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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / 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 1-9753
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GEORGIA GULF CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-1563799
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 PERIMETER CENTER TERRACE, SUITE 595, ATLANTA, GEORGIA 30346
Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (770) 395-4500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AS OF
CLASS OCTOBER 18, 1999
----- -----------------
Common Stock, $0.01 par value 30,966,774 shares
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GEORGIA GULF CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
PAGE
NUMBERS
PART I. FINANCIAL INFORMATION --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998........ 1
Condensed Consolidated Statements of Income for
the Three and Nine Months Ended September 30,
1999 and 1998................................... 2
Condensed Consolidated Statements of Cash Flows
for the Nine Months
Ended September 30, 1999 and 1998............... 3
Notes to Condensed Consolidated Financial
Statements as of
September 30, 1999.............................. 4-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 8-12
Item 3. Quantitative and Qualitative Disclosure About
Market Risk............................................. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................ 13
Item 6. Exhibits and Reports on Form 8-K................. 13
SIGNATURES.................................................. 14
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
GEORGIA GULF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS
Cash and cash equivalents................................... $ 3,213 $ 1,244
Receivables................................................. 63,657 60,964
Insurance receivable........................................ 419 9,030
Inventories................................................. 67,755 69,339
Prepaid expenses............................................ 2,785 2,227
Deferred income taxes....................................... 6,492 6,492
----------- -----------
Total current assets...................................... 144,321 149,296
----------- -----------
Property, plant and equipment, at cost...................... 666,261 656,527
Less accumulated depreciation............................. (300,337) (268,334)
----------- -----------
Property, plant and equipment, net...................... 365,924 388,193
----------- -----------
Goodwill.................................................... 83,295 85,154
----------- -----------
Other assets................................................ 33,133 29,626
----------- -----------
Net assets of discontinued operations....................... 3,532 13,319
----------- -----------
Total assets................................................ $ 630,205 $ 665,588
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 78,963 $ 65,270
Interest payable............................................ 4,316 2,272
Accrued taxes, other than income............................ 8,896 2,355
Accrued compensation........................................ 4,962 6,814
Other accrued liabilities................................... 11,421 10,856
----------- -----------
Total current liabilities................................. 108,558 87,567
----------- -----------
Long-term debt.............................................. 396,525 459,475
----------- -----------
Deferred income taxes....................................... 90,861 89,665
----------- -----------
Stockholders' equity
Common stock--$0.01 par value............................. 309 309
Additional paid-in capital................................ 602 --
Retained earnings......................................... 33,350 28,572
----------- -----------
Total stockholders' equity.............................. 34,261 28,881
----------- -----------
Total liabilities and stockholders' equity.................. $ 630,205 $ 665,588
=========== ===========
Common shares outstanding................................... 30,944,574 30,883,754
=========== ===========
See notes to condensed consolidated financial statements.
1
GEORGIA GULF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net sales................................. $ 213,277 $ 208,517 $ 573,253 $ 638,713
----------- ----------- ----------- -----------
Operating costs and expenses
Cost of sales........................... 175,302 161,883 487,122 503,698
Selling and administrative.............. 9,288 11,964 29,206 33,059
----------- ----------- ----------- -----------
Total operating costs and expenses.... 184,590 173,847 516,328 536,757
----------- ----------- ----------- -----------
Operating income.......................... 28,687 34,670 56,925 101,956
Other expense
Loss on interest rate hedge agreement... -- 9,500 -- 9,500
Interest, net........................... 7,037 8,053 21,719 22,882
----------- ----------- ----------- -----------
Income from continuing operations before
income taxes............................ 21,650 17,117 35,206 69,574
Provision for income taxes................ 7,903 6,278 12,850 25,965
----------- ----------- ----------- -----------
Income from continuing operations......... $ 13,747 $ 10,839 $ 22,356 $ 43,609
----------- ----------- ----------- -----------
Discontinued Operations
(Loss) earnings from discontinued
operations, net of tax................ $ (520) $ (664) $ (2,525) $ 28
Loss on disposal of discontinued
operations, net of tax................ (7,631) -- (7,631) --
----------- ----------- ----------- -----------
Net income................................ $ 5,596 $ 10,175 $ 12,200 $ 43,637
=========== =========== =========== ===========
Earnings (loss) per share:
Basic
Continuing operations................. $ 0.44 $ 0.35 $ 0.72 $ 1.38
Discontinued operations............... (0.26) (0.02) (0.33) --
----------- ----------- ----------- -----------
$ 0.18 $ 0.33 $ 0.39 $ 1.38
=========== =========== =========== ===========
Diluted
Continuing operations................. $ 0.44 $ 0.35 $ 0.72 $ 1.36
Discontinued operations............... (0.26) (0.02) (0.33) --
----------- ----------- ----------- -----------
$ 0.18 $ 0.33 0.39 $ 1.36
=========== =========== =========== ===========
Weighted average common shares
Basic................................... 30,936,764 31,047,468 30,919,368 31,691,501
Diluted................................. 31,068,452 31,287,379 31,004,457 32,044,014
See notes to condensed consolidated financial statements.
