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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 March 31, 2003
----------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-9307
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GUNDLE/SLT ENVIRONMENTAL, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 22-2731074
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
19103 Gundle Road Houston, Texas 77073
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (281) 443-8564
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant is
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at April 21, 2003
- ---------------------------- -------------------------------
Common stock, par value $.01 11,481,407
GUNDLE/SLT ENVIRONMENTAL, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statements of Income (Loss)
For the Three Months Ended March 31, 2003 and 2002
(Unaudited) 4
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2003 and 2002
(Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2:
Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
ITEM 3:
Quantitative and Qualitative Disclosures About Market
Risk 16
ITEM 4:
Controls and Procedures 16
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K 16
Certifications 18
2
GUNDLE/SLT ENVIRONMENTAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
MARCH 31 DECEMBER 31,
2003 2002
------------------ -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 18,814 $ 42,264
ACCOUNTS RECEIVABLE, NET 41,252 55,715
CONTRACTS IN PROGRESS 3,252 2,043
INVENTORY 36,451 27,352
DEFERRED INCOME TAXES 7,366 9,366
PREPAID EXPENSES AND OTHER 12,553 5,260
---------------- ---------------
TOTAL CURRENT ASSETS 119,688 142,000
PROPERTY, PLANT AND EQUIPMENT, NET 33,660 33,011
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 23,825 22,529
DEFERRED INCOME TAXES 1,616 545
RESTRICTED CASH 14,704 0
OTHER ASSETS 1,515 4,225
---------------- ---------------
$ 195,008 $ 202,310
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 35,384 $ 37,920
ADVANCE BILLINGS ON CONTRACTS
IN PROGRESS 3,751 5,173
CURRENT PORTION OF LONG-TERM DEBT 4,763 4,690
INCOME TAXES PAYABLE 2,618 1,952
---------------- ---------------
TOTAL CURRENT LIABILITIES 46,516 49,735
LONG-TERM DEBT 15,726 16,912
DEFERRED INCOME TAXES 252 252
OTHER LIABILITIES 1,196 1,366
MINORITY INTEREST 1,518 1,614
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 PAR VALUE, 1,000,000 SHARES
AUTHORIZED, NO SHARES ISSUED OR
OUTSTANDING - -
COMMON STOCK, $.01 PAR VALUE, 30,000,000
SHARES AUTHORIZED, 18,524,668 AND 18,437,156 SHARES
ISSUED 185 184
ADDITIONAL PAID-IN CAPITAL 71,613 70,763
RETAINED EARNINGS 96,274 99,149
ACCUMULATED OTHER COMPREHENSIVE INCOME (1,094) (487)
---------------- ---------------
166,978 169,609
TREASURY STOCK AT COST, 7,066,261 and 7,066,261 SHARES (37,178) (37,178)
---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 129,800 132,431
---------------- ---------------
$ 195,008 $ 202,310
================ ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-----------------------------
2003 2002
------------ ------------
SALES AND OPERATING REVENUE $ 39,119 $ 38,730
COST OF PRODUCTS & SERVICES 34,269 32,609
------------ ------------
GROSS PROFIT 4,850 6,121
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,641 7,359
RELOCATION COSTS 73 910
------------ ------------
OPERATING LOSS (2,864) (2,148)
OTHER (INCOME) EXPENSES:
INTEREST EXPENSE 644 659
INTEREST INCOME (102) (72)
OTHER (INCOME) EXPENSE, NET (712) 31
LOSS ON RETIREMENT OF DEBT 0 1,278
MINORITY INTEREST (50) (23)
------------ ------------
LOSS BEFORE INCOME TAXES (2,644) (4,021)
INCOME TAX BENEFIT (926) (1,689)
------------ ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,718) (2,332)
EXTRAORDINARY GAIN - SERROT ACQUISITION 0 24,627
------------ ------------
NET INCOME (LOSS) $ (1,718) $ 22,295
============ ============
BASIC EARNINGS (LOSS) PER SHARE
NET LOSS BEFORE EXTRAORDINARY ITEM (0.15) (0.21)
EXTRAORDINARY ITEM 0.00 2.23
------------ ------------
NET INCOME (LOSS) PER SHARE $ (0.15) $ 2.02
============ ============
DILUTED EARNINGS (LOSS) PER SHARE
NET LOSS BEFORE EXTRAORDINARY ITEM (0.14) (0.21)
EXTRAORDINARY ITEM 0.00 2.23
------------ ------------
NET INCOME (LOSS) PER SHARE $ (0.14) $ 2.02
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,458 11,050
============ ============
DILUTED 11,920 11,050
