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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 June 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-43089
THE GSI GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 37-0856587
(State or other jurisdiction (I.R.S. Employer
Of incorporation or organization) Identification No.)
1004 E. ILLINOIS STREET, ASSUMPTION, ILLINOIS 62510
(Address of principal executive offices) (Zip Code)
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 [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. Common stock, par
value $0.01 per share, 1,775,000 shares outstanding as of August 9, 2002.
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1
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statement 6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 20
* No response to this item is included herein for the reason that it is
inapplicable.
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
JUNE 28, DECEMBER 31,
ASSETS 2002 2001
- -------------------------------------------------------------------------- ---------- --------------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 2,550 $ 2,828
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . 40,628 28,887
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,290 55,294
Prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,003 2,245
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,347 4,816
---------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 123,818 94,070
---------- --------------
Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 59
---------- --------------
Property, Plant and Equipment, net . . . . . . . . . . . . . . . . . . . . 40,642 42,116
---------- --------------
Other Assets:
Goodwill and other intangible assets, net. . . . . . . . . . . . . . . . 13,995 15,061
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,887 3,435
---------- --------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . 16,882 18,496
---------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 181,342 $ 154,741
========== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------------------
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,550 $ 12,247
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,108 1,962
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 10,195 9,429
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,703 6,204
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . 2,785 2,707
---------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 48,341 32,549
---------- --------------
Long-Term Debt, less current maturities. . . . . . . . . . . . . . . . . . 150,116 136,211
---------- --------------
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 861 582
---------- --------------
Commitments and Contingencies
Stockholders' Deficit:
Common stock, $.01 par value, voting (authorized 6,900,000 shares;
issued 6,633,652 shares; outstanding 1,575,000 shares) . . . . . . . . 16 16
Common stock, $.01 par value, nonvoting (authorized 1,100,000 shares;
issued 1,059,316 shares; outstanding 200,000 shares) . . . . . . . . . 2 2
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,006 3,006
Accumulated other comprehensive loss (cumulative currency translation
adjustment) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,352) (10,216)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,311 19,550
Treasury stock, at cost, voting (5,058,652 shares) . . . . . . . . . . . (26,950) (26,950)
Treasury stock, at cost, nonvoting (859,316 shares). . . . . . . . . . . (9) (9)
---------- --------------
Total stockholders' deficit. . . . . . . . . . . . . . . . . . . . . (17,976) (14,601)
---------- --------------
Total liabilities and stockholders' deficit. . . . . . . . . . . . . $ 181,342 $ 154,741
========== ==============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE FISCAL MONTHS ENDED SIX FISCAL MONTHS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Sales $ 65,901 $ 65,498 $ 118,829 $ 110,467
Cost of sales 51,043 50,344 92,293 84,059
----------- ----------- ----------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . . 14,858 15,154 26,536 26,408
Selling, general and administrative expenses. . . . . . 9,110 9,690 17,922 19,505
Amortization expense. . . . . . . . . . . . . . . . . . 311 473 623 911
----------- ----------- ----------- -----------
Total operating expenses. . . . . . . . . . . . . . . 9,421 10,163 18,545 20,416
Operating income. . . . . . . . . . . . . . . . . . . . 5,437 4,991 7,991 5,992
Other income (expense):
Interest expense. . . . . . . . . . . . . . . . . . . (3,330) (3,672) (6,484) (7,351)
Other, net. . . . . . . . . . . . . . . . . . . . . . (376) (88) (702) 31
----------- ----------- ----------- -----------
Income (loss) before income tax provision (benefit) 1,731 1,231 805 (1,328)
----------- ----------- ----------- -----------
Income tax expense (benefit). . . . . . . . . . . . . . 126 98 135 (91)
