $ 52,090 $ 16,369 $ (4,624) $ 63,835
Cost of sales................................... 40,022 12,820 (4,105) 48,737
---------- --------- ---------- ----------
Gross profit.................................. 12,068 3,549 (519) 15,098
Selling, general and administrative expenses.... 5,996 3,396 -- 9,392
---------- --------- ---------- ----------
Operating income (loss)...................... 6,072 153 (519) 5,706
Interest expense................................ (3,734) (85) -- (3,819)
Other income (expense).......................... 52 (23) -- 29
---------- --------- ---------- ----------
Income (loss) before income taxes............... 2,390 45 (519) 1,916
Provision (benefit) for income taxes............ -- 2 -- 2
---------- --------- ---------- ----------
Income (loss) before equity in income of
consolidated subsidiaries.................... 2,390 43 (519) 1,914
Equity in income of consolidated subsidiaries... 43 -- (43) --
---------- --------- ---------- ----------
Net income (loss)............................... $ 2,433 $ 43 $ (562) $ 1,914
========== ========== ========== ==========
</TABLE>
10
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8. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX FISCAL MONTHS ENDED JUNE 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales....................................... $ 90,650 $ 28,619 $ (8,067) $ 111,202
Cost of sales................................... 69,687 22,396 (6,329) 85,754
---------- --------- ---------- ----------
Gross profit................................. 20,963 6,223 (1,738) 25,448
Selling, general and administrative expenses.... 12,177 6,340 -- 18,517
---------- --------- ---------- ----------
Operating income (loss)...................... 8,786 (117) (1,738) 6,931
Interest expense................................ (7,206) (193) -- (7,399)
Other income (expense).......................... 31 92 -- 123
---------- --------- ---------- ----------
Income (loss) before income taxes............... 1,611 (218) (1,738) (345)
Provision (benefit) for income taxes............ 8 (117) -- (109)
---------- --------- ---------- ----------
Income (loss) before equity in income of
consolidated subsidiaries.................... 1,603 (101) (1,738) (236)
Equity in income of consolidated subsidiaries... (101) -- 101 --
---------- --------- ---------- ----------
Net income (loss)............................... $ 1,502 $ (101) $ (1,637) $ (236)
========== ========== ========== ==========
</TABLE>
11
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8. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX FISCAL MONTHS ENDED JUNE 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities............ $ (9,427) $ 1,736 $ -- $ (7,691)
---------- --------- ---------- ----------
Cash flows from investing activities:
Capital expenditures......................... (3,954) (500) -- (4,454)
Other........................................ (257) 47 -- (210)
---------- --------- ---------- ----------
Net cash provided by (used in) investing
Activities................................... (4,211) (453) -- (4,664)
---------- --------- ---------- ----------
Cash flows from financing activities:
Net borrowings (payments) on debt............ 15,287 (2,100) -- 13,187
Other........................................ (877) (334) -- (1,211)
---------- --------- ---------- ----------
Net cash provided by (used in) financing
activities................................... 14,410 (2,434) -- 11,976
---------- --------- ---------- ----------
Change in cash and cash equivalents............. 772 (1,151) -- (379)
---------- --------- ---------- ----------
Cash and cash equivalents, beginning of period.. 215 3,025 -- 3,240
---------- --------- ---------- ----------
Cash and cash equivalents, end of period........ $ 987 $ 1,874 -- $ 2,861
========== ========== ========== ==========
</TABLE>
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the notes included in Item 1 hereof.
General
The Company is a leading manufacturer and supplier of agricultural
equipment and services worldwide. The Company's grain, swine and poultry
products are used by producers and purchasers of grain, and by producers of
swine and poultry. Fluctuations in grain and feed prices directly impact sales
of the Company's grain equipment. Because the primary cost of producing swine
and poultry is the cost of the feed grain consumed by animals, fluctuations in
the supply and cost of grain to users of the Company's products in the past has
impacted sales of the Company's swine and poultry equipment. The Company
believes, however, that its diversified product offerings mitigate some of the
effects of fluctuations in the price of grain since the demand for grain
storage, drying and handling equipment tends to increase during periods of
higher grain prices, which somewhat offsets the reduction in demand during such
periods for the Company's products by producers of swine and poultry. However,
the Company believes that low swine prices and environmental regulations will
for the foreseeable future continue to effect negatively the sales of its swine
equipment, and, therefore, its overall results of operations and financial
condition.
