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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 JUNE 30, 1998 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 August 4, 1998. There were 100
shares of GS Technologies Corporation Common Stock, par value $.01 per share,
outstanding at August 4, 1998.
This document consists of 16 sequentially numbered pages.
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PART I. FINANCIAL INFORMATION (UNAUDITED)
GS Technologies Corporation (the "Company" or "GST") a wholly-owned subsidiary
of GS Industries, Inc. ("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").
FORWARD-LOOKING STATEMENTS
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 that 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.
INDEX
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C> <C>
(1) Unaudited Consolidated Financial Statements of the Company
Unaudited Consolidated Statements of Operations for the Three Months
and Six Months ended June 30, 1997 and June 30, 1998 3
Unaudited Consolidated Balance Sheets as of December 31, 1997
and June 30, 1998 4
Unaudited Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1997 and June 30, 1998 5
Notes to Unaudited Consolidated Financial Statements 6
(2) Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
</TABLE>
2
<PAGE> 3
GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $ 184,515 $ 224,742 $ 393,398 $ 441,432
Operating costs and expenses:
Cost of products sold 168,693 203,130 345,682 387,914
Selling, general and administrative expenses 12,104 10,632 23,654 21,573
Depreciation and amortization 7,695 8,133 14,904 15,797
--------- --------- --------- ---------
188,492 221,895 384,240 425,284
--------- --------- --------- ---------
Operating profit (loss) (3,977) 2,847 9,158 16,148
Other income (expense):
Interest expense, net (10,398) (10,358) (20,598) (20,497)
Equity in income (loss) of joint ventures 1,423 91 3,239 (6)
Fees from joint ventures 558 849 1,445 2,028
Gain on disposition of properties (Note 4) 157 6,340 158 6,418
Other, net 77 43 462 395
--------- --------- --------- ---------
(8,183) (3,035) (15,294) (11,662)
--------- --------- --------- ---------
Income (loss) from continuing operations before
income tax (12,160) (188) (6,136) 4,486
Income tax (provision) benefit 6,199 104 3,128 (1,909)
--------- --------- --------- ---------
Income (loss) from continuing operations (5,961) (84) (3,008) 2,577
Discontinued operations (Note 3):
Income from discontinued operations,
net of taxes 1,402
Loss on disposal of discontinued operations,
net of taxes (23,965)
--------- --------- --------- ---------
(22,563)
--------- --------- --------- ---------
Net income (loss) $ (5,961) $ (84) $ (25,571) $ 2,577
========= ========= ========= =========
</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, June 30,
1997 1998
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,362 $ 11,456
Receivables net of allowance for doubtful accounts 94,768 116,032
Receivable from related party 6,484 5,723
--------- ---------
Total receivables 101,252 121,755
--------- ---------
Inventories 144,063 134,096
Prepaid expenses and other current assets 6,495 6,664
Deferred tax benefit 1,023 673
--------- ---------
Total current assets 256,195 274,644
Investments in joint ventures 41,639 41,014
Properties, net 260,957 254,772
Acquisition premium 60,713 59,908
Other assets 26,773 24,710
--------- ---------
Total assets $ 646,277 $ 655,048
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable $ 10,794 $ 7,389
Current portion of long-term debt 500 512
Income taxes payable 1,261 1,209
Payables and accrued liabilities 138,099 147,191
--------- ---------
Total current liabilities 150,654 156,301
Long-term debt 334,888 336,374
Post retirement benefit obligations other than pensions 26,848 27,582
Deferred income taxes payable 7,098 4,733
Other long-term liabilities 31,628 34,021
Commitments and contingencies (Note 9)
--------- ---------
Total liabilities 551,116 559,011
--------- ---------
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized, and
100 shares issued and outstanding at December 31, 1997 and
June 30, 1998 1 1
Additional paid in capital 132,166 132,166
Accumulated deficit (33,845) (31,268)
Cumulative translation adjustment (3,161) (4,862)
--------- ---------
Total stockholder's equity 95,161 96,037
--------- ---------
Total liabilities and stockholder's equity $ 646,277 $ 655,048
========= =========
</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>
Six Months Ended
-------------------------
June 30, June 30,
1997 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (25,571) $ 2,577
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 14,904 15,797
Loss on disposal of discontinued operations 23,965
Net cash from discontinued operations (3,095)
(Gain) on disposition of properties (158) (6,418)
Deferred income taxes (6,573) (2,016)