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
------------------------------------
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (1,718) $ 22,295
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION 2,192 2,059
AMORTIZATION 170 183
DEFERRED INCOME TAXES 929 11
MINORITY INTEREST (50) (23)
GAIN ON SALE OF ASSETS (361) (35)
GAIN ON PURCHASE OF SERROT 0 (24,627)
DEFERRED GAIN ON HEDGE 0 (290)
CHANGE IN OPERATING ASSETS AND LIABILITIES, NET OF
EFFECTS FROM ACQUISITIONS:
ACCOUNTS RECEIVABLE 16,469 19,403
CONTRACTS IN PROGRESS (1,195) (690)
INVENTORY (8,036) (3,382)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (149) (9,592)
ADVANCE BILLINGS ON CONTRACTS IN PROGRESS (1,428) 991
INCOME TAXES PAYABLE (2,295) (,857)
OTHER ASSETS AND LIABILITIES (7,334) (951)
RESTRICTED CASH (14,704) 0
-------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (17,510) 2,495
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT (1,474) (445)
PROCEEDS FROM SALE OF EQUIPMENT 361 108
CASH PAID FOR ACQUISITIONS , NET OF CASH ACQUIRED (3,747) (2,724)
OTHER 0 145
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (4,860) (2,916)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
REVOLVER 0 (4,968)
PAYMENT OF FINANCING FEES 0 (1,994)
PROCEEDS FROM NEW DEBT 0 25,338
PROCEEDS FROM THE EXERCISE OF STOCK OPTIONS AND
PURCHASES UNDER THE EMPLOYEE STOCK PURCHASE PLAN 252 191
RETIREMENT OF LONG-TERM DEBT (1,181) (20,835)
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (929) (2,268)
-------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (151) (83)
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,450) (2,772)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 42,264 16,163
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 18,814 $ 13,391
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation -
General -
The accompanying unaudited, condensed consolidated financial statements
have been prepared by the Registrant ("Gundle/SLT Environmental, Inc." or the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission. These condensed consolidated financial statements reflect all normal
recurring adjustments which are, in the opinion of management, necessary for the
fair presentation of such financial statements for the periods indicated.
Certain information relating to the Company's organization and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States has been
condensed or omitted in this Form 10-Q pursuant to Rule 10-01 of Regulation S-X
for interim financial statements required to be filed with the Securities and
Exchange Commission. However, the Company believes that the disclosures herein
are adequate to make the information presented not misleading. The results for
the three months ended March 31, 2003, are not necessarily indicative of future
operating results. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
The accounting policies followed by the Company in preparing interim
condensed consolidated financial statements are similar to those described in
the "Notes to Consolidated Financial Statements" in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002.
Organization -
Gundle/SLT Environmental, Inc., a Delaware corporation, through GSE Lining
Technology, Inc. and the Company's other operating subsidiaries, is primarily
engaged in the manufacture, sale and installation of geosynthetic lining
systems.
Stock-Based Compensation -
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-based Compensation, the Company has
elected to continue to follow the Accounting Principles Board Opinion ("APB")
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock-based compensation plans. Under APB 25, if the
exercise price of employee stock options equals or exceeds the fair value of the
underlying stock on the date of grant, no compensation expense is recognized.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share as if the fair value method, in
6
accordance with Statement of Financial Accounting Standards No. 123, had been
applied to all outstanding and unvested awards in each period.
Three Months Ended
March 31, March 31,
2003 2002
--------- ---------
Net income (loss) applicable to common
stockholders
As reported.................................... $ (1,718) $ 22,295
Total stock-based employee compensation
expense under fair value based method for 217 81
all awards, net of tax........................
