<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
For the quarterly period ended September 30, 1996
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Commission file number 033-80618
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GS Technologies Operating Co., Inc.
- ------------------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1656035
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
GS Technologies Corporation
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(Exact name of registrant as specified in its charter)
Delaware 04-3204785
- ------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
1901 Roxborough Road, Suite 200, Charlotte, NC 28211
- -----------------------------------------------------------------------------------------------------------
(Address of principal executive offices)
Registrants' telephone number, including area code (704) 366-6901
---------------------------------------------------------
</TABLE>
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 was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
There were 100 shares of GS Technologies Operating Co., Inc. Common Stock, par
value $.01 per share, outstanding at November 6, 1996. There were 100 shares of
GS Technologies Corporation Common Stock, par value $.01 per share, outstanding
at November 6, 1996.
This document consists of 19 sequentially numbered pages.
1
<PAGE> 2
PART I. FINANCIAL INFORMATION (UNAUDITED)
GS Technologies Corporation (the "Company" or "GST") was incorporated in 1993
to effect the November 12, 1993 acquisition (the "Acquisition") of the business
and net assets of Armco Worldwide Grinding Systems, a division of Armco Inc.
("Armco"). In August 1994, GS Technologies Operating Co., Inc. ("GSTOC"), a
wholly-owned subsidiary of GST, issued $125 million of registered debt
securities. These securities are fully and unconditionally guaranteed by
GSTOC's parent, GST.
On August 17, 1995, the Company was party to a merger transaction whereby it
was merged into a subsidiary of a new parent company, GS Industries, Inc.
("GSI"), resulting in all of the issued and outstanding common stock of the
Company being converted into shares of common stock of GSI and the Company
becoming a wholly-owned subsidiary of GSI.
On October 5, 1995, GSI and the Company through its wholly owned subsidiary,
GSTOC, purchased all the common stock of Georgetown Industries, Inc. ("GII")
and GII and its subsidiaries are now wholly-owned subsidiaries of GSTOC. In
connection with this acquisition, GSTOC issued an additional $125 million of
registered debt securities which are also guaranteed by GST.
INDEX
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C>
(1) Unaudited Consolidated Financial Statements of the Company
Unaudited Consolidated Statements of Income for the Three Months and
Nine Months ended September 30, 1996 and September 30, 1995 3
Unaudited Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995 4
Unaudited Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1996 and September 30, 1995 5
Notes to Unaudited Consolidated Financial Statements 6
(2) Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
</TABLE>
2
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GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------------
September 30, September 30,
1995 1995
(as Restated, September 30, (as Restated, September 30,
Note 6) 1996 Note 6) 1996
--------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Net sales $102,065 $239,204 $341,598 $706,812
Operating costs and expenses:
Cost of products sold 88,398 204,617 286,264 612,023
Selling, general and administrative
expenses 7,289 14,928 24,214 42,709
Depreciation and amortization 1,757 8,015 5,249 23,825
-------- -------- -------- --------
97,444 227,560 315,727 678,557
-------- -------- -------- --------
Operating profit 4,621 11,644 25,871 28,255
Other income (expense)
Interest income 363 233 818 568
Interest expense (5,608) (11,877) (13,490) (34,433)
Equity in income of joint ventures 1,046 1,758 3,296 3,608
Fees from joint ventures 357 541 973 1,779
Other, net (69) 163 (111) 81
Minority interest (56) (107) (112) (253)
-------- -------- -------- --------
(3,967) (9,289) (8,626) (28,650)
-------- -------- -------- --------
Income (loss) before income tax and
cumulative effect of accounting
change 654 2,355 17,245 (395)
Income tax (provision) benefit (279) (1,220) (7,438) 182
-------- -------- -------- --------
Income (loss) before cumulative
effect of accounting change 375 1,135 9,807 (213)
Cumulative effect of change in
accounting for spare parts and
supplies inventories, net of taxes of
$2,444 (Note 6) 3,556
-------- -------- -------- --------
Net income $ 375 $ 1,135 $ 9,807 $ 3,343
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE> 4
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,451 $ 3,518
Receivables less allowance for doubtful accounts 114,828 109,294
Receivable from related party 7,283 6,149
-------- --------
Total receivables 122,111 115,443
-------- --------
Inventories 159,154 152,813
Prepaid expenses and other current assets 9,969 8,968