----------- ----------- ----------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . $ 1,605 $ 1,133 $ 670 $ (1,237)
----------- ----------- ----------- -----------
Basic and diluted income (loss) per share . . . . . . . $ 0.90 $ 0.64 $ 0.38 $ (0.70)
----------- ----------- ----------- -----------
Weighted average common shares outstanding. . . . . . . 1,775,000 1,775,000 1,775,000 1,775,000
=========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX FISCAL MONTHS ENDED
-----------------------
JUNE 28, JUNE 29,
2002 2001
---------- ----------
Cash Flows From Operating Activities:
Depreciation and amortization expense . . . . . . . . . 3,694 4,356
Other . . . . . . . . . . . . . . . . . . . . . . . . . (12,525) (12,165)
---------- ----------
Net cash flows used in operating activities . . (8,831) (7,809)
---------- ----------
Cash Flows From Investing Activities:
Capital expenditures. . . . . . . . . . . . . . . . . . (3,707) (3,363)
Proceeds from sale of fixed assets. . . . . . . . . . . 1,253 429
Other . . . . . . . . . . . . . . . . . . . . . . . . . 152 (561)
---------- ----------
Net cash flows used in investing activities . . (2,302) (3,495)
---------- ----------
Cash Flows From Financing Activities:
Proceeds from shareholder loan. . . . . . . . . . . . 418 559
Payments on shareholder loan. . . . . . . . . . . . . (291) (1,173)
Payments on long-term debt. . . . . . . . . . . . . . . (3,127) (2,298)
Net borrowings under line-of-credit agreement . . . . . 16,900 16,700
Dividends . . . . . . . . . . . . . . . . . . . . . . (1,909) (1,159)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (915) (519)
---------- ----------
Net cash flows provided by financing activities 11,076 12,110
---------- ----------
Effect of Exchange Rate Changes on Cash . . . . . . . . . (221) (262)
Increase (Decrease) In Cash and Cash Equivalents. . . . . $ (278) $ 544
Cash and Cash Equivalents, beginning of period. . . . . . 2,828 2,679
---------- ----------
Cash and Cash Equivalents, end of period. . . . . . . . . $ 2,550 $ 3,223
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared by The GSI Group, Inc.
(the "Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information not misleading. These
financial statements should be read in conjunction with the financial statements
and related notes contained in the Company's December 31, 2001 Form 10-K as
filed with the Securities and Exchange Commission. Other than as indicated
herein, there have been no significant changes from the data presented in said
10-K.
In the opinion of management, the financial statements contain all
adjustments necessary to present fairly the financial position of the Company as
of June 28, 2002 and the results of operations for the six months ended June 28,
2002 and cash flows for the six months ended June 28, 2002. Those adjustments
consist only of normal recurring adjustments. Certain prior year amounts have
been reclassified to be consistent with the current year presentation.
The condensed consolidated balance sheet of the Company as of December 31,
2001 has been derived from the audited consolidated balance sheet of the Company
as of that date.
The results of operations for the six-month period ended June 28, 2002 are
not necessarily indicative of the operating results for the full year.
2. COMPREHENSIVE LOSS
The components of comprehensive loss for the periods presented are as
follows (in thousands):
June 28, June 29,
2002 2001
Net income (loss) . . . . . . . . . . . . . $ 670 $ (1,237)
Cumulative currency translation adjustment. (2,136) (1,761)
Comprehensive loss. . . . . . . . . . . . $ (1,466) $ (2,998)
========== ==========
3. DETAIL OF CERTAIN ASSETS
JUNE 28, DECEMBER 31,
2002 2001
--------- -------------
(IN THOUSANDS)
Inventories
Raw materials $ 20,555 $ 13,341
Work-in-process 14,795 18,322
Finished goods 37,940 23,631
--------- -------------
Total $ 73,290 $ 55,294
========= =============
6
4. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $5.9 million and $6.8 million in interest
during the six months ended June 28, 2002 and June 29, 2001, respectively. The
Company paid $0.0 million and $0.1 million income taxes during the first six
months of 2002 and 2001.
5. LONG-TERM DEBT
The indenture governing the Company's senior subordinated notes provides
for certain restrictive covenants. The more significant of the covenants
restrict the ability of the Company to dispose of assets, incur additional
indebtedness, pay dividends or make distributions and other payments affecting
subsidiaries. The Company was in compliance with the covenants under the
indenture as of June 28, 2002.
The Credit Facility with LaSalle Bank National Association requires the
Company to maintain certain financial covenants. The Company was in compliance
with the covenants under the Credit Facility as of June 28, 2002. The Credit
Facility provides for a $5.0 million borrowing base over-advance which expires
on September 30, 2002 and bears an interest rate of LIBOR plus 3.5%.