-------- ----------
Pro forma net income (loss) applicable to
common stockholders $ (1,935) $ 22,214
======== ==========
Basic earnings (loss) per share
As reported.................................... $ (.15) $ 2.02
Pro forma...................................... $ (.17) $ 2.01
Diluted earnings (loss) per share
As reported.................................... $ (.14) $ 2.02
Pro forma...................................... $ (.16) $ 2.01
Reclassifications -
The accompanying consolidated 2002 financial statements contain certain
reclassifications to conform to the presentation used in 2003.
(2) Inventory -
Inventory is stated at the lower of cost or market. Cost, which includes
material, labor and overhead, is determined by the weighted average cost method,
which approximates the first in, first out cost method. Inventory consisted of
the following (000's):
March 31, December 31,
2003 2002
------------ -----------
Raw materials and supplies $ 11,547 $ 7,588
Finished goods 24,904 19,764
--------- ---------
$ 36,451 $ 27,352
(3) Income Taxes -
The Company's provision for income taxes is recorded at the statutory rates
adjusted for the effect of any permanent differences. The Company has a tax
holiday in Thailand through 2003 and a 50% reduced tax rate for 2004 through
2008.
(4) Equity -
On September 18, 1998, the Company's board of directors adopted a stock
repurchase plan under which the Company was authorized to repurchase up to
1,000,000 shares of its outstanding common stock in
7
open market transactions depending on market conditions. This amount was
increased to 3,000,000 shares as of December 31, 2000. As of March 31, 2003,
stockholders' equity included 1,380,357 shares repurchased under this program.
All of these transactions were funded with the Company's available cash. At
March 31, 2003, the Company had 11,458,407 shares outstanding.
(5) Other Comprehensive Income -
During the first quarter of 2003 and 2002, other comprehensive income
(losses), representing foreign currency translation adjustments, amounted to
$(607,000) and $(527,000), respectively. The 2003 loss included a cumulative
translation adjustment of $(1,882,000) related to the Company's January 2003
purchase of its joint venture partner's 50% interest in its Egyptian joint
venture formed in 1996. This cumulative adjustment resulted from a decline in
the Egyptian Pound exchange rate during the period the joint venture investment
was accounted for under the equity method of accounting.
(6) Business Combinations -
Serrot Acquisition 2002
On February 4, 2002, the Company completed the purchase of all the
outstanding stock of Serrot International, Inc. (SII) from Waste Management
Holdings, Inc. at a purchase cost of $12.0 million, which included $338,000 of
debt assumed. The total cost of the acquisition was $16.4 million, which
includes the purchase price and after tax costs associated with severances and
closing a SII plant. During 2002, the Company recorded the transaction using the
purchase method of accounting resulting in the recognition of a $26.0 million
extraordinary gain representing the excess fair value of the assets acquired
over the purchase price after its allocation to SII's long-lived assets net of
their associated tax benefits. The $24.6 million recognized as an extraordinary
gain for the three months ended March 31, 2002, is different from the
extraordinary gain for the year ended December 31, 2002, due to purchase
accounting adjustments recorded during the subsequent 2002 quarters.
In conjunction with the SII acquisition, the Company established a pre-tax
liability of $7.7 million for estimated severance and other costs associated
with the involuntary termination of SII employees and the closing of a SII
plant. Through March 31, 2003, approximately $6.6 million of these costs have
been paid. The Company anticipates substantially all of these estimated costs
will be paid by the end of 2003.
8
Unaudited pro forma, combined operating results of the Company and SII
assuming the merger was completed as of January 1, 2002 is summarized as
follows:
Three Months Ended
March 31, 2002
Sales and Operating Revenue $47,413
Net Loss ($3,162)
Basic Loss per Share ($.29)
Diluted Loss per Share ($.29)
Egyptian Acquisition 2003
In January 2003, the Company completed the acquisition of the stock of
Hyma/GSE Manufacturing Co. S.A.E., and Hyma/GSE Lining Technology Co. S.A.E.
held by its joint venture partners in Cairo, Egypt, for $4 million. The Company
recorded $1,601,000 of goodwill with the acquisition. In addition, the Company
agreed to purchase a blown film round die extrusion manufacturing line currently
leased to Hyma/GSE Manufacturing Co. S.A.E., by the end of 2003, at a price of
$950,000, and to relocate the manufacturing equipment within 24 months of such
purchase.
