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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, 1999 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 9, 1999. There were 100
shares of GS Technologies Corporation Common Stock, par value $.01 per share,
outstanding at August 9, 1999.
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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").
INDEX
ITEM PAGE
(1) Unaudited Consolidated Financial Statements of the Company
Unaudited Consolidated Statements of Operations for the Three Months
and Six Months ended June 30, 1998 and June 30, 1999 3
Unaudited Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999 4
Unaudited Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1998 and June 30, 1999 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
<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,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 224,742 $ 193,320 $ 441,432 $ 397,964
Operating costs and expenses:
Cost of products sold 203,130 171,839 387,914 349,232
Selling, general and administrative expenses 10,632 11,930 21,573 24,097
Depreciation and amortization 8,133 8,237 15,797 15,984
--------- --------- --------- ---------
221,895 192,006 425,284 389,313
--------- --------- --------- ---------
Operating profit 2,847 1,314 16,148 8,651
Other income (expense):
Interest expense, net (10,358) (10,167) (20,497) (20,291)
Equity in income (loss) of joint ventures 91 (5,580) (6) (7,553)
Fees from joint ventures 849 581 2,028 1,467
Gain on disposition of properties (Note 4) 6,340 23 6,418 23
Other, net 43 103 395 31
--------- --------- --------- ---------
(3,035) (15,040) (11,662) (26,323)
--------- --------- --------- ---------
Income (loss) before income tax (188) (13,726) 4,486 (17,672)
Income tax (provision) benefit 104 (994) (1,909) (2,031)
--------- --------- --------- ---------
Net income (loss) $ (84) $ (14,720) $ 2,577 $ (19,703)
========= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements
3
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GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,664 $ 8,741
Receivables less allowance for doubtful accounts 86,058 96,030
Receivables from related parties 6,268 6,861
--------- ---------
Total receivables 92,326 102,891
--------- ---------
Inventories 138,615 119,942
Prepaid expenses and other current assets 6,861 6,067
Taxes recoverable from parent 9,297
Income taxes receivable 3,474 6,144
Deferred tax benefit 6,422 7,205
--------- ---------
Total current assets 267,659 250,990
Investments in joint ventures 38,590 33,813
Properties, net 254,876 248,661
Acquisition premium 59,102 58,297
Other assets 23,148 20,075
--------- ---------
Total assets $ 643,375 $ 611,836
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable $ 8,568 $ 7,350
Current portion of long-term debt 518 509
Payables to related parties 11,279 6,707
Payables and accrued liabilities 131,785 121,879
--------- ---------
Total current liabilities 152,150 136,445
Long-term debt 336,241 341,513
Loans from parent 4,900
Post retirement benefit obligations other than pensions 28,231 29,096
Deferred income taxes payable 18,061 19,074
Other long-term liabilities 34,896 32,312
Commitments and contingencies (Note 10)
--------- ---------
Total liabilities 574,479 558,440
--------- ---------
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized, and 100 shares
issued and outstanding at December 31, 1998 and June
30, 1999 1 1
Additional paid in capital 132,716 138,082
Accumulated deficit (59,196) (78,900)
Accumulated other comprehensive loss (4,625) (5,787)
--------- ---------
Total stockholder's equity 68,896 53,396
--------- ---------
Total liabilities and stockholder's equity $ 643,375 $ 611,836
========= =========
</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>
Six Months Ended
-------------------------
June 30, June 30,
1998 1999
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,577 $(19,703)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 15,797 15,984
Gain on disposition of properties (6,418) (23)
Deferred income taxes (2,016) 245
Equity in loss of joint ventures 6 7,553
Dividends from joint ventures 6,290 1,122
Post retirement benefit obligations accrued in excess of cash paid 734 865
Changes in operating assets and liabilities:
Receivables (20,503) (2,805)
Inventories 9,967 17,276
Payables and accrued liabilities 9,094 (12,668)
Income taxes (52) (2,589)
Other 901 1,915
--------- --------
Net cash provided by operating activities 16,377 7,172
--------- --------
INVESTING ACTIVITIES:
Purchase of properties (10,021) (9,854)
Investment in joint ventures (6,538) (3,750)
Proceeds from disposal of properties 11,884 113
--------- --------
Net cash provided by (used in) investing activities (4,675) (13,491)
--------- --------
FINANCING ACTIVITIES:
Borrowings under revolving credit facility 114,634 78,858
Repayments on revolving credit facility (117,784) (73,347)
Borrowings from parent 4,900
Repayment of loans from parent (4,900)
Capital contribution from parent 5,366
Repayments of long-term debt (250) (250)
Proceeds from (payments on) notes payable, net (3,407) (662)
--------- --------
Net cash provided by (used) in financing activities (1,907) 5,065
--------- --------
Effect of exchange rate changes on cash (1,701) (669)
--------- --------
Net increase (decrease) in cash and cash equivalents 8,094 (1,923)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,362 10,664
--------- --------
End of period $ 11,456 $ 8,741
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 20,421 $ 18,813
Cash paid during the period for taxes $ 3,951 $ 2,948
</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. 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 June 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 $(20.9) million and $1.2 million for six months ended June 30,1999
and 1998, respectively.
