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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 COMMISSION FILE NUMBER 033-80618
SEPTEMBER 30, 1999
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 10, 1999. There were
100 shares of GS Technologies Corporation Common Stock, par value $.01 per
share, outstanding at November 10, 1999.
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PART I. FINANCIAL INFORMATION (UNAUDITED)
GS Industries, Inc.'s ("GSI"), wholly-owned subsidiary GS Technologies
Corporation (the "Company" or "GST") is the largest producer of steel wire rod
in North America. GST through its Mining Products Group is also the largest
global provider of grinding media 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 guy strand and other 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, 1999 and 1998 3
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 (Unaudited) 4
Unaudited Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
(2) Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
(3) Quantitative and Qualitative Disclosures about Market Risk 15
2
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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,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 188,141 $ 196,567 $ 586,105 $ 637,999
Cost of products sold 167,573 182,745 516,805 570,659
------------- ------------- ------------- -------------
Gross Profit 20,568 13,822 69,300 67,340
Selling, general and administrative expenses 12,316 11,114 36,413 32,688
Depreciation and amortization 8,165 7,798 24,149 23,595
------------- ------------- ------------- -------------
Operating profit (loss) 87 (5,090) 8,738 11,057
Interest expense, net (10,135) (9,795) (30,426) (30,292)
Equity in loss of joint ventures (5,072) (570) (12,625) (576)
Fees from joint ventures and royalties 569 813 2,036 2,841
Gain on disposition of properties (Note 4) 18 115 41 6,533
Other, net 603 307 633 702
------------- ------------- ------------- -------------
Loss before income tax (13,930) (14,220) (31,603) (9,735)
Income tax (provision) benefit (1,423) 1,050 (3,454) (859)
------------- ------------- ------------- -------------
Net loss $ (15,353) $ (13,170) $ (35,057) $ (10,594)
============= ============= ============= =============
</TABLE>
See notes to unaudited consolidated financial statements
3
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GS TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,850 $ 10,664
Receivables less allowance for doubtful accounts 88,746 86,058
Receivables from related parties 6,570 6,268
------------- ------------
Total receivables 95,316 92,326
------------- ------------
Inventories 121,208 138,615
Prepaid expenses and other current assets 7,089 6,861
Taxes recoverable from parent 9,297
Income taxes receivable 5,464 3,474
Deferred tax benefit 7,832 6,422
------------- ------------
Total current assets 242,759 267,659
Investments in joint ventures 28,291 38,590
Properties, net 245,626 254,876
Acquisition premium 57,894 59,102
Other assets 17,605 23,148
------------- ------------
Total assets $ 592,175 $ 643,375
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable $ 1,625 $ 8,568
Current portion of long-term debt 505 518
Payables to related parties 5,386 11,279
Payables and accrued liabilities 130,770 131,785
------------- ------------
Total current liabilities 138,286 152,150
------------- ------------
Long-term debt 338,611 336,241
Loans from parent 4,900
Post retirement benefit obligations other than pensions 29,522 28,231
Deferred income taxes payable 19,753 18,061
Other long-term liabilities 28,556 34,896
------------- ------------
Total liabilities 554,728 574,479
============= ============
Commitments and contingencies (Note 10)
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized, and
100 shares issued and outstanding at September 30, 1999
and December 31, 1998 1 1
Additional paid in capital 138,082 132,716
Accumulated deficit (94,253) (59,196)
Accumulated other comprehensive loss (6,383) (4,625)
------------- ------------
Total stockholder's equity 37,447 68,896
------------- ------------
Total liabilities and stockholder's equity $ 592,175 $ 643,375
============= ============
</TABLE>
See notes to unaudited consolidated financial statements
4
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GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (35,057) $ (10,594)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 24,149 23,595
Gain on disposition of properties (41) (6,534)
Deferred income taxes 326 (5,101)
Equity in loss of joint ventures 12,625 576
Dividends from joint ventures 1,122 6,290