6. COMMITMENTS AND CONTINGENCIES
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain drying and handling equipment in the
summer and fall in conjunction with the harvesting season, and swine and poultry
producers purchasing equipment during prime construction periods in the spring,
summer and fall. The Company's sales and net income have historically been
lower during the first and fourth fiscal quarters as compared to the second and
third quarters.
The Company has a contract with the Syrian government and one with the
Yemen Company for Industrial Development to manufacture and supervise the
assembly of grain handling systems. Other current assets and other assets
include $2.5 million of retainage withheld until completion of the projects and
the meeting of certain performance criteria. These receivables are secured by
letters of credit totaling $1.9 million and are expected to be collected through
the year 2002.
The Company has an operating lease agreement that requires the Company to
maintain a certain senior debt to EBITDA ratio, tangible net worth and certain
levels of capital expenditures and EBITDA. The Company was in compliance with
these covenants under the operating lease agreement as of June 28, 2002.
Certain lease agreements are collateralized by a letter of credit of $2.0
million that expires on October 15, 2002.
7. BUSINESS SEGMENT
The Company has no separately reportable segments in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosure About
Segments of an Enterprise and Related Information." Under the enterprise wide
disclosure requirements of SFAS 131, the Company reports sales by each product
line. Amounts for the first quarters of 2002 and 2001 are as shown in the table
below (in thousands).
JUNE 28, JUNE 29,
2002 2001
--------- ---------
Grain product line . $ 65,288 $ 62,587
Swine product line . 26,076 23,192
Poultry product line 27,465 24,688
--------- ---------
Sales . . . . . $ 118,829 $ 110,467
========= =========
For the first six months of 2002 and 2001, sales in Brazil were $10.5
million and $7.5 million, respectively. Long-lived assets in Brazil were $2.6
million at June 28, 2002.
7
8. CURRENT ACCOUNTING ISSUES
SFAS No. 142 "Goodwill and Other Intangible Assets", was effective for the
Company for the fiscal quarter beginning January 1, 2002. The Company adopted
SFAS No. 142 and performed the initial impairment assessment as of January 1,
2002. There was no impairment of goodwill as of June 28, 2002.
9. GUARANTOR SUBSIDIARIES
The Company's payment obligation under the senior subordinated notes are
fully and unconditionally guaranteed on a joint and several basis by David
Manufacturing Company, GSI/Cumberland de Mexico S. de R.L. de C.V.,
GSI/Cumberland BV, GSI/Cumberland SA (Pty) Ltd., GSI Group (Asia) Sdn. Bhd.,
Agromarau Industria e Comercio Ltda., GSI Agricultural Equipment Shanghai Co.
Ltd., and The GSI Group (Canada) Inc. (the "Guarantor Subsidiaries"). The
Guarantor Subsidiaries are direct wholly owned subsidiaries of the Company. The
obligations of the Guarantor Subsidiaries under their guarantees are
subordinated to such subsidiaries' obligations under their guarantee of the
Credit Facility.
Presented below is unaudited condensed consolidating financial information
for The GSI Group, Inc. ("Parent Company") and the Guarantor Subsidiaries. In
the Company's opinion, separate financial statements and other disclosures
concerning the Guarantor Subsidiaries would not provide additional information
that is material to investors.
Investments in subsidiaries are accounted for by the Parent Company using
the equity method of accounting. Earnings of subsidiaries are, therefore,
reflected in the Parent Company's investments in and advances to/from
subsidiaries' accounts and earnings. The elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions.
