<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Filed Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
Commission File Number 033-80618
GS TECHNOLOGIES OPERATING CO., INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1656035
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
GS TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3204785
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1901 Roxborough Road
Suite 200
Charlotte, North Carolina 28211
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (704) 366-6901
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.
Yes [X] No [ ]
There were 100 shares of GS Technologies Operating Co., Inc. Common
Stock, par value $.01 per share, outstanding at November 12, 1997. There were
100 shares of GS Technologies Corporation Common Stock, par value $.01 per
share, outstanding at November 12, 1997.
This document consists of 17 sequentially numbered pages.
<PAGE> 2
PART I. FINANCIAL INFORMATION (UNAUDITED)
GS Technologies Corporation (the "Company" or "GST"), a wholly-owned subsidiary
of GS Industries ("GSI"), is the largest producer of steel wire rod in North
America and of grinding media and mill liners for the worldwide mining industry
as well as a leading producer of certain wire products for the U.S. and export
markets. GST has fully and unconditionally guaranteed two series of senior notes
totaling $250 million aggregate principal amount issued by its wholly-owned
subsidiary, GS Technologies Operating Co., Inc. ("GSTOC").
INDEX
ITEM PAGE
(1) Unaudited Consolidated Financial Statements of the Company
Unaudited Consolidated Statements of Operations for the Three Months
and Nine Months ended September 30, 1996 and September 30, 1997 3
Unaudited Consolidated Balance Sheets as of December 31, 1996
and September 30, 1997 4
Unaudited Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1996 and September 30, 1997 5
Notes to Unaudited Consolidated Financial Statements 6
(2) Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
2
<PAGE> 3
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 204,954 $ 216,853 $ 609,667 $ 610,249
Operating costs and expenses:
Cost of products sold 175,934 178,870 529,462 524,603
Selling, general and
administrative expenses 12,793 12,099 36,189 35,689
Depreciation and amortization 6,703 7,541 19,979 22,385
--------- --------- --------- ---------
195,430 198,510 585,630 582,677
--------- --------- --------- ---------
Operating profit 9,524 18,343 24,037 27,572
Other income (expense):
Interest expense, net (11,060) (10,069) (31,885) (30,664)
Equity in income of
joint ventures 1,758 1,867 3,608 5,108
Fees from joint ventures 541 602 1,779 2,043
Other, net 225 (56) 271 491
--------- --------- --------- ---------
(8,536) (7,656) (26,227) (23,022)
--------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes
and cumulative effect of
accounting change 988 10,687 (2,190) 4,550
Income tax (provision) benefit (636) (5,449) 1,085 (2,319)
--------- --------- --------- ---------
Income (loss) from continuing
operations before cumulative
effect of accounting change 352 5,238 (1,105) 2,231
Discontinued operations (Note 4):
Income from discontinued
operations, net of taxes 783 892 445
Loss on disposal of discontinued
operations, net of taxes (23,008)
--------- --------- --------- ---------
783 892 (22,563)
--------- --------- --------- ---------
Income (loss) before cumulative
effect of accounting change 1,135 5,238 (213) (20,332)
Cumulative effect of change in
accounting for spare parts
inventories, net of taxes (Note 5) 3,556
--------- --------- --------- ---------
Net income (loss) $ 1,135 $ 5,238 $ 3,343 $ (20,332)
========= ========= ========= =========
</TABLE>
See 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,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,747 $ 5,469
Receivables less allowance for doubtful accounts 106,314 103,197
Receivable from related party 6,991 8,890
--------- ---------
Total receivables 113,305 112,087
--------- ---------
Inventories 128,976 137,613
Net assets of discontinued operations 75,265
Prepaid expenses and other current assets 4,190 6,109
Recoverable income taxes 5,902 --
Deferred tax benefit 2,092 2,609
--------- ---------
Total current assets 337,477 263,887
Investments in joint ventures 31,097 33,443
Properties, net 263,402 262,755
Acquisition premium 62,324 61,116
Other assets 20,904 28,763
--------- ---------
Total assets $ 715,204 $ 649,964
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable $ 15,717 $ 14,610
Current portion of long-term debt 862 504
