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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
----------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 1-9307
GUNDLE/SLT ENVIRONMENTAL, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 22-2731074
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
19103 Gundle Road Houston, Texas 77073
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (281) 443-8564
----------------
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 is
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at October 22, 2002
- ---------------------------- ----------------------------------------
Common stock, par value $.01 11,297,644
GUNDLE/SLT ENVIRONMENTAL, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2002 (Unaudited) and
December 31, 2001 3
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2002
and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002
and 2001 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements 6
ITEM 2:
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
ITEM 3:
Quantitative and Qualitative Disclosures About
Market Risk 18
ITEM 4:
Evaluation of Disclosure Controls and Procedures 18
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K 18
Signature 19
Certifications 20
2
GUNDLE/SLT ENVIRONMENTAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30 DECEMBER 31,
2002 2001
---------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 21,685 $ 16,163
ACCOUNTS RECEIVABLE, NET 82,427 45,418
CONTRACTS IN PROGRESS 5,723 1,977
INVENTORY 22,580 17,151
DEFERRED INCOME TAXES 9,550 4,006
PREPAID EXPENSES AND OTHER 1,526 1,609
--------------- -------------
TOTAL CURRENT ASSETS 143,491 86,324
PROPERTY, PLANT AND EQUIPMENT, NET 33,895 33,355
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 22,419 22,205
DEFERRED INCOME TAXES 4,253 -
OTHER ASSETS 5,648 3,727
--------------- -------------
$ 209,706 $ 145,611
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 46,963 $ 26,351
ADVANCE BILLINGS ON CONTRACTS
IN PROGRESS 2,338 1,139
SHORT-TERM DEBT - 5,154
CURRENT PORTION OF LONG-TERM DEBT 4,605 5,268
INCOME TAXES PAYABLE 965 391
--------------- -------------
TOTAL CURRENT LIABILITIES 54,871 38,303
LONG-TERM DEBT 18,248 15,379
DEFERRED INCOME TAXES 1,418 1,145
OTHER LIABILITIES 1,159 350
MINORITY INTEREST 2,133 -
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 PAR VALUE, 1,000,000 SHARES
AUTHORIZED, NO SHARES ISSUED OR OUTSTANDING - -
COMMON STOCK, $.01 PAR VALUE, 30,000,000
SHARES AUTHORIZED, 18,347,656 AND 18,109,923 SHARES
ISSUED 183 181
ADDITIONAL PAID-IN CAPITAL 70,454 69,380
RETAINED EARNINGS 99,279 60,293
ACCUMULATED OTHER COMPREHENSIVE INCOME (861) (2,242)
--------------- -------------
169,055 127,612
TREASURY STOCK AT COST, 7,066,262 and 7,066,262 SHARES (37,178) (37,178)
--------------- -------------
TOTAL STOCKHOLDERS' EQUITY 131,877 90,434
--------------- -------------
$ 209,706 $ 145,611
=============== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ------------------------
2002 2001 2002 2001
---------- --------- ---------- ----------
SALES AND OPERATING REVENUE $ 93,957 $ 57,340 $ 214,619 $ 127,903
COST OF PRODUCTS & SERVICES 72,730 46,397 167,787 107,020
---------- --------- ---------- ----------
GROSS PROFIT 21,227 10,943 46,832 20,883
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,182 5,922 22,375 18,184
AMORTIZATION OF GOODWILL - 333 - 994
NONRECURRING CHARGES-SERROT ACQUISITION 215 - 2,221 -
---------- --------- ---------- ----------
OPERATING INCOME 13,830 4,688 22,236 1,705
OTHER (INCOME) EXPENSES:
INTEREST EXPENSE 751 458 2,191 1,253
INTEREST INCOME (249) (108) (383) (374)
OTHER INCOME, NET (1,320) (359) (1,041) (530)
MINORITY INTEREST 53 - 339 -
---------- --------- ---------- ----------
INCOME BEFORE INCOME TAXES 14,595 4,697 21,130 1,356
PROVISION FOR INCOME TAX EXPENSE 5,708 1,932 8,453 529
---------- --------- ---------- ----------
NET INCOME BEFORE EXTRAORDINARY ITEMS 8,887 2,765 12,677 827
EXTRAORDINARY GAIN - SERROT ACQUISITION 4,125 - 28,424 -
EXTRAORDINARY LOSS - EXTINGUISHMENT OF DEBT (26) - (767) -
---------- --------- ---------- ----------
NET INCOME $ 12,986 $ 2,765 $ 40,334 $ 827
========== ========= ========== ==========
