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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 27, 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 November 8, 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 Statements 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
Item 4. Controls and Procedures 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)
SEPTEMBER 27, DECEMBER 31,
ASSETS 2002 2001
- -------------------------------------------------------------------------- --------------- --------------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 3,396 $ 2,828
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . 39,347 28,887
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,898 55,294
Prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,348 2,245
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,006 4,816
--------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 116,995 94,070
--------------- --------------
Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 59
--------------- --------------
Property, Plant and Equipment, net . . . . . . . . . . . . . . . . . . . . 39,781 42,116
--------------- --------------
Other Assets:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,617 10,578
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . 3,549 4,483
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,983 3,435
--------------- --------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . 16,149 18,496
--------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 172,925 $ 154,741
=============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- --------------------------------------------------------------------------
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,432 $ 12,247
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,771 1,962
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 10,280 9,429
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,690 6,204
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . 2,674 2,707
--------------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 40,847 32,549
--------------- --------------
Long-Term Debt, less current maturities. . . . . . . . . . . . . . . . . . 147,700 136,211
--------------- --------------
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 845 582
--------------- --------------
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,068) (10,216)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,536 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. . . . . . . . . . . . . . . . . . . . . (16,467) (14,601)
--------------- --------------
Total liabilities and stockholders' deficit. . . . . . . . . . . . . $ 172,925 $ 154,741
=============== ==============
The accompanying notes to condensed 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 NINE FISCAL MONTHS ENDED
SEPT. 27, SEPT. 28, SEPT. 27, SEPT. 28,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Sales $ 70,119 $ 71,834 $ 188,948 $ 182,301
Cost of sales 52,854 52,850 145,147 136,909
----------- ----------- ----------- -----------
Gross profit . . . . . . . . . . . . . . 17,265 18,984 43,801 45,392
Selling, general and administrative expenses 9,213 10,167 27,135 29,672
Amortization expense . . . . . . . . . . . . 311 396 934 1,307
----------- ----------- ----------- -----------
Total operating expenses . . . . . . . . . 9,524 10,563 28,069 30,979
Operating income . . . . . . . . . . . . . . 7,741 8,421 15,732 14,413
Other income (expense):
Interest expense . . . . . . . . . . . . . (3,461) (3,664) (9,945) (11,015)
Other, net . . . . . . . . . . . . . . . . 128 68 (574) 99
----------- ----------- ----------- -----------
Income before income tax provision . . . 4,408 4,825 5,213 3,497
----------- ----------- ----------- -----------
Income tax expense . . . . . . . . . . . . . 183 208 318 117
----------- ----------- ----------- -----------
Net income . . . . . . . . . . . . . . . $ 4,225 $ 4,617 $ 4,895 $ 3,380
----------- ----------- ----------- -----------
Basic and diluted income per share . . . . . $ 2.38 $ 2.60 $ 2.76 $ 1.90
----------- ----------- ----------- -----------
Weighted average common shares outstanding . 1,775,000 1,775,000 1,775,000 1,775,000
=========== =========== =========== ===========
The accompanying notes to condensed 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)
NINE FISCAL MONTHS ENDED
------------------------
SEPT. 27, SEPT. 28,
2002 2001
----------- -----------
Cash Flows From Operating Activities:
Depreciation and amortization expense . . . . . . . . . 5,432 6,933
Other . . . . . . . . . . . . . . . . . . . . . . . . . (7,857) (6,976)
----------- -----------
Net cash flows used in operating activities . . (2,425) (43)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures. . . . . . . . . . . . . . . . . . (4,986) (3,671)
Proceeds from sale of fixed assets. . . . . . . . . . . 1,273 486
Other . . . . . . . . . . . . . . . . . . . . . . . . . (64) (660)
----------- -----------
Net cash flows used in investing activities . . (3,777) (3,845)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from shareholder loan. . . . . . . . . . . . 568 1,017
Payments on shareholder loan. . . . . . . . . . . . . (533) (1,868)
Payments on long-term debt. . . . . . . . . . . . . . . (3,804) (2,518)
Net borrowings under line-of-credit agreement . . . . . 15,100 10,420
Dividends . . . . . . . . . . . . . . . . . . . . . . (1,909) (1,159)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (1,874) (827)
----------- -----------
Net cash flows provided by financing activities 7,548 5,065
----------- -----------
Effect of Exchange Rate Changes on Cash . . . . . . . . . (778) (463)
Increase In Cash and Cash Equivalents . . . . . . . . . . $ 568 $ 714
Cash and Cash Equivalents, beginning of period. . . . . . 2,828 2,679
----------- -----------
Cash and Cash Equivalents, end of period. . . . . . . . . $ 3,396 $ 3,393
=========== ===========
The accompanying notes to condensed 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 accounting principles generally accepted in the United States of America
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 September 27, 2002 and the results of operations for the nine months ended
September 27, 2002 and cash flows for the nine months ended September 27, 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 nine-month period ended September 27,
2002 are not necessarily indicative of the operating results for the full year.
