<PAGE>
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 September 30, 2000 Commission File Number 1-9307
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GUNDLE/SLT ENVIRONMENTAL, INC.
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(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
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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 October 25, 2000
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Common stock, par value $.01 11,373,733
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GUNDLE/SLT ENVIRONMENTAL, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of
September 30, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Income
For the Three and Nine Months Ended September 30,
2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000
and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
PART II - OTHER INFORMATION 12
2
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GUNDLE/SLT ENVIRONMENTAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31,
2000 1999
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(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 4,602 $ 16,873
ACCOUNTS RECEIVABLE, NET 53,624 54,948
CONTRACTS IN PROGRESS 10,500 2,508
INVENTORY 21,465 19,733
DEFERRED INCOME TAXES 4,573 4,948
PREPAID EXPENSES AND OTHER 1,537 804
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TOTAL CURRENT ASSETS 96,301 99,814
PROPERTY, PLANT AND EQUIPMENT, NET 31,686 30,881
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 23,875 25,217
OTHER ASSETS 3,586 5,785
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$ 155,448 $ 161,697
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 31,298 $ 29,073
ADVANCE BILLINGS ON CONTRACTS
IN PROGRESS 1,981 2,360
SHORT-TERM DEBT 1,262
CURRENT PORTION OF LONG-TERM DEBT 5,318 5,343
INCOME TAXES PAYABLE 2,953 2,323
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TOTAL CURRENT LIABILITIES 42,812 39,099
LONG-TERM DEBT 20,798 26,017
DEFERRED INCOME TAXES 1,148 1,858
OTHER LIABILITIES 1,301 1,452
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 PAR VALUE, 1,000,000 SHARES
AUTHORIZED, NO SHARES ISSUED OR
OUTSTANDING - -
COMMON STOCK, $.01 PAR VALUE, 30,000,000
SHARES AUTHORIZED, 18,103,695 AND 18,096,211 SHARES
ISSUED 181 181
ADDITIONAL PAID-IN CAPITAL 69,844 69,358
RETAINED EARNINGS 59,235 55,277
ACCUMULATED OTHER COMPREHENSIVE INCOME (3,538) 627
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125,722 125,443
TREASURY STOCK AT COST, 6,729,962 and 5,327,581 SHARES (36,333) (32,172)
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TOTAL STOCKHOLDERS' EQUITY 89,389 93,271
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$ 155,448 $ 161,697
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</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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
SALES AND OPERATING REVENUE $ 59,982 $ 61,389 $ 147,251 $ 135,906
COST OF PRODUCTS & SERVICES 48,964 47,093 120,726 106,557
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GROSS PROFIT 11,018 14,296 26,525 29,349
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,842 5,800 18,066 18,308
AMORTIZATION OF GOODWILL 333 343 1,011 1,027
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OPERATING INCOME 4,843 8,153 7,448 10,014
OTHER (INCOME) EXPENSES:
INTEREST EXPENSE 459 583 1,644 2,170
INTEREST INCOME (87) (139) (639) (760)
OTHER (INCOME) EXPENSE, NET (329) (235) (504) (342)
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INCOME BEFORE INCOME TAXES 4,800 7,944 6,947 8,946
PROVISION FOR INCOME TAXES 1,807 3,337 2,709 3,757
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NET INCOME $ 2,993 $ 4,607 $ 4,238 $ 5,189
=========== ========== ========== ==========
BASIC AND DILUTED EARNINGS
PER COMMON SHARE $ 0.26 $ 0.36 $ 0.35 $ 0.40
=========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 11,518 12,907 12,110 12,984
=========== ========== ========== ==========
</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>
NINE MONTHS ENDED
SEPTEMBER 30
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 4,238 $ 5,189
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION 5,985 6,105
AMORTIZATION 1,078 1,100
DEFERRED INCOME TAXES (498) 236
GAIN ON SALE OF ASSETS (19) (98)
INCREASE (DECREASE) IN CASH DUE TO
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (980) (23,390)
CONTRACTS IN PROGRESS (8,207) (3,576)
INVENTORY (2,214) 269
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 3,244 6,927
ADVANCE BILLINGS ON CONTRACTS IN PROGRESS (355) 425
INCOME TAXES PAYABLE 870 443
OTHER 189 164
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,331 (6,206)
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CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT (3,406) (5,241)
PROCEEDS FROM SALE OF EQUIPMENT 19 222
PAYMENTS FOR THE ACQUISITION OF A BUSINESS, NET OF
CASH ACQUIRED (4,194) 0
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NET CASH USED IN INVESTING ACTIVITIES (7,581) (5,019)
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CASH FLOWS FROM FINANCING ACTIVITIES:
REPURCHASE OF COMMON STOCK (4,161) (932)
PROCEEDS FROM THE EXERCISE OF STOCK OPTIONS AND
PURCHASES UNDER THE EMPLOYEE STOCK PURCHASE PLAN 25 14
RETIREMENT OF LONG-TERM DEBT (5,186) (5,217)
INCREASE IN SHORT-TERM DEBT 1,262 0
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NET CASH USED IN FINANCING ACTIVITIES (8,060) (6,135)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH 39 (205)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (12,271) (17,565)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 16,873 29,399
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CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 4,602 $ 11,834
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</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 accounting principles generally accepted in the United States
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 nine months ended September 30, 2000,
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, 1999.