Income taxes receivable 8,684 8,048
-------- --------
Total current assets 311,369 288,790
Investments in joint ventures 13,366 24,959
Properties, net 296,126 311,926
Acquisition premium 93,848 92,155
Other assets 23,355 22,483
Deferred tax benefit 1,830 2,098
-------- --------
Total assets $739,894 $742,411
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable $ 5,176 $ 16,311
Current portion of long-term debt 2,933 930
Payables and accrued liabilities 163,393 160,003
Other current liabilities 4,114 6,533
-------- --------
Total current liabilities 175,616 183,777
Long-term debt 369,994 361,048
Post retirement benefit obligations other than pensions 24,268 25,748
Deferred income taxes payable 32,260 35,381
Other long-term liabilities 31,147 25,960
Commitments and contingencies (Notes 10 and 12)
-------- --------
Total liabilities 633,285 631,914
-------- --------
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized, and 100 shares
issued and outstanding at December 31, 1995 and September 30, 1996 1 1
Additional paid in capital 132,166 132,166
Retained earnings (accumulated deficit) (24,164) (20,821)
Cumulative translation adjustment (1,394) (849)
-------- --------
Total stockholder's equity 106,609 110,497
-------- --------
Total liabilities and stockholder's equity $739,894 $742,411
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
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GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine
Months Ended
September 30, Nine
1995 (as Months Ended
Restated, September 30,
Note 6) 1996
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 9,807 $ 3,343
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change (3,556)
Depreciation and amortization 5,249 23,825
Loss on disposal of fixed assets 21
Deferred income taxes 2,173 409
Equity in income of joint ventures (3,296) (3,608)
Dividends from joint ventures 1,969 3,622
Post retirement benefit obligations accrued in excess of cash paid 1,412 1,480
Changes in operating assets and liabilities:
Receivables 1,395 6,948
Inventories (14,953) 12,341
Payables and accrued liabilities 2,812 (3,390)
Other current liabilities 709 2,419
Income taxes (2,613) 636
Other 7,815 (5,152)
-------- --------
Net cash provided by operating activities 12,479 39,338
-------- --------
INVESTING ACTIVITIES:
Purchase of properties (44,876) (37,619)
Proceeds from disposal of properties 5,000 1,108
Investment in joint ventures (11,211)
-------- --------
Net cash used in investing activities (39,876) (47,722)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 27,835 167,192
Repayments of long-term debt (178,141)
Distributions to stockholders (5,698)
Proceeds from (payments on) notes payable, net (2,523) 11,135
-------- --------
Net cash provided by financing activities 19,614 186
-------- --------
Effect of exchange rate changes on cash 132 265
-------- --------
Net decrease in cash and cash equivalents (7,651) (7,933)
Cash and cash equivalents:
Beginning of period 19,317 11,451
-------- --------
End of period $ 11,666 $ 3,518
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 19,237 $ 29,866
Cash paid (refunded) during the period for taxes $ 6,383 (2,793)
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of GS Technologies
Corporation have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, these
statements reflect all adjustments (which include only normal recurring
adjustments unless otherwise noted herein) necessary for a fair presentation.
2. FINANCIAL STATEMENT NOTES
Reference is made to the Notes to Combined/Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 for a summary of significant accounting policies and other
information, the substance of which has not changed materially as of September
30, 1996, unless otherwise noted herein.
3. 1994 RECAPITALIZATION
In August 1994, in connection with the recapitalization of the Company (the
"Recapitalization"), GSTOC issued $125,000 of Senior Notes due September, 2004
with interest payable semi-annually at an annual rate of 12%. The proceeds
from the Senior Notes were used to repay outstanding debt of $54,862, to pay a
distribution of $65,000 (the "Distribution") of which $61,223 was paid to the
Company's stockholders and $3,777 was paid in lieu of dividends to Armco
pursuant to the terms of a warrant agreement, and to partially fund debt
issuance costs of $6,850. The Company paid $45,000 of the Distribution in
August, 1994. In October 1994, the Board of Directors declared a dividend of
$20,000 of which $14,457 was paid in November 1994 and $5,543 was paid in
January 1995.
4. THE GEORGETOWN ACQUISITION
On August 17, 1995, the Company was merged into a subsidiary of a new parent
company, GS Industries, Inc. ("GSI"), resulting in all of the issued and
outstanding common stock of the Company being converted into shares of common
stock of GSI and the Company becoming a wholly-owned subsidiary of GSI. On
October 5, 1995, GSI and the Company, through GSTOC, acquired Georgetown
Industries, Inc. ("GII") and its subsidiaries which are now wholly-owned
subsidiaries of GSTOC.
