<PAGE> 1
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, 1997 Commission File Number 1-9307
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GUNDLE/SLT ENVIRONMENTAL, 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) (281) 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
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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 August 6, 1997
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Common stock, par value $.01 18,087,111
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GUNDLE/SLT ENVIRONMENTAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C>
Condensed Consolidated Balance Sheets as of
June 30, 1997 (Unaudited) and
December 31, 1996 3
Consolidated Statements of Income
for the Three and Six Months Ended
June 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997
and 1996 (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 11
</TABLE>
2
<PAGE> 3
GUNDLE/SLT ENVIRONMENTAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 22,344 $ 43,122
ACCOUNTS RECEIVABLE, NET 47,245 53,506
CONTRACTS IN PROGRESS 5,068 3,948
INVENTORY 26,261 21,430
DEFERRED INCOME TAXES 6,792 6,991
PREPAID EXPENSES AND OTHER 2,012 2,154
--------- ---------
TOTAL CURRENT ASSETS 109,722 131,151
PROPERTY, PLANT AND EQUIPMENT, NET 38,272 40,282
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 28,983 29,858
OTHER ASSETS 3,915 2,755
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$ 180,892 $ 204,046
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 33,817 $ 33,138
ADVANCE BILLINGS ON CONTRACTS
IN PROGRESS 1,029 936
CURRENT PORTION OF LONG-TERM DEBT 5,603 5,648
INCOME TAXES PAYABLE 956 2,976
DEFERRED INCOME TAXES 1,077 1,868
--------- ---------
TOTAL CURRENT LIABILITIES 42,482 44,566
LONG-TERM DEBT 38,331 44,092
DEFERRED INCOME TAXES 4,216 4,584
OTHER LIABILITIES 1,376 1,291
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 PAR VALUE, 1,000,000 SHARES
AUTHORIZED, NO SHARES ISSUED OR
OUTSTANDING -- --
COMMON STOCK, $.01 PAR VALUE, 30,000,000
SHARES AUTHORIZED, 18,087,111 AND 17,872,174 SHARES
ISSUED 181 179
ADDITIONAL PAID-IN CAPITAL 70,296 69,405
RETAINED EARNINGS 42,228 41,800
CUMULATIVE TRANSLATION ADJUSTMENT 2,304 3,600
UNEARNED COMPENSATION (1,753) (1,204)
--------- ---------
113,256 113,780
TREASURY STOCK AT COST, 2,571,656 and 500,000 SHARES (18,769) (4,267)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 94,487 109,513
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$ 180,892 $ 204,046
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
GUNDLE/SLT ENVIRONMENTAL, 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,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SALES AND OPERATING REVENUE $ 48,352 $ 60,625 $ 81,701 $ 87,732
COST OF PRODUCTS & SERVICES SOLD 40,076 44,502 67,257 66,083
-------- -------- -------- --------
GROSS PROFIT 8,276 16,123 14,444 21,649
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,842 7,037 12,093 13,101
AMORTIZATION OF GOODWILL 312 270 615 498
-------- -------- -------- --------
OPERATING INCOME 2,122 8,816 1,736 8,050
OTHER EXPENSES:
INTEREST EXPENSE 1,141 1,259 2,152 2,552
INTEREST INCOME (534) (383) (1,032) (696)
OTHER (INCOME) EXPENSE, NET (170) 105 (121) (118)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 1,685 7,835 737 6,312
PROVISION FOR INCOME TAXES 708 3,291 310 2,651
-------- -------- -------- --------
NET INCOME $ 977 $ 4,544 $ 427 $ 3,661
======== ======== ======== ========
EARNINGS PER COMMON SHARE $ 0.06 $ 0.26 $ 0.03 $ 0.21
======== ======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 15,494 17,336 15,714 17,272
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 427 $ 3,661
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION 3,414 3,568
AMORTIZATION 714 545
DEFERRED INCOME TAXES (831) 1,905
GAIN ON SALE OF ASSETS (198) (54)
INCREASE (DECREASE) IN CASH DUE TO
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 5,725 10,031
CONTRACTS IN PROGRESS (1,408) (1,034)
INVENTORY (5,684) (5,509)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (644) 2,342
ADVANCE BILLINGS ON CONTRACTS IN PROGRESS 112 833
INCOME TAXES PAYABLE (1,126) 2,571
OTHER 759 (1,353)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,260 17,506
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT (2,598) (1,255)
PROCEEDS FROM SALE OF EQUIPMENT 291 123
PAYMENTS FOR ACQUISITION OF A BUSINESS
