<PAGE> 1
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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 September 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 November 13, 1998. There were
100 shares of GS Technologies Corporation Common Stock, par value $.01 per
share, outstanding at November 13, 1998.
This document consists of 17 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, including steel balls, rods and cast wear
mill liners for the worldwide mining industry. GST is also a market leader in
the production of pre-stressed concrete strand, galvanized strand, and other
wire products. 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>
(1) Unaudited Consolidated Financial Statements of the Company
Unaudited Consolidated Statements of Operations for the Three Months
and Nine Months ended September 30, 1997 and September 30, 1998 3
Unaudited Consolidated Balance Sheets as of December 31, 1997
and September 30, 1998 4
Unaudited Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1997 and September 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 Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 216,853 $ 196,567 $ 610,249 $ 637,999
Operating costs and expenses:
Cost of products sold 178,870 182,745 524,603 570,659
Selling, general and administrative expenses 12,099 11,114 35,689 32,688
Depreciation and amortization 7,541 7,798 22,385 23,595
--------- --------- --------- ---------
198,510 201,657 582,677 626,942
--------- --------- --------- ---------
Operating profit (loss) 18,343 (5,090) 27,572 11,057
Other income (expense):
Interest expense, net (10,069) (9,795) (30,664) (30,292)
Equity in income (loss) of joint ventures 1,867 (570) 5,108 (576)
Fees from joint ventures 602 813 2,043 2,841
Gain (loss) on disposition of properties (Note 5) (26) 115 131 6,533
Other, net (30) 307 360 702
--------- --------- --------- ---------
(7,656) (9,130) (23,022) (20,792)
--------- --------- --------- ---------
Income (loss) from continuing operations before
income tax 10,687 (14,220) 4,550 (9,735)
Income tax (provision) benefit (5,449) 1,050 (2,319) (859)
--------- --------- --------- ---------
Income (loss) from continuing operations 5,238 (13,170) 2,231 (10,594)
Discontinued operations (Note 4):
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) $ 5,238 $ (13,170) $ (20,332) $ (10,594)
========= ========= ========= =========
</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,
1997 1998
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,362 $ 3,904
Receivables, net of allowance for doubtful accounts 94,768 98,507
Receivable from related party 6,484 6,170
--------- ---------
Total receivables 101,252 104,677
--------- ---------
Inventories 144,063 135,841
Prepaid expenses and other current assets 6,495 7,420
Deferred tax benefit 1,023
--------- ---------
Total current assets 256,195 251,842
Investments in joint ventures 41,639 39,931
Properties, net 260,957 252,952
Acquisition premium 60,713 59,505
Other assets 26,773 23,908
--------- ---------
Total assets $ 646,277 $ 628,138
========= =========
Liabilities and Stockholder's Equity Current liabilities:
Notes payable $ 10,794 $ 1,741
Current portion of long-term debt 500 504
Income taxes payable 1,261 1,622
Payables and accrued liabilities 138,099 139,525
--------- ---------
Total current liabilities 150,654 143,392
Long-term debt 334,888 339,395
Post retirement benefit obligations other than pensions 26,848 27,669
Deferred income taxes payable 7,098 975
Other long-term liabilities 31,628 34,032
Commitments and contingencies (Note 10)
--------- ---------
Total liabilities 551,116 545,463
--------- ---------
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized, and 100 shares issued
and outstanding at December 31, 1997 and September
30, 1998 1 1
Additional paid in capital 132,166 132,166
Accumulated deficit (33,845) (44,439)
Cumulative translation adjustment (3,161) (5,053)
--------- ---------
Total stockholder's equity 95,161 82,675
--------- ---------
Total liabilities and stockholder's equity $ 646,277 $ 628,138
========= =========
</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,
1997 1998
------------- -------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (20,332) $ (10,594)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 22,385 23,595
Loss on disposal of discontinued operations 23,008
Net cash from discontinued operations (2,138)
(Gain) on disposition of properties (131) (6,534)
Deferred income taxes (672) (5,101)
Equity in (income) loss of joint ventures (5,108) 576
Dividends from joint ventures 2,103 6,290
Post retirement benefit obligations accrued in excess of cash paid 861 821