2. COMPREHENSIVE INCOME
The components of comprehensive loss for the periods presented are as
follows (in thousands):
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
--------------- ---------------
Net income . . . . . . . . . . . . . . . . $ 4,895 $ 3,380
Cumulative currency translation adjustment (4,852) (3,346)
Comprehensive income . . . . . . . . . . $ 43 $ 34
=============== ===============
3. DETAIL OF CERTAIN ASSETS
SEPTEMBER 27, DECEMBER 31,
2002 2001
-------------- -------------
(IN THOUSANDS)
Inventories
Raw materials. . $ 18,731 $ 13,341
Work-in-process. 16,725 18,322
Finished goods . 31,442 23,631
-------------- -------------
Total . . . $ 66,898 $ 55,294
============== =============
6
4. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $6.6 million and $7.6 million in interest
during the nine months ended
September 27, 2002 and September 28, 2001, respectively. The Company paid $0.0
million and $0.1 million income taxes during the first nine 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 September 27, 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 September 27, 2002.
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 $2.8 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 September 27, 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 three quarters of 2002 and 2001 are as shown in the
table below (in thousands).
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
-------------- --------------
Grain product line . $ 105,325 $ 105,409
Swine product line . 38,420 38,818
Poultry product line 45,203 38,074
-------------- --------------
Sales . . . . . $ 188,948 $ 182,301
============== ==============
For the first nine months of 2002 and 2001, sales in Brazil were $14.8
million and $12.2 million, respectively. Long-lived assets in Brazil were $1.9
million at September 27, 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 September 27, 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., The GSI
Group (Europe) Ltd., The GSI Group Africa (Pty) Ltd., GSI Group (Asia) Sdn.
