<PAGE>
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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 September 29, 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 November 13, 2000.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
PART I - Financial Information
Item 1. Financial Statements
<S> <C> <C>
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
<PAGE>
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>
September 29, December 31,
<S> <C> <C>
Assets 2000 1999
---------------------------------------------------------------------------------- -------- --------
Current Assets:
Cash and cash equivalents....................................................... $ 3,262 $ 3,240
Accounts receivable, net........................................................ 39,947 26,433
Inventories, net................................................................ 53,037 47,156
Prepaids........................................................................ 698 3,370
Other........................................................................... 3,449 2,795
-------- --------
Total current assets.......................................................... 100,393 82,994
-------- --------
Notes Receivable.................................................................. 59 59
-------- --------
Property, Plant and Equipment, net................................................ 48,579 48,808
-------- --------
Other Assets:
Goodwill and other intangible assets, net....................................... 19,514 21,126
Other........................................................................... 4,491 5,063
-------- --------
Total other assets......................................................... 24,005 26,189
-------- --------
Total assets............................................................... $173,036 $158,050
======== ========
Liabilities and Stockholders' Deficit
----------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term debt............................................ $ 5,233 $ 4,305
Accounts payable................................................................ 17,894 11,012
Payroll and payroll related expenses............................................ 4,091 2,942
Accrued interest................................................................ 4,573 1,899
Current portion of deferred income taxes........................................ 1,011 1,011
Other accrued expenses.......................................................... 8,094 9,146
Customer deposits............................................................... 4,752 6,667
-------- --------
Total current liabilities.................................................. 45,648 36,982
-------- --------
Long-Term Debt, less current maturities........................................... 134,464 133,315
-------- --------
Deferred Income Taxes, less current portion....................................... 1,178 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 September 29,
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)................................................................... (7,199) (6,996)
Retained earnings............................................................... 22,880 15,936
Treasury stock, at cost, voting (5,058,652 shares as of September 29,
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............................................... (8,254) (13,634)
-------- --------
Total liabilities and stockholders' deficit............................... $173,036 $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 Nine Fiscal Months
Ended Ended
-------------------------------------------------------
Sept 29, Oct 1, Sept 29, Oct 1,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net sales...................................................... $ 80,586 $ 77,050 $ 191,788 $ 180,049
Cost of sales.................................................. 56,579 59,051 142,333 140,945
Cost of sales - restructuring charges.......................... -- -- -- 248
---------- ---------- ---------- ----------
Total cost of sales...................................... 56,579 59,051 142,333 141,193
Gross profit......................................... 24,007 17,999 49,455 38,856
Selling, general and administrative expenses................... 10,061 8,932 27,851 27,099
Amortization expense........................................... 449 439 1,176 1,073
Restructuring charges.......................................... -- -- -- 669
---------- ---------- ---------- ----------
Total operating expenses................................. 10,510 9,371 29,027 28,841
Operating income............................................... 13,497 8,628 20,428 10,015
Other income (expense):
Interest expense........................................... (3,855) (3,745) (11,254) (11,280)
Other, net................................................. (42) 296 81 350
---------- ---------- ---------- ----------
Income (loss) before income taxes.................... 9,600 5,179 9,255 (915)
---------- ---------- ---------- ----------
Income tax expense (benefit)................................... 558 177 449 (101)
---------- ---------- ---------- ----------
Net income (loss).................................... $ 9,042 $ 5,002 $ 8,806 $ (814)
---------- ---------- ---------- ----------
Basic and diluted net income (loss) per share.................. $ 5.09 $ 2.50 $ 4.62 $ (0.41)
---------- ---------- ---------- ----------
Weighted average common shares outstanding..................... 1,775,000 2,000,000 1,905,699 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>
Nine Fiscal Months Ended
----------------------------
Sept 29, Oct 1,
<S> <C> <C>
2000 1999
------ -----
Cash Flows From Operating Activities:
Net income (loss).......................................................... $ 8,806 $ (814)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization............................................ 6,754 5,242
Amortization of deferred financing costs................................. 547 530
Loss (gain) on sale of assets............................................ 133 (121)
Deferred taxes........................................................... (209) (210)
Changes in assets and liabilities:
Account receivable..................................................... (13,248) (3,322)
Inventories............................................................ (6,131) 6,321
Other current assets................................................... 2,013 2,637
Accounts payable, accrued expenses and other liabilities............... 7,895 (1,525)
------- ------
Net cash flows provided by operating activities....................... $ 6,560 $ 8,738
------- -------
Cash Flows From Investing Activities:
Capital expenditures....................................................... (5,881) (8,434)
Proceeds from sale of fixed assets......................................... 290 405
Payments received on notes receivable...................................... -- 1,025
Other...................................................................... 323 (875)
------- -------
Net cash flows used in investing activities........................... (5,268) (7,879)
------- -------
Cash Flows From Financing Activities:
Proceeds from shareholder loan............................................. 1,540 --
Payments on long-term debt................................................. (3,417) (1,657)
Net borrowings under line-of-credit agreement.............................. 3,606 2,000
Contributed capital........................................................ 65 462
Purchase of treasury stock................................................. (1,426) --
Dividends.................................................................. (1,862) --
Other...................................................................... 224 401
------- -------
Net cash flows (used in) provided by financing activities............. (1,270) 1,206
------- -------
Increase In Cash and Cash Equivalents....................................... $ 22 $ 2,065
Cash and Cash Equivalents, beginning of period.............................. 3,240 1,192
------- -------
Cash and Cash Equivalents, end of period.................................... $ 3,262 $ 3,257
======= =======
</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 September 29, 2000 and the results of operations for the nine fiscal months
ended September 29, 2000 and cash flows for the nine fiscal months ended
September 29, 2000. Certain prior year amounts have been reclassified to be
consistent with the current year presentation.
The results of operations for the nine fiscal month period ended September
29, 2000 are not necessarily indicative of the operating results for the full
year.
2. Recent Accounting Pronouncement
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" as amended by SAB 101A,
which provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. In June 2000, the SEC
issued SAB 101B which deferred the effective date of SAB 101 until the last
quarter of fiscal years beginning after December 15, 1999. The Company does not
believe that the adoption of SAB 101 will have a material impact on the
Company's financial condition or results of operations.
3. Comprehensive Income
The components of comprehensive income (loss) for the nine fiscal months
presented are as follows (in thousands):
<TABLE>
<CAPTION>
September 29, October 1,
2000 1999
------------ ---------
<S> <C> <C>
Net income (loss).................................. $8,806 $ (814)
Cumulative translation adjustment.................. (203) (5,995)
------------ ---------
Comprehensive income (loss)...................... $8,603 $(6,809)
============ ==========
</TABLE>
6
<PAGE>
4. Inventory
The components of inventory for the periods presented are as follows (in
thousands):
<TABLE>
<CAPTION>
September 29, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials................................ $18,563 $18,751
Work-in-process.............................. 9,016 10,500
Finished goods............................... 25,458 17,905
------------ ------------
Total..................................... $53,037 $47,156
============ ============
</TABLE>
5. Supplemental Cash Flow Information
The Company paid approximately $7.8 and $7.6 million in interest during the
nine fiscal months ended September 29, 2000 and October 1, 1999, respectively.
The Company paid income taxes of $0.1 during the nine fiscal months ended
September 29, 2000 and October 1, 1999.
6. Long-Term Debt
In June 2000, a shareholder of the Company extended a loan to the Company
for $1.5 million. This loan bears interest at the floating prime rate, currently
9.5%, and is payable on demand and included in current maturities of long-term
debt in the accompanying Condensed Consolidated Balance Sheets.
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 September 29, 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 September 29, 2000.
7. 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 Condensed Consolidated Balance Sheets. 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.
7
<PAGE>
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 specified senior debt to EBITDA ratio, tangible net worth and level
of capital expenditures and EBITDA. The Company was in compliance with these
covenants under the operating lease agreement as of September 29, 2000. The
Company also has lease agreements collateralized by a letter of credit of $2.0
million that expires on October 15, 2001.