8
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 28, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 100 $ 2,450 $ -- $ 2,550
Accounts receivable, net. . . . . . . . . . . . 38,178 9,859 (7,409) 40,628
Inventories, net. . . . . . . . . . . . . . . . 55,070 18,421 (201) 73,290
Other current assets. . . . . . . . . . . . . . 5,415 1,935 -- 7,350
--------- -------------- -------------- --------------
Total current assets. . . . . . . . . . . . . . 98,763 32,665 (7,610) 123,818
Property, plant and equipment, net . . . . . . . . . 33,657 6,985 -- 40,642
Goodwill and other intangible assets, net. . . . . . 2,980 11,015 -- 13,995
Investment in and advances to/from subsidiaries. . . 45,437 (6,005) (39,432) --
Other long-term assets . . . . . . . . . . . . . . . 2,820 67 -- 2,887
--------- -------------- -------------- --------------
Total assets. . . . . . . . . . . . . . . . . . $183,657 $ 44,727 $ (47,042) $ 181,342
========= ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt . . . . . . . $ 2,761 $ 24 $ -- $ 2,785
Accounts payable. . . . . . . . . . . . . . . . 23,698 10,261 (7,409) 26,550
Accrued liabilities . . . . . . . . . . . . . . 16,667 2,350 (11) 19,006
--------- -------------- -------------- --------------
Total current liabilities . . . . . . . . . . . 43,126 12,635 (7,420) 48,341
Long-term debt . . . . . . . . . . . . . . . . . . . 146,329 12,386 (8,599) 150,116
Other long-term liabilities. . . . . . . . . . . . . (174) 1,035 -- 861
--------- -------------- -------------- --------------
Total liabilities . . . . . . . . . . . . . . . 189,281 26,056 (16,019) 199,318
Stockholders' equity (deficit):
Common stock. . . . . . . . . . . . . . . . . . 18 23,539 (23,539) 18
Additional paid-in capital. . . . . . . . . . . 3,006 305 (305) 3,006
Accumulated other comprehensive loss. . . . . . -- (12,352) -- (12,352)
Retained earnings (deficit) . . . . . . . . . . 18,311 7,179 (7,179) 18,311
Treasury stock, at cost . . . . . . . . . . . . (26,959) -- -- (26,959)
--------- -------------- -------------- --------------
Total stockholders' equity (deficit). . . . . . (5,624) 18,671 (31,023) (17,976)
--------- -------------- -------------- --------------
Total liabilities and stockholders' equity (deficit) $183,657 $ 44,727 $ (47,042) $ 181,342
========= ============== ============== ==============
9
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 29, 2001
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 27 $ 3,196 $ -- $ 3,223
Accounts receivable, net. . . . . . . . . . . . 29,434 11,442 (5,893) 34,983
Inventories, net. . . . . . . . . . . . . . . . 45,410 17,249 137 62,796
Other current assets. . . . . . . . . . . . . . 2,383 1,302 -- 3,685
--------- -------------- -------------- --------------
Total current assets. . . . . . . . . . . . . . 77,254 33,189 (5,756) 104,687
Property, plant and equipment, net . . . . . . . . . 35,429 9,994 -- 45,423
Goodwill and other intangible assets, net. . . . . . 2,987 12,921 -- 15,908
Investment in and advances to/from subsidiaries. . . 47,368 (7,744) (39,624) --
Other long-term assets . . . . . . . . . . . . . . . 5,967 72 -- 6,039
--------- -------------- -------------- --------------
Total assets. . . . . . . . . . . . . . . . . . $169,005 $ 48,432 $ (45,380) $ 172,057
========= ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt . . . . . . . $ 3,173 $ 1,068 $ -- $ 4,241
Accounts payable. . . . . . . . . . . . . . . . 14,291 8,080 (5,893) 16,478
Accrued liabilities . . . . . . . . . . . . . . 15,859 3,945 -- 19,804
--------- -------------- -------------- --------------
Total current liabilities . . . . . . . . . . . 33,323 13,093 (5,893) 40,523
Long-term debt . . . . . . . . . . . . . . . . . . . 142,299 13,097 (9,031) 146,365
Other long-term liabilities. . . . . . . . . . . . . 142 1,652 -- 1,794
--------- -------------- -------------- --------------
Total liabilities . . . . . . . . . . . . . . . 175,764 27,842 (14,924) 188,682
Stockholders' equity (deficit):
Common stock. . . . . . . . . . . . . . . . . . 18 23,526 (23,526) 18
Additional paid-in capital. . . . . . . . . . . 3,006 305 (305) 3,006
Accumulated other comprehensive loss. . . . . . -- (9,866) -- (9,866)
Retained earnings (deficit) . . . . . . . . . . 17,176 6,625 (6,625) 17,176
Treasury stock, at cost . . . . . . . . . . . . (26,959) -- -- (26,959)
--------- -------------- -------------- --------------
Total stockholders' equity (deficit). . . . . . (6,759) 20,590 (30,456) (16,625)
--------- -------------- -------------- --------------
Total liabilities and stockholders' equity (deficit) $169,005 $ 48,432 $ (45,380) $ 172,057
========= ============== ============== ==============
10