2
GEORGIA GULF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
--------- ---------
Cash flows from operating activities:
Net income................................................ $ 12,200 $ 43,637
Adjustments to reconcile net income to net cash provided
by operating activities, net of acquired amounts:
Depreciation and amortization......................... 34,392 32,594
Provision for deferred income taxes................... 1,196 10,916
Loss on disposal of discontinued operations, net...... 7,631 --
Loss (earnings) on discontinued operations, net....... 2,525 (28)
Change in operating assets, liabilities and other..... 24,053 22,756
--------- ---------
Net cash provided by continuing operations.................. 81,997 109,875
Net cash (used in) provided by discontinued operations...... (369) 2,934
--------- ---------
Net cash provided by operating activities................... 81,628 112,809
--------- ---------
Cash flows from financing activities:
Long-term debt proceeds................................... 115,000 180,300
Long-term debt payments................................... (177,950) (110,000)
Proceeds from issuance of common stock.................... 471 1,377
Purchase and retirement of common stock................... -- (55,002)
Dividends paid............................................ (7,422) (7,561)
--------- ---------
Net cash (used in) provided by financing activities......... (69,901) 9,114
--------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (9,758) (20,148)
Acquisition, net of cash acquired......................... -- (99,902)
--------- ---------
Net cash used in investing activities....................... (9,758) (120,050)
--------- ---------
Net change in cash and cash equivalents..................... 1,969 1,873
Cash and cash equivalents at beginning of period............ 1,244 1,621
--------- ---------
Cash and cash equivalents at end of period.................. $ 3,213 $ 3,494
========= =========
See notes to condensed consolidated financial statements.
3
GEORGIA GULF CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. For further information, refer to the
consolidated financial statements and footnotes thereto included in the annual
report for the year ended December 31, 1998 for Georgia Gulf Corporation and its
subsidiaries (the "Company" or "Georgia Gulf").
Operating results for Georgia Gulf for the three- and nine-month periods
ended September 30, 1999, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
NOTE 2: NEW ACCOUNTING PRONOUNCEMENT
During June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows derivative gains and losses to offset related results
on the hedged item in the income statement, and requires that a company must
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. In June 1999, the FASB issued SFAS No. 137 which
deferred the effective date of SFAS No. 133 for fiscal quarters of all fiscal
years beginning after June 15, 2000, although earlier adoption is permitted.
SFAS No. 133 cannot be applied retroactively. Management has not yet quantified
the impacts of adopting SFAS No. 133 on the Company's financial statements.
NOTE 3: DISCONTINUED OPERATIONS
On September 2, 1999, the Company announced its decision to exit the
methanol business at the end of 1999. In connection with the discontinuance of
the methanol business, Georgia Gulf incurred a one-time charge of $7.6 million
(net of taxes) related to the write-off of the methanol plant assets, net of
expected proceeds, and an accrual for estimated losses during the phase-out
period. Georgia Gulf will fulfill customer contracts with purchased methanol
until December 31, 1999. The methanol plant remains idle and management intends
to dismantle the facility at some time in the future. A number of methanol sales
contracts have been assigned and Georgia Gulf's customer list has been sold. Net
proceeds from the sale of the methanol railcars, customer list and other
discontinued plant assets are estimated at $2.9 million. The disposition of the
methanol operations represents the disposal of a business segment under APB
Opinion No. 30. Accordingly, results of these operations have been classified as
discontinued and prior periods have been restated, including the reallocation of
fixed overhead charges to other business segments. For business segment
reporting purposes, the methanol business results were previously classified as
the segment "Gas Chemicals".