Bhd., Agromarau Industria e Comercio Ltda., The GSI Group (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
SEPTEMBER 27, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 53 $ 3,343 $ -- $ 3,396
Accounts receivable, net. . . . . . . . . . . . 38,743 8,703 (8,099) 39,347
Inventories, net. . . . . . . . . . . . . . . . 50,451 16,447 -- 66,898
Other current assets. . . . . . . . . . . . . . 5,555 1,799 -- 7,354
--------- -------------- -------------- --------------
Total current assets. . . . . . . . . . . . . . 94,802 30,292 (8,099) 116,995
Property, plant and equipment, net . . . . . . . . . 33,584 6,197 -- 39,781
Goodwill and other intangible assets, net. . . . . . 2,917 10,249 -- 13,166
Investment in and advances to/from subsidiaries. . . 44,557 (5,219) (39,338) --
Other long-term assets . . . . . . . . . . . . . . . 2,977 6 -- 2,983
--------- -------------- -------------- --------------
Total assets. . . . . . . . . . . . . . . . . . $178,837 $ 41,525 $ (47,437) $ 172,925
========= ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt . . . . . . . $ 2,674 $ -- $ -- $ 2,674
Accounts payable. . . . . . . . . . . . . . . . 15,908 10,623 (8,099) 18,432
Accrued liabilities . . . . . . . . . . . . . . 17,673 2,079 (11) 19,741
--------- -------------- -------------- --------------
Total current liabilities . . . . . . . . . . . 36,255 12,702 (8,110) 40,847
Long-term debt . . . . . . . . . . . . . . . . . . . 143,981 11,993 (8,274) 147,700
Other long-term liabilities. . . . . . . . . . . . . -- 845 -- 845
--------- -------------- -------------- --------------
Total liabilities . . . . . . . . . . . . . . . 180,236 25,540 (16,384) 189,392
Stockholders' equity (deficit):
Common stock. . . . . . . . . . . . . . . . . . 18 23,539 (23,539) 18
Additional paid-in capital. . . . . . . . . . . 3,006 335 (335) 3,006
Accumulated other comprehensive loss. . . . . . -- (15,068) -- (15,068)
Retained earnings . . . . . . . . . . . . . . . 22,536 7,179 (7,179) 22,536
Treasury stock, at cost . . . . . . . . . . . . (26,959) -- -- (26,959)
--------- -------------- -------------- --------------
Total stockholders' equity (deficit). . . . . . (1,399) 15,985 (31,053) (16,467)
--------- -------------- -------------- --------------
Total liabilities and stockholders' equity (deficit) $178,837 $ 41,525 $ (47,437) $ 172,925
========= ============== ============== ==============
9
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 28, 2001
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 118 $ 3,275 $ -- $ 3,393
Accounts receivable, net. . . . . . . . . . . . 32,236 13,093 (5,510) 39,819
Inventories, net. . . . . . . . . . . . . . . . 43,425 13,246 270 56,941
Other current assets. . . . . . . . . . . . . . 3,468 1,477 -- 4,945
--------- -------------- -------------- --------------
Total current assets. . . . . . . . . . . . . . 79,247 31,091 (5,240) 105,098
Property, plant and equipment, net . . . . . . . . . 34,366 9,193 -- 43,559
Goodwill and other intangible assets, net. . . . . . 2,965 12,287 -- 15,252
Investment in and advances to/from subsidiaries. . . 48,569 (8,929) (39,640) --
Other long-term assets . . . . . . . . . . . . . . . 5,668 24 -- 5,692
--------- -------------- -------------- --------------
Total assets. . . . . . . . . . . . . . . . . . $170,815 $ 43,666 $ (44,880) $ 169,601
========= ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt . . . . . . . $ 2,937 $ 1,010 $ -- $ 3,947
Accounts payable. . . . . . . . . . . . . . . . 15,654 7,119 (5,510) 17,263
Accrued liabilities . . . . . . . . . . . . . . 17,299 2,965 -- 20,264
--------- -------------- -------------- --------------
Total current liabilities . . . . . . . . . . . 35,890 11,094 (5,510) 41,474
Long-term debt . . . . . . . . . . . . . . . . . . . 136,924 11,816 (8,901) 139,839
Other long-term liabilities. . . . . . . . . . . . . 142 1,738 -- 1,880
--------- -------------- -------------- --------------
Total liabilities . . . . . . . . . . . . . . . 172,956 24,648 (14,411) 183,193
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. . . . . . -- (11,451) -- (11,451)
Retained earnings . . . . . . . . . . . . . . . 21,794 6,625 (6,625) 21,794
Treasury stock, at cost . . . . . . . . . . . . (26,959) -- -- (26,959)
--------- -------------- -------------- --------------
Total stockholders' equity (deficit). . . . . . (2,141) 19,018 (30,469) (13,592)
--------- -------------- -------------- --------------
Total liabilities and stockholders' equity (deficit) $170,815 $ 43,666 $ (44,880) $ 169,601
========= ============== ============== ==============
10