4. PROPERTY DISPOSITIONS
In June 1998, the Company sold its wholly-owned subsidiary, Tubos y
Alcantarillas S.A., ("Tubos") for $9.5 million resulting in a gain of $5.2
million.
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.
5. INVENTORIES
Inventories consist of the following:
December 31, June 30,
1998 1999
------------- --------------
Inventories at FIFO and average cost:
Finished and semi-finished $ 76,003 $ 66,455
Raw materials 62,612 53,487
------------- --------------
Total $ 138,615 $ 119,942
============= ==============
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 also 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
production cost. Income or losses from joint ventures, including AIR, are
reported in the statement of operations under the caption "Equity in income
(loss) of joint ventures". During the six months ended June 30, 1999, the
Company sold most of its purchases of DRI to a third party at negative gross
margins.
Because of problems with its third party material handling facility, the date
for the conversion of AIR's construction loan to term loan status was extended
until March 31, 1999. 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. Under certain circumstances, the Company may be required
to make an additional equity contribution to this joint venture of up to $3.7
million.
7. PAYABLES AND ACCRUED LIABILITIES
Payables and accrued liabilities consist of the following:
December 31, June 30,
1998 1999
-------------- ---------------
Trade payables $ 84,170 $ 74,250
Salaries and wages 11,052 11,488
Accrued interest payable 10,072 9,617
Other 26,491 26,524
-------------- ---------------
$ 131,785 $ 121,879
============== ===============
8. CLAIM SETTLEMENTS
During the first six months of 1999, the Company realized $6.9 million of
pre-tax gains, classified as a reduction in cost of goods sold, from settlements
reached with the Company's suppliers of electrodes resulting from antitrust
claims investigations against the electrode suppliers and from a customer of the
Company in settlement of the Company's claim related to such customer's minimum
purchase requirements.
9. NOTES PAYABLE
Notes payable of $7.4 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 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 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 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 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, 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 agreement with a former owner, the
Company has been indemnified, through November 1999, 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.
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.
<TABLE>
<CAPTION>
June 30, 1999 and the six months ended June 30, 1999
-------------------------------------------------------
United South Europe
States America and Other Total
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $ 340,285 $ 51,650 $ 6,029 $ 397,964
Operating profit (loss) (184) 8,661 174 8,651
Equity in income (loss) of joint ventures (3,809) (3,937) 193 (7,553)
Net income (loss) (22,517) 2,404 410 (19,703)
Identifiable assets 538,081 56,693 17,062 611,836
Total liabilities 523,540 28,339 6,561 558,440
Net assets 14,541 28,354 10,501 53,396
Six months ended June 30, 1998
-------------------------------------------------------
United South Europe
States America and Other Total
--------- -------- -------- ---------
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 (loss) income (5,426) 6,506 1,497 2,577
</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, June 30,
1998 1999
-------- --------
<S> <C> <C>
Current assets $198,595 $183,901
Noncurrent assets 311,870 301,016
-------- --------
Total assets $510,465 $484,987
======== ========
Current liabilities $105,998 $101,033
Noncurrent liabilities 381,263 378,527
-------- --------
Total liabilities 487,261 479,560
Stockholder's equity 23,204 5,427
-------- --------
Total $510,465 $484,987
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 173,781 $ 149,232 $ 341,716 $ 308,276
--------- --------- --------- ---------
Cost of products sold 164,574 139,724 312,754 283,553
Selling, general and administrative expenses 5,995 7,363 12,279 14,985
Depreciation and amortization 7,115 7,132 13,745 13,781
--------- --------- --------- ---------
Operating profit (loss) (3,903) (4,987) 2,938 (4,043)
Interest expense (10,114) (9,881) (19,874) (19,857)
Equity in loss of joint venture (659) (3,668) (1,912) (4,821)
Fees from joint ventures 1,096 896 2,392 2,167
Other, net 160 123 256 113
--------- --------- --------- ---------
Income (loss) before income tax (13,420) (17,517) (16,200) (26,441)
Income tax (provision) benefit 6,416 (236) 7,745 (487)
--------- --------- --------- ---------
Net income (loss) $ 7,004 $ (17,753) $ (8,455) $ (26,928)
========= ========= ========= =========
</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" 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.