BASIC EARNINGS PER SHARE
NET INCOME BEFORE EXTRAORDINARY ITEMS 0.79 0.25 1.14 0.07
EXTRAORDINARY ITEMS 0.36 - 2.48 -
---------- --------- ---------- ----------
BASIC NET INCOME PER SHARE $ 1.15 $ 0.25 $ 3.62 $ 0.07
========== ========= ========= ==========
DILUTED EARNINGS PER SHARE
NET INCOME BEFORE EXTRAORDINARY ITEMS 0.76 0.25 1.09 0.07
EXTRAORDINARY ITEMS 0.35 - 2.39 -
---------- --------- --------- ----------
DILUTED NET INCOME PER SHARE $ 1.11 $ 0.25 $ 3.48 $ 0.07
========== ========= ========= ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,247 11,044 11,154 11,046
========== ========= ========== ==========
DILUTED 11,721 11,044 11,585 11,046
========== ========= ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
2002 2001
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 40,334 $ 827
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION 5,862 6,091
AMORTIZATION 525 1,009
DEFERRED INCOME TAXES 4,584 (59)
MINORITY INTEREST 339 -
GAIN ON SALE OF ASSETS (181) (172)
GAIN ON PURCHASE OF SERROT (28,424) -
GAIN ON SALE OF JOINT VENTURE INTEREST (51) -
DEFERRED GAIN ON HEDGE (290) -
INCREASE (DECREASE) IN CASH DUE TO
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (10,907) (1,628)
CONTRACTS IN PROGRESS (2,304) (4,035)
INVENTORY 1,692 (1,895)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 3,616 3,168
ADVANCE BILLINGS ON CONTRACTS IN PROGRESS 412 184
INCOME TAXES PAYABLE (1,035) (43)
OTHER 810 (940)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,982 2,507
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT (6,420) (9,143)
PROCEEDS FROM SALE OF EQUIPMENT 520 357
PROCEEDS FROM THE ACQUISITION OF SERROT, NET OF
CASH ACQUIRED 1,031 -
SALE OF JOINT VENTURE INTEREST, NET OF CASH SOLD (957) -
OTHER 182 (2)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (5,644) (8,788)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
REVOLVER (5,000) 10,000
PAYMENT OF FINANCING FEES (2,037) -
PROCEEDS FROM LONG-TERM DEBT 25,338 -
REPURCHASE OF COMMON STOCK - (74)
PROCEEDS FROM THE EXERCISE OF STOCK OPTIONS AND
PURCHASES UNDER THE EMPLOYEE STOCK PURCHASE PLAN 1,053 17
PAYMENT OF LONG-TERM DEBT (23,113) (5,452)
NET CHANGE IN SHORT-TERM DEBT - -
-------- --------
NET CASH PROVIDED BY(USED IN) FINANCING ACTIVITIES (3,759) 4,491
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (57) (1,145)
-------- --------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 5,522 (2,935)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 16,163 11,270
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 21,685 $ 8,335
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation -
General -
The accompanying unaudited, condensed consolidated financial statements
have been prepared by the Registrant ("Gundle/SLT Environmental, Inc." or the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission. These condensed consolidated financial statements reflect all normal
recurring adjustments which are, in the opinion of management, necessary for the
fair presentation of such financial statements for the periods indicated.
Certain information relating to the Company's organization and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States has been
condensed or omitted in this Form 10-Q pursuant to Rule 10-01 of Regulation S-X
for interim financial statements required to be filed with the Securities and
Exchange Commission. However, the Company believes that the disclosures herein
are adequate to make the information presented not misleading. The results for
the three and nine months ended September 30, 2002, are not necessarily
indicative of future operating results. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
The accounting policies followed by the Company in preparing interim
condensed consolidated financial statements are similar to those described in
the "Notes to Consolidated Financial Statements" in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
Organization -
Gundle/SLT Environmental, Inc., a Delaware corporation, through GSE
Lining Technology, Inc. and the Company's other operating subsidiaries, is
primarily engaged in the manufacture, sale and installation of geosynthetic
lining systems.