NET OF CASH ACQUIRED 0 (4,774)
OTHER, NET 0 0
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NET CASH USED IN INVESTING ACTIVITIES (2,307) (5,906)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
REPURCHASE OF COMMON STOCK (14,502) 0
PROCEEDS FROM THE EXERCISE OF STOCK OPTIONS AND
PURCHASES UNDER THE EMPLOYEE STOCK PURCHASE PLAN 486 22
RETIREMENT OF LONG-TERM DEBT (5,449) (5,180)
OTHER (117) 439
-------- --------
NET CASH (USED IN) FINANCING ACTIVITIES (19,582) (4,719)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (149) (507)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20,778) 6,374
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 43,122 16,057
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 22,344 $ 22,431
======== ========
CASH PAID FOR INTEREST $ 2,260 $ 2,434
======== ========
CASH PAID FOR INCOME TAXES $ 1,468 $ 503
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
GUNDLE/SLT ENVIRONMENTAL, 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/SLT Environmental,
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, 1997, 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 December 31, 1996.
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 December 31, 1996.
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%.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. Statement 128 will have
no impact on the calculation of fully diluted earnings per share for these
quarters. The dilutive effect has already been excluded from earnings per share
due to its immaterial effect(less than 3%).
6
<PAGE> 7
The Company occasionally enters into forward contracts and cross
currency swaps in its management of foreign currency exposures. As a matter of
policy, the Company does not speculate in financial markets and therefore, does
not hold these contracts for trading purposes. The Company utilizes what it
considers straightforward instruments to accomplish its objectives.
The foreign currency forward contracts are used to hedge specific
transactions. Gains and losses on these contracts are recognized in the same
period as the gains and losses on the underlying position.
The Company is using a cross currency principal and interest rate swap
to effectively convert a portion of its U.S. dollar denominated debt into
German Marks. The objective of this hedging strategy is the management of the
foreign currency exchange risk associated with its net investment in Germany
and is based on the projected foreign currency cash flows from Germany over the
next eight years. The Company's investment in Germany and the foreign currency
portion of its swap are adjusted each period to reflect current foreign
exchange rates with the gains and losses recorded in the equity section of the
balance sheet. The differential paid or received on the interest rate component
is recognized as an adjustment to interest expense.
Organization -
Gundle/SLT Environmental, Inc., a Delaware corporation, through GSE
Lining Technology, Inc. and the Company's other wholly owned subsidiaries, is
primarily engaged in the manufacture, sale and installation of polyethylene
lining systems.
(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 (000's):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
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<S> <C> <C>
Raw materials and supplies $ 6,499 $ 5,084
Finished goods 19,762 16,346
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$26,261 $21,430
</TABLE>
(3) Income Taxes -
The Company's provision for income taxes is recorded at the statutory
rates adjusted for the effect of any permanent differences.
(4) Equity -
On January 23,1997, the Company purchased 2,071,656 shares of its
common stock at a price of $7 per share, for a total cost of $14,502,000. The
transaction was funded with the Company's available cash.
7
<PAGE> 8
(5) Acquisition -
On April 30, 1996, the Company acquired SGS Geosystems, Ltd. (SGS), a
UK geomembrane manufacturer, for $4,774,000 net cash plus the assumption of
certain obligations of SGS in the amount of $600,000. The acquisition was
accounted for as a purchase and, accordingly, the results of operations of SGS
have been included in the consolidated results of operations of the Company
from the date of acquisition. Pro forma financial information for SGS has not
been presented as it is not significant to the overall consolidated operating
results of the Company.