4
GEORGIA GULF CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: DISCONTINUED OPERATIONS (CONTINUED)
Net sales and income from discontinued operations are as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net sales.............................. $ 9,710 $11,948 $ 26,181 $40,012
======== ======= ======== =======
Pretax (loss) income from discontinued
operations........................... $ (819) $(1,048) $ (3,976) $ 45
Loss on disposal of business segment... (12,017) -- (12,017) --
Income tax benefit (expense)........... 4,685 384 5,837 (17)
-------- ------- -------- -------
Net (loss) income from discontinued
operations........................... $ (8,151) $ (664) $(10,156) $ 28
======== ======= ======== =======
Net assets of discontinued operations were as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Current assets...................................... $ 9,023 $ 4,536
Property, plant, and equipment, net................. -- 12,956
Current liabilities................................. (2,576) (1,189)
Long term liabilities............................... (2,915) (2,984)
------- -------
Net assets of discontinued operations............... $ 3,532 $13,319
======= =======
NOTE 4: INVENTORIES
The major classes of inventories were as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Raw materials and supplies.......................... $37,074 $26,462
Finished goods...................................... 30,681 42,877
------- -------
$67,755 $69,339
======= =======
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
Georgia Gulf has two interest rate swap agreements for a total notional
amount of $100,000,000 maturing in June 2002 to fix the interest rate on a term
loan. Also, the Company has an interest rate swap agreement for a notional
amount of $100,000,000 as a cash flow hedge for a cogeneration facility
operating lease agreement. This interest rate swap agreement will mature
August 2002.
In June 1998, the Company filed a shelf registration with the Securities and
Exchange Commission for the issuance of $200,000,000 of long-term bonds. Shortly
after the filing, the Company entered into an agreement to lock-in interest
rates on a portion of the long-term bonds. During the third quarter, treasury
yields plunged to their lowest levels in thirty years, while at the same time,
investors' preference for treasury bonds and reluctance to buy corporate bonds
limited the Company's ability to
5
GEORGIA GULF CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
issue longer-term bonds. As a result, the Company's plans to issue long-term
bonds were postponed indefinitely and the interest rate lock agreements were
terminated, resulting in a pre-tax loss of $9,500,000 in the third quarter of
1998.
Georgia Gulf does not use derivatives for trading purposes. Interest rate
swap agreements, a form of derivative, are used by the Company to manage
interest costs on certain portions of the Company's long-term debt. These
financial statements do not reflect temporary market gains and losses on
derivative financial instruments. Amounts paid or received on the interest rate
swap agreements are recorded to interest expense as incurred. As of
September 30, 1999, and December 31, 1998, interest rate swap agreements were
the only form of derivative financial instruments outstanding. The fair value
position of these swap agreements as of September 30, 1999 and December 31, 1998
was a receivable of $410,000 and a payable of $6,412,000, respectively.
NOTE 6: EARNINGS PER SHARE
The numerator in basic and diluted earnings per share computations is
reported net income and income from continuing and discontinued operations.
The following table reconciles the denominator for the basic and diluted
earnings per share computations shown on the condensed consolidated statements
of income (in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Weighted average common shares--basic....... 30,936 31,047 30,919 31,692
Plus incremental shares from assumed
conversions:
Options................................... 99 165 61 242
Employee stock purchase plan rights....... 33 75 24 110
------ ------ ------ ------
Weighted average common shares--diluted..... 31,068 31,287 31,004 32,044
====== ====== ====== ======
NOTE 7: SEGMENT INFORMATION
SFAS No. 131--"Disclosures about Segments of an Enterprise and Related
Information" became effective for fiscal year 1998 and for all succeeding
interim reporting periods. In accordance with the requirements of SFAS No. 131,
the Company has identified two reportable segments through which it conducts its
operating activities: chlorovinyls and aromatics. These two segments reflect the
organization used by Company management for internal reporting. The chlorovinyls
segment is a highly integrated chain of products which includes chlorine,
caustic soda, vinyl chloride monomer and vinyl resins and compounds. The
aromatics segment is also vertically integrated and includes cumene and the
co-products phenol and acetone. A third product segment, gas chemicals, which
included methanol, was discontinued in the third quarter of 1999.