Payables and accrued liabilities 150,951 149,543
--------- ---------
Total current liabilities 167,530 164,657
Long-term debt 368,554 322,837
Post retirement benefit obligations other than pensions 25,793 26,654
Deferred income taxes payable 17,489 17,334
Other long-term liabilities 23,077 25,497
Commitments and contingencies (Note 9)
--------- ---------
Total liabilities 602,443 556,979
--------- ---------
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized,
and 100 shares issued and outstanding at December 31,
1996 and June 30, 1997 1 1
Additional paid in capital 132,166 132,166
Retained earnings (accumulated deficit) (17,729) (38,061)
Cumulative translation adjustment (1,677) (1,121)
--------- ---------
Total stockholder's equity 112,761 92,985
--------- ---------
Total liabilities and stockholder's equity $ 715,204 $ 649,964
========= =========
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE> 5
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months ended
--------------------------------
September 30, September 30,
1996 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,343 $ (20,332)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change (3,556)
Depreciation and amortization 19,979 22,385
Loss on disposal of discontinued operations (non-cash) 23,008
Net cash from discontinued operations 6,900 (2,138)
(Gain) loss on disposal of fixed assets 20 (131)
Deferred income taxes 3,044 (672)
Equity in income of joint ventures (3,608) (5,108)
Dividends from joint ventures 3,622 2,103
Post retirement benefit obligations accrued in excess
of cash paid 1,480 861
Changes in operating assets and liabilities:
Receivables 11,152 1,218
Inventories 4,113 (8,637)
Payables and accrued liabilities (1,923) (1,883)
Income taxes 61 (4,327)
Other (5,134) 4,175
--------- ---------
Net cash provided by operating activities 39,493 10,522
--------- ---------
INVESTING ACTIVITIES:
Proceeds from disposal of discontinued operations 57,024
Purchase of properties (37,692) (20,072)
Proceeds from disposal of fixed assets 1,107
Investment in joint ventures (11,211) (497)
--------- ---------
Net cash provided by (used in) investing activities (47,796) 36,455
--------- ---------
FINANCING ACTIVITIES:
Proceeds from (payments on) notes payable, net 11,135 (1,107)
Borrowings under revolving credit facility 167,192 137,259
Repayments on revolving credit facility (177,891) (184,086)
Repayments on long-term debt (250) (375)
--------- ---------
Net cash provided by (used in) financing activities 186 (48,309)
--------- ---------
Effect of exchange rate changes on cash 265 (946)
--------- ---------
Net decrease in cash and cash equivalents (7,852) (2,278)
CASH AND CASH EQUIVALENTS:
Beginning of period 10,289 7,747
--------- ---------
End of period $ 2,437 $ 5,469
========= =========
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE> 6
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 (the "Company" or "GST") 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 Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
for a summary of significant accounting policies and other information, the
substance of which has not changed materially as of September 30, 1997, unless
otherwise noted herein.
3. THE GEORGETOWN ACQUISITION
In August, 1995, all of the issued and outstanding common stock of the Company
was converted into shares of common stock of GS Industries, Inc. ("GSI") and the
Company became a wholly-owned subsidiary of GSI. In October, 1995, GSI and the
Company, through its wholly-owned subsidiary, GS Technologies Operating Co.,
Inc. ("GSTOC"), acquired Georgetown Industries, Inc. ("GII") and GII and its
subsidiaries are now wholly-owned subsidiaries of GSTOC. The results of GII's
operations have been consolidated with those of the Company since the date of
acquisition.
The acquisition was recorded in accordance with the purchase method of
accounting. Accordingly, the purchase price plus direct costs were allocated to
the assets acquired and liabilities assumed based on preliminary estimates of
fair values at the date of acquisition, October 5, 1995. During 1996, as a
result of the recognition of previously unrecorded deferred tax assets, the
resolution of certain contingent liabilities and an increase in the recorded
value of certain fixed assets based on a formal appraisal, the allocation of the
purchase price was finalized. As a result, the value of identifiable assets
acquired was increased by approximately $26.9 million, with a resulting decrease
to the acquisition premium.