The accounting policies followed by the Company in preparing interim
condensed 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, 1999.
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.
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.
6
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(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,
which approximates the first in, first out cost method. Inventory consisted of
the following (000's):
September 30, December 31,
2000 1999
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Raw materials and supplies $ 6,910 $ 7,101
Finished goods 14,555 12,632
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$21,465 $19,733
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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. The Company has a tax
holiday in Thailand through 2003 and a 50% reduced tax rate for 2004 through
2008.
(4) Equity -
In September 1998, the Company announced a stock repurchase program, which
authorized the repurchase of up to 1,000,000 shares of its common stock. An
additional 1,000,000 shares were authorized in June, 2000. As of September 30,
2000, the company had repurchased 1,044,057 shares of common stock at prices
ranging from $2.50 to $4.625 per share under this program. In addition to this
program, the Company repurchased a block of 717,800 shares from an institutional
investor on June 8, 2000. All of these transactions were funded with the
Company's available cash. At September 30, 2000, the Company had 11,373,733
shares outstanding.
(5) Comprehensive Income -
During the third quarter of 2000 and 1999, other comprehensive income
(losses), representing foreign currency translation adjustments, amounted to
$(2,200,000) and $93,000 respectively. For the nine months ended September 30,
2000 and 1999, other comprehensive income(losses), amounted to $(4,165,000) and
$257,000 respectively. Approximately $1,490,000, net of taxes($610,000), of the
year-to-date amount was related to the termination of the Derivative Financial
Instrument to provide for deferred interest income, taxes payable and market
valuation adjustments. (See also footnote 6)
7
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(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 as is the US Dollar interest expense.
On April 7, 2000, the Company terminated the above derivative financial
instrument. The Company received $2,100,000 as the termination value of this
instrument. The purpose of the initial transaction was to hedge a portion of
the Company's net investment in Germany, which has since been reduced by more
than the face amount of the instrument.
The Company has elected to treat the portion of the termination value
related to the interest swap as deferred interest income to be amortized over
the remaining term of the hedge, consistent with pretermination treatment. The
after-tax portion related to the investment component will remain in other
comprehensive income until the Company's net investment in Germany is less than
zero. The full termination value is subject to income taxes in the current
period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
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FINANCIAL CONDITION
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RESULTS OF OPERATIONS
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Quarter:
For the three months ended September 30, 2000, sales and operating
revenue was $59,982,000 compared with $61,389,000 for the same period last year.
The change in the U.S. Dollar exchange rate compared to the German Deutsche
Mark, British Pound and Australian Dollar resulted in approximately $2,300,000
lower sales this quarter. U.S. sales and operating revenue was $36,039,000, 2%
lower than for the same period last year. Units shipped were down 18%. Revenue
added by U.S. installation services was up 22% from the same quarter last year.
Foreign sales and operating revenue was $23,943,000, 3% lower than last year,
but in local currency was 7% higher than last year. Foreign units shipped were
up 5%.
8
<PAGE>
Gross profit for the quarter was $3,278,000,or 23% less than the prior
year at $11,018,000. Exchange rates of the Company's functional foreign
currencies reduced the quarter's gross profit by $416,000. Gross Profit was also
negatively impacted by the 8% reduction in units shipped. Gross profit margin,
as a percentage of sales and operating revenue, decreased to 18.4% from 23.3%
last year. This decrease was primarily due to competitive pricing not rising as
fast as resin costs, the Company's primary raw material. Margin as a percentage
of sales and operating revenue was lower in both the U.S. and foreign markets.
Selling, general and administrative (SG&A) expenses were $5,842,000
compared with $5,800,000 in the third quarter of 1999. Cost reductions
resulting from the reduced value of foreign currencies were partially offset by
the addition of Thailand operations.
Interest expense was $124,000 less than last year primarily due to a
decrease in outstanding debt resulting from scheduled repayments.
Other (income)/loss was $94,000 more than last year. This year's Other
income includes a one-time settlement of small claims against a software vendor.