Post retirement benefit obligations accrued in excess of cash paid 1,293 821
Changes in operating assets and liabilities:
Receivables 4,516 (3,425)
Inventories 15,711 8,222
Payables and accrued liabilities (4,857) 1,428
Income taxes (1,890) 361
Other (3) 1,377
------------- -------------
Net cash provided by operating activities 17,894 17,016
------------- -------------
INVESTING ACTIVITIES:
Purchase of properties (14,805) (15,501)
Investment in joint ventures (3,750) (6,538)
Proceeds from disposal of properties 65 11,999
------------- -------------
Net cash used in investing activities (18,490) (10,040)
------------- -------------
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 130,498 170,080
Repayments on revolving credit facility (127,749) (170,094)
Borrowings from parent 4,900
Repayments of loans from parent (4,900)
Capital contribution from parent 5,366
Repayments of long-term debt (375) (375)
Payments on notes payable, net (6,387) (9,053)
------------- -------------
Net cash used in financing activities (3,547) (4,542)
------------- -------------
Effect of exchange rate changes on cash (671) (1,892)
------------- -------------
Net increase (decrease) in cash and cash equivalents (4,814) 542
CASH AND CASH EQUIVALENTS:
Beginning of period 10,664 3,362
------------- -------------
End of period $ 5,850 $ 3,904
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 28,314 $ 28,298
Cash paid during the period for taxes $ 3,586 $ 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 the Company 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. Certain amounts previously
reported have been reclassified to conform to the current year 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, 1998
for a summary of significant accounting policies and other information, the
substance of which has not changed materially as of September 30, 1999, unless
otherwise noted herein.
3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the Company represents net income (loss)
adjusted for foreign currency translation adjustments. Comprehensive income
(loss) was $(36.8) million and $(12.5) million for the nine months ended
September 30,1999 and 1998, respectively.
4. PROPERTY DISPOSITIONS
In June 1998, the Company sold its wholly-owned subsidiary, Tubos y
Alcantarillas S.A., ("Tubos") and an idle plant located in Cividale, Italy for
$11.4 million resulting in a gain of $6.3 million.
5. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1999 1998
------------------------------
Inventories at FIFO and average cost:
Finished and semi-finished $ 61,768 $ 76,003
Raw materials and supplies 59,440 62,612
------------------------------
Total $ 121,208 $ 138,615
==============================
The carrying value of inventories approximates replacement cost.
6
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Dollars in thousands, unless otherwise noted)
6. JOINT VENTURES
The Company owns 50% of American Iron Reduction, L.L.C. ("AIR"), a joint venture
company producing direct reduced iron ("DRI"). AIR started operations in January
1998 and has rated capacity of approximately 1.2 million metric tons of DRI
annually. DRI is a substitute for high quality steel scrap used in steel making
facilities.
The Company is a party to a DRI purchase agreement with AIR with a term of
approximately 12 years, subject to cancellation or extension as provided for in
the agreement, pursuant to which the Company agrees, subject to the terms of the
agreement, to purchase a maximum of 600,000 metric tons of DRI annually, if
produced and tendered by AIR. The Company's cost of acquiring DRI from AIR
approximates AIR's total cash cost. The Company accounts for DRI purchased from
AIR and resold to others as components of net sales and cost of products sold
and accounts for DRI used in its own steelmaking operations as a component of
cost of products sold. Income or losses from joint ventures, including AIR, are
reported in the statement of operations under the caption "Equity in loss of
joint ventures".
Because of problems with the material handling facility owned by an unrelated
party, the date for the conversion of AIR's construction loan to term loan
status was extended. AIR and its lenders were unable to agree upon conditions of
conversion and effective March 31, 1999, AIR defaulted under the terms of the
loan agreement. Discussions are currently underway with AIR's lenders regarding
a restructuring of AIR's loan agreement. However, there can be no assurance that
negotiations with AIR's lenders will be successful or completed on terms that
will not have an adverse impact on the Company's future cost of DRI or on the
Company's cash flows.
