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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
of the
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1995 Commission File Number 1-9307
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 22-2731074
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
19103 Gundle Road Houston, Texas 77073
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (713) 443-8564
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 is 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 issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at July 25, 1995
---------------------------- ----------------------------
Common stock, par value $.01 10,691,926
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GUNDLE ENVIRONMENTAL SYSTEMS, INC.
INDEX
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<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of
June 30, 1995 (Unaudited) and March 31, 1995 3
Consolidated Statements of Income
for the Three and Six Months Ended
June 30, 1995 and 1994 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1995
and 1994 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
PART II - OTHER INFORMATION 12
</TABLE>
2
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GUNDLE ENVIRONMENTAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1995
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(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 7,176 $ 13,227
ACCOUNTS RECEIVABLE 36,420 29,801
COSTS AND ESTIMATED EARNINGS IN EXCESS
OF BILLINGS ON CONTRACTS IN PROGRESS 4,629 3,664
INVENTORY 20,206 17,887
DEFERRED INCOME TAXES 2,769 2,375
PREPAID EXPENSES AND OTHER 1,407 443
------------- ------------
TOTAL CURRENT ASSETS 72,607 67,397
PROPERTY, PLANT AND EQUIPMENT, NET 31,643 32,744
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 23,556 23,787
OTHER ASSETS 191 202
------------- ------------
$ 127,997 $ 124,130
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 23,425 $ 21,356
BILLINGS IN EXCESS OF COSTS AND ESTIMATED
EARNINGS ON CONTRACTS IN PROGRESS 532 91
CURRENT PORTION OF LONG-TERM DEBT 5,095 96
INCOME TAXES PAYABLE 393 192
------------- ------------
TOTAL CURRENT LIABILITIES 29,445 21,735
DEFERRED INCOME TAXES 3,543 3,722
LONG-TERM DEBT 21,287 26,287
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, NO PAR VALUE, 1,000 SHARES
AUTHORIZED, NO SHARES ISSUED OR
OUTSTANDING - -
COMMON STOCK, $.01 PAR VALUE, 15,000,000
SHARES AUTHORIZED, 10,691,926 ISSUED AND
OUTSTANDING 107 107
ADDITIONAL PAID-IN CAPITAL 40,802 40,802
RETAINED EARNINGS 37,124 35,795
CUMULATIVE TRANSLATION ADJUSTMENT (44) (51)
------------- ------------
77,989 76,653
TREASURY STOCK AT COST, 500,000 SHARES (4,267) (4,267)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 73,722 72,386
------------- ------------
$ 127,997 $ 124,130
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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GUNDLE ENVIRONMENTAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -----------------------
1995 1994 1995 1994
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 36,045 $ 26,383 $ 57,233 $ 46,962
COST OF SALES 28,562 20,799 47,633 37,509
-------- -------- ---------- ----------
GROSS PROFIT 7,483 5,584 9,600 9,453
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,634 4,012 7,300 8,214
AMORTIZATION OF GOODWILL 192 172 376 344
MERGER EXPENSES 1,750 0 2,600 0
-------- -------- ---------- ----------
OPERATING INCOME 1,907 1,400 (676) 895
OTHER EXPENSES:
INTEREST EXPENSE, NET 621 491 1,219 976
OTHER (INCOME) EXPENSE, NET 67 35 (70) 98
-------- -------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 1,219 874 (1,825) (179)
PROVISION (BENEFIT) FOR INCOME TAXES (110) 320 (949) (74)
-------- -------- ---------- ----------
NET INCOME (LOSS) $ 1,329 $ 554 $ (876) $ (105)
======== ======== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE $ 0.13 $ 0.05 $ (0.09) $ (0.01)
======== ======== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,192 10,185 10,192 10,179
======== ======== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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GUNDLE ENVIRONMENTAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1995 1994
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (876) $ (105)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION 2,654 2,602
AMORTIZATION OF GOODWILL 415 345
DEFERRED INCOME TAXES (632) (470)
INCREASE (DECREASE) IN CASH DUE TO
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 8,732 (11,053)
COSTS AND ESTIMATED EARNINGS IN EXCESS
OF BILLINGS ON CONTRACTS IN PROGRESS 508 (448)
INVENTORY (8,261) (3,567)
PREPAID EXPENSES AND OTHER (1,105) (297)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (1,080) 160