Changes in operating assets and liabilities:
Receivables 1,218 (3,425)
Inventories (8,637) 8,222
Payables and accrued liabilities (1,883) 1,428
Income taxes (4,327) 361
Other 4,175 1,377
--------- ---------
Net cash provided by operating activities 10,522 17,016
--------- ---------
Investing activities:
Proceeds from disposal of discontinued operations 57,024
Purchase of properties (20,586) (15,501)
Proceeds from disposal of properties 514 11,999
Investment in joint ventures (497) (6,538)
--------- ---------
Net cash provided by (used in) investing activities 36,455 (10,040)
--------- ---------
Financing activities:
Borrowings from parent 4,900
Borrowings under revolving credit facility 137,259 170,080
Repayments on revolving credit facility (184,086) (170,094)
Repayments on long-term debt (375) (375)
Proceeds from (payments on) notes payable, net (1,107) (9,053)
--------- ---------
Net cash used in financing activities (48,309) (4,542)
--------- ---------
Effect of exchange rate changes on cash (946) (1,892)
--------- ---------
Net increase (decrease) in cash and cash equivalents (2,278) 542
Cash and cash equivalents:
Beginning of period 7,747 3,362
--------- ---------
End of period $ 5,469 $ 3,904
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 28,298
Cash paid during the period for taxes $ 5,547
</TABLE>
See notes to unaudited consolidated financial statements
5
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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 September 30, 1998, unless
otherwise noted herein.
3. Antitrust Claim Settlement
The Company reached a settlement with one of its suppliers of electrodes arising
out of antitrust investigations and claims against the supplier. As a result,
during the third quarter, the Company realized a $4.2 million pre-tax gain from
the combination of a cash settlement and credits taken against third quarter
purchases from this supplier. A final settlement payment is pending this
supplier's resolution of certain other existing litigation.
4. Discontinued Operations
In May 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 relevant periods presented. The West Coast Wire
Business had combined annual sales of $124.3 million and net earnings of $2.4
million in 1996.
5. 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
manufacturing 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.
6
<PAGE> 7
GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, unless otherwise noted)
6. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Inventories at FIFO and average cost:
Finished and semi-finished $ 81,871 $ 73,878
Raw materials 60,870 60,856
--------- ---------
Total 142,741 134,734
--------- ---------
Inventories at LIFO:
Finished and semi-finished 1,382 1,205
Adjustment to state inventories at LIFO value (60) (98)
--------- ---------
Total 1,322 1,107
--------- ---------
$ 144,063 $ 135,841
========= =========
</TABLE>
The carrying value of inventories approximates replacement cost.
7. Joint Ventures
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.
The Company has a 50% interest in a Direct Reduced Iron ("DRI") joint venture
which started operations in January 1998. This DRI facility is capable of
producing approximately 1.2 million metric tons of DRI annually. DRI is a
substitute for high quality 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, if tendered.
8. Payables and Accrued Liabilities
Payables and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------------- --------------------
<S> <C> <C>
Trade payables $ 86,015 $ 84,134
Salaries and wages 12,936 11,640
Accrued interest payable 10,509 9,878
Other 28,639 33,873
=================== ====================
$ 138,099 $ 139,525
=================== ====================
</TABLE>
9. Notes Payable
Notes payable of $1.7 million consists of short-term revolving credit facilities
in Peru and Italy.
7
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, unless otherwise noted)
10. Commitments and Contingencies
Litigation Other Contingencies
In 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 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 September 30, 1998, $2.8 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
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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 the second quarter of 1997 the Company's results were adversely impacted
by a ten-week work stoppage at its Kansas City facility. 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.
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), and other joint venture
interests around the world.