The quarterly expense for income taxes was $1,807,000 compared with
$3,337,000 in the same period last year. The tax provision for both periods was
recorded at the statutory rates adjusted for certain permanent differences. The
Company's effective tax rate was lowered from 42% to 38% to bring the year-to-
date effective rate to 39%. The 39% rate is based on projections of taxable
income from around the world.
Year-to-Date:
For the nine months ended September 30, 2000, sales and operating revenue
was $147,251,000 compared with $135,906,000 for the same period last year. This
8% increase in sales and operating revenue from last year was driven by 6%
higher unit shipments. The change in the U.S. dollar exchange rate compared to
the German Deutsche Mark, British Pound and Australian Dollar resulted in
approximately $5,200,000 lower sales in 2000. U.S. sales and operating revenue
was $79,427,000, 6% higher than for the same period last year. U.S. volume was
9% lower but overall weighted value per unit was 17% higher resulting from a
change in the mix of products and service revenue. Foreign sales and operating
revenue in dollars of $67,824,000 was 11% higher than the same period last year
and in local currencies was up 19%. Foreign volume was up 22%.
Gross profit for the period was $26,525,000, 10% lower than the prior year.
Gross profit was lower as a result of lower foreign exchange rates and lower
margin percentages, offset by higher volume. Gross profit margin, as a
percentage of sales and operating revenue, decreased to 18.0% from 21.6% last
year. This was the primary cause of decreased gross profit resulting from
competitive pricing not covering increases in resin costs. Lower foreign
exchange rates reduced gross profit by $800,000. Shipments were up 6%.
9
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Selling, general and administrative (SG&A) expenses were $18,066,000
compared with $18,308,000 in the first nine months of 1999. Cost reductions
resulting from the reduced value of foreign currencies were partially offset by
the addition of Thailand operations.
Interest expense was $526,000 less than last year primarily due to a
decrease in outstanding debt resulting from scheduled repayments.
Other (income)/loss was $162,000 more than last year. This year's Other
Income includes a one-time settlement of small claims against a software vendor.
The year-to-date expense for income taxes was $2,709,000 compared with
$3,757,000 in the same period last year. The tax provision for both periods was
recorded at the statutory rates adjusted for certain permanent differences. The
Company's effective tax rate was lowered from 42% to 39% due to the year-end
income and tax projections, especially adding income earned in Thailand where
the Company has a tax holiday.
LIQUIDITY AND CAPITAL RESOURCES
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At September 30, 2000, the Company had working capital of $53,489,000,
including cash and temporary investments of $4,602,000. 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 $27,378,000
in debt and $89,389,000 in stockholders' equity as of September 30, 2000.
On September 27, 1999, the Company amended its credit facility (the
"Revolver") with Bank of America, formerly NationsBank of Texas, as agent. The
amendment included changing the Revolver from $35,000,000 to $25,000,000 (at the
Company's request) and extending the credit commitment date to September 30,
2002. Under the terms of the Revolver, the Company is required to maintain
certain financial ratios and a specific level of consolidated net worth. At
September 30, 2000, there was no balance outstanding on the Revolver, but
$975,000 in letters of credit issued under this facility reduced the balance
available to $24,025,000. The letter of credit issued under this facility
secures self-insurance programs.
On April 7, 2000, the Company terminated its DM cross currency swap
discussed above. The Company received $2,100,000 as the termination value of
this instrument.
The Company intends to repurchase its stock in the open market from time to
time. As of September 30, 2000 a balance of 955,943 shares remained authorized
to be purchased in the open market.
10
<PAGE>
The Company is expanding into nonwoven manufacturing. It has authorized
spending $17,000,000 over a 3 year period to construct and equip a new facility
in South Carolina. The Company will spend $11,500,000 on the first phase.
Through September 30, $1,000,000 has been incurred, and the remaining
$10,500,000 will be spent within 6 months.
The Company believes that its cash balance, cash generated by operations
and the balance expected to be available under the Revolver will be 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.
Pricing for the Company's products and services is primarily driven by
worldwide manufacturing capacity in the industry, and by 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.
The Company has experienced raw material price increases in the first nine
months of 2000 and has been notified of more price increases later in the year.
As the Company has a number of fixed price contracts, these raw material price
increases are expected to 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.
The Company's fourth quarter is usually a loss quarter due to the
seasonality of its markets. At this time, it appears that the fourth quarter
volume and gross profit will both be slightly lower than last year resulting in
a net loss per share for the quarter exceeding our net loss per share in 1999 by
a few cents. This projection is specifically subject to the risks outlined in
this 10-Q
11
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* * *
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
12
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SIGNATURE
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 October 25 , 2000 BY /S/ Roger J. Klatt
------------------------ ----------------------------
ROGER J. KLATT,
EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
13