Earnings of industry segments exclude interest income and expense,
unallocated corporate expenses and general plant services, provision for income
taxes, and income and expense items
6
GEORGIA GULF CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: SEGMENT INFORMATION (CONTINUED)
reflected as "other income (expense)" on the Company's consolidated statements
of income. Intersegment sales and transfers are insignificant.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Segment net sales:
Chlorovinyls...................... $155,121 $130,636 $408,391 $390,936
Aromatics......................... 58,156 77,881 164,862 247,777
-------- -------- -------- --------
Net sales........................... $213,277 $208,517 $573,253 $638,713
======== ======== ======== ========
Segment operating income:
Chlorovinyls...................... $ 28,414 $ 18,832 $ 52,796 $ 54,591
Aromatics......................... 3,682 19,842 12,899 59,278
Corporate and general plant
services........................ (3,409) (4,004) (8,770) (11,913)
-------- -------- -------- --------
Total operating income.............. $ 28,687 $ 34,670 $ 56,925 $101,956
======== ======== ======== ========
NOTE 8: ACQUISITION OF NORTH AMERICAN PLASTICS, INC.
On May 11, 1998, the Company acquired all the issued and outstanding common
stock (the "Stock") of North American Plastics, Inc. ("North American
Plastics"), a privately-held manufacturer of flexible polyvinyl chloride ("PVC")
compounds with a production capacity of 190,000,000 pounds. North American
Plastics has two manufacturing locations in Mississippi, with revenues for 1997
of approximately $90,000,000. Its PVC compounds are used in wire and cable for
construction, automobiles and appliances, as well as various other consumer and
industrial products.
The Stock was acquired in exchange for net cash consideration of $99,902,000
plus the assumption of $500,000 in debt. The cash portion of the acquisition was
financed with proceeds from the Company's existing revolving credit facility.
The transaction was accounted for as a purchase and the consideration exchanged
exceeded the fair market value of the net tangible assets of North American
Plastics by approximately $86,725,000. This excess was allocated to goodwill and
is being amortized on a straight-line basis over a period of 35 years. The
results of operations of the acquired business have been included in Georgia
Gulf's condensed consolidated financial statements from the date of acquisition.
Pro forma results of operations have not been presented because the effect of
this acquisition was not significant.
NOTE 9: ACQUISITION OF VINYLS BUSINESS OF CONDEA VISTA
On August 30, 1999, the Company announced that it signed a definitive
agreement to acquire the vinyls business of CONDEA Vista Company for
approximately $270 million. The purchase includes substantially all of the
assets and the net working capital of the vinyls business as of the closing
date. The Company will finance the acquisition with a combination of new debt
and a refinancing of certain existing credit facilities and expects to complete
the transaction in the fourth quarter of 1999. The acquisition will be accounted
for by the purchase method of accounting for business combinations as of the
closing date.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Georgia Gulf is a leading manufacturer and marketer of two highly integrated
chemical lines, chlorovinyls and aromatics. The Company's chlorovinyl products
include chlorine, caustic soda, sodium chlorate, vinyl chloride monomer ("VCM"),
and polyvinyl chloride ("PVC") resins and compounds; the Company's primary
aromatic chemical products include cumene, phenol and acetone. On September 2,
1999, Georgia Gulf announced its decision to exit the methanol business at the
end of the year.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES. Net sales for the quarter ended September 30, 1999 were
$213.2 million, a gain of 2 percent compared to $208.5 million for the same
period in 1998. This gain was due to an increase of the overall average selling
price of 13 percent offset in part by a decline in sales volumes of 10 percent.
Net sales of chlorovinyls for the third quarter of 1999 were
$155.1 million, an increase of 19 percent compared to $130.6 million in the
third quarter of 1998. This increase was the result of a 22 percent increase in
average selling prices, offset in part by a 6 percent decline in sales volumes.
Strong demand for vinyl products, particularly VCM and PVC resins, resulted in
higher average selling prices which were partially offset by a 60 percent
decrease in caustic soda pricing. Contributing to lower sales volumes were
chlorine, caustic soda and PVC resins, offset in part by an increase in PVC
compound sales volumes. Additionally, chlorovinyls segment benefited from
increased electricity sales during certain peak demand periods in the third
quarter of 1999.