<TABLE>
<CAPTION>
September 30, 1998 and the nine months ended September 30, 1998
---------------------------------------------------------------
United South Europe
States America and Other Total
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Net sales $550,013 $82,553 $ 5,433 $637,999
Operating Profit 3,420 7,666 (29) 11,057
Equity in income (loss) of joint ventures (1,624) 1,070 (22) (576)
Net Income (loss) (21,358) 9,203 1,561 (10,594)
Identifiable assets 555,613 60,778 11,747 628,138
Total liabilities 511,323 30,920 3,220 545,463
Net assets 44,290 29,858 8,527 82,675
<CAPTION>
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 (loss) income (27,584) 6,578 674 (20,332)
</TABLE>
9
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, unless otherwise noted)
12. 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,
1997 1998
------------ -------------
<S> <C> <C>
Current assets $190,994 $191,064
Noncurrent assets 337,796 340,688
-------- --------
Total assets $528,790 $531,752
======== ========
Current liabilities $100,405 $103,521
Noncurrent liabilities 371,485 378,359
-------- --------
Total liabilities 471,890 481,880
Common stock, additional paid-in
capital and retained earnings 56,900 49,872
-------- --------
Total $528,790 $531,752
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 167,686 $ 151,253 $ 468,383 $ 492,971
Cost of products sold 141,383 149,247 415,655 462,001
Selling, general and administrative expenses 7,125 6,438 20,447 18,717
Depreciation and amortization 6,612 6,796 19,574 20,540
--------- --------- --------- ---------
Operating profit (loss) 12,566 (11,228) 12,707 (8,287)
Interest expense, net (9,567) (9,637) (29,142) (29,512)
Equity in loss of joint venture (956) (2,868)
Fees from joint ventures 841 983 2,788 3,375
Other, net (35) 16 228 270
--------- --------- --------- ---------
Income (loss) from continuing operations before taxes 3,805 (20,822) (13,419) (37,022)
Income tax benefit (provision) (1,271) 5,250 4,478 12,995
--------- --------- --------- ---------
Income (loss) from continuing operations 2,534 (15,572) (8,941) (24,027)
Discontinued operations:
Income from discontinued operations 1,402
Loss on disposal (23,965)
--------- --------- --------- ---------
(22,563)
--------- --------- --------- ---------
Net income (loss) $ 2,534 $ (15,572) $ (31,504) $ (24,027)
========= ========= ========= =========
</TABLE>
10
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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.
<TABLE>
<CAPTION>
SUMMARY STATEMENTS OF OPERATIONS
(Dollars in millions, unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 216.9 $ 196.6 $ 610.2 $ 638.0
Cost of products sold 178.9 182.7 524.6 570.7
Selling, general and administrative expenses 12.1 11.1 35.7 32.7
Depreciation and amortization 7.6 7.9 22.4 23.5
-------- -------- -------- --------
Operating profit (loss) 18.3 (5.1) 27.5 11.1
Net interest expense (1) (10.1) (9.8) (30.5) (30.3)
Gain on disposition of properties .1 .1 6.5
Other income (2) 2.4 .5 7.5 3.0
Income tax (provision) benefit (5.4) 1.1 (2.3) (.9)
-------- -------- -------- --------
Income (loss) from continuing operations 5.2 (13.2) 2.3 (10.6)
Income from discontinued operations 1.4
Loss on disposal of business (24.0)
-------- -------- -------- --------
Net income $ 5.2 $ (13.2) $ (20.3) $ (10.6)
======== ======== ======== ========
</TABLE>
(1) - Net interest expense includes interest income, interest expense and $.5
million and $1.4 million of amortization of debt issuance costs for the
quarters and nine months, respectively.
(2) - Other income includes equity in income (loss) of joint ventures, fees
from joint ventures, minority interest and other, net.
Results of Operations
Antitrust Claim Settlement. The Company reached a partial settlement with one of
its chief suppliers of electrodes arising out of antitrust investigations and
claims against the supplier. As a result, during the third quarter, the Company
realized a $4.2 million pre-tax gain from the combination of a cash settlement
and credits taken against third quarter purchases from this supplier. This gain
is reflected in the Company's Statement of Operations as a reduction of cost of
products sold. A final settlement payment is pending this supplier's resolution
of certain existing litigation.
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 has returned 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.
11
<PAGE> 12
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997.
Net Sales. Net sales increased by $27.8 million to $638.0 million in the first
nine months of 1998 compared to the first nine months of 1997. The Company
generated new sales of $23.1 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 resulting lack of demand for DRI and related
production interruptions, sales of DRI to third parties have been at negative
margins.
Wire rod sales were up $8.9 million to $314.6 million for the first nine months
of 1998 compared to $305.7 million for the first nine months of 1997. Wire rod
volume increased 57,300 tons in the first nine months of 1998 compared to the
same period of 1997. The increase reflects a recovery from depressed volumes
during the Kansas City facility's 1997 work stoppage, as partially offset by
lower 1998 volume at the Georgetown facility from a third quarter maintenance
shutdown. Average wire rod selling prices were lower by $11 per ton in 1998 as
record volumes of imports continue to drive pricing down industry-wide.