The primary raw materials used by the Company to manufacture its products
are steel and polymers. Fluctuations in the prices of steel and, to a lesser
extent, polymer materials can impact the Company's cost of sales. At the end of
1999, both of these materials experienced modest price increases. There can be
no assurances that the current price stability will continue or that prices for
these materials will not increase in the future.
In response to the raw material price increases that occurred during the
end of 1999, the Company has raised or will raise the selling price on a large
portion of its product offering. Affected products include all of the swine feed
storage, feed delivery, watering, and ventilation systems under the AP(TM) brand
name and all of the poultry feed storage, feed delivery, watering, ventilation,
and nesting systems under the Cumberland(R) brand name. The price increase will
also affect all tower drying systems, grain storage bins, and grain handling
systems under the GSI(R) brand name. These significant price increases will be
effective during the second and third quarters of 2000.
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain drying and handling equipment in the
summer and fall in conjunction with the harvesting season, and swine and poultry
producers purchasing equipment during prime construction periods in the spring,
summer and fall. The Company's net sales and net income have historically been
lower during the first and fourth fiscal quarters as compared to the second and
third quarters.
The Company's international sales have historically comprised a significant
portion of net sales. In the first half of 2000 and 1999, the Company's
international sales accounted for 32% and 34% of net sales, respectively.
Although the Company's sales are primarily denominated in U.S. dollars and are
not generally affected by currency fluctuations (except for the Company's
Brazilian operation), the production costs, profit margins and competitive
position of the Company are affected by the strength of the U.S. dollar relative
to the strength of the currencies in countries where its products are sold.
International operations generally are subject to various risks that are
not present in domestic operations, including restrictions on dividends,
restrictions on repatriation of funds, unexpected changes in tariffs and other
trade barriers, difficulties in staffing and managing foreign operations,
political instability, fluctuations in currency exchange rates, reduced
protection for intellectual property rights in some countries, seasonal
reductions in business activity and potentially adverse tax consequences, any of
which could adversely impact the Company's international operations.
The Company currently operates as a subchapter S corporation and,
accordingly, is not subject to federal income taxation for the periods for which
financial information has been presented herein. Because the Company's
13
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stockholders are subject to tax liabilities based on their pro rata shares of
the Company's income, the Company's policy is to make periodic distributions to
its stockholders in amounts equal to such tax liabilities.
In June 1999, the employment of John Funk, the Company's General Counsel
and Chief Financial Officer, was terminated. In June 2000, the Company entered
into a settlement agreement with Mr. Funk concerning a dispute about the effect
of the termination and his rights as a shareholder under various agreements
between him, the Company and its other shareholders. Pursuant to the settlement
agreement, the Company repurchased all of the shares of the Company held by Mr.
Funk for their original basis. In addition, Mr. Funk provided the Company and
Messrs. Sloan, Andrade, and Buffett with a release, and the Company and Messrs.
Sloan, Andrade and Buffett provided Mr. Funk with a release.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended July 2, 1999
Net sales increased 9.6% or $5.6 million to $63.8 million in the second
quarter of 2000 compared to $58.2 million in the second quarter of 1999. This
increase was driven by increased demand for grain equipment caused by a
successful early-order program and increased export activity. Swine equipment
sales decreased due to continued weak demand and poultry equipment sales
decreased slightly due to relatively flat domestic market conditions.
Gross profit increased to $15.1 million in the second quarter of 2000 or
23.7% of net sales from $12.6 million or 21.7% of net sales in the same period
of 1999. This increase was a result of increased sales in the second quarter of
2000 and the success of cost containment measures.