BILLINGS IN EXCESS OF COSTS AND EARNINGS
ON CONTRACTS IN PROGRESS 479 1,401
INCOME TAXES PAYABLE (816) 23
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 18 (11,409)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT, NET (461) (2,164)
PAYMENTS FOR ACQUISITION OF A BUSINESS,
NET OF CASH ACQUIRED -- (730)
LOANS TO AFFILIATES 13 152
ADVANCES TO AFFILIATES AND OTHER, NET (10) (689)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (458) (3,431)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM THE EXERCISE OF STOCK OPTIONS AND
PURCHASES UNDER THE EMPLOYEE STOCK PURCHASE PLAN 37 50
REPURCHASE OF COMMON STOCK -- (306)
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 37 (256)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (33) --
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (436) (15,096)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 7,612 18,755
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CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 7,176 $ 3,659
========== ==========
CASH PAID FOR INTEREST $ 1,404 $ 1,395
========== ==========
CASH PAID FOR INCOME TAXES $ 940 $ 154
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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GUNDLE ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation -
General -
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Registrant ("Gundle Environmental Systems, Inc." or
the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission. These condensed consolidated financial statements reflect
all normal recurring adjustments which are, in the opinion of management,
necessary for the fair presentation of such financial statements for the
periods indicated. Certain information relating to the Company's organization
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted in this Form 10-Q pursuant to Rule 10-01 of Regulation S-X for interim
financial statements required to be filed with the Securities and Exchange
Commission. However, the Company believes that the disclosures herein are
adequate to make the information presented not misleading. The results for the
three and six months ended June 30, 1995, are not necessarily indicative of
future operating results. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended March 31, 1995.
The accounting policies followed by the Company in preparing interim
consolidated financial statements are similar to those described in the "Notes
to Consolidated Financial Statements" in the Company's Annual Report on Form
10-K for the year ended March 31, 1995.
Earnings per common share are based on the weighted average number of
common shares and common share equivalents outstanding. Common share
equivalents (outstanding options to purchase shares of common stock) are
computed using the treasury stock method and were excluded from the earnings
per share calculations as dilution was less than 3%.
6
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Organization -
Gundle Environmental Systems, Inc., a Delaware corporation, through
its wholly owned subsidiaries is primarily engaged in the manufacture, sale and
installation of polyethylene lining systems.
Fiscal Year -
On April 17, 1995, the Company elected to change its fiscal year end
from March 31 to December 31, effective December 31, 1995. The Company intends
to restate all prior periods in its December 31, 1995 annual report on Form
10-K to conform with its newly adopted fiscal year. The Consolidated
Statements of Income and Cash Flow presented in this Form 10-Q have also been
restated.
Reclassifications -
The accompanying condensed consolidated financial statements for 1994
contain certain reclassifications to conform with the current year
presentation.
(2) Inventory -
Inventory is stated at the lower of cost or market. Cost, which
includes material, labor and overhead, is determined by the weighted average
cost method. Inventory consisted of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1995 1995
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<S> <C> <C>
Raw materials
and supplies $ 5,740,000 $ 5,636,000
Finished goods 14,466,000 12,251,000
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$20,206,000 $17,887,000
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</TABLE>
(3) Income Taxes -
The Company s tax benefit in the second quarter was due to adjusting
the year to date tax rate to equal the projected effective tax rate for the
year. This adjustment was due to the change in the Company s year end from
March 31 to December 31 and the difference in the effective rates between these
periods. The difference in rates is primarily due to the nondeductibility of
certain merger expenses in 1995.