GSI's common stockholders and certain members of management purchased stock of
GSI for $30,000 in cash. GSI acquired a portion of the GII common stock by
issuing approximately 4% of its common stock and a combination of pay-in-kind
subordinated notes and convertible preferred stock of GSI, which in the
aggregate, had a fair market value of approximately $102,000. The pay-in-kind
subordinated notes and preferred shares are unsecured obligations of GSI
maturing October 5, 2006 and are not guaranteed by any of GSI's subsidiaries.
The $30,000 in cash and the common stock of GII acquired by GSI were
contributed to the equity of the Company and were in turn contributed to the
equity of GSTOC. GSTOC used the $30,000 in cash, proceeds from a $125,000
public senior note offering (see below) and proceeds from borrowings under it's
credit facilities, to acquire the remaining GII common stock. The total
consideration paid was $307,000 of which $205,000 was cash and $102,000 was the
fair value of the securities described above.
The $125,000 Senior Notes were issued by GSTOC on October 5, 1995 and are due
on October 1, 2005. Interest is payable semi-annually at an annual rate of 12
1/4%. GSTOC replaced it's existing credit facility with a new facility
providing up to $145,000 in aggregate availability secured by the Company's
current assets and entered into a new $50,000 term loan facility secured by
property, plant and equipment. Proceeds from these facilities were used to
complete the acquisition and to refinance GII indebtedness.
6
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
The acquisition of GII was recorded in accordance with the purchase method of
accounting. Accordingly, the purchase price plus direct costs have been
allocated to the assets acquired and liabilities assumed based on estimated
fair values at the date of acquisition. This allocation was based on
preliminary estimates and may be revised at a later date. A summary of the
assets acquired, liabilities assumed and the purchase price paid follows:
<TABLE>
<S> <C>
Consideration:
Cash portion of purchase price $205,000
Non-cash equity contributions from GSI 102,000
Fees and expenses 3,000
--------
$310,000
========
Allocated as follows:
Identifiable assets acquired $180,122
Increase in properties to fair value 58,108
Deferred income taxes (22,662)
Acquisition premium 94,432
--------
$310,000
========
</TABLE>
5. INVESTMENT IN JOINT VENTURES
The Company's Peruvian subsidiary, Acerco, and two consortium partners (the
"Consortium") acquired on March 21, 1996 through Sidercorp S.A. ("Sidercorp")
approximately ninety-six percent (96%) of the outstanding common stock of
Empresa Siderurgica del Peru S.A., ("Siderperu"). Siderperu is a steel
manufacturer which produced and sold approximately 250,000 tons of rebar and
flat rolled steel products in 1995. Each of the Consortium members invested
approximately $11,147 and owns one-third (1/3) of the outstanding capital stock
of Sidercorp. Under the terms of the acquisition, Acerco will manage the
operations of Siderperu. Also, in connection with the acquisition, Siderperu
entered into a Technical Assistance Agreement with each of Acerco and GST and
entered into a Steel Bar Supply Agreement with Acerco and the Company's Chilean
subsidiary, MolyCop Chile S.A.
On June 12, 1996, the Company entered into an agreement to form a new Italian
corporation to be called GSI Lucchini SpA. The new joint venture, to be 49%
owned by the Company, will manufacture and sell grinding media. Amounts
expended to date in connection with this joint venture have not been material.
Manufacturing assets from the Company's Cividale forged ball plant will be sold
to the joint venture and used in production in the joint venture's new
facility.
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
---------- -------------
<S> <C> <C>
Inventories at FIFO and average cost:
Finished and semi-finished $ 73,065 $ 71,932
Raw materials 80,361 74,310
--------- --------
Total 153,426 146,242
--------- --------
Inventories at LIFO:
Finished and semi-finished 6,413 6,888
Adjustment to state inventories at LIFO value (685) (317)
--------- --------
Total 5,728 6,571
--------- --------
$159,154 $152,813
========= ========
</TABLE>
The carrying value of inventories approximates replacement cost.
7
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
During the fourth quarter of 1995, the Company elected to change its method of
inventory valuation for its Kansas City operations from the last-in, first-out
("LIFO") method to the first-in, first-out ("FIFO") method. Under the current
economic environment of low inflation, the Company believes that the FIFO
method will result in a better measurement of operating results. In accordance
with Accounting Principles Board Opinion No. 20, the change in the method of
inventory valuation from the LIFO method to the FIFO method has been applied
retroactively, and all prior period financial statements have been restated.
This change in accounting method had the effect of increasing previously
reported net income for the third quarter and first nine months of 1996 by $787
and $2,353, net of income taxes, respectively.
The Company's Italian operations continue to value inventory on the LIFO
method.
