<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 March 31, 1998 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
- --------------------------------------------------------------------------------
(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
----- -----
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 May 4, 1998
- ---------------------------- --------------------------
Common stock, par value $.01 18,102,336
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GUNDLE/SLT ENVIRONMENTAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of
March 31, 1998 (Unaudited) and
December 31, 1997 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998
and 1997 (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
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GUNDLE/SLT ENVIRONMENTAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 19,286 $ 24,844
ACCOUNTS RECEIVABLE, NET 43,136 53,606
CONTRACTS IN PROGRESS 2,061 2,189
INVENTORY 28,036 22,000
DEFERRED INCOME TAXES 6,448 6,408
PREPAID EXPENSES AND OTHER 1,308 913
--------- ---------
TOTAL CURRENT ASSETS 100,275 109,960
PROPERTY, PLANT AND EQUIPMENT, NET 34,959 35,283
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 27,766 28,118
OTHER ASSETS 4,931 4,600
--------- ---------
$ 167,931 $ 177,961
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 32,751 $ 39,835
ADVANCE BILLINGS ON CONTRACTS
IN PROGRESS 340 725
CURRENT PORTION OF LONG-TERM DEBT 5,690 5,767
INCOME TAXES PAYABLE 1,794 2,400
DEFERRED INCOME TAXES 750 772
--------- ---------
TOTAL CURRENT LIABILITIES 41,325 49,499
LONG-TERM DEBT 37,369 37,628
DEFERRED INCOME TAXES 3,775 3,297
OTHER LIABILITIES 1,194 1,427
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 PAR VALUE, 1,000,000 SHARES
AUTHORIZED, NO SHARES ISSUED OR
OUTSTANDING -- --
COMMON STOCK, $.01 PAR VALUE, 30,000,000
SHARES AUTHORIZED, 18,102,336 AND 18,087,111 SHARES
ISSUED 181 180
ADDITIONAL PAID-IN CAPITAL 69,951 69,929
RETAINED EARNINGS 45,362 46,350
ACCUMULATED OTHER COMPREHENSIVE INCOME 490 1,351
UNEARNED COMPENSATION (1,067) (1,051)
--------- ---------
114,917 116,759
TREASURY STOCK AT COST, 4,807,456 and 4,807,456 SHARES (30,649) (30,649)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 84,268 86,110
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$ 167,931 $ 177,961
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
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<S> <C> <C>
SALES AND OPERATING REVENUE $ 31,319 $ 33,349
COST OF PRODUCTS & SERVICES 26,194 27,181
-------- --------
GROSS PROFIT 5,125 6,168
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,690 6,251
AMORTIZATION OF GOODWILL 346 303
-------- --------
OPERATING INCOME (911) (386)
OTHER (INCOME) EXPENSES:
INTEREST EXPENSE 904 1,011
INTEREST INCOME (298) (498)
OTHER (INCOME) EXPENSE, NET 8 49
-------- --------
INCOME(LOSS) BEFORE INCOME TAXES (1,525) (948)
PROVISION FOR INCOME TAXES (656) (398)
-------- --------
NET INCOME(LOSS) $ (869) $ (550)
======== ========
BASIC AND DILUTED EARNINGS(LOSS)
PER COMMON SHARE $ (0.07) $ (0.03)
======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 13,295 15,945
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ (869) $ (550)
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION 1,757 1,697
AMORTIZATION 358 608
DEFERRED INCOME TAXES (645) (699)
GAIN ON SALE OF ASSETS (23) (148)
INCREASE (DECREASE) IN CASH DUE TO
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 10,329 13,841
CONTRACTS IN PROGRESS 96 490
INVENTORY (6,094) (6,036)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (7,139) 1,705
ADVANCE BILLINGS ON CONTRACTS IN PROGRESS (389) (120)
INCOME TAXES PAYABLE (1,217) (2,162)
OTHER (176) (108)
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NET CASH PROVIDED BY(USED IN)OPERATING ACTIVITIES (4,012) 8,518
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT (1,577) (717)
PROCEEDS FROM SALE OF EQUIPMENT 31 188
OTHER, NET (2) (236)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,548) (765)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
REPURCHASE OF COMMON STOCK 0 (14,502)
PROCEEDS FROM THE EXERCISE OF STOCK OPTIONS AND
PURCHASES UNDER THE EMPLOYEE STOCK PURCHASE PLAN 25 454
RETIREMENT OF LONG-TERM DEBT 0 (72)
OTHER 0 0
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NET CASH PROVIDED BY(USED IN) FINANCING ACTIVITIES 25 (14,120)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (23) (386)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,558) (6,753)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 24,844 43,122
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 19,286 $ 36,369
======== ========
CASH PAID FOR INTEREST $ 1,242 $ 1,659
======== ========
CASH PAID FOR INCOME TAXES $ 170 $ 1,822
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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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 months ended
March 31, 1998, 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, 1997.
