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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 March 31, 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 May 1, 1999. There were 100
shares of GS Technologies Corporation Common Stock, par value $.01 per share,
outstanding at May 1, 1999.
This document consists of 15 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 ("GSI"), is the largest producer of steel wire rod in North
America and of grinding media and mill liners for the worldwide mining industry
as well as a leading producer of certain wire products for the U.S. and export
markets. GST has fully and unconditionally guaranteed two series of senior
notes totaling $250 million aggregate principal amount issued by its
wholly-owned subsidiary, GS Technologies Operating Co., Inc. ("GSTOC").
Forward-Looking Statements
The forward-looking statements, included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. Words such as "expects", "anticipates", "believes" and
"intends", variations of such words and similar expressions are intended to
identify such forward-looking statements. Actual results could differ from
those anticipated in these forward-looking statements as a result of a number
of factors including, but not limited to, the factors discussed in that
section. Forward-looking information provided by the Company pursuant to the
safe harbor established under the Private Securities Litigation Reform Act of
1995 should be evaluated in the context of these factors.
INDEX
<TABLE>
<CAPTION>
Item Page
<S> <C>
(1) Unaudited Consolidated Financial Statements of the Company
Unaudited Consolidated Statements of Operations for the Three Months
ended March 31, 1998 and March 31, 1999 3
Unaudited Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999 4
Unaudited Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1998 and March 31, 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 14
</TABLE>
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GS TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1998 1999
--------- ---------
<S> <C> <C>
Net sales $ 216,690 $ 204,644
Operating costs and expenses:
Cost of products sold 184,783 177,393
Selling, general and administrative expenses 10,942 12,167
Depreciation and amortization 7,665 7,747
--------- ---------
203,390 197,307
--------- ---------
Operating profit 13,300 7,337
Other income (expense):
Interest expense, net (10,139) (10,125)
Equity in income (loss) of joint ventures (97) (1,974)
Fees from joint ventures 1,179 886
Gain (loss) on disposal of properties 78
Other, net 353 (70)
--------- ---------
(8,626) (11,283)
--------- ---------
Income (loss) before income tax 4,674 (3,946)
Income tax provision (2,014) (1,038)
--------- ---------
Net income (loss) $ 2,660 $ (4,984)
========= =========
</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, March 31,
1998 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,664 $ 8,910
Receivables less allowance for doubtful accounts 86,387 94,482
Receivables from related parties 5,939 8,508
--------- ---------
Total receivables 92,326 102,990
--------- ---------
Inventories 138,615 119,195
Prepaid expenses and other current assets 6,861 5,779
Taxes recoverable from parent 9,297
Income taxes receivable 3,474 3,365
Deferred tax benefit 6,422 6,892
--------- ---------
Total current assets 267,659 247,131
Investments in joint ventures 38,590 39,588
Properties, net 254,876 252,395
Acquisition premium 59,102 58,700
Other assets 23,148 20,801
--------- ---------
Total assets $ 643,375 $ 618,615
========= =========
Liabilities and Stockholder's Equity
Current liabilities:
Notes payable $ 8,568 $ 6,260
Current portion of long-term debt 518 514
Payables to related parties 8,161 9,711
Payables and accrued liabilities 134,903 122,519
--------- ---------
Total current liabilities 152,150 139,004
Long-term debt 336,241 330,388
Loans from parent 4,900
Post retirement benefit obligations other than pensions 28,231 28,646
Deferred income taxes payable 18,061 18,676
Other long-term liabilities 34,896 32,951
Commitments and contingencies (Note 8)
--------- ---------
Total liabilities 574,479 549,665
--------- ---------
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares authorized, and 100
shares issued and outstanding at December 31, 1998 and March
31, 1999 1 1
Additional paid in capital 132,716 138,082
Accumulated deficit (59,196) (64,180)
Accumulated comprehensive income (loss) (4,625) (4,953)
--------- ---------
Total stockholder's equity 68,896 68,950
--------- ---------
Total liabilities and stockholder's equity $ 643,375 $ 618,615
========= =========
</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>
Three Months Ended
------------------------
March 31, March 31,
1998 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ 2,660 $ (4,984)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 7,665 7,747
(Gain) loss on disposal of properties (78)
Deferred income taxes 1,130 145
Equity in (income) loss of joint ventures 97 1,974
Dividends from joint ventures 1,198 785
Post retirement benefit obligations accrued in excess of cash paid 567 415
Changes in operating assets and liabilities:
Receivables (15,212) (1,367)
Inventories (2,388) 19,420
Payables and accrued liabilities 16,918 (10,833)
Income taxes 411 109
Other 875 1,383
-------- --------
Net cash provided by operating activities 13,843 14,794
-------- --------
Investing activities:
Purchase of properties (4,483) (4,813)
Investment in joint ventures (6,447) (3,750)
Proceeds from disposal of properties 437 42
-------- --------
Net cash used in investing activities (10,493) (8,521)
Financing activities:
Borrowings under revolving credit facility 55,525 38,234
Repayments on revolving credit facility (58,689) (43,966)
Repayments on long-term debt (125) (125)
Proceeds from (payments on) notes payable, net 878 (2,308)
Contribution from parent 5,366
Repayment of loans from parent (4,900)
-------- --------
Net cash provided by (used in) financing activities (2,411) (7,699)
-------- --------
Effect of exchange rate changes on cash (556) (328)
-------- --------
Net increase (decrease) in cash and cash equivalents 383 (1,754)
Cash and cash equivalents:
Beginning of period 3,362 10,664
-------- --------
End of period $ 3,745 $ 8,910
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 10,523 $ 9,266
Cash paid during the period for taxes $ 489 $ 942
</TABLE>
See notes to unaudited consolidated financial statements
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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 March 31, 1998, unless
otherwise noted herein.