During the third quarter of 1998 and continuing into 1999, production was scaled
back as market conditions caused demand and prices of scrap and scrap
substitutes to fall dramatically. Consequently, the Company has incurred equity
losses from this joint venture of $9.0 million for the nine months ending
September 30, 1999, as compared to a loss of $3.6 million for the same period of
last year. In addition, the Company has resold most of its DRI under its
purchase agreement and realized a gross margin loss of $2.3 million for the nine
months ending September 30,1999 as compared to a loss of $4.0 million for the
same period of 1998.
7. PAYABLES AND ACCRUED LIABILITIES
Payables and accrued liabilities consist of the following:
September 30, December 31,
1999 1998
-----------------------------
Trade payables $ 82,257 $ 84,170
Salaries and wages 12,120 11,052
Accrued interest payable 9,753 10,072
Other 26,640 26,491
-----------------------------
$ 130,770 $ 131,785
=============================
8. CLAIM SETTLEMENTS
The Company has recorded certain gains resulting from credits on amounts
previously paid to its electrode suppliers as a result of settlements stemming
from antitrust claims against the electrode suppliers. The Company also
recognized a gain from one of its customers regarding minimum purchase
requirements. For the quarter and nine months ending September 30, 1999, the
Company received $1.6 million and $8.5 million of these credits, which were
recorded as a reduction in cost of products sold.
9. NOTES PAYABLE
Notes payable of $1.6 million consists of short-term revolving credit facilities
in Chile, Peru, and the Philippines.
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 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 compensatory 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
itself 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, cash flows, 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 also 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 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 probable liabilities related to environmental issues,
based upon information from engineering and environmental specialists, the
Company has made provisions and accruals. At September 30, 1999, $2.6 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 agreements with the
former owners of certain of the Company's facilities, the Company has been
indemnified for certain environmental issues and conditions at certain of its
facilities, subject to limitations as to time and amounts, among other things,
as set forth in the indemnification provisions of such purchases and sale
agreements.
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.
The Company's collective bargaining agreement at the Duluth, Minnesota facility
expired on August 24, 1999. The Company and the United Steelworkers Union were
unable to reach an agreement and a work stoppage by the union workers commenced.
There are approximately 140 union workers at the Duluth facility and management
together with its salaried workforce and temporary workers have continued to
operate the plant with minimal impact to production and without any interruption
in shipments to the Company's customers.
11. GEOGRAPHIC INFORMATION
Financial information, by geographic region, for the Company is presented below.
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 including Canada,
Mexico, and Australia.
<TABLE>
<CAPTION>
September 30, 1999 and the
nine months ended September 30, 1999
--------------------------------------------------------
United South Europe
States America and Other Total
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 498,853 $ 78,659 $ 8,593 $ 586,105
Operating profit (loss) (4,825) 13,346 217 8,738
Equity in income (loss) of joint ventures (6,693) (6,086) 154 (12,625)
Net income (loss) (39,360) 3,794 509 (35,057)
Identifiable assets 519,212 57,604 15,359 592,175
Total liabilities 520,145 28,299 6,284 554,728
Net assets (933) 29,305 9,075 37,447
</TABLE>
<TABLE>
<CAPTION>
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 (loss) income (21,358) 9,203 1,561 (10,594)
</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. ("GSTOC") is a wholly-owned subsidiary of
the Company. GSTOC issued the Senior Notes which are unconditionally guaranteed
by the Company. Accordingly, summarized financial information for GSTOC and its
subsidiaries on a stand alone basis is provided below.