(7) Plant Closing -
In September 2002, the Company committed to a restructuring plan involving
the closure of its Calgary plant and relocation of its main production line to
Houston, Texas. The Company established a liability of $700,000 for the costs of
closure, primarily the estimated severance-related costs associated with the
involuntary termination of 41 employees pursuant to this plan. The charge was
reported as a Relocation Cost in the Company's 2002 consolidated statement of
operations. Through March 31, 2003, approximately $490,000 of these costs had
been paid. The Company anticipates that substantially all amounts will be paid
by the end of the second quarter of 2003.
(8) Refinancing -
On February 4, 2002, the Company entered into a note agreement with one
lender in the amount of $25,000,000 and entered into a 3-year credit agreement
with Bank of America, N.A., as agent, to borrow up to $55,000,000 on a revolving
basis. Simultaneously the Company paid off its $20,000,000, 7.34% notes. The
refinancing resulted in a loss of $1,278,000 before income taxes which has been
reported as Loss on Retirement of Debt for the three months ended March 31,
2002.
9
(9) New Accounting Pronouncements -
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections.
This statement eliminates the requirement under SFAS 4 to aggregate and classify
all gains and losses from extinguishment of debt as an extraordinary item, net
of related income tax effect. This statement also amends SFAS 13 to require
certain lease modifications with economic effects similar to sale-leaseback
transactions to be accounted for in the same manner as sale-leaseback
transactions. In addition, SFAS 145 requires reclassification of gains and
losses in all prior periods presented in comparative financial statements
related to debt extinguishment that do not meet the criteria for extraordinary
item in APB 30. The statement is effective for fiscal years beginning after May
15, 2002, with early adoption encouraged. The Company adopted SFAS 145 effective
January 1, 2003. The adoption of the statement resulted in the reclassification
of the extraordinary loss on extinguishment of debt of $1,278,000 from
extraordinary loss to loss on retirement of debt.
In July 2002, the FASB issued SFAS 146, Obligations Associated with
Disposal Activities, which is effective for disposal activities initiated after
December 31, 2002, with early application encouraged. SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs in a Restructuring). Under this statement, a
liability for a cost associated with an exit or disposal activity would be
recognized and measured at its fair value when it is incurred rather than at the
date of commitment to an exit plan. Also, severance pay would be recognized over
time rather than up front provided the benefit arrangement requires employees to
render service beyond a minimum retention period, which would be based on the
legal notification period, or if there is no such requirement, 60 days, thereby
allowing a liability to be recorded over the employees' future service period.
The Company adopted SFAS 146 effective with disposal activities initiated after
December 31, 2002. The adoption of this statement has not had a material effect
on the Company's consolidated financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Interpretation requires certain
guarantees to be recorded at fair value and also requires a guarantor to make
certain disclosures regarding guarantees. The Interpretation's initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The adoption of
this Interpretation has not had a material impact on the Company's consolidated
financial statements or disclosures.
10
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which is effective for fiscal years
ended after December 15, 2002. SFAS 148 amends SFAS 123, Accounting for
Stock-Based Compensation to permit two additional transition methods for a
voluntary change to the fair value method of accounting for stock-based employee
compensation from the intrinsic method under APB 25, Accounting for Stock Issued
to Employees, and does not permit the prospective method of transition under
SFAS 123. In addition, SFAS No. 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements concerning the method of accounting used for stock-based employee
compensation and the effects of that method on reported results of operations.
Under SFAS 148, pro forma disclosure will be required in a specific tabular
format in the "Summary of Significant Accounting Policies." The Company has
adopted the disclosure requirements of this statement effective December 16,
2002. The adoption had no effect on the Company's consolidated financial
position or results of operations. The Company continues to account for its
stock-based compensation plans under APB 25.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RECENT DEVELOPMENT
Management believes the value of the Company exceeds its book value which
was approximately $130 million at March 31, 2003, and has engaged an advisor
investment banker, Harris Williams & Co. This advisory group is studying the
Company and its opportunities, and will make recommendations to management on
ways to increase shareholder value. They are considering acquisitions, mergers,
joint ventures, and even the sale of the Company.