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE FISCAL MONTHS ENDED JUNE 28, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,329 $ 13,193 $ (8,621) $ 65,901
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 50,702 9,395 (9,054) 51,043
--------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . . . . . 10,627 3,798 433 14,858
Selling, general and administrative expenses. . . . . . . . 6,419 3,002 -- 9,421
--------- -------------- -------------- --------------
Operating income . . . . . . . . . . . . . . . . . . . 4,208 796 433 5,437
Interest expense. . . . . . . . . . . . . . . . . . . . . . (3,312) (18) -- (3,330)
Other expense . . . . . . . . . . . . . . . . . . . . . . . (104) (272) -- (376)
--------- -------------- -------------- --------------
Income before income taxes. . . . . . . . . . . . . . . . . 792 506 433 1,731
Provision (benefit) for income taxes. . . . . . . . . . . . (23) 149 -- 126
--------- -------------- -------------- --------------
Income before equity in income of consolidated subsidiaries 815 357 433 1,605
Equity in income of consolidated subsidiaries . . . . . . . 357 -- (357) --
--------- -------------- -------------- --------------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,172 $ 357 $ 76 $ 1,605
========= ============== ============== ==============
11
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE FISCAL MONTHS ENDED JUNE 29, 2001
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,858 $ 16,157 $ (5,517) $ 65,498
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 43,326 12,756 (5,738) 50,344
--------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . . . . . 11,532 3,401 221 15,154
Selling, general and administrative expenses. . . . . . . . 6,898 3,265 -- 10,163
--------- -------------- -------------- --------------
Operating income . . . . . . . . . . . . . . . . . . . 4,634 136 221 4,991
Interest expense. . . . . . . . . . . . . . . . . . . . . . (3,562) (110) -- (3,672)
Other expense . . . . . . . . . . . . . . . . . . . . . . . (164) 76 -- (88)
--------- -------------- -------------- --------------
Income before income taxes. . . . . . . . . . . . . . . . . 908 102 221 1,231
Provision (benefit) for income taxes. . . . . . . . . . . . (1) 99 -- 98
--------- -------------- -------------- --------------
Income before equity in income of consolidated subsidiaries 909 3 221 1,133
Equity in income of consolidated subsidiaries . . . . . . . 3 -- (3) --
--------- -------------- -------------- --------------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 912 $ 3 $ 218 $ 1,133
========= ============== ============== ==============
12
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX FISCAL MONTHS ENDED JUNE 28, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,443 $ 25,367 $ (14,981) $ 118,829
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 89,021 18,383 (15,111) 92,293
--------- -------------- -------------- --------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . 19,422 6,984 130 26,536
Selling, general and administrative expenses . . . . . . . . 12,812 5,733 -- 18,545
--------- -------------- -------------- --------------
Operating income. . . . . . . . . . . . . . . . . . . . 6,610 1,251 130 7,991
Interest expense . . . . . . . . . . . . . . . . . . . . . . (6,450) (34) -- (6,484)
Other expense. . . . . . . . . . . . . . . . . . . . . . . . (244) (458) -- (702)
--------- -------------- -------------- --------------
Income (loss) before income taxes. . . . . . . . . . . . . . (84) 759 130 805
Provision (benefit) for income taxes . . . . . . . . . . . . (17) 152 -- 135
--------- -------------- -------------- --------------
Income before equity in income of consolidated subsidiaries. (67) 607 130 670
Equity in income of consolidated subsidiaries. . . . . . . . 607 -- (607) --
--------- -------------- -------------- --------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ 540 $ 607 $ (477) $ 670
========= ============== ============== ==============
13
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX FISCAL MONTHS ENDED JUNE 29, 2001
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,079 $ 27,986 $ (9,598) $ 110,467
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,241 21,687 (9,869) 84,059
--------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 19,838 6,299 271 26,408
Selling, general and administrative expenses. . . . . . . . . . . . 13,762 6,654 -- 20,416
--------- -------------- -------------- --------------
Operating income (loss). . . . . . . . . . . . . . . . . . . . 6,076 (355) 271 5,992
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . (7,131) (220) -- (7,351)
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . (131) 162 -- 31