Effective January 1, 1996, the Company changed its method of accounting for
spare parts and supplies from expensing them at time of purchase to
inventorying them and charging them to expense in the period in which they are
used. This method is consistent with prevailing industry practice and in
management's opinion, results in a better matching of costs with related
revenues. The effect of the change was to increase net income for the nine
months ended September 30, 1996 by $3,556, net of applicable taxes. Proforma
results for the nine month period ended September 30, 1995 would not have been
materially different from historical results had this new method been employed.
7. PAYABLES AND ACCRUED LIABILITIES
Payables and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
----------- --------------
<S> <C> <C>
Trade payables $108,505 $112,256
Salaries and wages 12,035 14,260
Accrued interest payable 10,136 9,640
Other 32,717 23,847
-------- --------
$163,393 $160,003
======== ========
</TABLE>
8. NOTES PAYABLE
Notes payable at September 30, 1996 consist of $11,591, $4,437 and $283 in
short-term revolving credit facilities in Peru, Italy and Chile, respectively.
8
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
9. SUMMARIZED FINANCIAL INFORMATION OF GSTOC
GSTOC has issued Senior Notes unconditionally guaranteed by the Company.
Accordingly, summarized financial information for GSTOC on a stand alone basis
is provided below.
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -----------
<S> <C> <C>
Current assets $255,850 $239,042
Noncurrent assets 375,444 387,438
-------- --------
Total $631,294 $626,480
======== ========
Current liabilities $132,901 $153,032
Noncurrent liabilities 452,012 420,761
-------- --------
584,913 573,793
Common stock, additional paid-in
capital and retained earnings 46,381 52,687
-------- --------
Total $631,294 $626,480
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------------
September 30, September 30,
1995 1995
(as Restated, September 30, (as Restated, September 30,
Note 6) 1996 Note 6) 1996
---------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Net sales $57,007 $195,666 $212,834 $575,316
Cost of products sold 53,055 171,965 186,965 512,304
Selling, general and administrative
expenses 2,410 9,862 9,581 27,631
Depreciation and amortization 815 7,140 2,401 21,149
------- -------- -------- --------
Operating profit 727 6,699 13,887 14,232
Interest expense (4,658) (11,149) (11,472) (31,892)
Fees from joint ventures 356 683 973 2,386
Other, net (73) 193 602 (179)
------- -------- -------- --------
Income (loss) before income tax and
cumulative effect of accounting
change (3,648) (3,574) 3,990 (15,453)
Income tax (provision) benefit 1,435 845 (1,659) 6,064
------- -------- -------- --------
Income (loss) before cumulative
effect of accounting change (2,213) (2,729) 2,331 (9,389)
Cumulative effect of change in
accounting 3,556
------- -------- -------- --------
Net income (loss) (2,213) $ (2,729) $ 2,331 $ (5,833)
======= ======== ======== ========
</TABLE>
9
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
10. COMMITMENTS AND CONTINGENCIES
INDEMNIFICATIONS FROM ARMCO
In connection with the Company's acquisition of the Worldwide Grinding Systems
from Armco, the Company has been indemnified by Armco for known environmental
matters and known quantified income tax issues related to periods prior to
November 12, 1993. The Company has also been indemnified against all other
unknown pre-closing environmental matters or conditions for a period of six
years from closing, subject to an aggregate deductible of $250 and a
fifty-fifty sharing for aggregate claims between $10,000 and $15,000 with a
maximum cap of $12,500. Management of the Company is not aware of any current
information which would indicate that Armco will not be able to satisfy its
obligation to the Company under these indemnifications.
ENVIRONMENTAL MATTERS
The Company's U.S. facilities are subject to a broad range of federal, state
and local environmental requirements, including those governing discharges to
the air and water, the handling and disposal of solid and hazardous wastes and
the remediation of contamination associated with releases of hazardous
substances at Company facilities and associated offsite disposal locations.
Liabilities with respect to hazardous substance releases arise principally
under the federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and similar state laws, which impose strict,
retroactive, joint and several liability upon statutorily defined classes of
"potentially responsible parties." The Company's foreign facilities and joint
ventures are subject to varying degrees of environmental regulation in the
jurisdictions in which those facilities are located.
Based on the continuing review of environmental requirements the Company
believes that it is currently in compliance with environmental requirements.
Nevertheless, as is the case with steel producers in general, if a release of
hazardous substances occurs on or from the Company's properties or any
associated offsite disposal locations, or if contamination from prior
activities is discovered at such properties or locations, the Company may be
held liable and may be required to pay the cost of remedying the condition or
satisfying third party damage claims. The amount of any such liability could be
material. The Company devotes considerable resources to ensuring that its
operations are conducted in a manner that reduces such risks.