4. DISCONTINUED OPERATIONS
On May 14, 1997, the Company sold Georgetown Wire Company, Inc. and Tree Island
Industries, Ltd. (the "West Coast Wire Business") for approximately $55.9
million, resulting in an estimated loss on disposition of $23.0 million, net of
taxes. Accordingly, the results of operations, cash flows and net assets of this
business have been classified as discontinued operations for all periods
presented. The Company has recorded a net tax benefit of $16.7 million on the
transaction; of this amount, $15.4 million relates to the difference between the
book and tax basis of the business sold. This amount was recorded as a deferred
tax asset in connection with finalizing the purchase accounting (see Note 3).
The remaining tax benefit of $1.3 million has been netted against the loss from
discontinued operations. The West Coast Wire Business had combined annual sales
of $124.3 million and net earnings of $2.4 million in 1996. The Company is in
the process of finalizing the disposition accounting. The final loss on
disposition is not expected to be materially different from the estimate
recorded.
6
<PAGE> 7
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ -------------
<S> <C> <C>
Inventories at FIFO and average cost:
Finished and semi-finished $ 63,465 $ 77,494
Raw materials 61,154 58,471
--------- ---------
Total 124,619 135,965
--------- ---------
Inventories at LIFO:
Finished and semi-finished 4,658 1,714
Adjustment to state inventories at LIFO value (301) (66)
--------- ---------
Total 4,357 1,648
--------- ---------
$ 128,976 $ 137,613
========= =========
</TABLE>
The carrying value of inventories approximates replacement cost.
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
to the change was to increase net income for the nine months ended June 30, 1996
by $3.6 million, net of applicable taxes of $2.4 million.
6. INVESTMENT IN JOINT VENTURES
In March 1996, the Company's Peruvian subsidiary, Acerco, and two joint venture
partners acquired, through Sidercorp S.A. ("Sidercorp"), approximately
ninety-six percent of the outstanding common stock of Empresa Siderugica del
Peru S.A. ("Siderperu"). Each of the joint venture partners made an initial
investment of $11.1 million and owns one-third of the outstanding capital stock
of Sidercorp. Under the terms of the agreement, Acerco is the operating partner
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.
In June 1996, the Company entered into an agreement to form a new Italian joint
venture called GSI Lucchini SpA. The joint venture, 49% owned by the Company,
manufactures and sells grinding media. Manufacturing assets and spare parts
inventory from the Company's Cividale forged ball plant were sold to the joint
venture's new facility which commenced operations in March 1997. Operations at
the Cividale facility ceased at the end of October 1996.
The Company, through GSTOC, and Birmingham Steel are each 50% shareholders in a
joint venture, American Iron Reduction LLC, (AIR) which is currently
constructing a Direct Reduced Iron (DRI) facility. This DRI facility is expected
to produce approximately 1.2 million metric tons of DRI annually and
construction is expected to be completed by the first quarter of 1998. DRI is a
substitute for steel scrap used in the Company's steel making facilities. The
Company made an initial non-cash equity contribution of $5.0 million and is
committed to make additional equity investments of approximately $10.8 million
in 1997 and $4.2 million in 1998. Under certain circumstances, the Company may
be required to make an additional equity contribution of $7.5 million. The
Company also entered into a DRI purchase agreement with AIR to purchase up to
600,000 metric tons of DRI annually. The financing was obtained on a
non-recourse basis to GSTOC and the Company.
All of the joint ventures are charged technical service fees pursuant to
technology and management support agreements. These amounts are included in the
accompanying income statements as a separate component of other income.
7
<PAGE> 8
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
7. PAYABLES AND ACCRUED LIABILITIES
Payables and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ -------------
<S> <C> <C>
Trade payables $ 91,652 $ 88,057
Salaries and wages 14,269 14,828
Accrued interest payable 9,639 10,507
Other 35,391 36,151
======== ========
$150,951 $149,543
======== ========
</TABLE>
8. NOTES PAYABLE
Notes payable consists of short-term debt of $8.4 million, $5.8 million and $0.4
million in short-term revolving credit facilities in Peru, Chile and Italy,
respectively.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION AND OTHER CONTINGENCIES
In August, 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 $48.5 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. On August 19, 1997, the
action was dismissed from the Supreme Court of the State of New York. Samsung
has appealed the dismissal decision to the 1st Department Appellate Division of
the State of New York. The Company believes that it has substantial and
meritorious defenses and will defend itself accordingly.
