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UNITED STATES
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 April 1, 2005
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 by check mark whether the registrant is an accelerated filer: Yes
[ ] No [X]
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, 826,948 shares outstanding as of May 13, 2005.
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1
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 4
Statements of Operations 5
Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
Item 4. Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
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 17
* No response to this item is included herein for the reason that it is
inapplicable.
2
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 the 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 that the stated objectives will be achieved.
3
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)
APRIL 1, DECEMBER 31,
ASSETS 2005 2004
- ------------------------------------------------------------------------- ----------- --------------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 1,987 $ 2,304
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . 29,275 24,656
Inventories, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,922 53,588
Prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,114 3,489
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,670 3,416
----------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 92,968 87,453
----------- --------------
Property, Plant and Equipment, net. . . . . . . . . . . . . . . . . . . . 32,165 32,548
----------- --------------
Other Assets:
Goodwill and other intangible assets, net . . . . . . . . . . . . . . . 11,586 11,758
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,254 1,309
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,544 2,544
----------- --------------
Total other assets. . . . . . . . . . . . . . . . . . . . . . . . . 15,384 15,611
----------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140,517 $ 135,612
=========== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------------------------------------------
Current Liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,383 $ 16,629
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,374 1,708
Payroll and payroll related expenses. . . . . . . . . . . . . . . . . . 5,737 4,652
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . 6,811 6,937
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,581 7,090
Current maturities of long-term debt. . . . . . . . . . . . . . . . . . 5,116 5,167
----------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 48,002 42,183
----------- --------------
Long-Term Debt, less current maturities . . . . . . . . . . . . . . . . . 130,002 133,963
----------- --------------
Minority Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,560 1,366
Stockholders' Deficit:
Common stock, $.01 par value, voting (authorized 6,900,000 shares;
issued 6,633,652 shares; outstanding 626,948 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,548 5,821
Accumulated other comprehensive loss (cumulative currency translation
adjustment). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,674) (10,124)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,620 3,944
Treasury stock, at cost, voting (6,006,704 shares). . . . . . . . . . . (41,550) (41,550)
Treasury stock, at cost, nonvoting (859,316 shares) . . . . . . . . . . (9) (9)
----------- --------------
Total stockholders' deficit . . . . . . . . . . . . . . . . . . . . (39,047) (41,900)
----------- --------------
Total liabilities and stockholders' deficit . . . . . . . . . . . . $ 140,517 $ 135,612
=========== ==============
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 OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE FISCAL MONTHS ENDED
-------------------------
RESTATED
APRIL 1, APRIL 2,
2005 2004
---------- -----------
Sales $ 72,674 $ 58,444
Cost of sales 54,750 46,713
---------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . 17,924 11,731
Selling, general and administrative expenses. . . . . . . . . . . . 8,827 8,705
Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . 162 162
---------- -----------
Total operating expenses. . . . . . . . . . . . . . . . . . . . . 8,989 8,867
---------- -----------
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . 8,935 2,864
Other income (expense):
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . (3,581) (3,075)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 474 (284)
---------- -----------
Income (loss) from continuing operations before income tax expense. 5,828 (495)
Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . 614 99
---------- -----------
Income (loss) from continuing operations. . . . . . . . . . . . . . 5,214 (594)
Discontinued Operations:
Gain (loss) from discontinued operations, net of income taxes . -- 129
---------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,214 $ (465)
========== ===========
Basic and diluted earnings (loss) per share . . . . . . . . . . . . $ 6.31 $ (0.26)
---------- -----------
Weighted average common shares outstanding. . . . . . . . . . . . . 826,948 1,775,000
========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE FISCAL MONTHS ENDED