RESULTS OF OPERATIONS
Quarter:
For the three months ended March 31, 2003, sales and operating revenue was
$39,119,000 compared with $38,730,000 for the same period last year. While U.S.
units shipped were up 11%, sales and operating revenue of $17,826,000 was 7.5%
lower than the same period last year. A larger percentage of 2003 first quarter
U.S. shipments were to installation jobs and installation activities resulted in
lower service revenues during the first quarter of 2003. Foreign sales and
operating revenue was $21,293,000, 4.0% higher than last year, and included
$1,086,000 from the Egyptian entity acquired in 2003. Foreign units shipped were
up 4.2%. Foreign currency translation increased 2003 foreign sales and operating
revenue by approximately $2,157,000.
Gross profit for the quarter was $4,850,000, or 21% lower than the prior
year at $6,121,000. Gross profit, as a percentage of sales
11
and operating revenue, decreased to 12.4% from 15.8% last year. These decreases
were due to unabsorbed fixed costs that resulted from lower installation and
manufacturing activity. Foreign currency translation increased 2003 gross profit
by approximately $427,000.
Selling, general and administrative (SG&A) expenses were $7,641,000
compared with $7,359,000 in the first quarter of 2002, a 4% increase. This
increase was almost exclusively a result of foreign currency translation. SG&A,
as a percent of sales, was 19.5% compared to 19.0% last year.
Relocation costs of $73,000 are expenses the Company incurred to relocate
inventory and equipment from the Canadian plant closed in December 2002, to its
plant in Houston, Texas. Relocation costs of $910,000 in 2002 are related to
costs of closing SII acquired facilities and relocating inventory and equipment
to locations in Houston, Texas and Kingstree, South Carolina, certain legal and
professional costs, and an accrual for an internal bonus program that was
payable contingent upon the attainment of targeted synergy savings during 2002.
Interest expense of $644,000 was 2.3% lower than last year primarily due to
the reduction in the outstanding balance of long-term debt that is being re-paid
in monthly installments. Average debt outstanding during the quarter was
$2,904,000 lower than last year.
Other (income) expense, net, decreased from $1,873,000 of expense in 2002,
to $220,000 of income in 2003. The 2002 refinancing resulted in a loss of
retirement of debt of $1,278,000 before income taxes for the three months ended
March 31, 2002. Foreign exchange was $166,000 more favorable than last year
primarily due to some Euro receivables in the United States partially offset by
fees for unused line of credit. Gain from the sale of equipment increased by
$329,000, royalty income increased by $59,000, and other income from Egypt was
$39,000.
The quarterly provision for income taxes was a benefit of $926,000 compared
with a $1,689,000 benefit in the same period last year. The year-to-date tax
provision was determined at the statutory rates adjusted for certain permanent
differences on an entity-by-entity, year-to-date basis. The year 2003 rate was
favorably impacted by a reduced rate in Germany through the declaration of a
dividend to the U.S. parent company. The Company has a tax holiday in Thailand
through 2003 and a 50% reduced tax rate for 2004 through 2008.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
The Company's primary source of liquidity during the first quarter of 2003
was cash on hand. At March 31, 2003, the Company had working capital of
$73,172,000 of which $18,814,000 was cash and cash equivalents. The Company's
operating results and liquidity are normally reduced in the first quarter as
both product deliveries and
12
installations are at their lowest levels due to inclement weather experienced in
the Northern Hemisphere. Nevertheless, the Company believes that it has
sufficient funds (on hand and expected from future operations) and adequate
financial resources available to meet its anticipated liquidity needs including
anticipated requirements for working capital, capital expenditures, and debt
service in 2003.
Total capitalization as of March 31, 2003 was $150,289,000, consisting of
total debt of $20,489,000 and equity of $129,800,000. The debt-to-capitalization
ratio at March 31, 2003 was 13.6% compared to 14.0% at the end of fiscal year
2002.