There are various claims pending involving the Company arising out of the normal
course of business. In management's opinion, the ultimate liability resulting
therefrom will not materially effect the financial position or results of
operations of the Company.
INDEMNIFICATIONS FROM ARMCO
As part of the Purchase and Sale Agreement with Armco, the Company has been
indemnified by Armco for known environmental matters and known quantified income
tax issues related to periods prior to November, 1993. The Company has also been
indemnified against all unknown other pre-closing environmental matters or
conditions for a period of six years from closing. Armco's indemnity covers 100%
of the first $10.0 million subject to an aggregate deductible of $250 and a
fifty-fifty sharing for aggregate claims between $10.0 million and $15.0 million
with a maximum cap of $12.5 million. 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.
8
<PAGE> 9
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
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 upon reviews of the varying requirements, the Company believes 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 currently under discussion with
various federal and local agencies, 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, 1997, $2.4 million was 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.
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 December 1997 and November 2003. In the course of previous
contract negotiations, the Company has on occasion been affected by work
stoppages.
The collective bargaining agreement at the Kansas City facility expired on March
31, 1997 and the Company and the United Steel Workers of America ("USWA") were
unable to agree on terms of a new labor agreement. A work stoppage at this
facility commenced on April 2, 1997. On June 13, 1997, the 650 employees covered
by this collective bargaining agreement ratified a new five and one-half year
agreement and returned to work. This facility has now returned to full
production. Management estimates that the work stoppage cost the Company
approximately $21.9 million in pre-tax earnings during the quarter ended June
30, 1997 in lost volume, production inefficiencies and accruing for the effect
of increased pension benefits.
The collective bargaining agreement with employees at the Company's facility in
Tempe, Arizona was due to expire in November, 1997. The Company has successfully
negotiated a new contract which extends until November, 2003.
The Company's collective bargaining agreement at the Georgetown, South Carolina
facility is due to expire on December 8, 1997. The Company has begun preliminary
discussions with the USWA; however, the ultimate outcome of these negotiations
is currently not known.
9
<PAGE> 10
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands)
10. 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), and other joint venture
interests around the world.
<TABLE>
<CAPTION>
September 30, 1997 and the Nine Months ended September 30, 1997
---------------------------------------------------------------------------
United South Europe
States America and Other Total
---------------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Net sales $523,036 $76,903 $10,310 $610,249
Operating profit 20,298 6,808 466 27,572
Equity in income of joint ventures 2,099 2,700 309 5,108
Net income (loss) (27,584) 6,578 674 (20,332)
Identifiable assets 568,820 69,227 11,917 649,964
Total liabilities 507,721 45,122 4,136 556,979
Net assets 61,099 24,105 7,781 92,985
</TABLE>
<TABLE>
<CAPTION>
Nine Months ended September 30, 1996
--------------------------------------------------------------------
United South Europe
States America and Other Total
--------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Net sales $527,729 $63,407 $18,531 $609,667
Operating profit 16,364 6,930 743 24,037
Equity in income of joint ventures 2,641 37 930 3,608
Net income (loss) (2,067) 4,346 1,064 3,343
</TABLE>
11. SUMMARIZED FINANCIAL INFORMATION OF GSTOC
GS Technologies Operating Co., Inc. and its subsidiaries ("GSTOC") is a
wholly-owned subsidiary of the Company. 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,
1996 1997
------------ -------------
<S> <C> <C>
Current assets $273,518 $195,238
Noncurrent assets 313,719 322,696
-------- --------
Total assets $587,237 $517,934
======== ========
Current liabilities $110,017 $107,320
Noncurrent liabilities 401,844 357,416
-------- --------
Total liabilities 511,861 464,736
Stockholder's equity 75,376 53,198
-------- --------
Total $587,237 $517,934
======== ========
</TABLE>
10
<PAGE> 11
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUMMARIZED FINANCIAL INFORMATION OF GSTOC - (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 161,416 $ 167,686 $ 478,171 $ 468,383