September 30, December 31,
1999 1998
------------- ------------
Current assets $ 177,276 $198,595
Noncurrent assets 290,944 311,870
------------- ------------
Total assets $ 468,220 $510,465
============= ============
Current liabilities $ 104,918 $105,998
Noncurrent liabilities 373,896 381,263
------------- ------------
Total liabilities 478,814 487,261
Stockholder's equity (10,594) 23,204
------------- ------------
Total $ 468,220 $510,465
============= ============
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 142,152 $ 151,253 $ 450,428 $ 492,971
Cost of products sold 133,603 149,247 417,155 462,001
------------- ------------- ------------- -------------
Gross Profit 8,549 2,006 33,273 30,970
Selling, general and administrative expenses 7,843 6,438 22,828 18,717
Depreciation and amortization 7,062 6,796 20,843 20,540
------------- ------------- ------------- -------------
Operating loss (6,356) (11,228) (10,398) (8,287)
Interest expense (9,872) (9,637) (29,729) (29,512)
Equity in loss of joint venture (3,427) (956) (8,248) (2,868)
Fees from joint ventures and royalties 947 983 3,114 3,375
Other, net 176 16 289 270
------------- ------------- ------------- -------------
Loss before income tax (18,532) (20,822) (44,972) (37,022)
Income tax (provision) benefit (238) 5,250 (726) 12,995
------------- ------------- ------------- -------------
Net loss $ (18,770) $ (15,572) $ (45,698) $ (24,027)
============= ============= ============= =============
</TABLE>
10
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The forward-looking statements, included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" reflect management's
best judgment based on factors currently known and such forward looking
statements 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 is provided by the
Company pursuant to the safe harbor established under the Private Securities
Litigation Reform Act of 1995 and should be evaluated in the context of these
factors.
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.
RESULTS OF OPERATIONS
SUMMARY STATEMENTS OF OPERATIONS
(Dollars in millions, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 188.2 $ 196.6 $ 586.1 $ 638.0
Cost of products sold 167.6 182.7 516.8 570.7
------------- ------------- ------------- -------------
Gross margin 20.6 13.9 69.3 67.3
------------- ------------- ------------- -------------
Selling, general and administrative expenses 12.3 11.1 36.4 32.7
Depreciation and amortization 8.2 7.9 24.2 23.5
------------- ------------- ------------- -------------
Operating profit 0.1 (5.1) 8.7 11.1
Net interest expense (1) (10.1) (9.8) (30.4) (30.3)
Gain on disposition of properties 0.1 6.5
Other income (expense) (2) (4.0) 0.5 (9.9) 3.0
Income tax (provision) benefit (1.4) 1.1 (3.5) (0.9)
------------- ------------- ------------- -------------
Net loss $ (15.4) $ (13.2) $ (35.1) $ (10.6)
============= ============= ============= =============
</TABLE>
(1) - Net interest expense includes interest income, and $0.5 million and $1.4
million of amortization of debt issuance costs for the three and nine
months ended September 30, 1999, respectively.
(2) - Other income includes equity in income (loss) of joint ventures, fees
from joint ventures, minority interest and other, net.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998.
NET SALES. Net sales decreased by 8% or $51.9 million to $586.1 million in the
first nine months of 1999 compared to the same period of 1998. Total shipment
volume increased approximately 17,800 tons to 1,648,000 tons for the first nine
months of 1999. However, depressed pricing experienced by the domestic steel
industry due to high levels of low priced imported steel resulted in an overall
decline of $36 per ton in total average selling prices and contributed to the
decline in net revenue. Wire rod sales of $281.1 million for the first nine
months of 1999 were below 1998 levels by approximately $33.5 million despite an
increase in shipments of approximately 21,000 tons as average wire rod selling
prices declined $42 per ton from the comparable period of 1998.
Revenues from the Company's mining product sales for the first nine months of
1999 were down on a combined basis by approximately $12.3 million from 1998
levels due primarily to lower selling prices.
The Company's wire products sales were up approximately $4.1 million to $68.0
million for the first nine months of 1999 from an approximate 12,200 ton
increase in shipments, partially offset by a decrease in average selling prices
of $39 per ton.
11
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COST OF PRODUCTS SOLD AND GROSS MARGIN. Cost of products sold as a percent of
net sales was 88.2% for the nine-months ending September 30, 1999, reflecting an
improvement of 1.3% as compared to the comparable period of 1998. Margins
continued to be adversely impacted by declines in average selling prices. These
negative factors were more than offset by reductions in the Company's raw
material costs and the claims settlements. During the first nine months of 1999,
the Company realized $8.5 million of gains, classified as a reduction in cost of
products sold, from settlements reached with the Company's suppliers of
electrodes and from a customer of the Company in settlement of a claim related
to such customer's minimum purchase requirements as compared to $4.2 million of
gains from electrode settlements in 1998. In addition, the Company realized a
gross margin loss of $2.3 million in 1999 as compared to $4.0 million in 1998 on
resales of DRI.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first nine months of 1999 have increased $3.7
million to $36.4 million. The increase results from costs associated with new
system installations, Year 2000 compliance programs and the recruitment and
relocation of certain management personnel.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
first nine months of 1999 increased by $0.7 million to $24.2 million. This
increase results from capital additions and improvements.