---------------------------
RESTATED
APRIL 1, APRIL 2,
2005 2004
--------------------------- ----------
Cash Flows From Operating Activities:
Depreciation and amortization expense . . . . . . . . . 1,622 1,364
Other . . . . . . . . . . . . . . . . . . . . . . . . . 5,509 5,088
--------------------------- ----------
Net cash flows provided by operating activities 7,131 6,452
--------------------------- ----------
Cash Flows From Investing Activities:
Capital expenditures. . . . . . . . . . . . . . . . . . (1,268) (577)
Proceeds from sale of fixed assets. . . . . . . . . . . 207 352
Other . . . . . . . . . . . . . . . . . . . . . . . . . 2 (30)
--------------------------- ----------
Net cash flows used in investing activities . . (1,059) (255)
--------------------------- ----------
Cash Flows From Financing Activities:
Proceeds from shareholder loan. . . . . . . . . . . . -- 734
Payments on shareholder loan. . . . . . . . . . . . . -- (530)
Payments on long-term debt. . . . . . . . . . . . . . . (51) --
Net payments under line of credit agreement . . . . . . (4,030) (6,589)
Dividends . . . . . . . . . . . . . . . . . . . . . . (1,538) (250)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (725) (494)
--------------------------- ----------
Net cash flows used in financing activities . . (6,344) (7,129)
--------------------------- ----------
Effect of Exchange Rate Changes on Cash . . . . . . . . . (45) 1
Decrease In Cash and Cash Equivalents . . . . . . . . . . $ (317) $ (931)
Cash and Cash Equivalents, beginning of period. . . . . . 2,304 3,439
--------------------------- ----------
Cash and Cash Equivalents, end of period. . . . . . . . . $ 1,987 $ 2,508
=========================== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
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, 2004 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 the Company's 2004 Form 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 April 1, 2005 and the results of operations and cash flows for the three
months ended April 1, 2005. Those adjustments consist only of normal recurring
adjustments.
The results of operations for the three-month period ended April 1, 2005
are not necessarily indicative of the operating results for the full year.
2. RESTATEMENT
During the Company's 2004 year-end closing process, the Company discovered
unintentional accounting errors in prior years' financial statements. The
errors were corrected in the 2004 financial statements. A description of the
errors and related impact of each on the financial statements follows. Amounts
are stated in thousands of dollars.
At the end of 2001, the Company began the process of shutting down its
Mason City, Iowa plant, which served as the headquarters for its DMC subsidiary.
As the Company began the revenue cycle process at its corporate headquarters,
cost of sales estimates were understated during 2002, while cost accounting
records were being developed for the products previously handled by the Mason
City employees, which caused the remaining inherited inventory costs to be
overstated by approximately $6,470. The Company became aware of the
overstatement in early 2003, but erroneously assigned the overstated value to
inventory that would flow through the cost of sales over the next few years.
This erroneous correction reduced the stated value of the inventory by
approximately $2,206 in 2003 and $4,264 in 2004. During the 2004 year-end
closing process, this issue was re-examined, and the Company determined that it
would be appropriate to restate the 2002 cost of sales and year-end inventory,
the period when the overstatement occurred. This adjustment increased the
previously reported 2004 quarterly net income by $360.
In 1997, the Company's majority stockholder began selling non-voting shares
to certain employees. The Company's majority stockholder helped finance each
employee's purchase with a loan to each employee with the shares as the only
collateral for the notes. APB Opinion 25 and its interpretations require that
these transactions be imputed to the Company's financial statements and be
accounted for as variable stock awards, which practice the Company had not
previously followed. Treatment of the transaction as a variable stock award
requires the Company to recognize as compensation expense the extent to which
the fair market value of the underlying shares exceeds the original purchase
price for such shares. The fair value of the underlying shares first exceeded
the price paid for the shares in 2002. The effect of recording the resulting
compensation expense reduced previously reported 2004 quarterly net income by
$448. There were no dividends paid to the non-voting stockholders during the
first fiscal quarter of 2004.
In 2002, the Company entered into an agreement with the manager of its
Brazilian subsidiary whereby the Company agreed to issue him shares of the
Brazilian subsidiary's stock primarily based on the financial performance of the
Brazilian subsidiary. This agreement constitutes a stock compensation
arrangement for which the Company did not previously recognize compensation
expense. The effect of recording compensation expense related to this
arrangement reduced previously reported 2004 quarterly net income by $125.