(6) Derivative Financial Instruments -
Effective October 18, 1996, the Company swapped $10,000,000 in
long-term debt with an annual interest rate of 7.34% for 15,380,000 Deutsche
Mark (DM) denominated long-term debt with an annual interest rate of 6.32%,
effectively hedging a portion of its net investment in Germany. The DM swap
agreement requires the Company to re-exchange 3,076,000 DM for $2,000,000 each
August 1 for the five year period beginning August 1, 2001. The DM swap will be
included in long-term debt and will be marked to market as the U.S. Dollar/DM
exchange rate changes. These adjustments will be included as a component of
cumulative translation adjustment in shareholders' equity. Interest payments
and receipts are semi-annual on February 1 and August 1. The DM interest
payment will also be subject to exchange rate fluctuations. Interest expense
will also be impacted by these exchange rate fluctuations.
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, 1997, sales were $48,352,000
compared with $60,625,000 for the same period last year. This 20% decrease in
sales resulted from 11% fewer units shipped this quarter and approximately a
10% decrease in the weighted value per unit, due to the mix of products sold.
Unit selling prices were relatively the same as last year. North American sales
of $26,294,000 were down $7,985,000, or 23%. While unit volume was down by 34%,
the value added per unit installed was up primarily due to the mix of
installation contracts. Foreign sales of $22,058,000 decreased by $4,288,000,
or 16% as compared to last year. A unit volume increase of 6% was offset by the
effect of lower foreign exchange rates and a reduction in installation contract
revenue in Germany.
Gross profit for the quarter was $8,276,000, down 49% from the prior
year. As a percentage of sales, gross profit decreased from 27% to 17%. The
primary cause of this decrease was a 32% increase in U.S. raw materials costs
that could not be passed on to customers as a result of competitors vying for
orders to use excess manufacturing capacity.
8
<PAGE> 9
Selling, general and administrative expenses were $5,842,000 compared
with $7,037,000 in the second quarter of 1996. Significant reductions in SG&A
expenses in our German operations contributed to this improvement. Last years'
German costs were higher due to employee reduction costs and a higher Deutsche
Mark value.
Other (Income) Expense, Net of $170,000 income compares to an expense
of $105,000 in 1996. This change resulted mainly from differences in gains or
losses from asset disposals.
Interest expense fell $118,000 from last year due to the decreased
level of debt outstanding and the results of the principal and interest rate
swap discussed in Note 6 to the Financial Statements, while interest income
increased by $201,000 from an increase in invested cash balances.
The quarterly expense for income taxes was $708,000 compared with
$3,291,000 in the same period last year. The tax expense for both periods was
recorded at the statutory rates adjusted for certain nondeductible expenses.
Year to Date
Sales for the six months ended June 30, 1997, were $81,701,000
compared with $87,732,000 for the same period last year. This 7% decrease in
sales is the result of an effective 11% decrease in the weighted value per
unit, while volume remained approximately the same as last year. North American
sales of $38,073,000 were down $7,035,000, or 16%. While unit volume was down
21%, the value added per unit installed was up primarily due to the mix of
installation contracts. Foreign sales of $43,628,000 were up $1,004,000, or 2%
compared to last year. A unit volume increase of 24% was offset by the effect
of lower foreign exchange rates and a reduction in installation contract
revenue in Germany.
Gross profit for the six months was $14,444,000 , down 33% from the
prior year. As a percentage of sales, gross profit decreased from 25% for the
same period last year to 18%. The primary cause of this decrease was a 25%
increase in U.S. raw materials costs that could not be passed on to customers
as a result of competitors vying for orders to use excess manufacturing
capacity.
Selling, general and administrative expenses were $12,093,000 compared
with $13,101,000 in 1996 or an 8% reduction. This resulted from significant
reductions in expenses at our German operation due to lower staffing levels and
this year's lower value of the Deustche Mark.
Interest expense fell $400,000 from last year due to the decreased
level of debt outstanding and the lower interest rate created by the Company's
principal and interest rate swap as discussed in Note 6 to the Financial
Statements. Interest income increased by $336,000 from an increase in invested
cash balances.