Cost of products sold 143,282 141,383 429,743 415,655
Selling, general and
administrative expenses 7,727 7,125 21,111 20,447
Depreciation and amortization 5,828 6,612 17,303 19,574
--------- --------- --------- ---------
Operating profit (loss) 4,579 12,566 10,014 12,707
Interest expense (10,565) (9,567) (29,912) (29,142)
Fees from joint ventures 683 841 2,386 2,788
Other, net 362 (35) 264 228
--------- --------- --------- ---------
Income (loss) from continuing
operations before income tax and
cumulative effect of accounting
change (4,941) 3,805 (17,248) (13,419)
Income tax (provision) benefit 1,429 (1,271) 6,967 4,478
--------- --------- --------- ---------
Income (loss) from continuing
operations before cumulative
effect of accounting change (3,512) 2,534 (10,281) (8,941)
Discontinued operations:
Income from discontinued
operations, net of taxes 783 892 445
Loss on disposal of discontinued
operations, net of taxes (23,008)
Cumulative effect of change in
accounting, net of taxes 3,556
========= ========= ========= =========
Net income (loss) $ (2,729) $ 2,534 $ (5,833) $ (31,504)
========= ========= ========= =========
</TABLE>
11
<PAGE> 12
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. All amounts and percentages are presented net
of discontinued operations unless otherwise noted.
The forward-looking statements included in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" which reflect management's
best judgment based on factors currently known, involve risks and uncertainties.
Words such as "expects", "anticipates", "believes" and "intends", variations of
such words and similar expressions are intended to identify such forward-looking
statements. Actual results could differ from those anticipated in these
forward-looking statements as a result of a number of factors including, but not
limited to, the factors discussed in such section. Forward-looking information
provided by the Company pursuant to the safe harbor established under the
Private Securities Litigation Reform Act of 1995 should be evaluated in the
context of these factors.
SUMMARY STATEMENTS OF INCOME
(Dollars in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 204,954 $ 216,853 $ 609,667 $ 610,249
Cost of products sold 175,934 178,870 529,462 524,603
Selling, general and administrative
expenses 12,793 12,099 36,189 35,689
Depreciation and amortization 6,703 7,541 19,979 22,385
--------- --------- --------- ---------
Operating profit 9,524 18,343 24,037 27,572
Net interest expense (1) (11,060) (10,069) (31,885) (30,664)
Other income (2) 2,524 2,413 5,658 7,642
Income (loss) from continuing operations
before income tax 988 10,687 (2,190) 4,550
Income tax (provision) benefit (636) (5,449) 1,085 (2,319)
--------- --------- --------- ---------
Income (loss) from continuing operations 352 5,238 (1,105) 2,231
Income from discontinued operations,
net of taxes 783 892 445
Loss on disposal of discontinued
operations, net of taxes (23,008)
Cumulative effect of accounting change,
net of taxes 3,556
--------- --------- --------- ---------
Net income (loss) $ 1,135 $ 5,238 $ 3,343 $ (20,332)
========= ========= ========= =========
</TABLE>
(1) - Net interest expense includes interest income, ($284 and $866 for the
three and nine months of 1997) interest expense and amortization of
debt-issuance costs ($459 and $1,377 for the three and nine months of
1997).
(2) - Other income includes equity in income of joint ventures, fees from
joint ventures, minority interest and other, net.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996.
DISCONTINUED OPERATIONS. On May 14, 1997, the Company sold its West Coast Wire
Business for approximately $55.9 million, resulting in an estimated loss on
disposition of approximately $23.0 million, net of taxes. Accordingly, the
results of operations of this business have been reclassified as discontinued
operations and the following discussion excludes the tons shipped and other
operating results of this business for all periods presented.
12
<PAGE> 13
NET SALES. Net sales increased $0.6 million from $609.7 million in 1996 to
approximately $610.2 million for 1997. Results for the first nine months of 1997
were significantly impacted by a work stoppage at the Company's Kansas City
facility. The work stoppage began on April 2, 1997 and ended with the successful
ratification of a new five and one-half year agreement on June 13, 1997.
Estimates indicate the work stoppage cost the Company approximately $21.9
million in pretax earnings during the quarter ended June 30, 1997 in lost
volume, increased pension benefits and production inefficiencies, as the Kansas
City management team maintained production at reduced levels.