3. Comprehensive Income
Comprehensive income for the Company represents net income (loss) adjusted for
foreign currency translation adjustments. Comprehensive income (loss) was
($5.3) million and $2.1 million for the quarters ended March 31, 1999 and 1998,
respectively.
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
--------- ---------
<S> <C> <C>
Inventories at FIFO and average cost:
Finished and semi-finished $ 75,020 $ 66,833
Raw materials and supplies 62,612 51,440
--------- ---------
Total 137,632 118,273
--------- ---------
Inventories at LIFO:
Finished and semi-finished 1,093 1,012
Adjustment to state inventories at LIFO value (110) (90)
--------- ---------
Total 983 922
--------- ---------
$ 138,615 $ 119,195
========= =========
</TABLE>
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)
5. Joint Ventures
The Company has a 50% interest in 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 up to 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 quarter ended March 31, 1999, the
Company sold most of its purchases of DRI to a third party which resulted in
negative gross margins.
Because of construction problems with the adjacent 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 or on the ability
of AIR to continue as a going concern.
6. Payables and Accrued Liabilities
Payables and accrued liabilities consist of the following:
December 31, 1998 March 31, 1999
------------------ -----------------
Trade payables $ 84,170 $ 77,719
Salaries and wages 11,052 10,646
Accrued interest payable 10,072 9,696
Other 29,609 24,458
------------------ -----------------
$ 134,903 $ 122,519
================== =================
7. Claim Settlements
During the first quarter of 1999, the Company realized $6.0 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 investigations and from a customer of the Company in settlement
of the Company's claim related to such customer's minimum purchase
requirements.
8. Notes Payable
Notes payable of $6.3 million consists of short-term revolving credit
facilities in Chile, Peru, and the Philippines.
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, unless otherwise noted)
9. Commitments and Contingencies
Litigation Other Contingencies
In August, 1996, Samsung America, Inc. ("Samsung") filed an action in the
Supreme Court of the state of New York seeking monetary damages against GSI,
the Company, its Peruvian subsidiary, Acerco, and Acerco's partners in the
Siderperu joint venture, collectively, ("the Defendants"). Samsung seeks to
recover purported damages of $48.5 million and punitive damages of $10.0
million and alleges that the Defendants failed to honor a written contract
which entitled Samsung to obtain an equity interest in Siderperu and to provide
certain distribution and trading services on an exclusive basis. The Company
believes that it has substantial and meritorious defenses and will defend
itself accordingly.
The Company's subsidiary, Georgetown Steel Corporation, is the defendant in
three related suits filed in 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 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.
Indemnifications from Armco
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.
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 March 31, 1999, $2.5 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.
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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.
10. Geographic Information
Financial information, by geographic region, for the Company is presented
below. United States includes GSTOC and MEI. South America is principally
comprised of the Company's operations in Chile and Peru. Europe and Other
includes the Company's operations in Europe (principally Italy), and other
joint venture interests around the world.