(2) Inventory -
Inventory is stated at the lower of cost or market. Cost, which includes
material, labor and overhead, is determined by the weighted average cost method,
which approximates the first in, first out cost method. Inventory consisted of
the following (000's):
September 30, December 31,
2002 2001
------------- ------------
6
Raw materials and supplies $ 7,677 $ 4,625
Finished goods 14,903 12,526
------- -------
$22,580 $17,151
======= =======
(3) Income Taxes -
The Company's provision for income taxes is recorded at the statutory
rates adjusted for the effect of any permanent differences. The Company has a
tax holiday in Thailand through 2003 and a 50% reduced tax rate for 2004 through
2008.
(4) Equity -
On September 18, 1998, the Company's board of directors adopted a stock
repurchase plan under which the Company was authorized to repurchase up to
1,000,000 shares of its outstanding common stock in open market transactions
depending on market conditions. This amount was increased to 3,000,000 as of
December 31, 2000. As of September 30, 2002, stockholders' equity included
1,380,357 shares repurchased under this program. All of these transactions were
funded with the Company's available cash. At September 30, 2002, the Company had
11,281,394 shares outstanding.
(5) Comprehensive Income -
During the third quarter of 2002 and 2001, other comprehensive income
(losses), representing foreign currency translation adjustments, amounted to
$(285,000) and $1,009,000, respectively. For the nine months ended September 30,
2002 and 2001, other comprehensive income (losses), amounted to $1,381,000 and
$(1,308,000) respectively.
(6) Goodwill -
In June 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets", effective for years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment tests in accordance with the statements.
The Company adopted SFAS No. 142 as of January 1, 2002. If GSE had not amortized
goodwill in the first nine months of 2001 the following pro forma results would
have occurred:
Three months ended Nine months ended
------------------ ------------------
September 30, 2001 September 30, 2001
------------------ ------------------
Net Income $2,958 $1,403
Basic Earnings Per Share $ .27 $ .13
Diluted Earnings Per Share $ .27 $ .13
7
During the second quarter 2002, the Company performed the initial testing
of impairment of goodwill on its reporting unit. The test was applied utilizing
the fair value of the reporting unit as of January 1, 2002, as determined based
on the reporting units discounted cash flow. There was no goodwill impairment in
the Company's one reporting unit.
(7) Business Combination
On February 4, 2002, the Company completed the purchase of all the
outstanding stock of Serrot International, Inc. (SII) from Waste Management
Holdings, Inc. (WMI) at a purchase cost of $12.0 million, which included
$338,000 of debt assumed. The total cost of the acquisition is expected to be
$15.8 million, which includes the purchase price and after tax costs associated
with severance and closing a SII plant. The Company recorded the transaction
using the purchase method of accounting resulting in the recognition of $28.4
million of negative goodwill representing the excess fair value of the assets
acquired over the purchase price after its allocation to SII's long-lived assets
net of their associated tax benefits. The negative goodwill was recognized as an
extraordinary gain for the nine months ended September 30, 2002.
In conjunction with the purchase, the Company established a pre-tax
liability of $6.4 million for estimated severance and other costs associated
with the involuntary termination of SII employees and the closing of a SII
plant. Through September 30, 2002, approximately $5.4 million of these costs
have been paid. The Company anticipates approximately $5.6 million of these
costs will be paid by the end of 2002.
Unaudited pro forma combined operating results of the Company and
SII assuming the merger was completed as of January 1, 2002 and 2001,
respectively, are summarized as follows:
Nine months ended September 30,
------------------------------
2002 2001
---- ----
Sales & Operating Revenue $223,302 $250,345
Net Income $ 10,752 $ 3,398
Basic Earnings Per Share $ .96 $ .31
Diluted Earnings Per Share $ .93 $ .31
The pro forma information includes adjustments for changes to interest
costs related to new financing obtained in conjunction with the acquisition and
decreased depreciation expense of acquired property and equipment as a result of
the allocation of negative goodwill to long-lived assets. The pro forma
information excludes an extraordinary gain of $28.4 million resulting from
excess negative goodwill. The pro forma information is not necessarily
indicative of the results of operations had the transaction been effected on the
assumed date or the results of operations for any future periods.
8
(8) Refinancing -
On February 4, 2002, the Company entered into a note agreement with one
lender in the amount of $25,000,000 and entered into a 3-year credit agreement
with Bank of America, N.A., as agent, to borrow up to $55,000,000 on a revolving
basis. Simultaneously the Company paid off its $20,000,000, 7.34% notes plus
$1,500,000 of make-whole costs with two lenders. The refinancing resulted in an
extraordinary loss of $767,000 net of taxes.