7
Prior to the 2004 closing process, the Company had been using Mexican Pesos
as the functional currency of its Mexican subsidiary. During the 2004 closing
process, the Company determined that the correct functional currency of its
Mexican subsidiary should be U.S. Dollars rather than Mexican Pesos. The effect
of this change reduced previously reported 2004 quarterly net income by $6.
The Company changed from a stop-loss workers' compensation insurance policy
to a high-deductible self-insured policy in 2000 and did not subsequently accrue
a liability for claims incurred but not reported. The effect of accruing for
such claims in 2004 reduced previously reported quarterly net income by $55.
The Company also made adjustments in 2004 to correct previous reporting of
overhead adjustments in overseas inventories and gain on inter-company sales.
The impact of the above noted adjustments on the Company's financial
statements for the first fiscal quarter of 2004 is summarized in the table
below. Amounts are stated in thousands of dollars except for per share line
items.
AS
AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED
FIRST FISCAL QUARTER 2004
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . 47,104 (391) 46,713
Selling, general and administrative expenses 8,161 544 8,705
Operating income . . . . . . . . . . . . . . 3,207 (343) 2,864
Other, net . . . . . . . . . . . . . . . . . (179) (6) (185)
Net loss . . . . . . . . . . . . . . . . . . (159) (306) (465)
Basic and diluted loss per share . . . . . . ($0.09) ($0.17) ($0.26)
3. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the periods
presented are as follows (in thousands):
(Unaudited) (Restated)
April 1, April 2,
------------ -----------
2005 2004
------------ -----------
Net income (loss) . . . . . . . . . . . . . $ 5,214 $ (465)
Cumulative currency translation adjustment. (550) (398)
Comprehensive income (loss) . . . . . . . $ 4,664 $ (863)
============ ===========
4. DETAIL OF CERTAIN ASSETS
(UNAUDITED) (RESTATED)
APRIL 1, DECEMBER 31,
2005 2004
------------ --------------
(IN THOUSANDS)
Inventories
Raw materials. . $ 22,952 $ 23,573
Work-in-process. 16,712 8,856
Finished goods . 17,258 21,159
------------ --------------
Total . . . $ 56,922 $ 53,588
============ ==============
8
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $0.5 million in interest during the fiscal
quarters ended April 1, 2005 and April 2, 2004. The Company paid no income
taxes during the first quarters of 2005 and 2004 because it was a subchapter "S"
corporation during those periods.
6. LONG-TERM DEBT
The indenture governing the Company's senior subordinated notes contains
certain restrictive covenants. The more significant of these 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 April
1, 2005. The Company issued a call for redemption of its senior subordinated
notes due 2007 on May 16, 2005. See Note 9, "Subsequent Events."
The credit facility with Congress Financial Corporation (Central) (the
"Credit Facility") required the Company to maintain a senior debt to EBITDA
ratio and a fixed charge coverage ratio. Borrowings under the Credit Facility
were secured by substantially all of the assets of the Company. The Company had
$21.1 million of availability under the revolving portion of the Credit Facility
as of April 1, 2005. The Company was in compliance with the covenants under the
Credit Facility as of April 1, 2005. On May 16, 2005, the Company refinanced
the Credit Facility and entered into a new loan and security agreement with
Wachovia Capital Finance Corporation (Central). See Note 9, "Subsequent
Events."
7. 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.
8. 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 fiscal quarters of 2005 and 2004 are as shown in
the table below (in thousands).
(UNAUDITED) (RESTATED)
APRIL 1, APRIL 2,
2005 2004
------------ -----------
Grain product line. . . $ 42,914 $ 32,464
Swine product line. . . 12,860 9,924
Poultry product line. . 16,900 16,246
Discontinued operations -- (190)
------------ -----------
Sales. . . . . . . $ 72,674 $ 58,444
============ ===========
For the first fiscal quarters of 2005 and 2004, sales in Brazil were $8.6
million and $7.3 million, respectively. Long-lived assets in Brazil were $4.4
million at April 1, 2005.