Equity in (income) loss of joint ventures (3,239) 6
Dividends from joint ventures 1,922 6,290
Post retirement benefit obligations accrued in excess of cash paid 566 734
Changes in operating assets and liabilities:
Receivables 14,990 (20,503)
Inventories 402 9,967
Payables and accrued liabilities (10,725) 9,094
Income taxes (1,711) (52)
Other 897 901
--------- ---------
Net cash provided by operating activities 6,574 16,377
--------- ---------
INVESTING ACTIVITIES:
Proceeds from disposal of discontinued operations 57,024
Purchase of properties (12,165) (10,021)
Investment in joint ventures (497) (6,538)
Proceeds from disposal of properties 514 11,884
--------- ---------
Net cash provided by (used in) investing activities 44,876 (4,675)
--------- ---------
FINANCING ACTIVITIES:
Borrowings from parent 4,900
Borrowings under revolving credit facility 93,597 114,634
Repayments on revolving credit facility (145,609) (117,784)
Repayments on long-term debt (250) (250)
Proceeds from (payments on) notes payable, net (237) (3,407)
--------- ---------
Net cash used in financing activities (52,499) (1,907)
--------- ---------
Effect of exchange rate changes on cash (489) (1,701)
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,538) 8,094
CASH AND CASH EQUIVALENTS:
Beginning of period 7,747 3,362
--------- ---------
End of period $ 6,209 $ 11,456
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 19,837 $ 20,421
Cash paid during the period for taxes $ 4,266 $ 3,951
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE> 6
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)
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, 1997
for a summary of significant accounting policies and other information, the
substance of which has not changed materially as of June 30, 1998, unless
otherwise noted herein.
3. DISCONTINUED OPERATIONS
In 1997, the Company sold Georgetown Wire Company, Inc. and Tree Island
Industries, Ltd. (the "West Coast Wire Business"). Accordingly, the results of
operations, cash flows and net assets of this business have been classified as
discontinued operations for all periods presented. The West Coast Wire Business
had combined annual sales of $124.3 million and net earnings of $2.4 million in
1996.
4. PROPERTY DISPOSITIONS
In June 1998, the Company completed the sale of its wholly-owned subsidiary,
Tubos Y Alcantarillas S.A., ("Tubos") for $9.5 million resulting in a gain on
disposition of $5.2 million. Tubos was created in March 1998, and was
capitalized by the Company through the contribution of certain non-strategic
assets located in Peru.
In June 1998, the Company sold an idle plant located in Cividale, Italy for $1.9
million resulting in a gain on disposition of $1.1 million. The manufacturing
assets from this facility were transferred into an Italian joint venture in
October 1996.
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ---------
<S> <C> <C>
Inventories at FIFO and average cost:
Finished and semi-finished $ 81,871 $ 77,669
Raw materials 60,870 55,426
--------- ---------
Total 142,741 133,095
--------- ---------
Inventories at LIFO:
Finished and semi-finished 1,382 1,061
Adjustment to state inventories at LIFO value (60) (60)
--------- ---------
Total 1,322 1,001
--------- ---------
$ 144,063 $ 134,096
========= =========
</TABLE>
The carrying value of inventories approximates replacement cost.
6
<PAGE> 7
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
6. JOINT VENTURES
The Company has a 50% interest in a Direct Reduced Iron ("DRI") joint venture
which started operations January 1998. This DRI facility is expected to produce
approximately 1.2 million metric tons of DRI annually. DRI is a substitute for
steel scrap used in the Company's steel making facilities. The Company has made
equity contributions of $20 million ($6.5 million during 1998) to the joint
venture. Under certain circumstances, the Company may be required to make an
additional equity contribution of up to $7.5 million. The Company is also party
to a DRI purchase agreement with this joint venture to purchase up to 600,000
metric tons of DRI annually.
All joint ventures are invoiced 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. PAYABLES AND ACCRUED LIABILITIES
Payables and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ---------
<S> <C> <C>
Trade payables $ 86,015 $ 94,653
Salaries and wages 12,936 11,593
Accrued interest payable 10,509 9,743
Other 28,639 31,202
-------- --------
$138,099 $147,191
======== ========
</TABLE>
8. NOTES PAYABLE
Notes payable of $7.4 million consists of short-term revolving credit facilities
in Chile, Peru, and Italy.
7
<PAGE> 8
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
9. COMMITMENTS AND CONTINGENCIES
LITIGATION 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. The Company believes
that it has substantial and meritorious defenses and will defend itself
accordingly.