7
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(4) Merger with SLT Environmental, Inc. -
On March 28, 1995, the Company signed a definitive agreement
to merge with SLT Environmental, Inc. (SLT). The agreement provides that,
upon consummation of the merger, stockholders of SLT will receive 7,000,000
shares of the Company s common stock for all issued and outstanding shares of
SLT common stock. The merger received governmental clearance on May 23, 1995
and will be voted on by the Company s stockholders at its annual meeting to be
held July 27, 1995.
Expenses associated with the merger of $2,600,000 have been
reflected in the Company s results for the six months ended June 30, 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Quarter -
For the three months ended June 30, 1995 net sales were $36,045,000
compared with $26,383,000 for the same period last year. The increase in sales
is the result of an overall increase in pricing of 33% and an increase in unit
sales volume of 3%. Domestic pricing and volume were up 32% and 10%,
respectively. International pricing increased 29% from last year while volumes
fell 8%. The increased pricing is the result of the pass through of increased
raw material costs compared with the prior year and increased pricing of the
Company s installation services.
Gross profit for the quarter was $7,483,000 compared with $5,584,000
last year. Gross profit as a percentage of sales was 21% for both periods. The
increased gross profit was due to the increased sales volume. Raw material
prices stabilized during the quarter.
Selling, general and administrative expenses were $3,634,000 compared
with $4,012,000 in the prior year. The decrease in these expenses from year to
year primarily relates to the reorganization of the installation and the sales
and marketing functions in the third quarter of 1994, including closing the
Company s sales office in Germany.
Expenses of $1,750,000 were recorded in the quarter related to the
merger with SLT Environmental, Inc. (SLT).
8
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Net interest expense was $621,000 compared with $491,000 last year.
The increase is primarily the result of the prior year s expense being offset
with over $80,000 of interest income collected on past due trade accounts
receivable.
The quarterly benefit for income taxes was $110,000 compared with a
provision of $320,000 in the same period last year. The tax benefit in the
current period was due to adjusting the year to date tax rate to equal the
projected effective tax rate for the year. This adjustment was due to the
change in the Company s year end from March 31 to December 31 and the
difference in the effective tax rate between these periods. The difference in
rates is primarily due to the nondeductibility of certain merger expenses in
1995.
Year to Date -
Net sales of $57,233,000 for the six months ended June 30, 1995
exceeded sales in the prior year of $46,962,000 by 22%. Overall, pricing
increased 30% when compared with last year and unit sales volume was down 6%.
Domestic and international pricing was up 29% and 28%, respectively, while
volumes were down 3% and 10%. The increase in pricing reflects the recovery of
increased raw material costs and increased revenues from installation projects.
Gross profit was $9,600,000 or 17% of sales versus $9,453,000 or 20%
of sales last year. The increase in gross profit was due to the increased
level of sales. The 3% decrease in gross profit percentage was the result of
lower profitability on the Company s installation projects compared with the
prior year.
Selling, general and administrative expenses of $7,300,000 were
$914,000 or 11% less than last year primarily due to the reorganization of the
installation and the sales and marketing functions in the third quarter of
1994, including closing the Company s sales office in Germany.
Merger expenses for the six months were $2,600,000. The Company does
not anticipate any significant additional expenses related to the merger with
SLT.
Net interest expense of $1,219,000 was $243,000 or 25% higher than the
prior year due to lower average investible cash balances in the current year,
the collection of $80,000 of interest income on past due trade accounts
receivables, and the addition of $1,383,000 of debt, at 8%, related to the
acquisition of P.G. Technology in December of 1994.
9
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The Company's benefit for income taxes was $949,000 compared with
$74,000 for the same period last year. The tax benefit in both years was
provided at the statutory rates adjusted for certain permanent differences.
The effective tax rate of 52% in 1995 resulted from a portion of the $2,600,000
of merger expenses being nondeductible.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company had working capital of $43,162,000,
including cash and temporary investments of $7,176,000. The Company's cash,
inventory and receivable balances fluctuate from quarter to quarter due to the
seasonality of sales. The Company's capital structure consists of $26,382,000
in long term debt and $73,722,000 stockholders' equity as of June 30, 1995.
