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, 1999 Commission File Number 1-9307
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
- --------------------------------------------------------------------------------
(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 5, 1999
- ---------------------------- --------------------------
Common stock, par value $.01 13,024,997
<PAGE>
GUNDLE/SLT ENVIRONMENTAL, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of
March 31, 1999 (Unaudited) and
December 31, 1998 ........................................... 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1999 and 1998 (Unaudited) ......................... 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999
and 1998 (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
PART IV - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K .......................................... 11
2
<PAGE>
GUNDLE/SLT ENVIRONMENTAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS ............................ $ 24,068 $ 29,399
ACCOUNTS RECEIVABLE, NET ............................. 31,184 46,517
CONTRACTS IN PROGRESS ................................ 5,092 1,884
INVENTORY ............................................ 21,644 18,562
DEFERRED INCOME TAXES ................................ 5,164 5,609
PREPAID EXPENSES AND OTHER ........................... 3,309 1,039
--------- ------------
TOTAL CURRENT ASSETS ........................... 90,461 103,010
PROPERTY, PLANT AND EQUIPMENT, NET ..................... 33,983 34,838
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET .......................... 26,328 26,868
OTHER ASSETS ........................................... 5,509 4,604
--------- ------------
$ 156,281 $ 169,320
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ............. $ 26,201 $ 32,486
ADVANCE BILLINGS ON CONTRACTS
IN PROGRESS ......................................... 1,380 1,861
CURRENT PORTION OF LONG-TERM DEBT .................... 5,347 5,366
INCOME TAXES PAYABLE ................................. 897 3,192
DEFERRED INCOME TAXES ................................ 493 536
--------- ------------
TOTAL CURRENT LIABILITIES ...................... 34,318 43,441
LONG-TERM DEBT ......................................... 31,840 32,048
DEFERRED INCOME TAXES .................................. 2,792 2,491
OTHER LIABILITIES ...................................... 646 1,547
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, 18,096,211 AND 18,092,336 SHARES
ISSUED ............................................. 181 181
ADDITIONAL PAID-IN CAPITAL ........................... 69,339 69,374
RETAINED EARNINGS .................................... 47,962 50,370
ACCUMULATED OTHER COMPREHENSIVE INCOME ............... 453 832
UNEARNED COMPENSATION ................................ (72) (130)
--------- ------------
117,863 120,627
TREASURY STOCK AT COST, 5,053,689 and 4,964,689 SHARES (31,178) (30,834)
--------- ------------
TOTAL STOCKHOLDERS' EQUITY ..................... 86,685 89,793
--------- ------------
$ 156,281 $ 169,320
========= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
SALES AND OPERATING REVENUE ............................ $ 22,448 $ 31,319
COST OF PRODUCTS & SERVICES ............................ 19,562 26,194
-------- --------
GROSS PROFIT ........................................... 2,886 5,125
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .............................. 6,388 5,690
AMORTIZATION OF GOODWILL ............................... 344 346
-------- --------
OPERATING INCOME ....................................... (3,846) (911)
OTHER (INCOME) EXPENSES:
INTEREST EXPENSE ..................................... 812 904
INTEREST INCOME ...................................... (367) (298)
OTHER (INCOME) EXPENSE, NET .......................... (140) 8
-------- --------
INCOME BEFORE INCOME TAXES ............................. (4,151) (1,525)
PROVISION FOR INCOME TAXES ............................. (1,743) (656)
-------- --------
NET INCOME ............................................. $ (2,408) $ (869)
======== ========
BASIC AND DILUTED EARNINGS
PER COMMON SHARE .................................... $ (0.18) $ (0.07)
======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING .................................. 13,065 13,295
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ........................................... $ (2,408) $ (869)
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION ....................................... 2,091 1,757
AMORTIZATION ....................................... 351 358
DEFERRED INCOME TAXES .............................. 445 (645)
GAIN ON SALE OF ASSETS ............................. (3) (23)
INCREASE (DECREASE) IN CASH DUE TO