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, 1997.
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaces the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to the Statement 128
requirements.
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.
6
<PAGE> 7
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):
March 31, December 31,
1998 1997
--------- -------------
Raw materials and supplies $ 6,594 $ 6,812
Finished goods 21,442 15,188
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$28,036 $22,000
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(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. On
December 16, 1997, the Company purchased 2,200,000 shares of its common stock at
a price of $5.40 per share for a total cost of $11,880,000. Both of these
transactions were funded with the Company's available cash. At March 31, 1998,
the company had 13,294,880 shares outstanding.
7
<PAGE> 8
(5) Comprehensive Income -
On January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments to be
included in other comprehensive income. Prior to adoption these amounts were
reported separately in shareholders' equity. Prior year financial statements
have been reclassified, where appropriate, to conform to the requirements of
Statement 130.
During the first quarter of 1998 and 1997, total comprehensive losses,
representing foreign currency translation adjustments, amounted to $(861,000)
and $(1,200,000) respectively.
(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 is
included in long-term debt and is marked to market as the U.S. Dollar/DM
exchange rate changes. These adjustments are included as a component of
accumulated other comprehensive income in shareholders' equity. Interest
payments and receipts are semi-annual on February 1 and August 1. The DM
interest payment is also subject to exchange rate fluctuations. Interest expense
is also 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 March 31, 1998, sales were $31,319,000
compared with $33,349,000 for the same period last year. This 6% decrease in
sales resulted from 3% fewer units shipped this quarter and approximately an 8%
lower US dollar value of German Deutsche Mark(DM) sales. Sales into North
America of $13,776,000 were up $1,968,000, or 17% from the same quarter last
year, on a similar increase in volume. Unit selling prices of North American
sales were relatively the same as last year. Foreign sales of $17,543,000 were
down $3,998,000, or 19% from the same quarter last year on 13% lower volume. The
primary reasons for the lower foreign sales were lower volumes to the Southeast
Asia and Latin and South American markets and the lower US dollar value of the
company's sales made in DM's.
8
<PAGE> 9
Gross profit for the quarter was $5,125,000, down 17% from the prior
year. As a percentage of sales, gross profit decreased to 16% from 19%. The
primary cause of this decrease was a decrease in per unit selling prices as a
result of competitors vying for orders to use excess manufacturing capacity.
Selling, general and administrative (SG&A) expenses were $5,690,000
compared with $6,251,000 in the first quarter of 1997. Of this difference,
approximately $150,000 resulted from foreign currency translation changes, and
another $275,000 is the result of lower compensation earned from restricted
stock grants.
Interest expense was $107,000 less than last year primarily due to a
decrease in outstanding debt resulting from scheduled repayments.
Interest income was $200,000 less than last year primarily due to lower
amounts of invested cash. In December 1997, the Company used $11,880,000 to
repurchase 2,200,000 shares of its common stock.
The quarterly benefit from income taxes was $656,000 compared with
$398,000 in the same period last year. The tax expense for both periods was
recorded at the statutory rates adjusted for certain nondeductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $64,640,000,
including cash and temporary investments of $19,286,000. The Company's cash,
inventory and receivable balances fluctuate from quarter to quarter due to the
seasonality of sales. The Company's capital structure consisted of $43,059,000
in debt and $84,268,000 in stockholders' equity as of March 31, 1998.
The Company has a $35,000,000 multi-currency revolving credit facility
(the "Revolver") with NationsBank of Texas that was amended to extend the credit
commitment date to September 30, 1999. Under the terms of the revolving credit
agreement, the Company is required to maintain certain financial ratios and a
specific level of consolidated tangible net worth. At March 31, 1998, there was
no balance outstanding on the Revolver, but $975,000 in letters of credit issued
under this facility reduced the balance available to $34,025,000. The letters of
credit issued under this facility secure 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.