The Company has a $20,000,000 revolving credit facility with
NationsBank of Texas. As of June 30, 1995, there was no balance outstanding on
the revolving line of credit. However, letters of credit issued under this
facility totaled $2,405,000 thereby reducing the balance available to
$17,595,000. The letters of credit issued under this facility primarily secure
performance of installation contracts and self insurance programs.
On March 28, 1995 the Company signed a definitive agreement to merge
with SLT. Under the terms of the agreement, SLT will merge with the Company in
exchange for 7 million shares of the Company s common stock. In connection
with the merger, the Company expects to replace its existing $20,000,000
revolver, with a $35,000,000 revolving and term credit facility to be provided
by a syndicate of commercial banks (the "New Credit Facility") and to issue an
additional $25,000,000 of senior notes (the "New Notes"), thus increasing the
Company s credit availability to $60,000,000 from the present $20,000,000.
Upon consummation of the merger, the Company expects to issue the New Notes and
utilize available cash or make borrowings under the New Credit Facility in an
amount sufficient to retire all SLT s outstanding indebtedness, which
aggregated approximately $41,000,000 at June 30, 1995.
In general, the New Credit Facility and New Notes will contain
restrictions with respect to the incurrence of additional indebtedness, the
payment of cash dividends or similar restricted payments, the ability of the
Company to consolidate or merge into another corporation or transfer or sell
assets, unless certain criteria are met. The New Credit Facility and the New
Notes will also
10
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require the maintenance of certain financial ratios and a specified level of
consolidated net worth.
The Company believes that its cash balance, cash generated by
operations and the balance available under the Revolver are adequate to meet
these and any other foreseeable cash requirements during calendar 1995.
The Company s operations are subject to seasonal fluctuation with the
greatest volume of product deliveries and installations typically occurring in
the summer and fall months. In particular, the Company s operating results are
most impacted in the first quarter as both product deliveries and installations
are at their lowest levels due to the inclement weather experienced in the
Northern Hemisphere during this period.
Pricing of the Company s products and services are principally driven
by worldwide manufacturing capacity in the industry and raw material pricing.
The Company s primary raw material occasionally is in short supply and is
subject to substantial price fluctuation in response to market demand. Any
additional increase in worldwide manufacturing capacity, interruption in raw
material supply or abrupt raw material price increase could have an adverse
effect upon the Company s operations. Inflation has not had a significant
impact on the Company s operations.
11
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PART II - OTHER INFORMATION
ITEM 6 - Exhibits and reports on Form 8-K
(a) 27 -- Financial Data Schedule
(b) None
12
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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.
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
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DATE July 26, 1995 BY /s/ Roger J. Klatt
----------------------------
ROGER J. KLATT,
SENIOR VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
DATE July 26, 1995 BY /s/ Keith E. St. Clair
-----------------------------
KEITH E. ST. CLAIR,
CORPORATE CONTROLLER
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 7,176,000
<SECURITIES> 0
<RECEIVABLES> 36,420,000
<ALLOWANCES> 0
<INVENTORY> 20,206,000
<CURRENT-ASSETS> 72,607,000
<PP&E> 31,643,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 127,997,000
<CURRENT-LIABILITIES> 29,445,000
<BONDS> 21,287,000
<COMMON> 107,000
0
0
<OTHER-SE> 73,615,000
<TOTAL-LIABILITY-AND-EQUITY> 127,997,000
<SALES> 36,045,000
<TOTAL-REVENUES> 36,045,000
<CGS> 28,562,000
<TOTAL-COSTS> 28,562,000
<OTHER-EXPENSES> 5,576,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 621,000
<INCOME-PRETAX> 1,219,000
<INCOME-TAX> (110,000)
<INCOME-CONTINUING> 1,329,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,329,000
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