<TABLE>
<CAPTION>
March 31, 1999 and the three months ended March 31, 1999
-------------------------------------------------------------------------
United South Europe
States America and Other Total
----------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 175,376 $ 26,476 $ 2,792 $ 204,644
Operating Profit 2,998 4,300 39 7,337
Equity in income (loss) of joint ventures (574) (1,485) 85 (1,974)
Net Income (loss) (6,752) 1,608 160 (4,984)
Identifiable assets 540,587 60,943 17,085 618,615
Total liabilities 509,711 31,789 8,165 549,665
Net assets 30,876 29,154 8,920 68,950
Three months ended March 31, 1998
-------------------------------------------------------------------------
United South Europe
States America and Other Total
----------------- ----------------- ---------------- ---------------
Net sales $ 187,590 $ 26,830 $ 2,270 $ 216,690
Operating profit 9,595 3,664 41 13,300
Equity in income of joint ventures (838) 757 (16) (97)
Net income (loss) (1,288) 3,655 293 2,660
</TABLE>
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GS TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, unless otherwise noted)
11. Summarized Financial Information of GSTOC
GS Technologies Operating Co., Inc. and its subsidiaries ("GSTOC") is a
wholly-owned subsidiary of the Company. GSTOC has issued Senior Notes
unconditionally guaranteed by the Company. Accordingly, summarized financial
information for GSTOC on a stand alone basis is provided below.
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------------- ------------------
<S> <C> <C>
Current assets $ 198,595 $ 181,621
Noncurrent assets 311,870 309,202
------------------- ------------------
Total assets $ 510,465 $ 490,823
=================== ==================
Current liabilities $ 105,998 $ 101,515
Noncurrent liabilities 381,263 368,413
------------------- ------------------
Total liabilities 487,261 469,928
Common stock, additional paid-in
capital and retained earnings 23,204 20,895
------------------- ------------------
Total $ 510,465 $ 490,823
=================== ==================
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1999
------------------- ------------------
Net sales $ 167,935 $ 159,045
Cost of products sold 148,180 143,828
Selling, general and administrative expenses 6,284 7,622
Depreciation and amortization 6,630 6,648
------------------- ------------------
Operating profit 6,841 947
Interest expense (9,761) (9,976)
Equity in loss of joint venture (1,253) (1,153)
Fees from joint ventures 1,296 1,272
Other, net 97 (14)
------------------- ------------------
Income (loss) before income tax (2,780) (8,924)
Income tax (provision) benefit 1,329 (251)
------------------- ------------------
Net income (loss) $ (1,451) $ (9,175)
=================== ==================
</TABLE>
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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.
SUMMARY STATEMENTS OF OPERATIONS
(Dollars in millions, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------- ------------------
March 31, 1998 March 31, 1999
----------------- ------------------
<S> <C> <C>
Net sales $ 216.7 $ 204.6
Cost of products sold 184.9 177.4
Selling, general and administrative expenses 10.9 12.2
Depreciation and amortization 7.6 7.7
----------------- ------------------
Operating profit 13.3 7.3
Net interest expense (1) (10.1) (10.1)
Other income (expense) (2) 1.5 (1.2)
Income tax (provision) benefit (2.0) (1.0)
----------------- ------------------
Net income (loss) $ 2.7 $ (5.0)
================= ==================
</TABLE>
(1) - Net interest expense includes interest income, interest expense and
$459 of amortization of debt issuance costs.
(2) - Other income includes equity in income (loss) of joint ventures,
fees from joint ventures, minority interest and other, net.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998.
American Iron Reduction LLC ("AIR"). The Company has a 50% interest in a Direct
Reduced Iron ("DRI") joint venture which commenced operations in January 1998.
This facility is capable of producing 1.2 million metric tons of DRI annually.
However, during 1998 and the first quarter of 1999, production was scaled back
as market conditions caused scrap and scrap substitute demand and pricing to
fall dramatically. The Company realized a first quarter net equity loss from
this joint venture of $1.2 million. Additionally, sales of DRI to third parties
were at a loss of $2.2 million in the first quarter of 1999 and the high cost
per metric ton of DRI utilized in the Company's steelmaking facilities
contributed to an overall deterioration of gross margins.
Claim Settlements. During the first quarter of 1999, the Company realized $6.0
million of pre-tax gains from settlements reached with the Company's suppliers
of electrodes resulting from antitrust related claims against the 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. The Company's net sales of $204.6 million for the first quarter of
1999 were down approximately $12.1 million or 5.5% from the same period in
1998. While the Company's volume of shipments was strong, increasing
approximately 44,300 tons quarter to quarter, the depressed pricing being
experienced due to record levels of low priced steel imports was the primary
cause for the decline in net sales.
Revenue from wire rod sales of $99.5 million for the first quarter of 1999 was
below 1998 revenue by approximately $12.0 million despite an increase in
shipments of 29,600 tons as average wire rod selling prices declined $65 per
ton, quarter to quarter.