The Company has several environmental issues, some of which involve compliance
and/or remediation at certain properties. The Company records certain
operating expenses for environmental compliance, testing and other
environmental related costs as expenses when incurred. When it has been
possible to determine reasonable estimates of liabilities related to
environmental issues, based upon information from engineering and environmental
specialists, the Company has made provisions and accruals. At September 30,
1996, $3,735 is accrued for environmental related issues. The Company believes,
based upon information currently available to management, that it will not
require expenditures to maintain compliance with environmental requirements
which would have a material adverse effect on its financial condition, results
of operations or competitive position.
10
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
LITIGATION AND OTHER CONTINGENCIES
On August 30, 1996, Samsung America, Inc. ("Samsung") filed an action in the
Supreme Court of the State of New York seeking monetary damages against GSI,
the Company, its Peruvian subsidiary, Acerco, and Acerco's partners in the
Siderperu joint venture, collectively, ("the Defendants"). Samsung seeks to
recover purported damages of $48.0 million and punitive damages of $10.0
million and alleges that the Defendants failed to honor a written contract
which entitled Samsung to obtain an equity interest in Siderperu and to provide
certain distribution and trading services on an exclusive basis. Although no
assurances can be given, the Company believes the allegations are without merit
and will defend itself accordingly.
There are various claims and legal proceedings arising out of the normal course
of business pending against the Company and its subsidiaries. In management's
opinion, the ultimate liability resulting therefrom will not have a material
adverse effect on the financial position or results of operations of the
Company.
LABOR RELATIONS
A significant portion of the Company's employees are covered by collective
bargaining agreements negotiated with various unions. These agreements expire
at various times between November 1996 and March 1999. In the course of
contract negotiations, the Company has on infrequent occasion been affected by
work stoppages which have been short in duration and have not had a material
adverse effect on the Company's results of operations or financial position.
Management believes that its relationships with the unions are generally good
and that upcoming negotiations will be conducted on a mutually satisfactory
basis.
11
<PAGE> 12
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
11. GEOGRAPHIC INFORMATION
Financial information, by geographic region, for the Company is presented
below. United States includes GSTOC and MEI. South America is principally
comprised of the Company's operations in Chile and Peru. Europe and Other
includes the Company's operations in Europe (principally Italy), Canada and
other joint venture interests around the world.
<TABLE>
<CAPTION>
September 30, 1996 and the nine months ended September 30, 1996
---------------------------------------------------------------
United South Europe
States America and Other Total
------- ------- --------- --------
<S> <C> <C> <C> <C>
Net sales $559,299 $63,407 $ 84,106 $706,812
Equity in income of joint ventures 2,641 37 930 3,608
Operating profit 17,803 6,930 3,522 28,255
Net income (loss) (2,722) 4,346 1,719 3,343
Identifiable assets 577,452 53,661 111,298 742,411
Total liabilities 556,390 33,740 41,784 631,914
Net assets 21,062 19,921 69,514 110,497
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1995
---------------------------------------------------
Total (as
United South Europe Restated,
States America and Other Note 6)
-------- ------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $188,370 $22,024 $ 28,810 $239,204
Equity in income of joint ventures 1,092 479 187 1,758
Operating profit 7,244 2,611 1,789 11,644
Net income (loss) (1,880) 2,168 847 1,135
</TABLE>
12. SUBSEQUENT EVENT
The Company's Peruvian subsidiaries had received various notices of proposed
tax assessments from the Peruvian tax authorities for the years 1985 through
1991, the balances of which aggregated $16,900 as of December 31, 1994. As of
June 30, 1996, the Company had resolved approximately $8,200 of the total
proposed tax assessments with total cash payments of $228. Due to the large
number of unsettled tax cases throughout the Peruvian tax system, the
Government of Peru issued a one-time amnesty program in October 1996. The
Company has elected to participate in the amnesty program and will settle all
remaining proposed Peruvian tax assessments, including interest and penalties,
for a payment of approximately $250. The amounts paid for resolution of the
tax assessments were or will be reimbursed in full by Armco under the
indemnification provisions of the agreement between Armco and the Company.
12
<PAGE> 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis is provided to increase understanding of,
and should be read in conjunction with, the unaudited consolidated financial
statements and accompanying notes. The results of operations, cash flows and
financial position reported by the Company for 1996 are not comparable with
1995 due to the acquisition of Georgetown Industries, Inc. ("GII") on October
5, 1995.