Grinding media sales were $152.4 million in the first nine months of 1998
compared to $144.6 million in 1997. Worldwide grinding media shipments for the
first nine months of 1998 increased 15,100 tons over the prior year and average
worldwide selling prices were up $2 per ton.
Volume of wire products was consistent for the two nine month periods, however,
average selling price per ton was down $33 per ton in 1998 compared to 1997
resulting in a decrease in sales of $3.0 million. Additionally, the Company has
increased its internal consumption of billets and billet sales to third parties
have decreased $7.2 million.
Cost of Products Sold and Gross Margins. Cost of products sold as a percent of
net sales increased to 89.5% compared to 86.0% for the same period in 1997. As
discussed above, sales of DRI to third parties resulted in negative margins of
$4.0 million in the first nine months of 1998. Additionally, margins were
negatively impacted by high costs of electricity in July, August, and September
which, in some cases, led to temporary curtailments due to power interruptions
and shortages. Finally, conversion costs at the Jacksonville wire products
facility were higher due to the work stoppage and training for a newly hired
work force.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first nine months decreased as a percent of net
sales to 5.1% in 1998 from 5.9% in 1997 as the Company continues to closely
monitor costs.
Depreciation and Amortization. Depreciation and amortization expense for the
first nine months increased by $1.1 million to $23.5 million. This increase
results from capital additions and improvements.
Net Interest Expense. Net interest expense of $30.3 million for the first nine
months remained relatively unchanged with $30.5 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 $3.0 million for 1998
compared to $7.5 million for 1997 due primarily to the inclusion in 1998 of a
$2.2 million equity loss from operations at the DRI joint venture in Louisiana.
Income Tax Provision/Benefit. The Company recorded an income tax provision of
$0.9 million on a pre-tax loss from continuing operations of $9.7 million for
the first nine months of 1998. This compares to an income tax provision of $2.3
million on a pre-tax earnings from continuing operations of $4.6 million for the
first nine months of 1997. Taxes remain 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 non-deductibility of acquisition premium
amortization expense.
Income (Loss) from Continuing Operations. As a result of the factors discussed
above, the Company had a net loss from continuing operations of $10.6 million
for the first nine months of 1998 compared to income from continuing operations
of $2.3 million for the first nine months of 1997.
12
<PAGE> 13
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 nine months of 1997 of
$20.3 million compared to a net loss of $10.6 million for the first nine months
of 1998.
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997.
Net Sales. Net Sales for the third quarter of 1998 were $196.6 million compared
to $216.9 million for the third quarter of 1997. As discussed above, the
decrease results largely from depressed selling prices and a reduction in 1998
wire rod volume from the scheduled maintenance shutdown. Negative margins from
sales of DRI to third parties were $3.2 million as scrap prices continue a sharp
decline.
Wire rod sales of $95.1 million for the third quarter of 1998 were down $19.5
million from $114.6 million in 1997. Quarter to quarter, average wire rod
selling prices were down $44 per ton driven largely by increased volume of
foreign imports at record low prices.
Grinding media sales were $50.6 million for the third quarter of 1998 compared
to $46.6 million in 1997. Worldwide grinding media shipments for the three
months ended September 30, 1998 were up 8,900 tons to 107,345 compared to the
same quarter of 1997 and average selling prices were down $2 per ton quarter to
quarter.
Cost of Products Sold and Gross Margin. Cost of products sold as a percent of
net sales increased from 82.4% in 1997 to 92.9% in 1998. Conversion costs in the
production of wire rod were higher in 1998 than 1997 due to unusually high
electricity costs and operating curtailments resulting therefrom. Additionally,
due to low scrap prices and a resulting lack of demand for DRI, production
volume at AIR has been periodically curtailed creating production inefficiencies
and high costs per ton.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percent of net sales for the third quarter of 1998
and the third quarter of 1997 remained constant at 5.6%.
Other Income. Other income decreased $1.9 million from third quarter 1997 to $.5
million for the third quarter of 1998 due primarily to operating losses at AIR.
Income Tax Provision/Benefit. The Company recorded an income tax benefit of
$1.1 million on a pre-tax loss of $14.2 million. This compares to 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. Taxes remain high due primarily to
limitations on the Company's current ability to utilize foreign tax credits, the
non-deductibility of acquisition premium amortization expense and the mix of
U.S. and foreign source earnings.