The Company's subsidiary, Georgetown Steel Corporation, is the defendant in
three related suits filed in June 1998 and July 1998 by certain private
plaintiffs in the Court of Common Pleas for the County of Georgetown, South
Carolina. The plaintiffs allege trespass, nuisance, negligence and violation of
State and Federal law in connection with the escape of "mill dust" and gases
from Georgetown's steel mill into the atmosphere and onto the plaintiffs'
property in Georgetown, South Carolina. The plaintiffs seek certification as a
class action in each case. The plaintiffs in these actions seek unspecified
actual, compensatory and punitive damages. The Company believes the actions lack
merit and intends to defend them vigorously.
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.
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 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 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 June 30, 1998, $2.7 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. As part of the Purchase and Sale Agreement with Armco, the Company has
been indemnified by Armco for certain environmental issues at certain of its
facilities.
8
<PAGE> 9
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
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. In the course of previous contract negotiations, the Company has
on occasion been affected by work stoppages.
During 1997 the Company's results were adversely impacted by a ten week work
stoppage at its Kansas City facility (April 2 - June 13, 1997). A new long term
agreement is now in place at this facility through October 2002.
The Company's collective bargaining agreement at the Jacksonville, Florida
facility expired on April 30, 1998. The Company was unable to reach agreement
with the union and a work stoppage commenced. The Company re-staffed the
facility with permanent replacement workers and production is returning to
normal levels. On July 16, 1998, the union notified the Company that striking
workers had accepted the Company's final offer that was proposed by management
before the work stoppage began. The Company has advised the union that the
striking workers will be placed on a recall list for rehire as positions become
available in the future.
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>
June 30, 1998 and the six months ended June 30, 1998
----------------------------------------------------
United South Europe
States America and Other Total
------- ------- --------- -------
<S> <C> <C> <C> <C>
Net sales 380,690 56,951 3,791 441,432
Operating Profit 8,661 7,494 (7) 16,148
Equity in income (loss) of joint ventures (837) 891 (60) (6)
Net Income (loss) (5,426) 6,506 1,497 2,577
Identifiable assets 575,667 67,207 12,174 655,048
Total liabilities 517,961 37,133 3,917 559,011
Net assets 57,706 30,074 8,257 96,037
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1997
-------------------------------------------------
United South Europe
States America and Other Total
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Net sales $335,613 $49,608 $8,177 $393,398
Operating profit 4,604 4,393 161 9,158
Equity in income of joint ventures 1,526 1,597 116 3,239
Net (loss) income (29,906) 4,096 239 (25,571)
</TABLE>
9
<PAGE> 10
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
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, June 30,
1997 1998
------------ --------
<S> <C> <C>
Current assets $191,164 $202,124
Noncurrent assets 337,626 341,155
-------- --------
Total assets $528,790 $543,279
======== ========
Current liabilities $100,405 $106,905
Noncurrent liabilities 371,485 376,929
-------- --------
Total liabilities 471,890 483,834
Common stock, additional paid-in
capital and retained earnings 56,900 59,445
-------- --------
Total $528,790 $543,279
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 136,003 $ 173,781 $ 300,700 $ 341,716
Cost of products sold 131,558 164,574 274,222 312,754
Selling, general and administrative expenses 6,843 5,995 13,358 12,279
Depreciation and amortization 6,733 7,115 13,015 13,745
--------- --------- --------- ---------
Operating profit (loss) (9,131) (3,903) 105 2,938
Interest expense (9,816) (10,114) (19,573) (19,874)
Equity in loss of joint venture (659) (1,912)
Fees from joint ventures 898 1,096 1,947 2,392
Other, net (76) 160 300 256
--------- --------- --------- ---------
Income (loss) from continuing operations before income tax (18,125) (13,420) (17,221) (16,200)
Income tax benefit (provision) 6,049 6,416 5,747 7,745
--------- --------- --------- ---------
Income (loss) from continuing operations (12,076) (7,004) (11,474) (8,455)
Discontinued operations:
Income from discontinued operations 1,402
Loss on disposal (23,965)
--------- --------- --------- ---------
(22,563)
--------- --------- --------- ---------
Net loss $ (12,076) $ (7,004) $ (34,037) $ (8,455)
========= ========= ========= =========
</TABLE>
10
<PAGE> 11
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.
SUMMARY STATEMENTS OF OPERATIONS
(Dollars in millions, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 184.5 $ 224.7 $ 393.4 $ 441.4
Cost of products sold 168.7 203.1 345.7 387.9
Selling, general and administrative expenses 12.1 10.6 23.6 21.6
Depreciation and amortization 7.7 8.2 14.9 15.8
-------- -------- -------- --------
Operating profit (4.0) 2.8 9.2 16.1
Net interest expense (1) (10.4) (10.3) (20.6) (20.5)
Gain on disposition of properties .2 6.3 .2 6.4
Other income (2) 2.0 1.0 5.1 2.5
Income tax (provision) benefit 6.2 .1 3.1 (1.9)
-------- -------- -------- --------
Income (loss) from continuing operations (6.0) (.1) (3.0) 2.6
Income from discontinued operations 1.4
Loss on disposal of business (24.0)
-------- -------- -------- --------
Net income $ (6.0) $ (.1) $ (25.6) $ 2.6
======== ======== ======== ========
</TABLE>
1 - Net interest expense includes interest income, interest expense and
$459 and $918 of amortization of debt issuance costs for the quarters
and six months, respectively.