SUMMARY STATEMENTS OF INCOME
(Dollars in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
September September September September
30, 1995(1) 30, 1996 30, 1995(1) 30, 1996
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Net sales $102,065 $239,204 $341,598 $706,812
Cost of products sold 88,398 204,617 286,264 612,023
Selling, general and administrative expenses 7,289 14,928 24,214 42,709
Depreciation 1,757 8,015 5,249 23,825
-------- -------- -------- --------
Operating profit 4,621 11,644 25,871 28,255
Net interest expense (2) (5,245) (11,644) (12,672) (33,865)
Other income (3) 1,278 2,355 4,046 5,215
Income tax (provision) benefit (279) (1,220) (7,438) 182
-------- -------- -------- --------
Income (loss) before cumulative effect of
accounting change 375 1,135 9,807 (213)
Cumulative effect of accounting change 3,556
-------- -------- -------- --------
Net income $ 375 $ 1,135 $ 9,807 $ 3,343
======== ======== ======== ========
</TABLE>
(1) - As restated to reflect the effect of retroactively changing the Kansas
City operations' method of valuing inventories from the last-in, first-out
(LIFO) method to the first-in, first-out (FIFO) method. See Note 6 to the
unaudited consolidated financial statements.
(2) - Net interest expense includes interest income, interest expense and
amortization of debt-issuance costs.
(3) - Other income includes equity in income of joint ventures, fees from joint
ventures, minority interest and other, net.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995.
NET SALES. Net sales for the nine months ended September 30, 1996 were $706.8
million compared to $341.6 million for the first nine months of 1995, an
increase of $365.2 or 106.9%. Net sales for the acquired GII group were $345.9
million. Excluding the GII acquisition, sales increased $19.3 million
resulting principally from volume increases in wire rod and grinding media as
partially offset by lower wire rod selling prices.
Wire rod sales were $283.0 million for the first nine months of 1996 compared
to $124.8 million for the same period of 1995. The net increase results from
incorporating wire rod sales from the Georgetown, South Carolina facility (part
of the GII acquisition) of $139.9 million for the first nine months of 1996.
Additionally, wire rod shipments from the Kansas City facility were up 90,000
tons in 1996 due to the second quarter 1995 shutdown for the rod mill
modernization project. The effect of this volume increase was partially offset
by a decline in average wire rod selling prices of $26 per ton compared to the
first nine months of 1995.
Grinding media sales of $146.8 million for the nine months ended September 30,
1996 exceeded prior year nine month sales by $10.2 million resulting from the
combination of an 18,000 ton increase in volume and an increase in average
selling price of $7 per ton.
Additional sales for the first nine months resulting from the GII acquisition
include $171.1 million of wire products and $30.5 million of billets.
13
<PAGE> 14
COST OF PRODUCTS SOLD. Cost of products sold as a percent of net sales for the
first nine months increased to 86.6% in 1996 from 83.8% in 1995. This increase
results from an increase in production costs at the Kansas City facility due to
inefficiencies associated with the production ramp-up following the rod mill
modernization combined with the decline in wire rod prices noted above. As a
result, gross margin was 13.4% for the first nine months of 1996 compared to
16.2% for the same period in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were up in total dollars to $42.7 million in the first
nine months of 1996 compared to $24.2 million in 1995, but have decreased as a
percent of net sales to 6.0% from 7.1%. The increase in total dollars results
from the GII acquisition while the decrease as a percent of sales reflects cost
reductions and efficiencies of combining operations and management teams.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
first nine months increased by $18.6 million to $23.8 million. Of this
increase, $16.5 million results from the GII acquisition and the remainder from
capital additions and improvements.
NET INTEREST EXPENSE. The increase in net interest expense of $21.2 million to
$33.9 million results from debt incurred to effect the GII acquisition and
borrowings related to the investment in Sidercorp. Of this total, $1.4 million
relates to amortization of loan acquisition costs.
OTHER INCOME. Other income, primarily equity income and fees from joint
ventures, increased to $5.2 million for the nine months ended September 30,
1996 compared to $4.0 million for 1995.
INCOME TAX PROVISION/BENEFIT. The Company recorded an income tax benefit of
$.2 million on a pre-tax loss of $.4 million for the first nine months of 1996
at an effective rate of 46.1%. This compares to income tax expense of $7.4
million on pre-tax earnings of $17.2 million for the first nine months of 1995
at an effective rate of 43.0%. The effective rate increased primarily due to
the nondeductibility of amortization expense associated with the premium
recorded in connection with the GII acquisition and a higher percentage of
foreign income and foreign income taxes which were not deductible for U.S. tax
purposes.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING. Effective January 1, 1996, the
Company adopted, at its Kansas City facility, the prevailing industry practice
which is to inventory spare parts and supplies when purchased and to charge
them to operations as utilized. In management's opinion this policy results in
a better matching of costs with related revenues and is consistent with
industry practice. Net earnings for the nine months ended September 30, 1996
include income of $3,556, net of applicable taxes, for the cumulative effect of
this change.