In January 2003, the Company purchased its joint venture partner's
remaining 50% interest in its Egyptian joint venture for a price of $4,000,000.
The Company also has a commitment to purchase a blown film round die extrusion
manufacturing line, currently leased to the end of calendar year 2003, for
$950,000.
The Company has a contract to sell its Calgary, Canada facility, closed on
December 31, 2002, for approximately $2,000,000. The sale is expected to be
completed in 2003.
On January 6, 2003, a judgment was entered against the Company in the
United States District Court for the Northern District of Texas for damages
arising out of the alleged patent infringement activities of SII conducted prior
to the acquisition of SII by the Company. The jury in Dallas determined that SII
had willfully infringed upon two patents held by Poly-America, L.P., one for the
manufacturing process and a second patent for the smooth edge textured sheet
produced on round die blown film manufacturing equipment. The court entered
judgment in the amount of $12,232,000 together with reasonable attorneys' fees
and prejudgment interest at the rate provided by law. The Company posted a
$14,678,000 supersedeas appeal bond issued by Westchester Fire Insurance Company
and entered into a Collateral Agreement with Westchester whereby the Company
deposited funds equal to the bond amount. The Collateral Agreement provides for
interest on the deposited fund, which interest accrues to the Company's benefit.
The Company has filed the appropriate motions to overturn the jury's verdict. If
not successful at the trial court level the Company will file an appeal to the
Court of Appeals sitting in Washington, D.C. On the advice of legal counsel, the
Company anticipates a favorable ruling on its appeal. However, such an outcome
is not assured. No amount has been accrued for this judgment.
The Company has a stock repurchase plan with 1,619,643 shares still
authorized. The repurchase program is inactive.
Credit Facilities
On February 4, 2002, the Company entered into a note agreement with a
lender in the amount of $25,000,000. This 3-year term facility is secured by the
Company's Houston, TX, and Kingstree, SC, real properties and all of the
Company's equipment at these locations. The promissory note requires monthly
payments of approximately $520,000 including interest at the rate of 9.22% and
matures on February 5, 2005 with a balloon payment equal to the unpaid principal
balance plus
13
accrued and unpaid interest. The terms of the note place various restrictions on
the Company's ability to pay dividends or make certain other payments, incur
additional debt, consolidate or merge into another corporation or sell assets
and make capital expenditures. The note also requires the Company to maintain
certain financial ratios and specified levels of consolidated net worth. At
March 31, 2003, the Company's balance outstanding under the note was
$20,489,000.
On February 4, 2002, the Company entered into a 3-year credit agreement
with Bank of America, N.A., as agent, to borrow up to $55,000,000 on a revolving
basis. The amount of borrowings allowed under the credit agreement is determined
by the amount of eligible receivable and inventory amounts that make up the
borrowing base. Loans made pursuant to the credit agreement bear interest, at
the Company's option, at the bank's prime rate or the reserve adjusted LIBOR
plus an applicable margin based on the ratio, from time-to-time, of the
Company's EBITDA (as defined in the credit agreement) to certain "fixed
charges", including principal paid on funded debts, cash interest expense,
dividends, stock repurchases and certain other distributions made, cash amount
of taxes paid and net capital expenditures made from time-to-time. The
applicable margin for prime rate loans may vary between 0% and .25% per annum,
and the applicable margin for LIBOR based loans may vary between 2% and 2.75%
per annum. Fees will be payable from time-to-time with respect to letters of
credit issued pursuant to the credit agreement at a rate equal to the margin
payable with respect to LIBOR based revolving loans. An annual commitment fee of
3/8% is payable on any unused portion of the facility. The terms of the credit
agreement place various restrictions on the Company's ability to pay dividends
or make certain other payments, incur additional debt, consolidate or merge into
another corporation or sell assets and to make capital expenditures. The credit
agreement also requires the Company to maintain certain financial ratios and
specified levels of consolidated net worth. As of March 31, 2003, the Company
had $16,064,000 available under this credit agreement.
At March 31, 2003, the Company had credit facilities with three German
banks in the amount of EUR 7,600,000. These revolving credit facilities are
secured by a corporate guarantee and bear interest at various market rates.