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE .............................. 14,648 10,329
CONTRACTS IN PROGRESS ............................ (3,291) 96
INVENTORY ........................................ (3,194) (6,094)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ......... (5,725) (7,139)
ADVANCE BILLINGS ON CONTRACTS IN PROGRESS ........ (451) (389)
INCOME TAXES PAYABLE ............................. (2,434) (1,217)
OTHER ............................................ (3,112) (176)
-------- --------
NET CASH PROVIDED BY(USED IN)OPERATING ACTIVITIES (3,083) (4,012)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT ........... (1,831) (1,577)
PROCEEDS FROM SALE OF EQUIPMENT ...................... 31 31
OTHER ................................................ 0 (2)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............ (1,800) (1,548)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
REPURCHASE OF COMMON STOCK ........................... (344) 0
PROCEEDS FROM THE EXERCISE OF STOCK OPTIONS AND
PURCHASES UNDER THE EMPLOYEE STOCK PURCHASE PLAN ... 14 25
RETIREMENT OF LONG-TERM DEBT ......................... (110) 0
-------- --------
NET CASH PROVIDED BY(USED IN) FINANCING ACTIVITIES (440) 25
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................ (8) (23)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ... (5,331) (5,558)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ... 29,399 24,844
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ......... $ 24,068 $ 19,286
======== ========
CASH PAID FOR INTEREST ................................. $ 1,177 $ 1,242
======== ========
CASH PAID FOR INCOME TAXES ............................. $ 1,508 $ 170
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
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, 1999, 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, 1998.
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, 1998.
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 life of
the contract. 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 as comprehensive income. The differential paid or received on the interest
rate component is recognized as an adjustment to interest expense.
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>
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.
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,
1999 1998
--------- ------------
Raw materials and supplies ........................ $ 3,623 $ 4,207
Finished goods .................................... 18,021 14,355
--------- ------------
$ 21,644 $ 18,562
========= ============
(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 -
In September 1998, the Company announced a stock repurchase program, which
authorizes the repurchase of up to 1,000,000 shares of its common stock. As of
March 31, 1999, the company had repurchased 154,000 shares of common stock at
prices ranging from $2.50 to $4.08 per share under this program. All of these
transactions were funded with the Company's available cash. At March 31, 1999,
the Company had 13,042,522 shares outstanding.
(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.
7
<PAGE>
During the first quarter of 1999 and 1998, other comprehensive income (losses),
representing foreign currency translation adjustments, amounted to $(379,000)
and $(861,000) 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 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, 1999, sales and operating revenue was
$22,448,000 compared with $31,319,000 for the same period last year. This 28%
decrease in sales and operating revenue from last year was the result of 31%
lower units shipped partially offset by a 4% higher overall weighted value per
unit. U.S. sales and operating revenue was $9,298,000, 33% lower than for the
same period last year. U.S. volume was 30% lower and overall weighted value per
unit was 4% lower. This reflects a 37% reduction in installation activity in the
quarter compared to 1998 due to fewer customers in warm weather areas. Foreign
sales and operating revenue was $13,150,000 this quarter, down 25% from last
year. Foreign volume was off 32%, primarily due to lower activity in the South
American mining industry following declines in mineral prices. However, the
overall weighted value per unit was up 11% partially offsetting the lower volume
resulting from a higher percentage of sales with installation.
Gross profit for the quarter was $2,886,000, or 44% below the prior year.
Shipments during the quarter were down 28%, primarily to the South American and
United States markets. Gross profit margin, as a percentage of sales and
operating revenue, decreased to 13% from 16% last year. This decrease was
primarily due to lower utilization of manufacturing and installation capacity
tied to the lower shipments from the US Operations.