8. 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 nine fiscal months of 2000 and
1999 are as shown in the table below (in thousands).
<TABLE>
<CAPTION>
September 29, October 1,
2000 1999
---- ----
<S> <C> <C>
Grain product line................ $120,953 $107,500
Swine product line................ 29,680 30,527
Poultry product line.............. 41,155 42,022
-------- --------
Net sales...................... $191,788 $180,049
======== ========
</TABLE>
For the first nine fiscal months of 2000 and 1999, sales in Brazil were
$15.6 and $13.6 million, respectively. Long-lived assets in Brazil were $4.2
million at September 29, 2000.
9. 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.
8
<PAGE>
9. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 29, 2000
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Commpany Susidiaries Eliminations Consolidated
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 304 $ 2,958 $ -- $ 3,262
Accounts receivable, net................... 33,648 13,297 (6,998) 39,947
Inventories, net........................... 39,043 16,426 (2,432) 53,037
Other current net.......................... 3,000 1,147 -- 4,147
-------- -------- -------- --------
Total current assets....................... 75,995 33,828 (9,430) 100,393
Property, plant and equipment, net........... 36,672 11,907 -- 48,579
Goodwill and other intangible assets, net.... 4,550 14,964 -- 19,514
Investment in and advances to/from
subsidiaries............................... 56,341 (19,629) (36,712) --
Other long-term assets....................... 4,485 65 -- 4,550
-------- ------- -------- --------
Total assets............................... $178,043 $41,135 $(46,142) $173,036
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......... $ 3,676 $ 1,557 $ -- $ 5,233
Accounts payable........................... 16,170 8,722 (6,998) 17,894
Accrued liabilities........................ 18,333 4,188 -- 22,521
-------- -------- -------- --------
Total current liabilities.................. 38,179 14,467 (6,998) 45,648
Long-term debt............................... 130,568 12,862 (8,966) 134,464
Other long-term liabilities.................. -- 1,178 -- 1,178
-------- -------- -------- --------
Total liabilities.......................... 168,747 28,507 (15,964) 181,290
Stockholders' equity (deficit):
Common stock............................... 18 23,248 (23,248) 18
Additional paid-in capital................. 3,006 305 (305) 3,006
Accumulated other comprehensive income..... -- (7,199) -- (7,199)
Retained earnings (deficit)................ 33,231 (3,726) (6,625) 22,880
Treasury stock, at cost.................... (26,959) -- -- (26,959)
-------- -------- -------- --------
Total stockholders' equity (deficit)....... 9,296 12,628 (30,178) (8,254)
-------- -------- -------- --------
Total liabilities and stockholders' equity... $178,043 $ 41,135 $(46,142) $173,036
======== ======== ======== ========
</TABLE>
9
<PAGE>
9. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE FISCAL MONTHS ENDED SEPTEMBER 29, 2000
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales.......................................... $63,669 $21,186 $(4,269) $80,586
Cost of sales...................................... 46,844 15,449 (5,714) 56,579
------- ------- ------- -------
Gross profit..................................... 16,825 5,737 1,445 24,007
Selling, general and administrative expenses....... 6,392 4,118 -- 10,510
------- ------- ------- -------
Operating income................................ 10,433 1,619 1,445 13,497
Interest expense................................... (3,783) (72) -- (3,855)
Other income (expense)............................. (160) 118 -- (42)
------- ------- ------- -------
Income before income taxes......................... 6,490 1,665 1,445 9,600
Provision (benefit) for income taxes............... (8) 566 -- 558
------- ------- ------- -------
Income before equity in income of
consolidated subsidiaries........................ 6,498 1,099 1,445 9,042
Equity in income of consolidated subsidiaries...... 1,099 -- (1,099) --
------- ------- ------- -------
Net income......................................... $ 7,597 $ 1,099 $ 346 $ 9,042
======= ======= ======= =======
</TABLE>
10
<PAGE>
9. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE FISCAL MONTHS ENDED SEPTEMBER 29, 2000
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales.......................................... $154,319 $49,805 $(12,336) $191,788
Cost of sales...................................... 116,531 37,845 (12,043) 142,333
-------- ------- -------- --------
Gross profit................................... 37,788 11,960 (293) 49,455