(9) New Accounting Pronouncements -
In July 2002, the FASB issued SFAS 146, Obligations Associated with
Disposal Activities, which is effective for disposal activities initiated after
December 15, 2002, with early application encouraged. SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 97-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity(including
Certain Costs Incurred in a Restructuring)." Under this statement, a liability
for a cost associated with an exit or disposal activity would be recognized and
measured as its fair value when it is incurred rather than at the date of
commitment to an exit plan. Under SFAS 146, severance pay would be recognized
over time rather than up front provided the benefit arrangement requires
employees to render future service beyond a "minimum retention period", which
would be based on the legal notification period, or if there is no such
requirement, 60 days, thereby allowing a liability to be recorded over the
disposal activities initiated after December 15, 2002. Management does not
expect adoption of this statement to have a material effect on the Company's
consolidated financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Quarter:
For the three months ended September 30, 2002, sales and operating
revenue was $93,957,000 compared with $57,340,000 for the same period last year.
U.S. sales and operating revenue was $61,026,000, 79% higher than for the same
period last year. U. S. units shipped were up 114% and those installed were up
87%. Foreign sales and operating revenue was $32,931,000, 42% higher than last
9
year. Foreign units shipped were up 52%. Foreign currency translation
increased 2002 foreign sales and operating revenue by approximately $2,100,000.
The primary reason for the increased sales and operating revenue and units
shipped and installed was the completion, on February 4, 2002, of the
acquisition of Serrot International, Inc.(SII).
Gross profit for the quarter was $21,227,000, or 94% higher than the
prior year at $10,943,000. Gross profit was increased by lower per unit cost of
fixed overhead resulting from additional units manufactured, shipped and
installed. Gross profit margin, as a percentage of sales and operating revenue,
increased to 22.6% from 19.1% last year. Margin, as a percentage of sales and
operating revenue, improved primarily due to increases in the utilization of
GSE's manufacturing and installation assets. Foreign currency translation
increased 2002 gross profit by approximately $400,000.
Selling, general and administrative (SG&A) expenses were $7,182,000
compared with $5,922,000 in the third quarter of 2001, a 21% increase. Most of
this increase was associated with the acquisition of SII. SG&A, as a percent of
sales, was 7.6% compared to 10.3% last year.
Non-Recurring costs of $215,000 include expenses the Company incurred to
relocate inventory and equipment from facilities acquired from SII, to its
locations in Houston, Texas, and Kingstree, South Carolina, certain legal and
professional costs, and an accrual for an internal bonus program that is payable
contingent upon the attainment of targeted synergy savings during 2002.
Interest expense of $751,000 was $293,000 higher than last year primarily
due to an increase in the interest rate resulting from the refinancing of our
long-term debt to accomplish the acquisition of SII and increased amortization
of debt issuance costs of $165,000. Average debt outstanding during the quarter
was $8,079,000 lower than last year.
Other income, net increased $961,000 over last year. Foreign exchange was
$1,020,000 more favorable than last year primarily due to some Euro receivables
in the United States partially offset by fees for unused line of credit.
The quarterly provision for income taxes was $5,708,000 compared with
$1,932,000 in the same period last year. The year-to-date tax provision is
determined at the statutory rates adjusted for certain permanent differences on
an entity-by-entity, year-to-date basis. During the third quarter it was
determined that the effective rate for the consolidated entity for the
year-to-date 2002 will be 40% of taxable income. This rate compares to 42% for
the year 2001. The rate decrease results from more foreign profits taxed at
lower rates. The Company has a tax holiday in Thailand through 2003 and a 50%
reduced tax rate for 2004 through 2008. Income taxes for the first six months of
2002 were adjusted in the third quarter in the amount of $105,000.
10
The extraordinary gain from the SII acquisition increased by $4,125,000
as a result of receiving cash from the sale of certain non-strategic assets
acquired from SII that had been considered long-term assets at the time of the
acquisition and, accordingly, whose basis had been adjusted to zero by the
allocation of negative goodwill under the purchase method of accounting. See
additional discussion of extraordinary gain on page 13.
The extraordinary loss from extinguishment of debt was adjusted for the
changes in the effective income tax rate outlined above.