NET INCOME. As a result of the various factors noted above, the Company had
net income for the first nine months of 1996 of $3.3 million compared to net
income of $9.8 million for the first nine months of 1995.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
NET SALES. Net sales for the third quarter ended September 30, 1996 were
$239.2 million compared to $102.1 million for the third quarter of 1995, an
increase of $137.1 million or 134.4%. Net sales for the acquired GII group
were $115.4 million. The remainder of the increase results from volume
increases in wire rod and grinding media as partially offset by a decline in
wire rod selling prices.
Wire rod sales were $99.0 million for the third quarter of 1996 compared to
$28.4 million for 1995. Excluding wire rod sales resulting from the GII
acquisition of $49.4 million, the net increase is $21.2 million. This increase
results from increased volume of 71,000 tons at Kansas City to 152,000 tons for
the third quarter of 1996 as the mill continues to ramp up production following
the rod mill modernization. The modernization project required a shut down of
36 days during the second quarter of 1995 and volume was adversely affected for
the remainder of 1995. The effect of the volume improvement in 1996 was offset
by a decrease in average wire rod selling price, quarter to quarter, of $27 per
ton.
Grinding media sales of $49.3 million for the quarter exceeded prior year sales
of $46.8 million resulting from a volume increase of approximately 7,000 tons
and an increase in the average selling price of $14 per ton.
Additional sales for the three months ended September 30, 1996 resulting from
the GII acquisition include $60.8 million of wire products and $17.9 million of
billets.
14
<PAGE> 15
COST OF PRODUCTS SOLD. Cost of products sold as a percent of net sales
decreased to 85.5% in the third quarter of 1996 from 86.6% in 1995. Production
costs at the Kansas City facility were higher in the three month period ended
September 30, 1995 due to inefficiencies associated with the production ramp-up
following rod mill modernization. Production levels were significantly lower
in the months following the rod mill shut down. As a result, gross margin
improved to 14.5% in third quarter 1996 from 13.4% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were up in total dollars to $14.9 million in 1996
compared to $7.3 million in 1995, but have decreased as a percent of net sales
to 6.2% from 7.2%. The increase in total dollars results from the GII
acquisition while the decrease as a percent of sales reflects cost reductions
and efficiencies of combining operations and management teams.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
third quarter increased by $6.3 million to $8.0 million. Of this increase,
$5.5 million results from the GII acquisition and the remainder from capital
additions and improvements.
NET INTEREST EXPENSE. The increase in net interest expense of $6.4 million
results from debt incurred to effect the GII acquisition and borrowings related
to the investment in Sidercorp. Of this total, $0.5 million relates to
amortization of loan acquisition costs.
OTHER INCOME. Other income, which is primarily equity in income of joint
ventures and fees from joint ventures increased to $2.4 million for 1996
compared to $1.3 million for 1995.
INCOME TAX PROVISION/BENEFIT. The company recorded an income tax provision of
$1.2 million on pre-tax earnings of $2.3 million for the third quarter of 1996
at an effective rate of 51.8%. This compares to income tax expense of $.3
million on pre-tax earnings of $.7 million for the third quarter of 1995 at an
effective rate of 42.7%. The effective rate increased primarily due to the
nondeductibility of amortization expense associated with the premium recorded
in connection with the GII acquisition and a higher percentage of foreign
income and foreign income taxes which were not deductible for U.S. tax
purposes.
NET INCOME. As a result of the various factors noted above, the Company had
net income for the third quarter of 1996 of $1.1 million compared to net income
of $.4 million for the third quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had total cash and cash equivalents of $3.5
million, mostly at the Company's foreign operations, a decrease of $7.9 million
from December 31, 1995. Operating activities for the nine months ended
September 30, 1996 provided $39.3 million of cash. Dividends received from
joint ventures provided $3.6 million in cash. Changes in operating assets and
liabilities provided $11.4 million of cash, largely from reductions in accounts
receivable and inventories of $6.7 million and $6.3 million, respectively, as
offset by a decrease in accounts payable and accrued liabilities. Financing
activities provided $.2 million of cash from borrowings, net of repayments, on
revolvers and long-term debt. The Company invested $47.7 million in properties
and invested $11.1 million to purchase a one-third interest in a joint venture
in Peru which operates a steel manufacturer producing rebar and flat rolled
steel products.