Net sales of aromatics for the third quarter of 1999 were $58.2 million, a
decrease of 25 percent compared to $77.9 million for the same period in 1998.
This decrease was the result of a 15 percent decrease in sales volume and a
13 percent decline in prices. Lower cumene sales volumes were partially offset
with an increase in cumene selling prices. Phenol prices decreased 29 percent
from the prior year period, resulting from new capacity additions creating an
oversupply of phenol.
COST OF SALES. Cost of sales for the third quarter of 1999 was
$175.3 million, an increase of 8 percent compared to $161.9 million in 1998.
This increase was due to an increase in prices for all major raw materials. As a
percentage of sales, cost of sales increased to 82.2 percent in the third
quarter of 1999 compared to 77.6 percent in the third quarter of 1998. This
increase in cost of sales as a percentage of net sales was due to higher raw
material costs along with reduced operating rates and the reallocation of
ongoing fixed charges which were previously allocated to the discontinued
methanol business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $9.3 million for the three months ended
September 30, 1999, a decrease of 22 percent from the same period in 1998. This
decrease was attributable to a reduction in employee headcount and lower legal
and environmental expenditures.
OPERATING INCOME. Operating income in the third quarter of 1999 was
$28.7 million, a decrease of 17 percent compared to $34.7 million in the third
quarter of 1998. This decrease was the result of lower operating income in
aromatics offset in part by an increase in operating income for chlorovinyls.
Chlorovinyls operating profit for the third quarter of 1999 was $28.4 million,
an increase of 51 percent compared to $18.8 million for the same period in 1998.
This increase was due to average selling price increases outpacing raw material
price increases and the sale of electricity during peak demand periods, which
resulted in a $4.7 million contribution to operating income. Our aromatics
operating profit for the third quarter of 1999 was $3.7 million, a decrease of
81 percent compared to $19.8 million in 1998. This decrease was due to lower
operating rates, lower cumene sales volume, increased raw material
8
costs and a decrease in the selling price for phenol. Operating income as a
percentage of net sales declined to 13.5 percent of sales in the third quarter
of 1999 from 16.6 percent for the same period last year. This decrease was the
result of higher raw material costs across all product lines and reduced pricing
in aromatics, which together outpaced average selling price increases in
chlorovinyls resulting in reduced overall margins.
OTHER EXPENSES. During the third quarter of 1998, Georgia Gulf incurred
other expenses of $9.5 million ($6.0 million net of taxes) related to the
termination an interest rate hedge agreement.
NET INTEREST EXPENSE. Interest expense decreased to $7.0 million for the
quarter ended September 30, 1999 compared with $8.1 million for the same period
in 1998. This decrease was attributable to lower average outstanding debt
balances during the third quarter of 1999.
PROVISION FOR INCOME TAXES. Provision for income taxes was $7.9 million for
the third quarter of 1999, an increase of 25 percent compared to $6.3 million in
1998. Our effective tax rate in the third quarter of 1999 was 36.5 percent
compared to 36.7 percent for the same period in 1998.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations for
the third quarter of 1999 was $13.7 million, an increase of 27 percent compared
to $10.8 million for the third quarter of 1998. This increase was a result of
the termination of the interest rate hedge agreement and higher interest expense
in the third quarter of 1998, offset by lower operating income for 1999.
(LOSS) EARNINGS FROM DISCONTINUED OPERATIONS. Discontinued methanol
operations incurred a net loss of $0.5 million for the third quarter of 1999 as
compared to a net loss of $0.7 million for the third quarter of 1998.
Additionally, during the third quarter of 1999, Georgia Gulf recognized a
one-time charge of $7.6 million, net of taxes, in connection with the write-off
of certain methanol assets and estimated future losses on servicing the
remaining methanol contracts through the end of the year.
NET INCOME. Net income in the third quarter of 1999 was $5.6 million, a
decrease of 45 percent compared to $10.2 million in the third quarter of 1998.
This decrease was due to the factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES. For the nine months ended September 30, 1999, Georgia Gulf
reported net sales of $573.3 million, a decrease of 10 percent compared to
$638.7 million for the same period in 1998. This decrease was primarily
attributable to a decline in sales volumes of 10 percent and lower average
selling prices for most products.