Year-to-date:
For the nine months ended September 30, 2002, sales and operating revenue
was $214,619,000 compared with $127,903,000 for the same period last year. U.S.
sales and operating revenue was $130,146,000, 92% higher than for the same
period last year. Units shipped were up 102% and those installed were up 124%.
Foreign sales and operating revenue was $84,473,000, 40% higher than last year.
Foreign units shipped were up 46% and those installed were up 2%. Foreign
currency translation increased 2002 foreign sales and operating revenue by
approximately $2,600,000. The primary reason for the increased sales and
operating revenue and units shipped and installed was the completion, on
February 4, 2002, of the acquisition of SII.
Gross profit for the nine months was $46,832,000, or 124% higher than the
prior year at $20,883,000. Gross profit was increased by lower per unit cost of
fixed overhead resulting from the additional units manufactured, shipped and
installed. Gross profit margin, as a percentage of sales and operating revenue,
increased to 21.8% from 16.3% last year. Margin as a percentage of sales and
operating revenue improved primarily due to increases in the utilization of
manufacturing and installation assets and increased spread between lower resin
costs purchased earlier and selling price of finished products. Foreign currency
translation increased 2002 gross profit by approximately $500,000.
SG&A expenses were $22,375,000 compared with $18,184,000 in the first
nine months of 2001, a 23% increase. Most of this increase was associated with
the acquisition of SII. SG&A, as a percentage of sales, was 10.4% compared to
14.2% last year.
Non-recurring costs include expenses the Company incurred to relocate
inventory and equipment from facilities acquired from SII, to its locations in
Houston, Texas, and Kingstree, South Carolina,
11
certain legal and professional costs, and an accrual for an internal bonus
program that is payable contingent upon the attainment of targeted synergy
savings during 2002. For the nine months the Company incurred $985,000 to
relocate equipment, non-recurring legal and professional costs of $336,000 and
$900,000 for the synergy bonus program.
Interest expense was $938,000 higher than last year primarily due to an
increase in the interest rate resulting from the refinancing of our long-term
debt to accomplish the acquisition of SII and increased amortization of debt
issuance cost of $440,000. Last year $164,000 of interest was capitalized.
Average debt outstanding during the first nine months was $4,529,000 lower than
last year.
Other income, net, was $511,000 higher than last year. Foreign exchange
gain was favorable by $1,029,000 from Euro receivables in the United States
partially offset by unused line of credit fees related to the Company's new
debt, and a reduction in the Company's Egyptian joint venture income.
The provision for income taxes was $8,453,000 compared with $529,000 in
the same period last year. The year-to-date tax provision is determined at the
statutory rates adjusted for certain permanent differences on an
entity-by-entity, year-to-date basis. During the third quarter, it was
determined that the effective rate for the consolidated entity for the
year-to-date 2002 will be 40% of taxable income. This rate compares to 42% for
the year 2001. The rate decrease results from more foreign profits taxed at
lower rates. The Company has a tax holiday in Thailand through 2003 and a 50%
reduced tax rate for 2004 through 2008.
The extraordinary gain from the SII acquisition of $28,424,000 represents
the fair value of assets acquired from SII of $55,086,000 reduced by the
purchase price of $11,969,000, and further reduced by $14,693,000 allocated to
long-lived assets net of their associated tax benefits under the purchase method
of accounting.
The extraordinary loss for extinguishment of debt results from
refinancing the Company's long-term notes on February 4, 2002, to acquire SII.
The Company paid $900,000 after-tax make-whole cost to retire its $20,000,000
balance of 7.34% notes with two lenders, offset by $133,000 after-tax deferred
interest income from closing out a prior cross-currency swap and deferred debt
issue cost related to this financing.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
The Company's primary sources of liquidity in the first nine months of
2002 were internally generated cash from operations, its credit line, and a
refinancing of its long-term notes. Primary uses of cash were capital
expenditures and the acquisition of SII. Cash provided by
12
operating activities in the first nine months was $14,982,000. Capital
expenditures totaled $6,420,000. The acquisition of SII increased the Company's
cash by $1,031,000. As of September 30, 2002, the Company had working capital
$88,620,000 of which $21,685,000 was cash and cash equivalent investments. The
Company's capital structure consisted of $22,853,000 in debt and $131,877,000 in
stockholders' equity at September 30, 2002.