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
<TABLE>
<CAPTION>
SUMMARY STATEMENTS OF OPERATIONS
(Dollars in millions, unaudited)
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 224.7 $ 193.3 $ 441.4 $ 397.9
Cost of products sold 203.1 171.8 387.9 349.2
-------- -------- -------- --------
Gross margin 21.6 21.5 53.5 48.7
-------- -------- -------- --------
Selling, general and administrative expenses 10.6 11.9 21.6 24.1
Depreciation and amortization 8.2 8.3 15.8 16.0
-------- -------- -------- --------
Operating profit 2.8 1.3 16.1 8.6
Net interest expense (1) (10.3) (10.2) (20.5) (20.3)
Gain on disposition of properties 6.3 6.4
Other income (expense) (2) 1.0 (4.9) 2.5 (6.0)
Income tax (provision) benefit .1 (.9) (1.9) (2.1)
-------- -------- -------- --------
Net income (loss) $ (.1) $ (14.7) $ 2.6 $ (19.7)
======== ======== ======== ========
</TABLE>
(1) - Net interest expense includes interest income, interest expense and
$459 and $918 of amortization of debt issuance costs for the three and
six months ended June 30, 1999, respectively.
(2) - Other income includes equity in income (loss) of joint ventures, fees
from joint ventures, minority interest and other, net.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998.
AMERICAN IRON REDUCTION LLC ("AIR"). The Company owns 50% of AIR which produces
direct reduced iron ("DRI") and commenced operations in January 1998. This
facility is capable of producing 1.2 million metric tons of DRI annually.
However, during late 1998 and continuing during the first six months of 1999,
production was scaled back as market conditions caused scrap and scrap
substitute demand and pricing to fall dramatically. The Company realized a net
equity loss from this joint venture of $4.8 million for the first half of 1999.
Additionally, the Company incurred a loss of $1.5 million on sales of DRI to
third parties during the first six months of 1999.
CLAIM SETTLEMENTS. During the first six months of 1999, the Company realized
$6.9 million of pre-tax gains, classified as a reduction in cost of goods sold,
from settlements reached with the Company's suppliers of electrodes resulting
from antitrust related claims against the electrode suppliers and from a
customer of the Company in settlement of the Company's claim related to such
customer's minimum purchase requirements.
NET SALES. Net sales decreased by $43.5 million to $397.9 million in the first
half of 1999 compared to the first half of 1998. The Company's total shipment
volume increased approximately 3,300 tons to 1,126,000 tons for the first half
of 1999. However, depressed pricing experienced by the domestic steel industry
due to high levels of low priced imported steel products resulted in an overall
decline in net sales. Wire rod sales of $192.9 million for the first six
11
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months of 1999 were below 1998 sales by approximately $26.5 million despite an
increase in shipments of approximately 31,600 tons as average wire rod selling
prices declined $55 per ton from the comparable six-month period of 1998.
Revenues from the Company's grinding media and mill liner shipments for the
first half of 1999 were down on a combined basis by approximately $8.7 million
from 1998 levels due primarily to lower selling prices.
The Company's wire products sales were up approximately $2.5 million to $44.8
million for the first six months of 1999 from an approximate 8,600 ton increase
in total shipments, partially offset by a decrease in average selling prices.
COST OF PRODUCTS SOLD AND GROSS MARGIN. Cost of products sold as a percent of
net sales remained constant at 87.8% for each of the six-month periods. Margins
continued to be adversely impacted by declines in average selling prices and
losses on sales of DRI to third parties. These negative factors were partially
mitigated by reductions in the Company's raw material costs and the claims
settlements recorded in the first half of 1999 as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first half have increased $2.5 million to $24.1
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 six months increased by $0.2 million to $16.0 million. This increase
results from capital additions and improvements.
NET INTEREST EXPENSE. Net interest expense of $20.3 million for the first half
of 1999 remained relatively constant with the $20.5 million for the same period
of 1998.
