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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
of the
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 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 July 28, 2000
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Common stock, par value $.01 11,593,733
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GUNDLE/SLT ENVIRONMENTAL, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of
June 30, 2000 (Unaudited) and
December 31, 1999 3
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 2000
and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows
For the Six Months Ended June 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 8
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>
JUNE 30 DECEMBER 31,
2000 1999
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(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 6,453 $ 16,873
ACCOUNTS RECEIVABLE, NET 51,720 54,948
CONTRACTS IN PROGRESS 6,067 2,508
INVENTORY 26,105 19,733
DEFERRED INCOME TAXES 4,854 4,948
PREPAID EXPENSES AND OTHER 1,828 804
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TOTAL CURRENT ASSETS 97,027 99,814
PROPERTY, PLANT AND EQUIPMENT, NET 31,951 30,881
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 24,351 25,217
OTHER ASSETS 3,734 5,785
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$ 157,063 $ 161,697
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 32,934 $ 29,073
ADVANCE BILLINGS ON CONTRACTS
IN PROGRESS 15 2,360
SHORT-TERM DEBT 2,233
CURRENT PORTION OF LONG-TERM DEBT 5,332 5,343
INCOME TAXES PAYABLE 3,479 2,323
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TOTAL CURRENT LIABILITIES 43,993 39,099
LONG-TERM DEBT 20,904 26,017
DEFERRED INCOME TAXES 1,551 1,858
OTHER LIABILITIES 1,037 1,452
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 PAR VALUE, 1,000,000 SHARES
AUTHORIZED, NO SHARES ISSUED OR
OUTSTANDING - -
COMMON STOCK, $.01 PAR VALUE, 30,000,000
SHARES AUTHORIZED, 18,103,695 AND 18,096,211 SHARES
ISSUED 181 181
ADDITIONAL PAID-IN CAPITAL 69,844 69,358
RETAINED EARNINGS 56,523 55,277
ACCUMULATED OTHER COMPREHENSIVE INCOME (1,338) 627
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125,210 125,443
TREASURY STOCK AT COST, 6,509,962 and 5,327,581 SHARES (35,632) (32,172)
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TOTAL STOCKHOLDERS' EQUITY 89,578 93,271
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$ 157,063 $ 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
SALES AND OPERATING REVENUE $ 57,387 $ 52,069 $ 87,268 $ 74,517
COST OF PRODUCTS & SERVICES 45,621 39,903 71,760 59,464
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GROSS PROFIT 11,766 12,166 15,508 15,053
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,025 6,119 12,225 12,507
AMORTIZATION OF GOODWILL 336 340 677 684
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OPERATING INCOME 5,405 5,707 2,606 1,862
OTHER (INCOME) EXPENSES:
INTEREST EXPENSE 574 776 1,185 1,588
INTEREST INCOME (274) (254) (552) (621)
OTHER (INCOME) EXPENSE, NET (284) 33 (174) (107)
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INCOME BEFORE INCOME TAXES 5,389 5,152 2,147 1,002
PROVISION FOR INCOME TAXES 2,263 2,163 902 421
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NET INCOME $ 3,126 $ 2,989 $ 1,245 $ 581
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BASIC AND DILUTED EARNINGS
PER COMMON SHARE $ 0.26 $ 0.23 $ 0.10 $ 0.04
========== ========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 12,191 12,982 12,407 13,022
========== ========= ========= =========
</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>
SIX MONTHS ENDED
JUNE 30
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 1,245 $ 581
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION 4,008 4,302
AMORTIZATION 739 750
DEFERRED INCOME TAXES (499) 236
GAIN ON SALE OF ASSETS (12) (76)
INCREASE (DECREASE) IN CASH DUE TO
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 2,261 (6,659)
CONTRACTS IN PROGRESS (3,652) (6,631)
INVENTORY (6,395) (729)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 4,555 (297)
ADVANCE BILLINGS ON CONTRACTS IN PROGRESS (2,320) (406)
INCOME TAXES PAYABLE 1,254 (1,836)
OTHER (319) (667)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 865 (11,432)
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CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT (1,167) (4,044)
PROCEEDS FROM SALE OF EQUIPMENT 15 192
PAYMENTS FOR THE ACQUISITION OF A BUSINESS, NET OF
CASH ACQUIRED (4,194) 0
OTHER (108) 0
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NET CASH USED IN INVESTING ACTIVITIES (5,454) (3,852)
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CASH FLOWS FROM FINANCING ACTIVITIES:
REPURCHASE OF COMMON STOCK (3,460) (859)
PROCEEDS FROM THE EXERCISE OF STOCK OPTIONS AND
PURCHASES UNDER THE EMPLOYEE STOCK PURCHASE PLAN 25 14
RETIREMENT OF LONG-TERM DEBT (5,097) (5,110)
INCREASE IN SHORT-TERM DEBT 2,213 0
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NET CASH USED IN FINANCING ACTIVITIES (6,319) (5,955)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH 488 493
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NET DECREASE IN CASH AND CASH EQUIVALENTS (10,420) (20,746)
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 $ 6,453 $ 8,652
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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 six months ended June 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
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):
June 30, December 31,
2000 1999
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Raw materials and supplies $ 7,490 $ 7,101
Finished goods 18,615 12,632
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$26,105 $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.