Net sales for chlorovinyls were $408.4 million for the nine months ended
September 30, 1999, an increase of 4 percent from $390.9 million for the same
period of 1998. Sales volumes for PVC compounds, including a full nine months of
sales for North American Plastics acquired in May 1998, were 40 percent higher
in 1999 compared to the same period in 1998. These increased sales volumes,
higher VCM average selling prices and the additional electricity sales were
partially offset by a 44 percent decline in caustic soda average selling prices
and an 18 percent reduction in caustic soda sales volumes.
Net sales for aromatics for the nine months ended September 30, 1999 were
$164.9 million, a decrease of 33 percent from $247.8 million for the same period
last year. This decrease was primarily attributable to a 48 percent decrease in
cumene sales volumes and lower average selling sales prices for all aromatic
products for the nine month comparison. Price declines in aromatics were
attributable to a 34 percent decrease in phenol average selling prices resulting
from market positioning in anticipation of significant capacity expansions and a
26 percent decrease in acetone average selling prices resulting from increased
production attributable to higher phenol demand.
9
COST OF SALES. Cost of sales for the nine months ended September 30, 1999
was $487.1 million, a decrease of 3 percent compared to $503.7 million in 1998.
This decrease was due to lower production volume partially offset by an increase
in ethylene prices. As a percentage of net sales, cost of sales increased to
85.0 percent for the first nine months of 1999 compared to 78.9 percent for the
first nine months of 1998. This increase in cost of sales as a percentage of net
sales was due to higher ethylene costs and lower average selling prices for most
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $29.2 million for the nine months ended
September 30, 1999, a decrease of 12 percent from $33.1 million in the same
period of 1998. This decrease was due to lower expenses from profit sharing
plans and decreased legal and environmental expenses.
OPERATING INCOME. Operating income for the nine months ended September 30,
1999 was $56.9 million, a decrease of 44 percent compared to $102.0 million for
the same period last year. This decrease was the result of lower operating
income in both chlorovinyls and aromatics. Chlorovinyls operating income for the
first nine months of 1999 was $52.8 million, a decrease of 3 percent compared to
$54.6 million for the same period in 1998. This decrease was attributable to
overall sales volume decreases, reduced caustic soda average selling prices and
increases in ethylene costs which were partially offset by increased VCM sales
prices, the sale of electricity during peak demand periods and the inclusion of
North American Plastics for the full nine-month period. Aromatics operating
income for the nine months ended September 30, 1999 was $12.9 million, a
decrease of 78 percent compared to $59.3 million for the first nine months of
1998. This decrease in operating income was due to lower prices for phenol and
acetone. As a percentage of net sales, operating income decreased to
9.9 percent of sales in the first nine months of 1999 compared to 16.0 percent
in 1998. This decrease in operating income as a percentage of net sales was
primarily the result of lower average selling prices and increased prices for
ethylene.
OTHER EXPENSES. During the third quarter of 1998, Georgia Gulf incurred
other expenses of $9.5 million, $6.0 million net of taxes, related to the
termination of an interest rate hedge agreement.
NET INTEREST EXPENSE. Interest expense decreased to $21.7 million for the
quarter ended September 30, 1999 compared with $22.9 million for the same period
in 1998. This decrease was attributable to lower average outstanding debt
balances during the first nine months of 1999.
PROVISION FOR INCOME TAXES. Provision for income taxes was $12.9 million
for the nine months ended in 1999, a decrease of 51 percent compared to
$26.0 million for the same period in 1998. This decrease was due to lower
taxable income. Our effective tax rate for the nine months ended in 1999 was
36.5 percent compared to 37.3 percent for the same period in 1998.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations for
nine months ended in 1999 was $22.4 million, a decrease of 48.7 percent compared
to $43.6 million for the same period in 1998. This decrease was due to the
factors discussed above.
(LOSS) EARNINGS FROM DISCONTINUED OPERATIONS. Discontinued methanol
operations incurred a net loss of $2.5 million for the nine months ended
September 30, 1999 as compared to breakeven earnings for the same period in
1998. Additionally, during the third quarter of 1999, Georgia Gulf recognized a
one-time charge of $7.6 million, net of taxes, in connection with the write-off
of certain methanol assets and estimated future losses on the servicing of the
remaining methanol contracts through the end of the year.