NET INTEREST EXPENSE. Net interest expense of $30.4 million for the first nine
months of 1999 remained relatively constant versus the same period of 1998.
GAIN ON DISPOSITION OF PROPERTIES. For the first nine months of 1999, there has
been no significant disposals of property as compared to the first nine months
of 1998, where the Company recognized a gain of $6.5 million on the disposition
of properties, primarily an idle facility in Italy and certain assets in Peru.
OTHER INCOME (EXPENSE). Other income (expense), which is primarily equity in
income (loss) of joint ventures and fees from joint ventures and royalties,
resulted in a loss of $9.9 million for the first nine months of 1999 compared to
income of $3.0 million in 1998. The change results primarily from equity losses
from AIR of $9.0 million for the first nine months of 1999 versus equity losses
of $4.2 million in 1998. Additionally, the Company realized an equity loss from
its joint venture in Peru of $6.1 million for the first nine months of 1999
compared to equity earnings of $1.1 million for the same period of 1998. The
joint venture in Peru has experienced a significant decline in volume and sales
prices due to an economic recession in that country.
INCOME TAX (PROVISION) BENEFIT. The Company recorded an income tax provision of
$3.5 million on a pre-tax loss of $31.6 million for the first nine months of
1999 resulting in an effective rate that is not meaningful. This compares to an
income tax provision of $0.9 million on a pre-tax loss of $9.7 million for the
first nine months of 1998. The rate is effected by limitations on the Company's
ability to utilize foreign tax credits, net operating loss carry forwards, and
the nondeductibility of amortization expense associated with the Company's
acquisition premium. Changes in the mix of U.S. and foreign earnings also affect
the rate of taxation.
NET INCOME (LOSS). As a result of the factors discussed above, the Company had a
net loss of $35.1 million for the first nine months of 1999 compared to a net
loss of $10.6 million for the first nine months of 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998.
NET SALES. Net Sales for the third quarter of 1999 were $188.2 million compared
to $196.6 million for the third quarter of 1998. As discussed above, this
decrease results primarily from declines in average selling prices being
experienced by the domestic steel industry.
Wire rod sales for the third quarter of 1999 were down $6.9 million to $88.2
million compared to the same period of 1998 due primarily to a substantial
decrease in average selling prices.
Mining product sales were $65.1 million for the third quarter of 1999 compared
to $68.7 million in the third quarter of 1998 reflecting a decrease in volume of
approximately 2,000 tons and a decrease in average selling prices quarter to
quarter.
COST OF PRODUCTS SOLD AND GROSS MARGIN. Third quarter cost of products sold as a
percent of net sales decreased from 92.9% in 1998 to 89.1% in 1999. Conversion
costs at the Company's mini mills were higher than normal in the third quarter
of 1998 vs. 1999 due to unusually high temperatures which caused power
interruptions and shortages
12
<PAGE> 13
and resulted in higher electricity cost and reduced production. In addition in
1998 the Company was forced to shut down one of its mini mills several times
related to impending hurricanes.
The Company realized $1.6 million in gains, classified as reductions of products
sold, from settlements from electrode suppliers in the third quarter of 1999 as
compared to $4.2 million in claims for the third quarter of 1998. Also the 1998
gross margin was adversely effected by losses on the resale of DRI which was
$3.6 million as compared to $0.2 million in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.2 million for the third quarter of 1999 to
$12.3 million as the Company incurred costs associated with new system
installations, and Year 2000 compliance programs, and the recruitment and
relocation of certain management personnel.