Grinding media sales for the first quarter of 1999 exceeded the first quarter
of 1998 by approximately $2.8 million reflecting an increase in volume of
approximately 11,000 tons, primarily from continuing expansion of the mining
industry in South America, as partially offset by a decline of $21 per ton in
average selling prices. Revenues from the Company's mill liner business
declined approximately $3.2 million quarter to quarter from the combination of
a 1,000 ton reduction in volume and an 8% decline in average selling prices.
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The Company's wire products sales were up approximately $1.5 million resulting
from an increase in volume of approximately 5,300 tons as offset by a 9%
decline in average selling prices.
Cost of Products Sold and Gross Margins. Cost of products sold as a percent of
net sales increased to 86.7% in the first quarter of 1999 from 85.3% in 1998.
Margins were adversely impacted by the overall decline in the Company's average
selling prices and by negative margins realized on sales of DRI to third
parties. These negative margin factors were partially mitigated by reductions
in the Company's raw material costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million to $12.2 million for the first
quarter of 1999. The increase results primarily from cost associated with new
system installations, Year 2000 issues, and the recruitment and relocation of
certain management personnel.
Depreciation and Amortization. Depreciation and amortization expense for the
first quarter increased by $.1 million to $7.7 million. This increase results
from capital additions and improvements.
Net Interest Expense. Net interest expense of $10.1 million for the first
quarter remained unchanged from the same quarter of 1998.
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 $1.2 million for the first quarter of 1999 compared to net income of $1.5
million in 1998. The change results primarily from an equity loss from AIR of
$1.2 million for the reasons discussed above and an equity loss from the
Company's joint venture in Peru of $1.4 for the first quarter of 1999 compared
to equity earnings of $0.7 million for the first quarter of 1998. The joint
venture in Peru experienced a significant decline in volume due to an economic
recession in that country.
Income Tax Provision/Benefit. The Company recorded an income tax provision of
$1.0 million on a pre-tax loss of $4.0 million for the first quarter of 1999
resulting in an effective rate that is not meaningful. This compares to an
income tax provision of $2.0 million on a pre-tax earnings from continuing
operations of $4.7 million for the first quarter of 1998 at an effective rate
of 43%. The rate is effected by limitations on the Company's ability to utilize
foreign tax credits and the nondeductibility of amortization expense associated
with the premium recorded in connection with the Georgetown acquisition.
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 $5.0 million for the first quarter of 1999 compared to net income
of $2.7 million for the first quarter of 1998.
Liquidity and Capital Resources
At March 31, 1999, the Company had total cash and cash equivalents of $8.9
million, a decrease of $1.8 million from December 31, 1998. Operating
activities provided $11.2 million of cash during the first quarter of 1999
composed of changes in operating assets and liabilities of $5.1 million and
non-cash depreciation and amortization of $7.7 million. The Company used $8.5
million in investing activities composed of capital improvements of $4.8
million and an investment in a joint venture of $3.8 million. Cash used in
financing activities was $4.1 million during the first quarter of 1999
comprised principally of repayments on the revolving credit line and repayments
of notes payable. 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 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.
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
available under the Revolving Credit Facility (as defined below), a revolving
credit facility at MEI and various credit facilities available at its
12
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international subsidiaries and joint ventures. See "Certain Relationships and
Related Transaction--Description of Indebtedness." 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, planned pricing
increases, including its cost reduction program and 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 March 31, 1999, the unused
availability under the Revolving Credit Facility was $46.6 million, and $10.0
million of letters of credit were outstanding.
Environmental and Tax Contingencies and Indemnification
Note 8 to the Company's Unaudited Consolidated Financial Statements is herein
incorporated by reference.
Year 2000
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 locations 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 they 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 second quarter of 1999 (with the exception of the implementation
of a new system in its steelmaking shops, which should be completed by the end
of the third quarter 1999).
Testing of individual systems is conducted 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 substantially complete for local
manufacturing, infrastructure, support and facility systems except as noted
above. This time frame will allow 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 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, with approximately 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 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.
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,
13
<PAGE> 14
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. 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.
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 imported into the U.S.
causing dramatic declines in selling prices industry-wide.
In March 1999, the Company and several of its competitors announced increases
in wire rod selling prices by $15 to $25 per ton. Additionally, a new bill,
which would impose quota limits on steel imports and enhance the steel import
monitoring system, was introduced in the U. S. Congress in March which, if
passed, could significantly relieve the industry's pressure from imports.
The Company 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
three months ended March 31, 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 8 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
March 31, 1999.
14
<PAGE> 15
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 5th of May 1999.
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
15
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