Management believes that funds available from the Company's cash flow from
operations and credit facilities will be sufficient, in the aggregate, to fund
planned working capital and capital expenditure requirements for the remainder
of 1996. There are fluctuations in the Company's working capital needs over
the course of a year, generally influenced by various factors such as
seasonality, inventory levels and the timing of raw material purchases. Due to
the cyclical nature of the Company's business, management believes that it is
important for the Company to maintain borrowing facilities in excess of working
capital requirements.
The Company currently intends to make an equity investment of up to $22.5
million primarily during 1997 in American Iron Reduction LLC, a joint venture
to build and operate a scrap substitute facility. The financing for the
project was closed in September and grading and foundation work at the site was
commenced. Construction is projected to be completed by the end of 1997. The
financing was obtained on a non-recourse basis to GSTOC and the Company.
15
<PAGE> 16
The Company will manage its liquidity needs on a consolidated basis with
borrowings that will be available under the Revolving Credit Facility, a
revolving credit facility at MEI and various credit facilities available at its
international subsidiaries and joint ventures. Management believes the
additional borrowing availability under its credit facilities and the cash
flows from operations will be sufficient to meet anticipated capital
expenditures and to make principal and interest payments on the Company's
indebtedness when due. The Company believes cash flows from operations will
continue to improve due to the ongoing benefits of its business strategy,
including its cost reduction program and planned capital investment projects.
Borrowings under the Revolving Credit Facility bear interest at a floating
rate. Increases in prevailing rates could adversely affect the Company's cash
flow. To the extent that the interest rate on the Revolving Credit Facility
increases or the principal amount outstanding increases, there will be
corresponding increases in the Company's interest obligations. Under the
Revolving Credit Facility, the Company availability is $145 million (subject to
a borrowing base limitation). As of September 30, 1996, the availability under
the Revolving Credit Facility was $131.9 million, of which $52.6 million was
advanced and $24.9 million was reserved for letters of credit outstanding.
The unsecured MEI revolving credit agreement permits borrowings on the
revolving line of credit up to $9 million. Unused availability under this
facility was $8.1 million at September 30, 1996.
The acquisition premium recorded as a result of the GII Acquisition is being
amortized over a period of forty years. Management believes that the use of
the forty-year amortization period is appropriate given the expected longevity
of the industry, Georgetown's leading market position, Georgetown's utilization
of modern manufacturing technology, and the diversity and lack of expected
obsolescence of Georgetown's products.
ENVIRONMENTAL AND TAX CONTINGENCIES, LITIGATION AND INDEMNIFICATION
Note 10 to the Company's Unaudited Consolidated Financial Statements is herein
incorporated by reference.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 10 to the Company's Unaudited Consolidated Financial
Statements for the quarter ended September 30, 1996 is herein
incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed herewith:
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
All other exhibits otherwise required in connection with this
quarterly report on Form 10-Q have heretofore been filed with the
Securities and Exchange Commission.
(b) No reports on Form 8-K were filed during the quarter
ended September 30, 1996.
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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 on the 6th day of
November, 1996.
GS Technologies Operating Co., Inc.
(Registrant)
By: /s/ Luis E. Leon
----------------------------------------------
Luis E. Leon
Senior Vice President, Chief Financial Officer
and Treasurer
18
<PAGE> 19
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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 on the 6th day of
November, 1996.
GS Technologies Corporation
(Registrant)
By: /s/ Luis E. Leon
----------------------------------------------
Luis E. Leon
Senior Vice President, Chief Financial Officer
and Treasurer
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,518
<SECURITIES> 0
<RECEIVABLES> 115,443<F1>
<ALLOWANCES> 0
<INVENTORY> 152,813
<CURRENT-ASSETS> 288,790
<PP&E> 311,926<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 742,411
<CURRENT-LIABILITIES> 183,777
<BONDS> 361,048
0
0
<COMMON> 1
<OTHER-SE> 110,496
<TOTAL-LIABILITY-AND-EQUITY> 742,411
<SALES> 706,812
<TOTAL-REVENUES> 706,812
<CGS> 612,023
<TOTAL-COSTS> 678,557
<OTHER-EXPENSES> (5,783)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,433
<INCOME-PRETAX> (395)
<INCOME-TAX> 182
<INCOME-CONTINUING> (213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3,556<F1>
<NET-INCOME> 3,343
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>AMOUNTS PRESENTED ARE NET
</FN>
</TABLE>