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE FISCAL MONTHS ENDED SEPTEMBER 27, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,544 $ 15,874 $ (9,299) $ 70,119
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,262 13,045 (9,453) 52,854
--------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 14,282 2,829 154 17,265
Selling, general and administrative expenses. . . . . . . . . . . . 6,808 2,716 -- 9,524
--------- -------------- -------------- --------------
Operating income . . . . . . . . . . . . . . . . . . . . . . . 7,474 113 154 7,741
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . (3,445) (16) -- (3,461)
Other income (expense). . . . . . . . . . . . . . . . . . . . . . . 478 (350) -- 128
--------- -------------- -------------- --------------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . 4,507 (253) 154 4,408
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . 1 182 -- 183
--------- -------------- -------------- --------------
Income (loss) before equity in income of consolidated subsidiaries. 4,506 (435) 154 4,225
Equity (deficit) in income of consolidated subsidiaries . . . . . . (435) -- 435 --
--------- -------------- -------------- --------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,071 $ (435) $ 589 $ 4,225
========= ============== ============== ==============
11
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE FISCAL MONTHS ENDED SEPTEMBER 28, 2001
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- ------------- -------------- --------------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,611 $ 18,414 $ (4,191) $ 71,834
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 43,009 13,833 (3,992) 52,850
--------- ------------- -------------- --------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . 14,602 4,581 (199) 18,984
Selling, general and administrative expenses . . . . . . . . 6,997 3,566 -- 10,563
--------- ------------- -------------- --------------
Operating income. . . . . . . . . . . . . . . . . . . . 7,605 1,015 (199) 8,421
Interest expense . . . . . . . . . . . . . . . . . . . . . . (3,914) 250 -- (3,664)
Other income (expense) . . . . . . . . . . . . . . . . . . . (476) 544 -- 68
--------- ------------- -------------- --------------
Income before income taxes . . . . . . . . . . . . . . . . . 3,215 1,809 (199) 4,825
Provision (benefit) for income taxes . . . . . . . . . . . . (130) 338 -- 208
--------- ------------- -------------- --------------
Income before equity in income of consolidated subsidiaries. 3,345 1,471 (199) 4,617
Equity in income of consolidated subsidiaries. . . . . . . . 1,471 -- (1,471) --
--------- ------------- -------------- --------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,816 $ 1,471 $ (1,670) $ 4,617
========= ============= ============== ==============
12
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE FISCAL MONTHS ENDED SEPTEMBER 27, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $171,987 $ 41,241 $ (24,280) $ 188,948
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 138,283 31,428 (24,564) 145,147
--------- -------------- -------------- --------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . 33,704 9,813 284 43,801
Selling, general and administrative expenses . . . . . . . . 19,620 8,449 -- 28,069
--------- -------------- -------------- --------------
Operating income. . . . . . . . . . . . . . . . . . . . 14,084 1,364 284 15,732
Interest expense . . . . . . . . . . . . . . . . . . . . . . (9,895) (50) -- (9,945)
Other income (expense) . . . . . . . . . . . . . . . . . . . 234 (808) -- (574)
--------- -------------- -------------- --------------
Income before income taxes . . . . . . . . . . . . . . . . . 4,423 506 284 5,213
Provision (benefit) for income taxes . . . . . . . . . . . . (16) 334 -- 318
--------- -------------- -------------- --------------
Income before equity in income of consolidated subsidiaries. 4,439 172 284 4,895
Equity in income of consolidated subsidiaries. . . . . . . . 172 -- (172) --
--------- -------------- -------------- --------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,611 $ 172 $ 112 $ 4,895
========= ============== ============== ==============
13
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE FISCAL MONTHS ENDED SEPTEMBER 28, 2001
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- ------------- -------------- --------------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $149,690 $ 46,400 $ (13,789) $ 182,301
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 115,250 35,520 (13,861) 136,909
--------- ------------- -------------- --------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . 34,440 10,880 72 45,392