9
<PAGE> 10
The year to date expense for income taxes was $310,000 compared with
$2,651,000 in the same period last year. The tax expense for both periods was
recorded at the statutory rates adjusted for the effect of certain
nondeductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of $67,240,000,
including cash and temporary investments of $22,344,000. 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 $43,934,000
in debt and $94,487,000 in stockholders' equity as of June 30, 1997.
The Company has a $35,000,000 multi-currency revolving credit facility
(the "Revolver") with NationsBank of Texas that was amended on September 30,
1996 to extend the credit commitment date to September 30, 1998. Under the
terms of the revolving line of credit agreement, the Company is required to
maintain certain financial ratios and a specific level of consolidated tangible
net worth. At June 30, 1997, there was no balance outstanding on the Revolver.
However, letters of credit issued under this facility totaled $1,125,000,
thereby reducing the balance available to $33,875,000. The letters of credit
issued under this facility secure performance of installation projects and
self-insurance programs.
The Company believes that its cash balance, cash generated by
operations and the balance available under the Revolver are adequate to meet
its cash requirements over the next year.
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.
The Company's foreign subsidiaries routinely accept contracts in
currencies different than their functional currency. The Company recognizes
that such practices are subject to the risk of foreign currency fluctuations
not present in U.S. operations. Foreign exchange gains and losses to date have
not been material to the Company's operations as a whole.
10
<PAGE> 11
Pricing for the Company's products and services is principally driven
by worldwide manufacturing capacity in the industry and raw material costs. The
Company's primary raw material, polyethylene, occasionally is in short supply
and is subject to substantial price fluctuation in response to its market
demand. Any increase in the industry's worldwide manufacturing capacity,
interruption in raw material supply or abrupt raw material price increases
could have an adverse effect upon the Company's operations and financial
performance. Inflation has not had a significant impact on the Company's
operations.
As a result of very strong demand for polyethylene, the Company's cost
of raw materials continues to increase. Due to a very competitive market for the
Company's products, the Company has not been able to increase it's selling price
sufficiently to offset these increasing costs. Accordingly, the Company expects
third quarter profits to be significantly below those reported in the third
quarter of 1996.
* * *
Forward-looking information
The statements regarding future financial performance and results and
the other statements that are not historical facts contained in this report are
forward-looking statements. The words "expect", "project", "estimate",
"predict" and similar expressions are also intended to identify forward-looking
statements. Such statements involve risks and uncertainties, including, but not
limited to, market factors, market prices, industry manufacturing capacity,
availability and cost of raw materials and other factors detailed herein and in
the Company's other Securities and Exchange Commission filings. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated.
PART II - OTHER INFORMATION
None
11
<PAGE> 12
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/SLT ENVIRONMENTAL, INC.
DATE August 8, 1997 BY /S/ Roger J. Klatt
---------------- --------------------------------
ROGER J. KLATT,
SENIOR VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
DATE August 8, 1997 BY /S/ ERNEST C. ENGLISH, JR.
---------------- --------------------------------
ERNEST C. ENGLISH, JR.,
CORPORATE CONTROLLER
<PAGE> 13
INDEX TO EXHIBITS
Exhibit Description
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27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,281
<SECURITIES> 20,063
<RECEIVABLES> 50,314
<ALLOWANCES> 3,069
<INVENTORY> 26,261
<CURRENT-ASSETS> 109,722
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 180,892
<CURRENT-LIABILITIES> 42,482
<BONDS> 43,934
0
0
<COMMON> 181
<OTHER-SE> 94,306
<TOTAL-LIABILITY-AND-EQUITY> 180,892
<SALES> 48,352
<TOTAL-REVENUES> 48,352
<CGS> 40,076
<TOTAL-COSTS> 46,230
<OTHER-EXPENSES> (170)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,141
<INCOME-PRETAX> 1,685
<INCOME-TAX> (708)
<INCOME-CONTINUING> 977
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 977
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