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 (EXPENSE). Other income (expense), which is primarily equity in
income (loss) of joint ventures and fees from joint ventures, was net expense of
$6.0 million for the first half of 1999 compared to net income of $2.5 million
in 1998. The change results primarily from an equity loss from AIR of $4.8
million for the first half of 1999 versus an equity loss of $1.9 million in
1998. Additionally, the Company realized an equity loss from its joint venture
in Peru of $3.9 million for the first half of 1999 compared to equity earnings
of $0.9 million for the first half of 1998. The joint venture in Peru
experienced a significant decline in volume due to an economic recession in that
country and worldwide steel industry conditions.
INCOME TAX PROVISION/BENEFIT. The Company recorded an income tax provision of
$2.1 million on a pre-tax loss of $17.7 million for the first six months of 1999
resulting in an effective rate that is not meaningful. This compares to an
income tax provision of $1.9 million on pre-tax earnings of $4.5 million for the
first six months of 1998 at an effective rate of 42.6%. 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 $19.7 million for the first six months of 1999 compared to net
income of $2.6 million for the first six months of 1998.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998.
NET SALES. Net Sales for the second quarter of 1999 were $193.3 million compared
to $224.7 million for the second quarter of 1998. As discussed above, this
decrease results from declines in average selling prices being experienced by
the domestic steel industry.
Wire rod sales for the second quarter of 1999 were down $14.4 million to $93.5
million compared to the same period of 1998 due primarily to a substantial
decrease in average selling prices.
Grinding media sales were $47.8 million for the second quarter of 1999 compared
to $52.4 million in 1998 reflecting a decrease in volume of approximately 5,000
tons and a decrease in average selling prices quarter to quarter. Revenues from
the Company's grinding media and mill liner business declined approximately $8.3
million quarter to quarter from the combination of a 1,600 ton reduction in
volume and a decrease in average selling prices.
12
<PAGE> 13
COST OF PRODUCTS SOLD AND GROSS MARGIN. Second quarter cost of products sold as
a percent of net sales decreased from 90.4% in 1998 to 88.9% in 1999. Conversion
costs were higher than normal in the second quarter of 1998 due to unusually
high temperatures which caused power interruptions and shortages and resulted in
higher electricity cost and reduced production.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.3 million for the second quarter of 1999 to
$11.9 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 net expense of $4.9 million
for the second quarter of 1999 compared to net income of $1.0 million for the
same three-month period of 1998. The change results primarily from an equity
loss at AIR of $3.7 million in 1999 compared to a $.7 million equity loss in
1998 and an equity loss from the Peruvian joint venture of $2.5 million in 1999
compared to equity earnings of $.1 million in the second quarter of 1998.
INCOME TAX PROVISION/BENEFIT. The Company recorded an income tax provision of
$.9 million on a pre-tax loss of $13.7 million. This compares to an income tax
benefit of $104,000 on a pre-tax loss of $188,000 for the second quarter of
1998.
NET INCOME (LOSS). As a result of the factors discussed above, the Company has a
net loss of $14.7 million for the three months ended June 30, 1999 compared to a
net loss of $84,000 for the same period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents of $8.7 million, a
decrease of $1.9 million from December 31, 1998. Operating activities provided
$7.2 million of cash during the six months ended June 30, 1999, composed
primarily of a net loss of $19.7 million, including a non-cash equity loss on
joint ventures of $7.6 million, non-cash depreciation and amortization of $16.0
million, dividends from joint ventures of $1.1 million and changes in current
assets and liabilities for the period providing $1.1 million; the Company
invested $9.9 million in properties and an additional $3.8 million in joint
ventures and financing activities provided $5.1 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 its restrictive debt covenants.
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 the Company's Revolving Credit Facility, and
various credit facilities available at its subsidiaries and joint ventures.
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, including its cost reduction
programs and capital investment projects.
13
<PAGE> 14
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 June 30, 1999, the unused availability under the
Revolving Credit Facility was $42.1 million, and $6.2 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 pursuing 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 second quarter, the Company has substantially completed its
Year 2000 modifications. The remaining system modifications and replacements are
in progress and will be completed during the third 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. More than one-half of this amount 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. 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.
At the present time, 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 in the third 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 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 being imported into the U.S. and
causing dramatic declines in selling prices industry-wide.
The Company's grinding media 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 electricity. Future operations could be affected by these factors.
The Company has announced wire rod price increases and intends to aggressively
pursue reductions in its conversion costs, particularly at its Kansas City
mini-mill. 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
There have been no material changes in the Company's market risk during the six
months ended June 30, 1999. The market risk inherent in the Company's financial
instruments represents potential changes in interest rates. 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
June 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 9th day of August 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
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