8
<PAGE>
Selling, general and administrative (SG&A) expenses were $6,388,000
compared with $5,690,000 in the first quarter of 1998. The majority of the
increase came from the Company's U.S. operations where the implementation of the
enterprise resource planning system and an expansion of the Company's marketing
program contributed to higher costs.
Interest expense was $92,000 less than last year primarily due to a
decrease in outstanding debt resulting from scheduled repayments.
Interest income was $69,000 more than last year primarily due to higher
amounts of invested cash.
Other income was $148,000 more than last year primarily due to foreign
exchange gains and improved income from the Company's unconsolidated Egyptian
joint venture.
The quarterly benefit from income taxes was $1,743,000 compared with
$656,000 in the same period last year. The tax benefit for both periods was
recorded at the statutory rates adjusted for certain nondeductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of $61,490,000,
including cash and temporary investments of $24,068,000. 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 $37,187,000
in debt and $86,685,000 in stockholders' equity as of March 31, 1999.
The Company has a $35,000,000 multi-currency revolving credit facility (the
"Revolver") with Bank of America, formerly NationsBank of Texas, as agent, 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, 1999, 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.
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.
9
<PAGE>
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 recently installed the JDEdwards suite of systems to replace
all U.S. legacy operating systems as part of a program to improve its customer
service and general administrative efficiency. The initial implementation of
this enterprise resource planning system was made in the first quarter of 1999.
The Company's German operation is in the process of installing a new financial
operating system as well. The Company-wide cost of these new systems, which are
year 2000 compliant, is estimated to be approximately $4.0 million with $3.5
million spent through March 31, 1999. The systems in use at the Company's other
foreign operations are year 2000 compliant.
The Company has conducted a review of its other administrative,
manufacturing and installation systems and has received assurances from its
vendors that their systems are year 2000 compliant. The Company is in the
process of evaluating the year 2000 status of its major customers and suppliers
and believes that all should be compliant by the end of 1999. The Company
believes that any non-compliant situations can be handled by the company without
any major disruption of service or revenues.
Since the Company has nearly completed the replacement of year 2000
non-compliant systems, no specific contingency plans have been made regarding
its operations and systems. The Company uses at least two suppliers for its
primary raw materials at each location. Accordingly, the Company believes any
interruption in raw materials supply due to year 2000 issues would be unlikely.
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
<PAGE>
The Company has experienced raw material price increases in the first
quarter and has been notified of more price increases to commence in the second
quarter. As the Company has a number of fixed price contracts, this raw material
price increase may lower the Company's gross profit margin in later quarters.
The Company is attempting to increase its prices on all new orders to offset the
effect of these raw material price increases.
Some of the Company's raw material suppliers are experiencing production
problems. The Company is actively working with its present and potential
suppliers. There is no assurance that it will be able to procure all the resin
it needs over the next two quarters.
* * *
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
None
11
<PAGE>
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 7, 1999 BY /S/ ROGER J. KLATT
ROGER J. KLATT,
EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
DATE MAY 7, 1999 BY /S/ ERNEST C. ENGLISH, JR.
ERNEST C. ENGLISH, JR.,
VICE PRESIDENT &
CORPORATE CONTROLLER
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 24,068
<SECURITIES> 0
<RECEIVABLES> 34,546
<ALLOWANCES> 3,362
<INVENTORY> 21,644
<CURRENT-ASSETS> 90,461
<PP&E> 92,612
<DEPRECIATION> 58,629
<TOTAL-ASSETS> 156,281
<CURRENT-LIABILITIES> 34,318
<BONDS> 31,840
0
0
<COMMON> 181
<OTHER-SE> 86,504
<TOTAL-LIABILITY-AND-EQUITY> 156,281
<SALES> 22,448
<TOTAL-REVENUES> 22,448
<CGS> 19,562
<TOTAL-COSTS> 26,294
<OTHER-EXPENSES> (140)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 812
<INCOME-PRETAX> (4,151)
<INCOME-TAX> (1,743)
<INCOME-CONTINUING> (2,408)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,408)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