9
<PAGE> 10
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. The conversion by most
European countries to the European Monetary Union and the Euro currency is not
expected to have a significant effect on the Company's operations.
The Company's products are sometimes sold into foreign markets with
extended terms, secured by an irrevocable letter of credit from a customer's
bank. Payment terms may extend up to six months. At March 31, 1998, the Company
had a U.S.dollar receivable of $3,666,000 from an Indonesian customer secured by
an irrevocable letter of credit issued by an Indonesian bank. As a result of the
economic and currency difficulties in Indonesia, this bank, along with many
other private banks in Indonesia, is now subject to a Government Guarantee
Program established by Indonesia's central bank. This program calls for the
registration and payment of amounts owed to international creditors through a
newly established agency. It is unclear how long it will take to fully implement
the procedures, process, and ultimately pay, these claims. The Company has
complied with all of the terms of the letter of credit and has received
confirmation to that effect from the bank. Payments under the letter of credit
were to begin in March. No payments have been received to date. The Company
believes based on information available at this time, and assurances from the
Company's customer, that the full amount of this letter of credit should
ultimately be collected.
The Company is in the process of implementing the JDEdwards suite of
systems to replace all U.S. legacy systems that are not year 2000 compliant.
This implementation will be completed by the end of 1998. The Company is
considering the use of this same system in its German operations. The
implementation of a new system in Germany will occur during 1999. The systems in
use at the Company's other foreign operations are year 2000 compliant.
Pricing for the Company's products and services is primarily driven by
worldwide manufacturing capacity in the industry, and raw material costs. The
Company's primary raw material, polyethylene, is occasionally in short supply
and subject to substantial price fluctuation in response to 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.
10
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Due to a very competitive market the Company has been forced to lower
the prices of its products. Even with slight year-to-year resin purchase price
reductions, the Company has been unable to maintain a material margin similar to
1997. Earnings compared to 1997 will continue to be negatively impacted if this
trend continues.
* * *
Forward-looking information:
This Form 10-Q contains certain forward-looking statements as such is
defined in the Private Securities Litigation Reform Act of 1995, and information
relating to the Company and its subsidiaries that are based on beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words,
"anticipate", "believe", "estimate", "expect", "intend" and words of similar
import, as they relate to the Company or its subsidiaries or Company management,
are intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitations, competitive market factors, world-wide
manufacturing capacity in the industry, general economic conditions around the
world, raw material pricing and supply, governmental regulation and supervision,
seasonality, distribution networks, and other factors described herein. Based
upon changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
PART II - OTHER INFORMATION
Resignation of Director:
Samir Badawi, Chairman of the Board of Directors has assumed the role
of acting President and CEO effective April 27, 1998 following the resignation
of William P. Reid, the former President, CEO and Director. Roger Klatt, Senior
Vice President and Chief Financial Officer since 1994 has assumed responsibility
for day-to-day operations as Executive Vice President.
11
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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/SLT ENVIRONMENTAL, INC.
Date: May 5, 1998 By: /s/ ROGER J. KLATT
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Roger J. Klatt,
Executive Vice President &
Chief Financial Officer
Date: May 5, 1998 By: /s/ ERNEST C. ENGLISH, JR.
---------------- ---------------------------------
Ernest C. English, Jr.,
Corporate Controller
12
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
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<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,816
<SECURITIES> 17,470
<RECEIVABLES> 46,670
<ALLOWANCES> 3,534
<INVENTORY> 28,036
<CURRENT-ASSETS> 100,275
<PP&E> 89,954
<DEPRECIATION> (54,995)
<TOTAL-ASSETS> 167,931
<CURRENT-LIABILITIES> 41,166
<BONDS> 43,059
0
0
<COMMON> 181
<OTHER-SE> 84,087
<TOTAL-LIABILITY-AND-EQUITY> 167,931
<SALES> 31,319
<TOTAL-REVENUES> 31,319
<CGS> 26,194
<TOTAL-COSTS> 32,230
<OTHER-EXPENSES> (50)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 904
<INCOME-PRETAX> (1,525)
<INCOME-TAX> (656)
<INCOME-CONTINUING> (869)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (869)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