9. SUBSEQUENT EVENTS
On May 16, 2005, the Company completed the offering of $110.0 million in
aggregate principal amount of its 12% senior notes due 2013. In connection with
this offering, the Company also refinanced its senior secured credit facility,
which new facility includes a $60.0 million revolving credit facility. Also on
this date, the closing of the acquisition of all of the issued and outstanding
shares of the Company's common stock by GSI Holdings Corp. took place.
9
The proceeds from the notes offering, together with borrowings under the
Company's refinanced credit facility and a cash equity contribution from GSI
Holdings Corp., will be used to redeem all of the Company's outstanding 10 %
senior subordinated notes due 2007 as well as pay the related redemption
premium, repay all outstanding borrowings under the Company's previous credit
facility, repay all outstanding loans made to the Company by its former majority
stockholder and pay fees and expenses related to the refinancing transactions.
The Company may redeem all or part of the new senior notes beginning on May
15, 2009 at the redemption prices specified in the indenture governing the new
notes. Prior to May 15, 2008, the Company may redeem up to 35% of the new notes
at a redemption price of 112% of the principal amount, plus accrued and unpaid
interest, if any, to the date of the redemption, with the proceeds of certain
equity offerings.
10
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 major worldwide manufacturer of agricultural equipment.
The Company's grain, swine and poultry products are used by producers and
purchasers of grain, and by producers of swine and poultry. Demand for our
agricultural equipment is driven by the overall level of grain, swine and
poultry production, the level of net farm income, agricultural real estate
values and producers' increasing focus on improving productivity in their
operations. In addition, fluctuations in grain and feed prices affect our sales,
with sustained increases in grain and feed prices increasing demand for our
grain equipment and decreasing demand for our swine and poultry equipment. We
believe that our diversified product offerings mitigate the effects of
fluctuations in the price of grain. Sales of our swine and poultry equipment are
also affected by long-term trends in consumer demand for pork and poultry both
domestically and internationally.
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain conditioning 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, operating income and net income
have historically been lower during the first and fourth fiscal quarters as
compared to the second and third quarters. Traditionally, this has caused the
Company to have increased working capital needs during the second and third
quarters as material is purchased and converted to inventory during the year.
Although the Company's sales are primarily denominated in U.S. dollars and
are not generally affected by currency fluctuations (except for transactions
from the Company's Brazilian operation), the production costs, profit margins
and competitive position 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 our total sales. In the first fiscal quarters of 2005 and 2004, the
Company's international sales accounted for 28% and 31% of total 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 our international operations.
The primary raw materials we use to manufacture our products are steel and
polymers. Fluctuations in the prices of steel and, to a lesser extent, polymer
materials can impact our cost of sales.
On May 16, 2005, in connection with the closing of the purchase of all of
the issued and outstanding shares of the Company's common stock by GSI Holdings
Corp., the Company was converted from a subchapter "S" corporation to a
subchapter "C" corporation, which means that it will now be a taxable entity for
federal and state income tax purposes. For the portion of the Company's fiscal
year preceding that date, the Company has made a tax distribution to its
stockholders in an amount sufficient to allow them to pay their resulting income
taxes for such period.
RESTATEMENT
During the Company's 2004 year-end closing process, the Company discovered
unintentional accounting errors in prior years' financial statements. The
errors were corrected in the 2004 financial statements. A description of the
errors and related impact of each on the financial statements follows. Amounts
are stated in thousands of dollars.
11
At the end of 2001, the Company began the process of shutting down its
Mason City, Iowa plant, which served as the headquarters for its DMC subsidiary.
As the Company began the revenue cycle process at its corporate headquarters,
cost of sales estimates were understated during 2002, while cost accounting
records were being developed for the products previously handled by the Mason
City employees, which caused the remaining inherited inventory costs to be
overstated by approximately $6,470. The Company became aware of the
overstatement in early 2003, but erroneously assigned the overstated value to
inventory that would flow through the cost of sales over the next few years.