Wire rod sales were up $22.8 million in the first nine months of 1997 to $305.7
million. Despite the second quarter 1997 strike at Kansas City and the gradual
return to normal production levels during the third quarter, wire rod volume for
the first nine months of 1997 exceeded the 1996 volume by approximately 35,200
tons. Additionally, the average wire rod selling price was $344 per ton in 1997
compared to $331 per ton in 1996.
Compared to the first nine months of 1996, grinding media sales were down $3.0
million to $144.6 million reflecting an increase in total volume of 2,900 tons
offset by a decrease in average selling prices for the first nine months of 1997
of approximately $13 per ton. Internationally, the Company substantially
increased its market share with several significant customers at slightly
reduced prices. Volume during the first nine months of 1997 from the Company's
South American operations increased by 25,700 tons. Domestic grinding media
volume in the first nine months of 1997 was down 16,900 tons from 1996 levels.
The Company estimated that volume of 13,000 tons was lost during the Kansas City
strike in the second quarter of 1997 and that residual effects continued to
adversely affect volumes in the third quarter of this year.
Mill liner sales increased $4.8 million to $56.8 million due largely to
favorable product mix resulting in an increase in average selling price of $63
per ton.
Sales of wire products decreased $5.8 million to $66.8 million due to decreased
volume of 9,600 tons, partially offset by a nine month to nine month increase in
average selling price of $9 per ton.
COST OF PRODUCTS SOLD AND GROSS MARGIN. Cost of products sold as a percent of
net sales decreased to 85.9% in 1997 from 86.8% in 1996 resulting in increased
gross profit margin from 13.2% in 1996 to 14.1% in 1997. Wire rod conversion
costs were unchanged for the comparative nine month periods reflecting a
significant spike (56%) during the second quarter work stoppage at Kansas City
offset by reduced conversion costs in the first and third quarters of 1997.
Conversion costs for the grinding media operations reflect a nine month to nine
month increase of 14% due to the effects of the strike and resulting volume
decline.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percent of sales for the nine months decreased from
5.9% in 1996 to 5.8% in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
first nine months of 1997 increased by $2.4 million to 22.4 million. This
increase results from capital additions and improvements.
NET INTEREST EXPENSE. The decrease in net interest expense of $1.2 million for
the nine months ended September 30, 1997 reflects the repayment of debt with
proceeds from the sale of the West Coast Wire Business.
OTHER INCOME. Other income, which is primarily equity income and fees from joint
ventures, increased to $7.6 million for 1997 compared to $5.7 million for 1996
due primarily to inclusion in 1997 of a full nine months of equity earnings and
fees from the Siderperu investment made in March 1996 and to improvements in
Siderperu's operations since it has been managed by the Company.
INCOME TAX PROVISION/BENEFIT. The Company recorded income taxes of $2.3 million
on pre-tax earnings from continuing operations of $4.6 million for the first
nine months of 1997. This compares to an income tax benefit of $1.1 million on a
pre-tax loss from continuing operations of $2.2 million for the first nine
months of 1996. The effective tax rate remains high due primarily to limitations
on the Company's current ability to utilize foreign tax credits and the
nondeductibility of amortization expense associated with the premium recorded in
connection with the GII acquisition. Income taxes recorded in connection with
the loss on discontinued operations of $1.3 million represent the net tax
benefit expected to be realized in excess of the amount recorded as a deferred
tax asset in the purchase accounting associated with the GII acquisition.
INCOME (LOSS) FROM CONTINUING OPERATIONS. As a result of the factors discussed
above, the Company had income from continuing operations of $2.2 million for the
first nine months of 1997 compared to a loss from continuing operations of $1.1
million for the first nine months of 1996.
13
<PAGE> 14
NET INCOME (LOSS). After the $23.0 million loss on the disposal of the West
Coast Wire Business, the Company experienced a net loss for the first nine
months of 1997 of $20.3 million compared to net income of $3.3 million for the
first nine months of 1996 after the cumulative effect of an accounting change
which increased 1996 net income by $3.6 million.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996.