Selling, general and administrative expenses . . . . . . . . 20,759 10,220 -- 30,979
--------- ------------- -------------- --------------
Operating income. . . . . . . . . . . . . . . . . . . . 13,681 660 72 14,413
Interest income (expense). . . . . . . . . . . . . . . . . . (11,045) 30 -- (11,015)
Other income (expense) . . . . . . . . . . . . . . . . . . . (607) 706 -- 99
--------- ------------- -------------- --------------
Income before income taxes . . . . . . . . . . . . . . . . . 2,029 1,396 72 3,497
Provision (benefit) for income taxes . . . . . . . . . . . . (103) 220 -- 117
--------- ------------- -------------- --------------
Income before equity in income of consolidated subsidiaries. 2,132 1,176 72 3,380
Equity in income of consolidated subsidiaries. . . . . . . . 1,176 -- (1,176) --
--------- ------------- -------------- --------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,308 $ 1,176 $ (1,104) $ 3,380
========= ============= ============== ==============
14
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE FISCAL MONTHS ENDED SEPTEMBER 27, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- ------------- --------------
Cash flows provided by (used in) operating activities . . . . . . $ (5,317) $ 2,892 $ -- $ (2,425)
--------- -------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures and proceeds from sales of fixed assets (4,295) (691) -- (4,986)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 730 479 -- 1,209
--------- -------------- ------------- --------------
Net cash used in investing activities. . . . . . . . . . . . (3,565) (212) -- (3,777)
--------- -------------- ------------- --------------
Cash flows from financing activities:
Net borrowings on debt. . . . . . . . . . . . . . . . . . . 8,611 2,720 -- 11,331
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,158) (2,625) -- (3,783)
--------- -------------- ------------- --------------
Net cash provided by financing activities. . . . . . . . . . 7,453 95 -- 7,548
--------- -------------- ------------- --------------
Effect of exchange rate changes in cash . . . . . . . . . . . . . -- (778) -- (778)
Change in cash and cash equivalents . . . . . . . . . . . . . . . (1,429) 1,997 -- 568
Cash and cash equivalents, beginning of period. . . . . . . . . . 1,482 1,346 -- 2,828
--------- -------------- ------------- --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 53 $ 3,343 -- $ 3,396
========= ============== ============= ==============
15
9. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE FISCAL MONTHS ENDED SEPTEMBER 28, 2001
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- ------------- --------------
Cash flows provided by (used in) operating activities . . . . . . $ (2,573) $ 2,530 $ -- $ (43)
--------- -------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures and proceeds from sales of fixed assets (3,385) (286) -- (3,671)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 823 (997) -- (174)
--------- -------------- ------------- --------------
Net cash used in investing activities. . . . . . . . . . . . (2,562) (1,283) -- (3,845)
--------- -------------- ------------- --------------
Cash flows from financing activities:
Net borrowings on debt . . . . . . . . . . . . . . . . . . . 8,073 (1,022) -- 7,051
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,840) 854 -- (1,986)
--------- -------------- ------------- --------------
Net cash provided by (used in) financing activities. . . . . 5,233 (168) -- 5,065
--------- -------------- ------------- --------------
Effect of exchange rate changes in cash . . . . . . . . . . . . . -- (463) -- (463)
Change in cash and cash equivalents . . . . . . . . . . . . . . . 98 616 -- 714
Cash and cash equivalents, beginning of period. . . . . . . . . . 20 2,659 -- 2,679
--------- -------------- ------------- --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 118 $ 3,275 -- $ 3,393
========= ============== ============= ==============
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 nine months of 2002 and 2001, the Company's
international sales accounted for 27% and 26% 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 initial steel price increases, the Company has nominally raised the
selling price of its 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 September 27, 2002 Compared to Three Months Ended September
28, 2001
Sales decreased 2.4% or $1.7 million to $70.1 million in the third quarter
of 2002 compared to $71.8 million in the third quarter of 2001. This decrease
was driven by decreased demand for the Company's grain products.