This erroneous correction reduced the stated value of the inventory by
approximately $2,206 in 2003 and $4,264 in 2004. During the 2004 year-end
closing process, this issue was re-examined, and the Company determined that it
would be appropriate to restate the 2002 cost of sales and year-end inventory,
the period when the overstatement occurred. This adjustment increased the
previously reported 2004 quarterly net income by $360.
In 1997, the Company's majority stockholder began selling non-voting shares
to certain employees. The Company's majority stockholder helped finance each
employee's purchase with a loan to each employee with the shares as the only
collateral for the notes. APB Opinion 25 and its interpretations require that
these transactions be imputed to the Company's financial statements and be
accounted for as variable stock awards, which practice the Company had not
previously followed. Treatment of the transaction as a variable stock award
requires the Company to recognize as compensation expense the extent to which
the fair market value of the underlying shares exceeds the original purchase
price for such shares. The fair value of the underlying shares first exceeded
the price paid for the shares in 2002. The effect of recording the resulting
compensation expense reduced previously reported 2004 quarterly net income by
$448. There were no dividends paid to the non-voting stockholders during the
first fiscal quarter of 2004.
In 2002, the Company entered into an agreement with the manager of its
Brazilian subsidiary whereby the Company agreed to issue him shares of the
Brazilian subsidiary's stock primarily based on the financial performance of the
Brazilian subsidiary. This agreement constitutes a stock compensation
arrangement for which the Company did not previously recognize compensation
expense. The effect of recording compensation expense related to this
arrangement reduced previously reported 2004 quarterly net income by $125.
Prior to the 2004 closing process, the Company had been using Mexican Pesos
as the functional currency of its Mexican subsidiary. During the 2004 closing
process, the Company determined that the correct functional currency of its
Mexican subsidiary should be U.S. Dollars rather than Mexican Pesos. The effect
of this change reduced previously reported 2004 quarterly net income by $6.
The Company changed from a stop-loss workers' compensation insurance policy
to a high-deductible self-insured policy in 2000 and did not subsequently accrue
a liability for claims incurred but not reported. The effect of accruing for
such claims in 2004 reduced previously reported quarterly net income by $55.
The Company also made adjustments in 2004 to correct previous reporting of
overhead adjustments in overseas inventories and gain on inter-company sales.
The impact of the above noted adjustments on the Company's first fiscal
quarter of 2004 financial statements is summarized in the table below. Amounts
are stated in thousands of dollars except for per share line items.
AS
AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED
FIRST FISCAL QUARTER 2004
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . 47,104 (391) 46,713
Selling, general and administrative expenses 8,161 544 8,705
Operating income . . . . . . . . . . . . . . 3,207 (343) 2,864
Other, net . . . . . . . . . . . . . . . . . (179) (6) (185)
Net loss . . . . . . . . . . . . . . . . . . (159) (306) (465)
Basic and diluted loss per share . . . . . . ($0.09) ($0.17) ($0.26)
12
RESULTS OF OPERATIONS
Three Months Ended April 1, 2005 Compared to Three Months Ended April 2, 2004
Sales increased 24.4% or $14.3 million to $72.7 million in the first
quarter of 2005 compared to $58.4 million in the first quarter of 2004. Grain
sales increased 32% in the first quarter 2005 to $42.9 million primarily as a
result of strong grain storage demand and market share penetration of new
products such as grain transportation equipment. Strong sales of grain
equipment in our Brazilian subsidiary also contributed to the increase. Swine
sales increased 29.6% due to an improved swine production market that allows
producers to upgrade equipment. Poultry equipment sales were essentially flat
year over year.
Gross profit increased to $17.9 million in the first quarter of 2005 or
24.7% of sales from $11.7 million or 20.1% of sales in the same period of 2004.
This increase was primarily due to increased volume, which allowed the company
to leverage its fixed expenses.
Operating expenses increased 2.9% or $0.2 million to $9.1 million in the
first quarter of 2005 from $8.9 million in the same period of 2004. This
increase was primarily the result of increased selling expenses related to the
increased volume.
Operating income increased to $8.9 million in the first quarter of 2005
from $2.9 million in the first quarter of 2004. Operating income margins
increased to 12.4% of sales in 2005 from 5.0% in 2004.