2 - Other income includes equity in income (loss) of joint ventures, fees
from joint ventures, minority interest and other, net.
DISCONTINUED OPERATIONS. In 1997, the Company sold its West Coast Wire Business
resulting in an estimated loss on disposition of $24.0 million, net of taxes.
Accordingly, the results of operations of this business have been reclassified
as discontinued operations and the following discussion excludes results of this
business for all periods presented.
LABOR RELATIONS. The Company's labor contract for the Kansas City mini-mill
expired in March 1997. When the Company and the USWA were unable to reach accord
on the terms of a new contract, the union commenced a work stoppage. Management
estimates that the ten week work stoppage in Kansas City cost the Company
approximately $21.9 million in pre-tax earnings in the second quarter of 1997.
The Company's collective bargaining agreement at the Jacksonville, Florida
facility expired on April 30, 1998. The Company was unable to reach agreement
with the union and a work stoppage commenced. The Company re-staffed the
facility with permanent replacement workers and production is returning to
normal levels. On July 16, 1998, the union notified the Company that the
striking workers had accepted the Company's final offer that was proposed by
management before the work stoppage began. The Company has advised the union
that the striking workers will be placed on a recall list for rehire as
positions become available in the future.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997.
NET SALES. Net sales increased by $48 million to $441.4 million in the first
half of 1998 compared to the first half of 1997. The Company generated new sales
of $18.3 million in 1998 from DRI purchased for resale from the Company's 50%
owned DRI joint venture. This joint venture completed construction of its plant
and commenced production of DRI in January 1998. Due to falling scrap prices and
production interruptions, sales of DRI by the company are currently at
unfavorable margins. As the facility ramps-up to its rated capacity of 1.2
million metric tons, it is anticipated that margins will improve.
11
<PAGE> 12
Wire rod sales were up $28.4 million to $219.5 million for the first six months
of 1998 compared to $191.1 million for the first six months of 1997. For the
first half of 1997, wire rod shipping volume of 567,000 tons, was below normal
levels due to the Kansas City work stoppage. Shipments for the comparable period
of 1998 were 641,000 tons.
Grinding media sales were $101.8 million in the first six months of 1998
compared to $97.9 million in 1997. Worldwide grinding media shipments for the
first half of 1998 increased 6,070 tons over the prior year and average
worldwide selling prices were up $5 per ton.
The Company's wire products sales were down $1.7 million for the first six
months of 1998 compared to the first six months of 1997 reflecting the impact of
the work stoppage, continued competition from imports and weather related delays
in construction activity. Additionally, the Company has increased its internal
consumption of billets and billet sales to third parties have decreased by $5.2
million.
COST OF PRODUCTS SOLD AND GROSS MARGINS. Cost of products sold as a percent of
net sales remained constant at 87.9% for each of the six-month periods as
conversion costs for wire rod and grinding media continue at higher than normal
levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first half have decreased as a percent of net
sales to 4.9% in 1998 from 6.0% in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
first six months increased by $0.9 million to $15.8 million. This increase
results from capital additions and improvements.
NET INTEREST EXPENSE. Net interest expense of $20.5 million for the first half
remained relatively constant with the $20.6 million for the same period of 1997.
GAIN ON DISPOSITION OF PROPERTIES. In June 1998, the Company recognized a gain
of $6.4 million on the disposition of properties, primarily an idle facility in
Italy and certain assets in Peru.
OTHER INCOME. Other income, which is primarily equity in income (loss) of joint
ventures and fees from joint ventures, decreased to $2.5 million for 1998
compared to $5.1 million for 1997 due primarily to the inclusion in the first
half of 1998 of an equity loss from start up operations at the DRI joint venture
in Louisiana of $1.9 million.
INCOME TAX PROVISION/BENEFIT. The Company recorded an income tax provision of
$1.9 million on pre-tax earnings from continuing operations of $4.5 million for
the first six months of 1998 at an effective rate of 42.5%. This compares to an
income tax benefit of $3.1 million on a pre-tax loss from continuing operations
of $6.1 million for the first six months of 1997 at an effective rate of 50.9%.