These credit facilities are used primarily to guarantee the performance of
European installation contracts and temporary working capital requirements. At
March 31, 2003, the Company had EUR 4,226,000 available under these credit
facilities with EUR 3,374,000 of bank guarantees outstanding.
Sources and Uses of Cash
Cash used in operating activities during the first quarter ended 2003 was
$17,510,000, compared to $2,495,000 generated from operating activities in the
prior year. The decrease has resulted from the lower operating results in 2003,
an increase in working capital during 2003, and the purchase of the supersedeas
bond as required by the Poly-America judgment (see Sources of Liquidity above).
Cash used by investing activities during the first quarter ended March 2003
was $4,860,000, compared to $2,916,000 in the prior year.
14
Cash of $1,113,000 was used for capital expenditures, net of the proceeds from
fixed assets sold, compared to $337,000 last year. During 2003, the purchase of
the Egyptian joint venture used cash of $3,747,000, net of cash acquired, while
the Company's purchase of SII used $2,724,000, net of cash acquired, in the
first quarter of 2002.
Cash used in financing activities during the first quarter ended March 2003
was $929,000, compared to $2,268,000 in the prior year. The difference is a
result of a revised debt retirement schedule pursuant to the refinancing of debt
in February 2002 (see Credit Facilities above).
Other
The Company's operations are subject to seasonal fluctuation with the
greatest volume of product deliveries and installations typically occurring in
the summer and fall months. In particular, the Company's operating results are
most impacted in the first quarter as both product deliveries and installations
are at their lowest levels due to the inclement weather experienced in the
Northern Hemisphere.
The Company's foreign subsidiaries routinely accept contracts in currencies
different than their functional currency. The Company recognizes that such
practices are subject to the risk of foreign currency fluctuations not present
in U.S. operations. Foreign exchange gains and losses to date have not been
material to the Company's operations as a whole.
Pricing for the Company's products and services is primarily driven by
worldwide manufacturing capacity in the industry, and by raw material costs. The
Company's primary raw materials, polyethylene and polypropylene, are
occasionally in short supply and subject to substantial price fluctuation in
response to market demand and the price of feed stocks, including natural gas.
Any increase in the industry's worldwide manufacturing capacity, interruption in
raw material supply or electricity supply, or abrupt raw material price
increases could have an adverse effect upon the Company's operations and
financial performance. Inflation has not had a significant impact on the
Company's operations.
Critical Accounting Policies and Estimates
A discussion of critical accounting policies is included in the Company's
2002 Annual Report on Form 10-K. There have been no material changes in critical
accounting policies since the date of that filing, or during the quarter ended
March 31, 2003.
* * *
Forward-looking information:
This Form 10-Q contains certain forward-looking statements as such is
defined in the Private Securities Litigation Reform Act of
15
1995, and information relating to the Company and its subsidiaries that are
based on beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words, "anticipate", "believe", "estimate", "expect", "intend" and
words of similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors including, without limitations, competitive market factors,
world-wide manufacturing capacity in the industry, general economic conditions
around the world, raw material pricing and supply, governmental regulation and
supervision, seasonality, distribution networks, and other factors described
herein. Based upon changing conditions, should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
No material change since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2003, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the design and operation of
the Company's disclosure controls and procedures. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of March 31,
2003. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to March 31, 2003.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No.
99.1 -Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of Samir T. Badawi
16
99.2 -Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of Roger J. Klatt
(b) Reports on From 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GUNDLE/SLT ENVIRONMENTAL, INC.
DATE April 24, 2003 BY /S/ Roger J. Klatt
------------------- -------------------------------
ROGER J. KLATT,
EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
17
CERTIFICATIONS
I Samir T. Badawi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gundle/SLT
Environmental, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or person's
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date April 24, 2003
--------------
/S/ Samir T. Badawi
--------------------
Samir T. Badawi
President &
Chief Executive Officer
19
CERTIFICATIONS
I Roger J. Klatt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gundle/SLT
Environmental, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report,fairly present in all
material respects the financialcondition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or person's
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
20
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date April 24, 2003
--------------
/S/ Roger J. Klatt
--------------------
Roger J. Klatt
Chief Financial Officer
21