Operating expenses increased 23.6% or $1.8 million to $9.4 million in the
second quarter of 2000 from $7.6 million in the same period of 1999. This
increase was primarily due to the increase in the doubtful account reserve in
recognition of the weaker agricultural market and a change in compensation
structure for the Company's employees.
Operating income increased 13.1% from $5.0 million in the second quarter of
1999 to $5.7 million in the second quarter of 2000. This increase was
attributable to the increase in sales and increased margins partially offset by
an increase in operating expenses.
Interest expense was essentially flat for the second quarter of 2000 as
compared to the second quarter of 1999.
Net income increased $0.8 million to $1.9 million for the second quarter of
2000 from $1.1 million in the same period of 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended July 2, 1999
Net sales increased 8.0% or $8.2 million to $111.2 million in the first
half of 2000 from $103.0 million in the same period of 1999. This increase was
primarily driven by increased demand for grain equipment caused by a successful
early-order program and increased export activity. The swine and poultry
equipment sales decreased due to continued weak domestic demand. Swine equipment
sales decreased due to continued weak demand and poultry equipment sales
decreased slightly due to relatively flat domestic market conditions.
Gross profit increased to $25.4 million in the first half of 2000 or 22.9%
of net sales from $20.9 million or 20.3% of net sales in the same period of
1999. This increase was caused by increased sales, the absence of a low-margin
international project, the absence of restructuring charges and reduced expenses
related to cost containment measures.
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<PAGE>
Operating expenses decreased 4.9% or $1.0 million to $18.5 million in the
first half of 2000 from $19.5 million in the same period of 1999. This decrease
was primarily due to the reduction in staffing which was a significant part of
the restructuring program in 1999. This decrease was partially offset by the
increase in the doubtful account reserve in recognition of the weaker
agricultural market and a change in compensation structure for the Company's
employees.
Operating income increased from $1.4 million in the first half of 1999 to
$6.9 million in the same period of 2000. This increase was attributable to the
increase in sales, improved margins and reduced operating expenses.
Interest expense was essentially flat for the first half of 2000 as
compared to the first half of 1999.
Net loss improved from $5.8 million in the first half of 1999 to a net loss
of $0.2 million in the same period of 2000.
Liquidity and Capital Resources
The Company has historically funded capital expenditures, working capital
requirements, debt service, stockholder dividends and stock repurchases from
cash flow from its operations, augmented by borrowings made under various credit
agreements and the sale of the Company's 10 1/4% senior subordinated notes.
As of June 30, 2000, the Company had $57.5 million of working capital, an
increase of $11.5 million from working capital as of December 31, 1999. The
increase in working capital was primarily due to increases in inventory and
accounts receivable, partially offset by increased accounts payable and accrued
payroll expenses.
Operating activities used $7.7 million and $3.1 million in cash flow in the
first half of 2000 and 1999, respectively. This $4.5 million decrease in cash
flow was primarily the result of increases in accounts receivable and
inventories of $12.4 million, partially offset by an increase in net income and
accrued expenses of $7.9 million compared to the first half of 1999.
Cash used in investing activities in the first half of 2000 was $4.7
million. The cash was used primarily for machinery and equipment purchases. Cash
used in investing activities in the first half of 1999 was $6.2 million. The
cash was used primarily for machinery and equipment purchases partially offset
by payments received on notes receivable.
Financing activities provided $12.0 and $10.6 million in cash flow in the
first half of 2000 and 1999, respectively. Cash provided in the first half of
2000 consisted primarily of $14.8 million from net borrowings under the
Company's credit facility, partially offset by payments on long-term debt of
$2.7 million. Cash provided by financing activities in the first half of 1999
consisted primarily of $11.4 million from net borrowings under the credit
facility.
The Company believes that existing cash, cash flow from operations and
available borrowings under the credit facility will be sufficient to support its
working capital, capital expenditures and debt service requirements for the
foreseeable future.
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The following is a cash flow statement that isolates the cumulative
translation adjustment impact from the other components of cash flow. This
presentation is not in compliance with generally accepted accounting principles;
however, management desires to include this information because it segregates
the effect of the foreign translation adjustments from the operating results of
the Company.