OTHER INCOME (EXPENSE). Other income (expense) was a net expense of $4.0 million
for the third quarter of 1999 compared to net income of $0.5 million for the
same period of 1998. The change results primarily from equity losses at AIR of
$3.7 million in the third quarter of 1999 compared to a $1.2 million equity loss
in the third quarter of 1998 and an equity loss from the Peruvian joint venture
of $2.1 million in the third quarter 1999 compared to equity earnings of $0.2
million in the third quarter of 1998.
INCOME TAX (PROVISION) BENEFIT. The Company recorded an income tax provision of
$1.4 million on a pre-tax loss of $14.0 million for the third quarter of 1999.
This compares to an income tax benefit of $1.1 million on a pre-tax loss of
$14.3 million for the third quarter of 1998.
NET INCOME (LOSS). As a result of the factors discussed above, the Company has a
net loss of $15.4 million for the three months ended September 30, 1999 compared
to a net loss of $13.2 million for the same period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of $5.9
million, a decrease of $4.8 million from December 31, 1998. Operating activities
provided $17.9 million of cash during the nine months ended September 30, 1999,
composed primarily of a net loss of $35.1 million, including a non-cash equity
loss on joint ventures of $12.6 million, non-cash depreciation and amortization
of $24.2 million, dividends from joint ventures of $1.1 million and changes in
current assets and liabilities for the period providing $13.5 million; the
Company invested $14.8 million in properties and $3.8 million in joint ventures
and financing activities used $3.5 million.
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 1999,
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 these factors, management
believes that it is important for the Company to maintain borrowing facilities
in excess of working capital requirements.
The Company is currently in compliance with the restrictive covenants contained
in its debt agreements. However, should any of the factors described under "Risk
Factors" adversely affect future operating results, the Company could violate
one or more of its restrictive covenants within the next twelve months. The
Company is evaluating its alternatives in the event that it is unable to comply
with its restrictive covenants in the near term. The alternatives include, but
are not limited to, obtaining waivers for possible future violations, amending
the covenants or refinancing the Company's outstanding obligations. If it
becomes necessary to obtain waivers or amendments, the Company does not expect
that these alternatives would have a significant impact on future results of
operations. However, should it become necessary to refinance one or more of the
Company's facilities, the Company may incur increased interest costs.
Capital expenditures in the Company's business tend to vary from year to year,
as the impact of major programs is concentrated in certain periods followed by
periods of maintenance spending. Management believes that this pattern is
typical of the industry. Recent capital spending has been maintenance related
with some focus towards growth in production, improvement in product quality and
reduction in product cost.
The Company manages its liquidity needs on a consolidated basis with borrowings
that will be available under GSTOC's Revolving Credit Facility, and various
credit facilities available at its subsidiaries and joint ventures.
13
<PAGE> 14
Management believes that cash flows from operations, after being adversely
impacted in late 1998 and 1999 by depressed market conditions as discussed
herein, will begin to improve due to the ongoing benefits of its business
strategy, previously announced price increases, its cost reduction programs and
capital investment projects.
Borrowings under GSTOC's 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 GSTOC's Revolving Credit Facility
increases or the principal amount outstanding increases, there will be
corresponding increases in the Company's interest obligations. Under GSTOC's
Revolving Credit Facility, GSTOC's borrowing availability is $120.0 million
(subject to a borrowing base limitation). As of September 30, 1999, the unused
availability under the Revolving Credit Facility was $37.3 million, and $7.1
million of letters of credit were outstanding.
ENVIRONMENTAL AND TAX CONTINGENCIES AND INDEMNIFICATION
Note 10 to the Company's Unaudited Consolidated Financial Statements is
incorporated herein by reference.
YEAR 2000
The Company is completing an organized program to assure that the Company's
systems will be Year 2000 compliant. The Company's Year 2000 program was
designed around phases, which included management awareness, system inventory
and assessment, modification or replacement, testing, contingency planning,
business partner communication, 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 locations and periodic meetings are held to
monitor progress.
The Company has completed the phases of management awareness, systems inventory
and assessment. Critical systems were identified and prioritized and decisions
made relative to the modification versus replacement of systems deemed to be
non-compliant. The cost of modifications to existing systems is being charged to
current operations. Where systems have been replaced with new applications, the
cost has been capitalized.