Interest expense increased $0.5 million in the first quarter of 2005 as
compared to the first quarter of 2004 due to higher borrowing costs.
Net loss decreased $5.7 million to income of $5.2 million for the first
quarter of 2005 from a loss of $0.5 million in the same period of 2004.
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 the Company's
credit facility and the sale of the Company's notes.
The Company's working capital requirements for its operations are seasonal,
with investments in working capital typically building in the second and third
quarters and then declining in the first and fourth quarters. The Company
defines working capital as current assets less current liabilities. As of April
1, 2005, the Company had $45.0 million of working capital, a decrease of $0.3
million from working capital as of December 31, 2004. The decrease in working
capital was primarily due to increases in payroll related expenses, accrued
expenses, accrued interest, customer deposits and accounts payable and decreases
in prepaids of $8.8 million, partially offset by increases in accounts
receivable and inventory of $7.9 million.
Operating activities provided $7.1 million and $6.4 million in cash flow in
the first quarters of 2005 and 2004, respectively. This $0.7 million increase
in cash flow was primarily the result of an increase in net income, depreciation
and amortization, inventory, deferred taxes and other current assets of $7.6
million, partially offset by a decrease in accounts receivable, accounts payable
and customer deposits of $6.7 million compared to the first quarter of 2004.
Investing activities used $1.1 million and $0.3 million in cash flow in the
first quarters of 2005 and 2004, respectively. The cash was used primarily for
machinery and equipment purchases.
Financing activities used $6.3 million and $7.1 million in cash flow in the
first quarters of 2005 and 2004, respectively. The cash was used primarily for
payments on the Company's credit facility.
The Company believes that existing cash, cash flow from operations and
available borrowings under its refinanced revolving credit facility will be
sufficient to support its working capital, capital expenditures and debt service
requirements for the foreseeable future.
13
On May 16, 2005, the Company entered into a five-year credit facility with
lenders led by Wachovia Capital Finance Corporation (Central) to provide up to a
maximum amount of $60.0 million, subject to various conditions including
borrowing base availability to replace the Company's then-existing senior credit
facility, which provided for maximum outstanding borrowings of $75.0 million.
Up to $15.0 million of the facility will be available for issuances of letters
of credit. The availability of revolving loans and letters of credit are based
on a borrowing base, which includes accounts receivable, inventory and fixed
assets. In addition, subject to the fulfillment of certain conditions,
including the consent of the Export-Import Bank of the United States ("Exim
Bank") and any changes that me be required to our exiting agreements with Exim
Bank, we expect to be able to borrow revolving loans and obtain letters of
credit of up to $2.5 million based on the value of certain foreign subsidiary
accounts receivable and inventory under the Exim Bank working capital guaranty
program. Revolving loan borrowings bear interest at a rate per annum as elected
by the Company equal to 1.5% to 2.0% over LIBOR or 0.0% to 0.50% over the Prime
Rate, both being based on excess availability under the borrowing base.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the critical accounting policies
since December 31, 2004.
14
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 April 1, 2005,
principal exposed to interest rate risk was limited to $35.8 million in variable
rate debt. The interest rates on the Company's various debt instruments range
from 4.5% to 12.25%. 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
$0.4 million impact on the Company's results of operations.
At April 1, 2005, approximately 13.8% of 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 subsidiaries. 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 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
OVERVIEW
In connection with the preparation of its Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, the Company's management identified
material weaknesses in the Company's internal controls over financial reporting.
As defined by the Public Company Accounting Oversight Board ("PCAOB") in
Auditing Standard No. 2, a material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
The identified material weaknesses in the Company's internal controls over
financial reporting have resulted in insufficient controls relating to inventory
accounting, the treatment of foreign currency matters, accounting matters
relating to differences between U.S. and foreign accounting principles and
practices, accounting for non-operating expenses, the accounting treatment of
purchases and sales of the Company's debt securities, executive salary accrual
methodology, the identification and treatment of relevant workers' compensation
reserves and minority interest reserves and the treatment of stock based
compensation expense issues. These weaknesses have resulted in adjustments being
recorded in the Company's financial statements for the first fiscal quarter
ended April 2, 2004. The Company's management has discussed the material
weaknesses with its independent registered public accounting firm, BKD LLP. BKD
LLP issued a "material weakness" letter in connection with its review of the
Company's financial statements for the fiscal year ended December 31, 2004.