At September 30, 2002, the Company had credit facilities with three German
banks in the amount of EUR 7,650,000. These facilities are in the process of
being renewed, and bear interest at various market rates. These credit
facilities are used primarily to guarantee the performance of European
installation contracts and temporary working capital requirements. At September
30, 2002, the Company had EUR 3,544,000 available under these credit facilities
with EUR 4,106,000 of bank guarantees outstanding and no current borrowings.
On February 4, 2002, the Company entered into a note agreement with a
lender in the amount of $25,000,000. This 3-year term facility is secured by the
Company's Houston, TX and Kingstree, SC, real properties and all of the
Company's equipment at these locations. The promissory note requires monthly
payments of approximately $520,000 including interest at the rate of 9.22% and
matures on February 5, 2005 with a balloon payment equal to the unpaid principal
balance plus accrued and unpaid interest. The terms of the note place various
restrictions on the Company's ability to pay dividends or make certain other
payments, incur additional debt, consolidate or merge into another corporation
or sell assets and make capital expenditures. The note also requires the Company
to maintain certain financial ratios and specified levels of consolidated net
worth.
On February 4, 2002, the Company entered into a 3-year credit agreement
with Bank of America, N.A., as agent, to borrow up to $55,000,000 on a revolving
basis. The amount of borrowings allowed under the credit agreement is determined
by the amount of eligible receivable and inventory amounts that make up the
borrowing base. Loans made pursuant to the credit agreement bear interest, at
the Company's option, at the bank's prime rate or the reserve adjusted LIBOR
plus an applicable margin based on the ratio, from time-to-time, of the
Company's EBITDA (as defined in the credit agreement) to certain "fixed
charges", including principal paid on funded debts, cash interest expense,
dividends, stock repurchases and certain other distributions made, cash amount
of taxes paid and net capital expenditures made from time-to-time. The
applicable margin for prime rate loans may vary between 0% and .25% per annum,
and the applicable margin for LIBOR based loans may vary between 2% and 2.75%
per annum. Fees will be payable from time-to-time with respect to letters of
credit issued pursuant to the credit agreement at a rate equal to the margin
payable with respect to LIBOR based revolving loans. An annual commitment fee of
3/8% is payable on any unused portion of the facility. The terms of the credit
agreement place various restrictions on the Company's ability to pay dividends
or make certain other payments, incur additional debt, consolidate or merge into
another corporation or sell assets and to make capital expenditures. The credit
agreement also requires the Company to maintain certain financial ratios and
specified levels of consolidated net worth. As of
13
September 30, 2002, the Company had no borrowings outstanding under this
facility. On September 30, 2002, the Company's available borrowing base under
the line of credit was approximately $55,000,000 of which the Company could have
borrowed approximately $37,000,000.
Using proceeds from the aforementioned note and credit agreements, the
Company paid in full $20,000,000 of 7.34% long term debt and $15,165,400 for the
purchase of all of the outstanding stock of SII. Based on SII's final closing
balance sheet, GSE received a purchase price adjustment of $3,534,000 from Waste
Management Holdings, Inc. on June 13, 2002. The Company also paid approximately
$4,000,000 of closing costs related to the acquisition. To complete the
acquisition the Company used $8,700,000 of its cash and borrowed $5,500,000
under its line of credit, which was subsequently repaid.
The Company estimates it will cost $9,900,000, before tax, for severance,
and relocating personnel, inventory and equipment during fiscal year 2002
related to the acquisition of SII and the closing of a manufacturing facility in
Calgary, Canada, of which approximately $7,659,000 occurred in the first nine
months. Management believes significant savings will result from plant
consolidations, sales and marketing consolidations, and administrative cost
savings on a combined basis.
The Company expects to rely upon internally generated cash flow and its
line of credit to maintain liquidity in the foreseeable future, as cash flow
from operations for the year is expected to be positive and adequate to fulfill
cash requirements in 2002 and 2003. The Company will use its line of credit for
seasonal working capital requirements and to maintain liquidity for short-term
imbalances. The Company's operating results and liquidity are normally reduced
in the first three months of the year as both product deliveries and
installations are at their lowest levels due to the inclement weather
experienced in the Northern Hemisphere.
Our long-term obligations consist primarily of the $22,853,000 long-term
note and are payable over the next two and one-half years.
Other
The Company's operations are subject to seasonal fluctuation with the
greatest volume of product deliveries and installations typically occurring in
the summer and fall months. In particular, the Company's operating results are
most impacted in the first quarter as both product deliveries and installations
are at their lowest levels due to the inclement weather experienced in the
Northern Hemisphere.