Selling, general and administrative expenses....... 18,569 10,458 -- 29,027
-------- ------- -------- --------
Operating income (loss)........................ 19,219 1,502 (293) 20,428
Interest expense................................... (10,989) (265) -- (11,254)
Other income (expense)............................. (129) 210 -- 81
-------- ------- -------- --------
Income (loss) before income taxes.................. 8,101 1,447 (293) 9,255
Provision for income taxes......................... -- 449 -- 449
-------- ------- -------- --------
Income (loss) before equity in income of
consolidated subsidiaries...................... 8,101 998 (293) 8,806
Equity in income of consolidated subsidiaries...... 998 -- (998) --
-------- ------- -------- --------
Net income (loss).................................. $ 9,099 $ 998 $ (1,291) $ 8,806
======== ======= ======== ========
</TABLE>
11
<PAGE>
9. Guarantor Subsidiaries (Continued)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE FISCAL MONTHS ENDED SEPTEMBER 29, 2000
(In thousands)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities............. $ 2,939 $ 3,621 $ -- $ 6,560
------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures........................... (5,128) (753) -- (5,881)
Other.......................................... 651 (38) -- 613
------- ------- ------- -------
Net cash used in investing
Activities..................................... (4,477) (791) -- (5,268)
------- ------- ------- -------
Cash flows from financing activities:
Net borrowings (payments) on debt.............. 4,493 (2,764) -- 1,729
Other.......................................... (2,866) (133) -- (2,999)
------- ------- ------- -------
Net cash provided by (used in) financing
activities..................................... 1,627 (2,897) -- (1,270)
------- ------- ------- -------
Change in cash and cash equivalents.............. 89 (67) -- 22
Cash and cash equivalents, beginning of period... 215 3,025 -- 3,240
------- ------- ------- -------
Cash and cash equivalents, end of period......... $ 304 $ 2,958 $ -- $ 3,262
======= ======= ======= =======
</TABLE>
12
<PAGE>
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. The Company
expects slight decreases in pricing for these materials in 2001. There can be no
assurances 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 raised the selling price on a large portion of its
product offering in the second and third quarters of 2000. 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 also affected all tower drying systems, grain
storage bins, and grain handling systems under the GSI(R) brand name.
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 three quarters of 2000 and 1999, the
Company's international sales accounted for 28% of net sales. 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
<PAGE>
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 September 29, 2000 Compared to Three Months Ended October 1,
1999
Net sales increased 4.6% or $3.5 million to $80.6 million in the third
quarter of 2000 compared to $77.1 million in the third quarter of 1999. This
increase was driven by increased demand for grain equipment caused by a strong
harvest and increased prices. 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 $24.0 million in the third quarter of 2000 or
29.8% of net sales from $18.0 million or 23.4% of net sales in the same period
of 1999. This increase was a result of increased sales and price increases in
the third quarter of 2000 and the success of cost containment measures related
to plant shut-downs at the end of the third quarter of 1999.
Operating expenses increased 12.2% or $1.1 million to $10.5 million in the
third quarter of 2000 from $9.4 million in the same period of 1999. This
increase was primarily due to a change in compensation structure for the
Company's employees.
Operating income increased 56.4% from $8.6 million in the third quarter of
1999 to $13.5 million in the third 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 third quarter of 2000 as
compared to the third quarter of 1999.
Net income increased $4.0 million to $9.0 million for the third quarter of
2000 from $5.0 million in the same period of 1999.
Nine Months Ended September 29, 2000 Compared to Nine Months Ended October 1,
1999
Net sales increased 6.5% or $11.7 million to $191.8 million in the first
three quarters of 2000 from $180.0 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, increased export activity, a strong harvest
and price increases. The swine and poultry equipment sales decreased due to
continued weak domestic demand.