(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
June 30, 2000, the company had repurchased 824,057 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 June 30, 2000, the Company had 11,593,733
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 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.
During the second quarter of 2000 and 1999, other comprehensive income (losses),
representing foreign currency translation adjustments, amounted to $(1,651,000)
and $543,000 respectively. For the six months ended June 30, 2000 and 1999,
other comprehensive income (losses) amounted to $(1,965,000) and $164,000
respectively. Approximately $1,490,000 of the second quarter reduction 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, which has been provided for in the financial statements.
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, 2000, sales and operating revenue was
$57,387,000 compared with $52,069,000 for the same period last year. This 10%
increase in sales and operating revenue was driven by 9% higher unit shipments.
Consistent with the Company's strategy to sell more products through its dealer
organization, this year 56% of the Company's sales and operating revenue was
from product sold without installation verses 47% 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 $1,800,000 lower sales this
year. U.S. sales and operating revenue was $31,087,000, 8% higher than for the
same period last year. Foreign sales and operating revenue was $26,300,000, 12%
higher than last year. Foreign sales and operating revenue in foreign currencies
was up 20%. Sales from the Company's Thailand manufacturing plant, purchased in
March, contributed 2/3 of the increase in foreign sales and operating revenue.
8
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Gross profit for the quarter was $11,766,000, 3% less than the prior year.
Exchange rates of the Company's functional foreign currencies negatively
impacted the quarter's gross profit by $313,000. Gross profit margin, as a
percentage of sales and operating revenue, decreased to 20.5% from 23.4% 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 $6,025,000
compared with $6,119,000 in the first quarter of 1999. Decreases in second
quarter 2000 SG&A were in the Company's European operations and were due to the
impact of lower foreign currency rates in 2000 as compared to 1999. In local
currencies selling, general and administrative expenses were equal to last year.
Interest expense was $202,000 less than last year primarily due to a
decrease in outstanding debt resulting from scheduled repayments in 1999 and
2000.
Other income/(loss) was $317,000 more than last year primarily due to
$150,000 favorable foreign exchange gains in our foreign operations and an
increase in income from the Company's unconsolidated Egyptian joint venture of
$40,000 and a prior year use tax refund of $140,000.
The quarterly expense for income taxes was $2,263,000 compared with
$2,163,000 in the same period last year. The tax provision for both periods was
recorded at the statutory rates adjusted for certain nondeductible expenses.
Year-to-Date:
For the six months ended June 30, 2000, sales and operating revenue was
$87,268,000 compared with $74,517,000 for the same period last year. This 17%
increase in sales and operating revenue from last year was driven by 16% 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 $2,700,000 lower sales. U.S. sales and operating revenue was
$43,338,000, 14% higher than for the same period last year. U.S. volume was 2%
lower but overall weighted value per unit was 16% higher resulting from a change
in the mix of products sold with installation services. Foreign sales and
operating revenue was $43,930,000, 20% higher than the same period last year.
Foreign volume was up 34%.
Gross profit for the period was $15,508,000, 3% better than the prior year.
Gross profit margin, as a percentage of sales and operating revenue, decreased
to 18% from 20% last year. This decrease was primarily due to increases in resin
costs which was somewhat offset by lower production costs.
9
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Selling, general and administrative (SG&A) expenses were $12,225,000
compared with $12,507,000 in the first six months of 1999. Decreases in year-
to-date SG&A were in the Company's European operations and were due to the
reduction of expenses in the German operations and the impact of lower foreign
currency rates in 2000 as compared to 1999.
Interest expense was $403,000 less than last year primarily due to a
decrease in outstanding debt resulting from scheduled repayments.
Other income/(loss) was $67,000 more than last year primarily due to
favorable foreign exchange gains in our foreign operations.
The year-to-date expense for income taxes was $902,000 compared with
$421,000 in the same period last year. The tax provision for both periods was
recorded at the statutory rates adjusted for certain nondeductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had working capital of $53,034,000, including
cash and temporary investments of $6,453,000. 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 $28,469,000 in debt and
$89,578,000 in stockholders' equity as of June 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 facility 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 revolving credit agreement, the Company is required
to maintain certain financial ratios and a specific level of consolidated net
worth. At June 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 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.
10
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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 six 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.
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 July 28, 2000 BY /S/ Roger J. Klatt
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ROGER J. KLATT,
EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
13