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the reports it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including the Company's Chief Executive Officer and Vice
President of Finance, as appropriate, to allow timely decisions regarding
disclosure. The Company's management, with the participation of its Chief
Executive Officer and Vice President of Finance, has performed an evaluation of
the Company's disclosure controls and procedures as of April 1, 2005, the end of
the period covered by this Quarterly Report on Form 10-Q. Based on that
evaluation, which included an review of the matters discussed above, the
Company's Chief Executive Officer and Vice President of Finance concluded that
the Company's disclosure controls and procedures were not effective as of the
end of the period covered by this Quarterly Report on Form 10-Q.
15
CHANGES IN INTERNAL CONTROLS
The Company's management believes that substantial remediation measures are
required in order to improve the Company's internal controls. The Company
believes that the material weaknesses identified above resulted in part from
inadequate staffing and training within the Company's finance and accounting
group, and the Company believes that the process of preparing this Quarterly
Report on Form 10-Q and the related review of the Company's financial statements
for the first fiscal quarter ended April 1, 2005 have resulted in a significant
improvement in the finance and accounting staff's familiarity with the
accounting and financial treatment of the issues identified above. The Company's
management is in the process of reviewing whether additional accounting and
financial management staff should be retained, and intends to review the
question of whether it should utilize additional, or different, outside
resources. At the same time as the Company continues its efforts to improve
internal control over financial reporting and disclosure controls and
procedures, management has implemented additional procedures and controls to
mitigate recognized deficiencies specifically for the preparation of this
Quarterly Report. Management believes that these additional controls and
procedures, when combined with the Company's existing disclosure controls and
procedures and internal control over financial reporting, were effective in
ensuring the proper collection, evaluation and disclosure of the financial and
other information included in this report and that the financial statements
included in this report are fairly stated in all material respects.
16
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.
(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.
17
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/ Ann Montgomery
--------------------
Vice President of Finance
(Chief Accounting Officer)
DATE: MAY 16, 2005
18
EXHIBIT 31.1
CERTIFICATIONS
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 16, 2005
/s/ Russell C. Mello
- -----------------------
Chief Executive Officer
19
EXHIBIT 31.2
CERTIFICATIONS
I, Ann Montgomery, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The GSI Group, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 16, 2005
/s/ Ann Montgomery
- --------------------
Vice-President of Finance
20
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-Q of The
GSI Group, Inc., a Delaware corporation (the "Company"), for the quarter ended
April 1, 2005, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), and pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Russell C. Mello, as
Chief Executive Officer of the Company, and Ann Montgomery, Vice President of
Finance of the Company, hereby certify that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: May 16, 2005
/s/ RUSSELL C. MELLO
-----------------------
Russell C. Mello
Chief Executive Officer
/s/ ANN MONTGOMERY
--------------------
Ann Montgomery
Vice President of Finance
This certification shall not be deemed "filed" by the Company for purposes
of Section 18 of the Securities Exchange Act of 1934. In addition, this
certification shall not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.
21
INDEX TO EXHIBITS
EXHIBIT
NO. DOCUMENT DESCRIPTION
- ------- ----------------------------------------------------------------------
3.1* Amended and Restated Articles of Incorporation of The GSI Group,
Inc., as amended as of October 23, 1997.
3.2 By-Laws of The GSI Group, Inc, as adopted on September 4, 2001.
31.1 Certification of Chief Executive Officer.
31.2 Certification of Vice President of Finance.
32.1 Section 906 Certification.
____________
* Incorporated by reference from the Company's Registration Statement of
Form S-4 (Reg. No. 333-43089) filed with the Commission pursuant to the
Securities Act of 1933, as amended.
22