The effective rate remains high due primarily to the mix of U.S. and foreign
source income, limitations on the Company's ability to utilize foreign tax
credits and the nondeductibility of acquisition premium amortization expense.
The decrease in the effective rate in 1998 results from a change in the mix of
U.S. and foreign earnings.
INCOME (LOSS) FROM CONTINUING OPERATIONS. As a result of the factors discussed
above, the Company had net income of $2.6 million for the first half of 1998
compared to a loss from continuing operations of $3.0 million for the first half
of 1997.
NET INCOME (LOSS). Due to the loss on the disposal of the West Coast Wire
Business, the Company recorded a net loss for the first six months of 1997 of
$25.6 million compared to net income of $2.6 million for the first six months of
1998.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997.
NET SALES. Net Sales for the second quarter of 1998 were $244.7 million compared
to $184.5 million for the second quarter of 1997. As discussed above, this
increase is primarily related to the 1997 Kansas City work stoppage.
Wire rod sales for the second quarter of 1998 were up $22.9 million to $107.8
million compared to the same period of 1997. An increase in wire rod shipments
of 77,800 tons was partially offset by a significant ($12 per ton) decrease in
average selling prices.
12
<PAGE> 13
Grinding media sales were $52.4 million for the second quarter of 1998 compared
to $46.9 million in 1997. Worldwide grinding media shipments for the three
months ended June 30, 1998 were at the highest level in the Company's history
reaching approximately 110,000 tons and average selling prices were up $3 per
ton quarter to quarter.
COST OF PRODUCTS SOLD AND GROSS MARGIN. Cost of products sold as a percent of
net sales decreased slightly from 91.4% in 1997 to 90.4% in 1998. Conversion
costs in the production of both wire rod and grinding media at Kansas City are
at a higher than normal levels. Contributing to the higher level of conversion
costs was a recent heat wave which caused temporary production curtailments due
to power interruptions and shortages and resulted in higher electricity cost and
reduced production.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percent of net sales decreased to 4.7% for the
second quarter of 1998 from 6.6% for the second quarter of 1997 as the Company
continues to closely monitor costs.
OTHER INCOME. Other income decreased $1.0 million from second quarter 1997 to
$1.0 million for the second quarter of 1998 due primarily to the start up
operations of AIR.
INCOME TAX PROVISION/BENEFIT. The Company recorded an income tax benefit of
$104,000 on a pre-tax loss of $188,000. This compares to an income tax benefit
of $6.2 million on a pre-tax loss from continuing operations of $12.2 million
for the second quarter of 1997. Taxes remain high due primarily to limitations
on the Company's current ability to utilize foreign tax credits and the
non-deductibility of acquisition premium amortization expense.
NET INCOME (LOSS). As a result of the factors discussed above, the Company has a
net loss of $84,000 for the three months ended June 30, 1998 compared to a net
loss of $6.0 million for the same period of 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had total cash and cash equivalents of $11.5
million, an increase of $8.1 million from December 31, 1997. Operating
activities provided $16.4 million of cash during the six months ended June 30,
1998, composed primarily of net earnings of $2.6 million, non-cash depreciation
and amortization of $15.8 million, dividends from joint ventures of $6.3 million
and changes in current assets and liabilities for the period providing $0.6
million; combined with reductions for a gain on disposition of properties of
$6.4 million and for a $2.0 million change in deferred income taxes.
While 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 1998, management continues to evaluate alternative sources of funds. 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.
As part of its strategy to expand its mining products business in South America,
GSI has signed an agreement to form a joint venture which will build and operate
a mill liner foundry in Santiago, Chile. GSI intends to make equity investments
of up to $9.0 million dollars through the end of 1999.
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 through the term of the Company's capital investment
program 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
13
<PAGE> 14
interest obligations. Under the Revolving Credit Facility, the Company's
availability is $120.0 million (subject to a borrowing base limitation). As of
June 30, 1998, the unused availability under the Revolving Credit Facility was
$82.0 million and $9.9 million of letters of credit were outstanding.
ENVIRONMENTAL AND TAX CONTINGENCIES AND INDEMNIFICATION
Note 9 to the Company's Unaudited Consolidated Financial Statements is herein
incorporated by reference.
14
<PAGE> 15
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, 1998.
15
<PAGE> 16
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 4th day of August, 1998.
GS Technologies Corporation
and
GS Technologies Operating Co., Inc.
(Registrant)
By: /s/ Luis E. Leon
--------------------------------
Luis E. Leon, Senior Vice President-Finance
Chief Financial Officer and Treasurer
16
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