Gross profit increased to $49.5 million in the first three quarters of 2000
or 25.8% of net sales from $38.9 million or 21.6% of net sales in the same
period of 1999. This increase was caused by increased sales, increased prices,
the absence of a low-margin international project, the absence of restructuring
charges and reduced expenses related to cost containment measures related to
plant shut-downs at the end of the third quarter of 1999.
14
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Operating expenses increased 0.6% or $0.2 million to $29.0 million in the
first three quarters of 2000 from $28.8 million in the same period of 1999. This
increase was primarily due to a change in compensation structure for the
Company's employees and the increase in the doubtful account reserve in
recognition of the weaker agricultural market. This increase was partially
offset by the reduction in staffing which was a significant part of the
restructuring program in 1999.
Operating income increased from $10.0 million in the first three quarters
of 1999 to $20.4 million in the same period of 2000. This increase was
attributable to the increase in sales and improved margins.
Interest expense was essentially flat for the first three quarters of 2000
as compared to the first three quarters of 1999.
Net income improved to $8.8 million in the first three quarters of 2000
from a $0.8 million loss in the same period of 1999.
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 September 29, 2000, the Company had $54.7 million of working capital,
an increase of $8.7 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, accrued
payroll expenses and accrued interest.
Operating activities provided $6.6 million and $8.7 million in cash flow in
the first three quarters of 2000 and 1999, respectively. This $2.2 million
decrease in cash flow was primarily the result of increases in accounts
receivable and inventories of $22.4 million, partially offset by a decrease in
other current assets and an increase in net income, accounts payable and accrued
expenses of $20.6 million compared to the first three quarters of 1999.
Cash used in investing activities in the first three quarters of 2000 was
$5.3 million. The cash was used primarily for machinery and equipment purchases.
Cash used in investing activities in the first three quarters of 1999 was $7.9
million. The cash was used primarily for machinery and equipment purchases
partially offset by payments received on notes receivable.
Financing activities used $1.3 in the first three quarters of 2000 and
provided $1.2 million in cash flow in the same period of 1999. Cash used in the
first three quarters of 2000 consisted primarily of $5.3 million from payments
on long-term debt and dividends, partially offset by net borrowings under the
Company's credit facility $3.6 million. Cash provided by financing activities in
the first three quarters of 1999 consisted primarily of $2.0 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 next
six to seven years.
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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>
Nine Fiscal Months Ended
-------------------------
Sept 29, Oct 1,
2000 1999
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net cash flows provided by operating activities............... $ 6,876 $11,967
------- -------
Cash Flows From Investing Activities:
Capital expenditures.......................................... (5,773) (5,866)
Proceeds from sale of fixed assets............................ 290 405
Payments received on notes receivable......................... -- 1,025
Other......................................................... 102 (677)
------- -------
Net cash flows used in investing activities................. (5,381) (5,113)
------- -------
Cash Flows From Financing Activities:
Proceeds from shareholder loan................................ 1,540 --
Payments on long-term debt.................................... (3,417) (1,657)
Net borrowings under line-of-credit agreement................. 3,606 2,000
Contributed capital........................................... 65 462
Purchase of treasury stock.................................... (1,426) --
Dividends..................................................... (1,862) --
Other......................................................... 224 401
------- -------
Net cash flows (used in) provided by financing activities... (1,270) 1,206
------- -------
Cumulative translation adjustment impact........................ (203) (5,995)
------- -------
Increase In Cash and Cash Equivalents........................... $ 22 $ 2,065
Cash and Cash Equivalents, beginning of period.................. 3,240 1,192
------- -------
Cash and Cash Equivalents, end of period........................ $ 3,262 $ 3,257
======= =======
</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
This report contains "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." This report contains
forward-looking statements regarding the Company's future sales of swine
equipment, overall results of operations and financial condition and pricing of
raw materials. 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, including general
economic conditions and consumer preferences that are outside of our control.
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 September 29,
2000, principal exposed to interest rate risk was limited to $35.8 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
$0.4 million impact on the Company's results of operations.
At September 29, 2000, approximately 15% 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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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 September 29, 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: November 13, 2000
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INDEX TO EXHIBITS
Exhibit
No. Document Description
-------
27.1 Financial Data Schedule
_______
20