<TABLE>
<CAPTION>
Six Fiscal Months Ended
--------------------------
June 30, July 2,
2000 1999
------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net cash flows provided by operating activities..................... $(7,890) $ (259)
------- -------
Cash Flows From Investing Activities:
Capital expenditures.................................................. (4,481) (5,011)
Proceeds from sale of fixed assets.................................... 194 398
Payments received on notes receivable................................. -- 1,025
Other................................................................. 11 (345)
------- -------
Net cash flows used in investing activi ies......................... (4,276) (3,933)
------- -------
Cash Flows From Financing Activities:
Proceeds from shareholder loan........................................ 1,000 --
Payments on long-term debt............................................ (2,651) (1,509)
Net borrowings under line-of-credit agreement......................... 14,838 11,361
Contributed capital................................................... 65 398
Purchase of treasury stock............................................ (1,426) --
Other................................................................. 150 333
------- -------
Net cash flows provided by (used in) financing activities.......... 11,976 10,583
------- -------
Cumulative translation adjustment impact (189) (5,191)
------- -------
Increase (Decrease) In Cash and Cash Equivalents......................... $ (379) $ 1,200
Cash and Cash Equivalents, beginning of period........................... 3,240 1,192
------- -------
Cash and Cash Equivalents, end of period................................. $ 2,861 $ 2,392
======= =======
</TABLE>
Inflation
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
Forward-Looking Statements
Certain statements contained in this Report are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by use of terms such as "believes," "anticipates," "intends," or
"expects." Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from future
results expressed or implied by such statements, and such statements should not
be regarded as a representation that the stated objectives will be achieved.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with adverse changes in
interest rates and foreign currency exchange rates. The Company does not hold
any market risk sensitive instruments for trading purposes. At June 30, 2000,
principal exposed to interest rate risk was limited to $47.0 million in variable
rate debt. The Company measures its interest rate risk by estimating the net
amount by which potential future net earnings would be impacted by hypothetical
changes in market interest rates related to all interest rate sensitive assets
and liabilities. A 1% change in interest rates would have a $0.5 million impact
on the Company's results of operations.
At June 30, 2000, approximately 17% of net sales were derived from
international operations with exposure to foreign currency exchange rate risk.
The Company mitigates its foreign currency exchange rate risk principally by
establishing local production facilities in the markets it serves and by
invoicing customers in the same currency as the source of the products. The
Company also monitors its foreign currency exposure in each country and
implements strategies to respond to changing economic and political
environments. The Company's exposure to foreign currency exchange rate risk
relates primarily to the financial position and the results of operations of its
Brazilian subsidiary. The Company's exposure to such exchange rate risk as it
relates to the Company's financial position and results of operations would be
adversely impacted by further devaluation of the Brazilian Real per U.S. dollar.
These amounts are difficult to accurately estimate due to factors such as the
inherent fluctuation of inter-company account balances, balance sheet accounts
and the existing economic uncertainty and future economic conditions in the
international marketplace.
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<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company which, in the
opinion of management, would have a material adverse affect on the Company's
business, financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
A list of the exhibits included as part of this Form 10-Q is set forth
in the Index to Exhibits that immediately precedes such exhibits, which is
incorporated herein by reference.
(b) Reports on Form 8-K:
The GSI Group, Inc. did not file any Current Reports on Form 8-K
during its fiscal quarter ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The GSI Group, Inc.
By: /s/ Russell C. Mello
-------------------------------------------
Senior Vice-President - Finance,
Secretary and Treasurer (Authorized
Signatory and Principal Financial Officer)
Date: May 5, 2000
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INDEX TO EXHIBITS
Exhibit
No. Document Description
------- --------------------
10.1 Settlement and Release of Claims by and among The GSI Group, Inc.,
John C. Sloan, Jorge Andrade, Howard G. Buffett, and John W. Funk
27.1 Financial Data Schedule
----------
20