NET SALES. Total net sales for the third quarter of 1997 were $216.9 million
compared to $204.9 million for the third quarter of 1996, reflecting
improvements in shipments and an increase in overall average sales prices.
Wire rod sales for the third quarter of 1997 were up $15.7 million to $114.6
million as compared to the comparable quarter of 1996. Wire rod shipments
increased by 24,900 tons and average wire rod sales prices were up quarter to
quarter by $23 per ton.
A net $2.8 million decrease in grinding media sales results from the combination
of a decrease in domestic volume of 11,400 tons, an increase in foreign volume
of 5,800 tons and a combined decrease in average selling prices of $3 per ton
quarter to quarter. The decrease in domestic grinding media shipments reflects
reduced volume due to the effects of the Kansas City strike. Internationally the
Company substantially increased its market share with several significant
customers.
Mill liner volume for the quarter ended September 30, 1997 increased 10% to
12,000 tons and the average sales price improved 4% primarily due to product mix
as compared to the prior year quarter.
Sales of wire products decreased approximately $2.5 million reflecting a 4,000
ton decline in volume, due primarily to competition from imports.
COST OF PRODUCTS SOLD AND GROSS MARGIN. Cost of products sold as a percent of
net sales decreased from 85.8% in 1996 to 82.5% in 1997 resulting in an increase
in gross margin from 14.2% to 17.5% quarter to quarter, reflecting continuing
gains in production efficiencies, the increased wire rod volume and higher
average selling prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percent of net sales decreased to 5.6% for the
third quarter of 1997 from 6.2% for the third quarter of 1996 due primarily to
improvements resulting from the Company's cost reduction/continuous improvement
program instituted in early 1997.
OTHER INCOME. Other income remained consistent at $2.4 million in 1997 compared
to $2.5 million in 1996.
INCOME TAX PROVISION/BENEFIT. The Company recorded an income tax provision of
$5.4 million on pre-tax earnings from continuing operations of $10.7 million for
the third quarter of 1997. This compares to an income tax provision of $.6
million on pre-tax earnings of $.9 million for the third quarter of 1996. The
effective tax rate remains high due primarily to limitations on the Company's
current ability to utilize foreign tax credits and the non-deductibility of
amortization expense associated with the GII acquisition premium.
NET INCOME (LOSS). As a result of the factors discussed above, the Company had
net earnings of $5.2 million for the three months ended September 30, 1997
compared to net income of $1.1 million for the same period of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had total cash and cash equivalents of $5.5
million, a decrease of $2.2 million from December 31, 1996. Operating activities
provided $10.5 million of cash during the nine months ended September 30, 1997.
Changes in operating assets and liabilities used $9.5 million of cash primarily
from an increase in inventories of $8.6 million due in part to timing of
shipments to customers and in part to reduced grinding media volume. Net cash of
$55.9 million was generated from the sale of the West Coast Wire Business of
which $52.4 million was used for repayment of debt. Additionally, cash of
$20.1 million was used to purchase properties.
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 next twelve
months. 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
14
<PAGE> 15
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 is committed to make an equity investment of $10.8 million, in 1997
and $4.2 million in early 1998, in American Iron Reduction LLC, a joint venture
which is currently completing construction of a Direct Reduced Iron (DRI)
facility.
The Company will manage its liquidity needs on a consolidated basis with
borrowings that will be available under the Company's 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 the Credit Facilities (as defined below)
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's availability is $145 million (subject to a borrowing
base limitation). As of September 30, 1997, the Company had borrowing capacity
pursuant to its borrowing base of $119.5 million, of which $12.9 million was
outstanding under the revolver and $24.8 million was outstanding in letters of
credit.
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 AND INDEMNIFICATION
Note 9 to the Company's Unaudited Consolidated Financial Statements is herein
incorporated by reference.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 9 to the Company's Unaudited Consolidated Financial Statements 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
(b) No reports on Form 8-K were filed during the quarter
ended June 30, 1997.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on the 12th day of November, 1997.
GS Technologies Corporation
and
GS Technologies Operating Co., Inc.
(Registrant)
By:
-------------------------------------------
Luis E. Leon, Senior Vice President-Finance
and Administration, Chief Financial Officer
and Treasurer
17
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