--------- -------------- -------------- --------------
(Loss) income before income taxes . . . . . . . . . . . . . . . . . (1,186) (413) 271 (1,328)
Provision (benefit) for income taxes. . . . . . . . . . . . . . . . 27 (118) -- (91)
--------- -------------- -------------- --------------
(Loss) income before equity in income of consolidated subsidiaries. (1,213) (295) 271 (1,237)
Equity in income of consolidated subsidiaries . . . . . . . . . . . (295) -- 295 --
--------- -------------- -------------- --------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,508) $ (295) $ 566 $ (1,237)
========= ============== ============== ==============
14
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX FISCAL MONTHS ENDED JUNE 28, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- ------------- --------------
Cash flows used in operating activities . . . . . . . . . . . . . $ (8,355) $ (476) $ -- $ (8,831)
--------- -------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures and proceeds from sales of fixed assets (3,428) (279) -- (3,707)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,385 20 -- 1,405
--------- -------------- ------------- --------------
Net cash used in investing activities. . . . . . . . . . . . (2,043) (259) -- (2,302)
--------- -------------- ------------- --------------
Cash flows from financing activities:
Net borrowings on debt. . . . . . . . . . . . . . . . . . . 10,763 3,137 -- 13,900
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,747) (1,077) -- (2,824)
--------- -------------- ------------- --------------
Net cash provided by financing activities. . . . . . . . . . 9,016 2,060 -- 11,076
--------- -------------- ------------- --------------
Effect of exchange rate changes in cash . . . . . . . . . . . . . -- (221) -- (221)
Change in cash and cash equivalents . . . . . . . . . . . . . . . (1,382) 1,104 -- (278)
Cash and cash equivalents, beginning of period. . . . . . . . . . 1,482 1,346 -- 2,828
--------- -------------- ------------- --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 100 $ 2,450 -- $ 2,550
========= ============== ============= ==============
15
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX FISCAL MONTHS ENDED JUNE 29, 2001
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- ------------- --------------
Cash flows used in operating activities . . . . . . . . . . . . . $ (7,771) $ (38) $ -- $ (7,809)
--------- -------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures and proceeds from sales of fixed assets (3,627) 264 -- (3,363)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (368) 236 -- (132)
--------- -------------- ------------- --------------
Net cash provided by (used in) investing activities. . . . . (3,995) 500 -- (3,495)
--------- -------------- ------------- --------------
Cash flows from financing activities:
Net borrowings on debt . . . . . . . . . . . . . . . . . . . 13,471 317 -- 13,788
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,525) (153) -- (1,678)
--------- -------------- ------------- --------------
Net cash provided by financing activities. . . . . . . . . . 11,946 164 -- 12,110
--------- -------------- ------------- --------------
Effect of exchange rate changes in cash . . . . . . . . . . . . . -- (262) -- (262)
Change in cash and cash equivalents . . . . . . . . . . . . . . . 180 364 -- 544
Cash and cash equivalents, beginning of period. . . . . . . . . . 20 2,659 -- 2,679
--------- -------------- ------------- --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 200 $ 3,023 -- $ 3,223
========= ============== ============= ==============
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the notes included in Item 1 hereof.
GENERAL
The Company is a leading manufacturer and supplier of agricultural
equipment and services worldwide. The Company's grain, swine and poultry
products are used by producers and purchasers of grain, and by producers of
swine and poultry. Fluctuations in grain and feed prices directly impact sales
of the Company's grain equipment. Because the primary cost of producing swine
and poultry is the cost of the feed grain consumed by animals, fluctuations in
the supply and cost of grain to users of the Company's products in the past has
impacted sales of the Company's swine and poultry equipment. The Company
believes, however, that its diversified product offerings mitigate some of the
effects of fluctuations in the price of grain since the demand for grain
storage, drying and handling equipment tends to increase during periods of
higher grain prices, which somewhat offsets the reduction in demand during such
periods for the Company's products by producers of swine and poultry.