Net Income (Loss). As a result of the factors discussed above, the Company
recorded a net loss of $13.2 million for the three months ended September 30,
1998 compared to net income of $5.2 million for the same period of 1997.
Liquidity and Capital Resources
At September 30, 1998, the Company had total cash and cash equivalents of $3.9
million, an increase of $.5 million from December 31, 1997. Operating activities
provided $17.0 million of cash during the nine months ended September 30, 1998,
composed primarily of a net loss of $10.6 million, non-cash depreciation and
amortization of $23.6 million, dividends from joint ventures of $6.3 million and
changes in current assets and liabilities for the period providing $7.9 million
(primarily from reducing inventory levels by $8.2 million), and reductions for a
gain on disposition of properties of $6.5 million and for a $5.1 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.
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
13
<PAGE> 14
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 interest obligations. Under the Revolving Credit
Facility, the Company's availability is $120.0 million (subject to a borrowing
base limitation). As of September 30, 1998, the unused availability under the
Revolving Credit Facility was $79.8 million and $10.1 million of letters of
credit were outstanding.
Environmental and Tax Contingencies and Indemnification
Note 10 to the Company's Unaudited Consolidated Financial Statements is herein
incorporated by reference.
Year 2000 Program
The following Year 2000 discussion is provided in response to the Securities and
Exchange Commission's recent interpretative statement expressing its view that
public companies should include detailed discussion of Year 2000 issues in their
MD&A.
The Company is pursuing an organized program to assure that the Company's
information technology systems and related infrastructure will be Year 2000
compliant. All operating locations and the corporate headquarters are
specifically addressing the Business Information Systems, the Process Control
Systems, the local infrastructure systems and the relationships with their
customers, suppliers and other business partners.
The Year 2000 program has been designed around phases which include: management
awareness, system inventory and assessment, modification or replacement,
testing, contingency planning, business partner communication, an external
audit, and employee awareness. A Year 2000 team has been established at each
location. Specific action plans and timelines have been established at each of
the location and periodic meetings are held to monitor progress.
The Company has completed the phases of management awareness, systems inventory,
and assessment. Critical systems have been identified and prioritized and
decisions have been made relative to the modification vs. replacement of systems
deemed to be non-compliant. Where systems can be modified utilizing existing or
contract labor, the cost of modifications is being charged to current
operations. In cases where the systems must be replaced with new applications,
the cost is being capitalized.
The Company is currently in the program modification and replacement phase of
its program. Business systems are being addressed at the local level and process
systems are being addressed, with the assistance of system vendors, on a local
as well as a corporate level for information sharing. The Company expects to
have this modification/replacement phase of its program completed by the end of
the first quarter 1999 (with the exception of the implementation of a new system
in its steelmaking shops, which should be completed by the end of the second
quarter 1999).
Testing of individual systems will occur as the systems are changed or modified.
Test plans for integrated systems indicate that this stage of testing will be
completed during the second quarter of 1999. By June 30, 1999 the Company
expects to have its Year 2000 program complete for local manufacturing,
infrastructure, support and facility systems. At that point, an audit will be
conducted to verify compliance. This time frame will allow for the pursuit of
further testing as required and the presentation of an employee awareness
training session to assure that all employees, from the factory floor to the
executive offices, are familiar with the Year 2000 situation and are prepared
for any undiscovered possibilities.
Management has determined that the costs for correction of the Year 2000 issues,
including any software and hardware changes required by these issues, as well as
the cost of personnel dedicated to this project will be approximately $3
million.
14
<PAGE> 15
The Company's Year 2000 program includes communications with its outside
business partners to prepare for Year 2000 readiness. The Company is using
letters to request information from its suppliers and other partners to
determine their Year 2000 compliance. If a business partner indicates that it
will not be ready for the Year 2000, the Company will develop a contingency plan
to address the issue, which might include changing partners.
At the present time, the Year 2000 team is developing contingency plans assuming
a variety of possible scenarios. These scenarios will include the possibilities
of non-compliance difficulties from the standpoint of a customer, supplier, or
internal manufacturing support function. How these scenarios are used will
depend on the results of the testing programs over the next six to nine months.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Note 10 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
September 30, 1998.
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 16th day of November 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
17
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