Gross profit decreased to $17.3 million in the third quarter of 2002 or
24.6% of sales from $19.0 million or 26.4% of sales in the same period of 2001.
This decrease was a result of decreased sales in the grain division and lost
productivity due to the impact of consolidation efforts.
17
Operating expenses decreased 9.8% or $1.0 million to $9.5 million in the
third quarter of 2002 from $10.5 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 decreased 8.1% to $7.7 million in the third quarter of
2002 from $8.4 million in the third quarter of 2001. This decrease was
attributable to the decrease in sales.
Interest expense decreased $0.2 million in the third quarter of 2002 as
compared to the third quarter of 2001 due to lower borrowing costs.
Net income decreased $0.4 million to $4.2 million for the third quarter of
2002 from $4.6 million in the same period of 2001.
Nine Months Ended September 27, 2002 Compared to Nine Months Ended September 28,
2001
Sales increased 3.7% or $6.6 million to $188.9 million in the first nine
months of 2002 compared to $182.3 million in the first nine months of 2001.
This increase was driven by increased demand for the Company's poultry products.
Gross profit decreased to $43.8 million in the first nine months of 2002 or
23.2% of sales from $45.4 million or 24.9% of sales in the same period of 2001.
The decrease was primarily the result of the absence of a few high-margin
international projects that were completed in the first nine months of 2001 and
lost productivity due to consolidation efforts.
Operating expenses decreased 9.4% or $2.9 million to $28.1 million in the
first nine months of 2002 from $31.0 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 9.2% to $15.7 million in the first nine months
of 2002 from $14.4 million in the first nine months of 2001. This increase was
attributable to the decrease in operating expenses.
Interest expense decreased $1.1 million in the first nine months of 2002 as
compared to the first nine months of 2001 due to lower borrowing costs.
Net income increased $1.5 million to $4.9 million for the first nine months
of 2002 from $3.4 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 September 27, 2002, the Company had $76.1 million of working capital,
an increase of $14.6 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 $22.1 million, partially offset by increases in accounts
payable, accrued expenses and customer deposits of $8.3 million.
Operating activities used $2.4 million and $0.0 million in cash flow in the
first nine months of 2002 and 2001, respectively. This $2.4 million decrease in
cash flow was primarily the result of an increase in inventory and other current
assets of $11.5 million, partially offset by increases in accrued expenses,
customer deposits, accounts payable and net income of $9.9 million compared to
the first nine months of 2001.
Investing activities used $3.8 million in cash flow in the first nine
months of 2002 and 2001. The cash was used primarily for machinery and
equipment purchases.
18
Financing activities provided $7.5 million and $5.1 million in cash flow in
the first nine 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 September 27,
2002, principal exposed to interest rate risk was limited to $49.9 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.
During the nine months ended September 27, 2002, approximately 16% 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.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's management within 90 days of the filing date of this
quarterly report, the Company's Chief Executive Officer and Chief Financial
Officer believe that the Company has appropriate disclosure controls and
procedures to ensure that information required to be disclosed by the Company in
its periodic reports is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities Exchange
Commission.
Since the date of such evaluation, there have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect these controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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: NOVEMBER 8, 2002
21
CERTIFICATIONS
I, Craig Sloan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The GSI Group, 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 we 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 persons 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
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not 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: November 8, 2002
/s/ Craig Sloan
-----------------
Chief Executive Officer
22
I, Russell C. Mello, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The GSI Group, 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 we 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 persons 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
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not 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: November 8, 2002
/s/ Russell C. Mello
-----------------------
Chief Financial Officer,
Secretary and Treasurer
23
INDEX TO EXHIBITS
EXHIBIT
NO. DOCUMENT DESCRIPTION
- ------- ----------------------------------------------------------------------
99.1 Certification of Chief Executive Officer and Chief Financial Officer
24