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain drying and handling equipment in the
summer and fall in conjunction with the harvesting season, and swine and poultry
producers purchasing equipment during prime construction periods in the spring,
summer and fall. The Company's net sales and net income have historically been
lower during the first and fourth fiscal quarters as compared to the second and
third quarters.
Although the Company's sales are primarily denominated in U.S. dollars and
are not generally affected by currency fluctuations (except for the Company's
Brazilian and South African operations), the production costs, profit margins
and competitive position of the Company are affected by the strength of the U.S.
dollar relative to the strength of the currencies in countries where its
products are sold.
The Company's international sales have historically comprised a significant
portion of net sales. In the first six months of 2002 and 2001, the Company's
international sales accounted for 28% and 30% of net sales, respectively.
International operations generally are subject to various risks that are not
present in domestic operations, including restrictions on dividends,
restrictions on repatriation of funds, unexpected changes in tariffs and other
trade barriers, difficulties in staffing and managing foreign operations,
political instability, fluctuations in currency exchange rates, reduced
protection for intellectual property rights in some countries, seasonal
reductions in business activity and potentially adverse tax consequences, any of
which could adversely impact the Company's international operations.
The primary raw materials used by the Company to manufacture its products
are steel and polymers. Fluctuations in the prices and availability of vendors
for steel and, to a lesser extent, polymer materials can impact the Company's
cost of sales. Recent increases in steel tariffs initiated by the U.S.
Government has adversely effected the price the Company pays for steel. In
response to steel price increases, the Company has nominally raised the selling
price of their products.
The Company currently operates as a subchapter S corporation and,
accordingly, is not subject to federal income taxation for the periods for which
financial information has been presented herein. Because the Company's
stockholders are subject to tax liabilities based on their pro rata shares of
the Company's income, the Company's policy is to make periodic distributions to
its stockholders in amounts equal to such tax liabilities.
RESULTS OF OPERATIONS
Three Months Ended June 28, 2002 Compared to Three Months Ended June 29,2001
Sales increased 0.6% or $0.4 million to $65.9 million in the second quarter
of 2002 compared to $65.5 million in the second quarter of 2001. This increase
was driven by increased demand for the Company's swine and poultry products.
17
Gross profit decreased to $14.9 million in the second quarter of 2002 or
22.6% of sales from $15.2 million or 23.1% of sales in the same period of 2001.
This decrease was a result of lost productivity due to the impact of
consolidation efforts.
Operating expenses decreased 7.3% or $0.8 million to $9.4 million in the
second quarter of 2002 from $10.2 million in the same period of 2001. This
decrease was primarily the result of cost cutting measures, which included the
consolidation of the Indianapolis sales office, that occurred during the first
quarter of 2002.
Operating income increased 8.9% to $5.4 million in the second quarter of
2002 from $5.0 million in the second quarter of 2001. This increase was
attributable to the decrease in operating expenses.
Interest expense decreased $0.4 million in the second quarter of 2002 as
compared to the second quarter of 2001 due to lower borrowing costs.
Net income increased $0.5 million to $1.6 million for the second quarter of
2002 from $1.1 million in the same period of 2001.
Six Months Ended June 28, 2002 Compared to Six Months Ended June 29,2001
Sales increased 7.6% or $8.3 million to $118.8 million in the first six
months of 2002 compared to $110.5 million in the first six months of 2001. This
increase was driven by increased demand for essentially all of the Company's
products.
Gross profit increased to $26.5 million in the first six months of 2002 or
22.3% of sales from $26.4 million or 23.9% of sales in the same period of 2001.
This increase was a result of increased sales. The decrease in gross profit as
a percent of sales was primarily the result of the absence of a few high-margin
international projects that took place in the first six months of 2001 and lost
productivity due to consolidation efforts.
Operating expenses decreased 9.2% or $1.9 million to $18.5 million in the
first six months of 2002 from $20.4 million in the same period of 2001. This
decrease was primarily the result of cost cutting measures, which included the
consolidation of the Indianapolis sales office.
Operating income increased 33.4% to $8.0 million in the first six months of
2002 from $6.0 million in the first six months of 2001. This increase was
attributable to the increase in gross profit and a decrease in operating
expenses.