The Company's foreign subsidiaries routinely accept contracts in
currencies different than their functional currency. The Company recognizes that
such practices are subject to the risk of foreign currency fluctuations not
present in U.S. operations. Foreign exchange gains and losses to date have not
been material to the Company's operations as a whole.
14
Pricing for the Company's products and services is primarily driven by
worldwide manufacturing capacity in the industry, and by raw material costs. The
Company's primary raw materials, polyethylene and polypropylene, are
occasionally in short supply and subject to substantial price fluctuation in
response to market demand. Any increase in the industry's worldwide
manufacturing capacity, interruption in raw material supply or electricity
supply, or abrupt raw material price increases could have an adverse effect upon
the Company's operations and financial performance. Inflation has not had a
significant impact on the Company's operations.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, management evaluates
estimates, including those related to bad debts, materials and supplies
obsolescence, investments, intangible assets and goodwill income taxes,
financing operations, workers' insurance, pensions and other post-retirement and
employment benefits and contingent liabilities. Estimates are based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from the
estimates used in preparing the consolidated financial statements contained
herein.
The Company believes the following are its most critical accounting
policies. These policies require significant judgmental estimates used in the
preparation of its consolidated financial statements, based on historical
experience and assumptions related to certain factors including competitive
market factors, worldwide manufacturing capacity in the industry, general
economic conditions around the world and governmental regulation and
supervision.
Allowance for doubtful accounts - The Company closely monitors its
customers' accounts on a regular basis, including an analysis of past due
accounts. The Company provides for potential doubtful accounts as
15
a percentage of sales and operating revenues based on historical experience and
past due accounts.
Warranty Reserve - The Company's products carry specified limited
warranties as to quality and workmanship. The Company establishes a reserve for
potential warranty claims based on history of claims experience and claims under
consideration.
Revenue recognition and job loss accrual - Revenues from installation
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated cost for each contract. The
Company's installation projects are reviewed for profitability on a monthly
basis. When it has been determined that a project will generate a loss for the
Company, the Company estimates that loss and books a reserve for the total
expected loss on the job.
Goodwill impairment - The Company reviews the carrying value of goodwill
when facts and circumstances suggest an other than temporary decline in the
recorded value. Effective January 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangibles. As a result of the statement the Company will no
longer amortize goodwill. The Company performed an initial test of impairment
and assessed goodwill for impairment during the second quarter of 2002. There
was no goodwill impairment in the Company's one reporting unit.
* * *
Forward-looking information:
This Form 10-Q contains certain forward-looking statements as such is
defined in the Private Securities Litigation Reform Act of 1995, and information
relating to the Company and its subsidiaries that are based on beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words,
"anticipate", "believe", "estimate", "expect", "intend" and words of similar
import, as they relate to the Company or its subsidiaries or Company management,
are intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitations, competitive market factors, world-wide
manufacturing capacity in the industry, general economic conditions around the
world, raw material pricing and supply, governmental regulation and supervision,
seasonality, distribution networks, and other factors
16
described herein. Based upon changing conditions, should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those described herein
as anticipated, believed, estimated, expected or intended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
No material change since December 31, 2001.
ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of September 30, 2002, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer, of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of September 30, 2002. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to September 30, 2002.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No.
10-K -Employment Agreement dated September 18, 2002, between Samir T. Badawi
and the Company
17
99.1 -Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of Samir T. Badawi
99.2 -Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of Roger J. Klatt
(b) Reports on From 8-K
None
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GUNDLE/SLT ENVIRONMENTAL, INC.
DATE October 24, 2002 BY /s/ Roger J. Klatt
---------------------- ----------------------------
ROGER J. KLATT,
EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
19
CERTIFICATIONS
I Samir T. Badawi, certify that:
1. I have reviewed this quarterly report on Form 10Q of Gundle/SLT
Environmental, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or person's
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
20
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date October 24, 2002
-----------------
/s/ Samir T. Badawi
--------------------
Samir T. Badawi
President &
Chief Executive Officer
21
CERTIFICATIONS
I Roger J. Klatt, certify that:
1. I have reviewed this quarterly report on Form 10Q of Gundle/SLT
Environmental, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
person's performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
22
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date October 24, 2002
-----------------
/s/ Roger J. Klatt
--------------------
Roger J. Klatt
Chief Financial Officer
23