At the end of the third quarter, the Company has virtually completed its Year
2000 modifications with only minor activities remaining. Ongoing testing will
continue through the fourth quarter of 1999.
Testing of individual systems was conducted as the systems were changed or
modified. Testing of the integrated systems indicates that the Company is
substantially ready for the Year 2000 in terms of its local manufacturing,
infrastructure, support, and facility systems except as noted above. This time
frame allows for the completion 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 unforeseen possibilities.
The estimated costs for correction of the Year 2000 issues is approximately $3
million with substantially all expended to-date.
The Company's Year 2000 program includes communications with its outside
business partners to prepare for Year 2000 readiness. The Company requested
information from its suppliers and other partners to determine their Year 2000
compliance. Business partners have indicated readiness for the Year 2000.
The Year 2000 team is developing contingency plans assuming a variety of
possible scenarios. These scenarios 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. The Company's goal is to have a completed
contingency plan in place by mid fourth quarter of 1999, based on information
received from its customers and suppliers relative to their compliance with Year
2000 issues.
The estimates and conclusions herein contain forward-looking statements and are
based on management's best estimates of future events. Risks to completing the
program include the availability of resources, the Company's ability to execute
the Company's Year 2000 program, and the ability of customers and suppliers to
bring their systems into Year 2000 compliance. All statements made herein
regarding our Year 2000 efforts are "Year 2000 Readiness Disclosures" made
pursuant to the Year 2000 Information and Readiness Disclosure Act, and to the
extent applicable, are entitled to the protections of such act.
14
<PAGE> 15
RISK FACTORS
During 1998 and continuing into 1999, the Company's results have been negatively
impacted by distressed market conditions within the domestic steel industry.
Distressed economic conditions in other countries, particularly in Asia, have
resulted in record levels of low priced steel wire rod being imported into the
U.S. and causing dramatic declines in selling prices industry-wide.
The Company's grinding media and mill liner business has been affected by a
slow-down in the mining industry resulting from declining commodity prices.
The Company's steel making operations are heavily dependent on the availability
and price of scrap, DRI and electricity. Future operations could be affected by
these factors.
The Company intends to aggressively pursue reductions in its conversion costs.
The Company will also continue to carefully evaluate capital spending and invest
only when anticipated economic returns clearly exceed cost and when necessary to
ensure proper maintenance of equipment.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS
There have been no material changes in the Company's market risk on financial
instruments during the nine months ended September 30, 1999. The market risk
inherent in the Company's financial instruments represents potential changes in
interest rates, primarily the US Prime Rate and the London Interbank Offering
Rate (LIBOR). The Company manages interest rate risks by maintaining certain
ratios of fixed to variable rate debt. The Company does not currently use
derivative financial instruments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 10 to the Company's Unaudited Consolidated Financial Statements
is incorporated herein 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, 1999.
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 10th day of November 1999.
GS Technologies Corporation
and
GS Technologies Operating Co., Inc.
(Registrant)
By: /s/ Luis E. Leon
---------------------------------------
Luis E. Leon, Executive Vice President
and Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GS INDUSTRIES FOR THE NINE MONTH PERIOD ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,850
<SECURITIES> 0
<RECEIVABLES> 95,316<F1>
<ALLOWANCES> 0
<INVENTORY> 121,208
<CURRENT-ASSETS> 242,759
<PP&E> 245,626<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 592,175
<CURRENT-LIABILITIES> 138,286
<BONDS> 338,611
0
0
<COMMON> 1
<OTHER-SE> 37,446
<TOTAL-LIABILITY-AND-EQUITY> 592,175
<SALES> 586,105
<TOTAL-REVENUES> 586,105
<CGS> 516,805
<TOTAL-COSTS> 60,562
<OTHER-EXPENSES> 9,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,426
<INCOME-PRETAX> (31,603)
<INCOME-TAX> 3,454
<INCOME-CONTINUING> (35,057)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,057)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>AMOUNTS PRESENTED ARE NET.
</FN>
</TABLE>