Interest expense decreased $0.9 million in the first six months of 2002 as
compared to the first six months of 2001 due to lower borrowing costs.
Net income increased $1.9 million to income of $0.7 million for the first
six months of 2002 from a loss of $1.2 million in the same period of 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded capital expenditures, working capital
requirements, debt service, stockholder dividends and stock repurchases from
cash flow from its operations, augmented by borrowings made under various credit
agreements and the sale of the Company's 10 % senior subordinated notes.
As of June 28, 2002, the Company had $75.5 million of working capital, an
increase of $14.0 million from working capital as of December 31, 2001. The
increase in working capital was primarily due to increases in inventory and
accounts receivable of $29.7 million, partially offset by increases in accounts
payable, accrued expenses and customer deposits of $15.7 million.
Operating activities used $8.8 million and $7.8 million in cash flow in the
first six months of 2002 and 2001, respectively. This $1.0 million decrease in
cash flow was primarily the result of an increase in accounts receivable,
inventory and other current assets of $19.3 million, partially offset by
increases in accrued expenses, customer deposits, accounts payable and net
income of $18.3 million compared to the first six months of 2001.
18
Investing activities used $2.3 million and $3.5 million in cash flow in the
first six months of 2002 and 2001, respectively. The cash was used primarily
for machinery and equipment purchases. The $1.2 million decrease in cash used
in investing activities was partially a result of proceeds from the sale of
fixed assets.
Financing activities provided $11.1 million and $12.1 million in cash flow
in the first six months of 2002 and 2001, respectively. The cash was provided
primarily from borrowings under the Credit Facility, partially offset by
payments on long-term debt.
The Company believes that existing cash, cash flow from operations and
available borrowings under the Credit Facility will be sufficient to support its
working capital, capital expenditures and debt service requirements for the
foreseeable future.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by use of terms such as "believes," "anticipates," "intends," or
"expects." Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from future
results expressed or implied by such statements, and such statements should not
be regarded as a representation the stated objectives will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with adverse changes in
interest rates and foreign currency exchange rates. The Company does not hold
any market risk sensitive instruments for trading purposes. At June 28, 2002,
principal exposed to interest rate risk was limited to $52.4 million in variable
rate debt. The Company measures its interest rate risk by estimating the net
amount by which potential future net earnings would be impacted by hypothetical
changes in market interest rates related to all interest rate sensitive assets
and liabilities. A 1% change in interest rates would have a $0.5 million impact
on the Company's results of operations.
At June 28, 2002, approximately 17% of net sales were derived from
international operations with exposure to foreign currency exchange rate risk.
The Company mitigates its foreign currency exchange rate risk principally by
establishing local production facilities in the markets it serves and by
invoicing customers in the same currency as the source of the products. The
Company also monitors its foreign currency exposure in each country and
implements strategies to respond to changing economic and political
environments. The Company's exposure to foreign currency exchange rate risk
relates primarily to the financial position and the results of operations of its
Brazilian and South African subsidiary. The Company's exposure to such exchange
rate risk as it relates to the Company's financial position and results of
operations would be adversely impacted by further devaluation of the Brazilian
Real per U.S. dollar and/or the South African Rand per U.S. dollar. These
amounts are difficult to accurately estimate due to factors such as the inherent
fluctuation of inter-company account balances, balance sheet accounts and the
existing economic uncertainty and future economic conditions in the
international marketplace.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company, which, in the
opinion of management, would have a material adverse affect on the Company's
business, financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
A list of the exhibits included as part of this Form 10-Q is set
forth in the Index to Exhibits that immediately precedes such exhibits, which is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
In a Current Report filed on Form 8-K dated August 5, 2002 the Company
reported information pursuant to "Item 4. Changes in Registrant's Certifying
Accountant".
20
SIGNATURES
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.
The GSI Group, Inc.
By: /s/ Russell C. Mello
-----------------------
Chief Financial Officer,
Secretary and Treasurer (Authorized
Signatory and Principal Financial
Officer)
DATE: AUGUST 9, 2002
21
INDEX TO EXHIBITS
EXHIBIT
NO. DOCUMENT DESCRIPTION
- ------- --------------------------------------------------------------------
99.1 Certification of Chief Executive Officer and Chief Financial Officer
22