NET INCOME. Net income for the nine months ended in 1999 was
$12.2 million, a decrease of 72 percent compared to $43.6 million for the same
period in 1998. This decrease was primarily due to lower income from continuing
operations as discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, Georgia Gulf generated
$81.6 million of cash flow from operating activities as compared with
$112.8 million during the nine months ended September 30, 1998. The "change in
operating assets, liabilities and other" category for the first nine months of
1999 included the net receipt of $8.6 million in litigation expenses which were
reimbursed by Georgia Gulf's insurance carriers in 1999. Other significant
working capital changes included increases in accounts receivable, accounts
payable and accrued liabilities due to the timing of payments. Changes in
working capital during the first nine months of 1998 were primarily attributable
to a decrease in inventories offset in part by lower accounts payable.
Debt decreased by $63.0 million during the nine months ended September 30,
1999, to a level of $396.5 million. Georgia Gulf had approximately
$180.0 million of availability under its $350.0 million revolving credit
facility as of September 30, 1999. The revolving credit facility has a stated
maturity date of March 30, 2000. The Company intends to refinance the revolving
credit facility in conjunction with the acquisition of the vinyls business of
CONDEA Vista and has, accordingly, classified this debt as long-term in the
accompanying condensed consolidated balance sheet as of September 30, 1999.
Capital expenditures for the nine months ended September 30, 1999 were
$9.8 million as compared to $20.1 million for the same 1998 period. Capital
expenditures for 1999 have been and will be directed toward increasing
efficiency of existing operations and certain environmental projects. Georgia
Gulf estimates that total capital expenditures for 1999, excluding the purchase
of the vinyls business of CONDEA Vista, will be less than $15.0 million.
Georgia Gulf declared dividends of $0.24 per share or $7.4 million during
the first nine months of 1999. As of September 30, 1999, Georgia Gulf had
authorization to repurchase up to 5.2 million shares under the current common
stock repurchase program, although no shares have been repurchased in 1999.
Georgia Gulf's management believes that cash flow from operations, along
with the availability under Georgia Gulf's current revolving credit facility,
will be sufficient to fund, for the foreseeable future, working capital,
dividend payments and capital investments of its current operations. Georgia
Gulf has announced its intention to purchase substantially all of the assets of
the vinyls business of CONDEA Vista for $270 million. Georgia Gulf also intends
to exercise its purchase option on the co-generation lease which will result in
additional borrowings of approximately $108.0 million to fund the purchase. The
existing $100 million aggregate principal 7 5/8% senior notes (due 2005) will
remain outstanding. Georgia Gulf plans to finance the acquisition of the vinyls
business of CONDEA Vista and the purchase of the co-generation facility with a
combination of new debt and a refinancing of certain existing credit facilities
during the fourth quarter of 1999.
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YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
Systems that do not properly recognize and process date-sensitive
information could generate erroneous data, or even fail, as the Year 2000
approaches. We have acquired or developed all of our financial reporting systems
within the past seven years; installation of these systems is complete and
testing indicates that these systems are Year 2000 compliant. Process control
software, which controls the operation of many of our plants, was updated to
Year 2000 compliant versions during 1998. None of the critical third parties
contacted by Georgia Gulf, both suppliers and customers, indicated anticipating
any difficulties handling Year 2000 issues. Although we acknowledge
unanticipated Year 2000 problems could occur, we believe that all critical
systems will continue to function after 1999 and that any remaining systems that
may not be Year 2000 compliant are low-risk. Accordingly, we have not developed
any contingency plans beyond our normal business interruption plans. As a part
of our efforts to maintain our Year 2000 compliant status, Year 2000 status of
certain suppliers will be updated during the fourth quarter of 1999.
Expenditures related to Year 2000 compliance efforts were not material.
FORWARD-LOOKING STATEMENTS
This form 10-Q and other communications to stockholders, as well as oral
statements made by representatives of Georgia Gulf, may contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements relate to, among other things, Georgia Gulf's outlook
for future periods, supply and demand, pricing trends and market forces within
the chemical industry, cost reduction strategies and their results, planned
capital expenditures, long-term objectives of management and other statements of
expectations concerning matters that are not historical facts.
Predictions of future results contain a measure of uncertainty and,
accordingly, actual results could differ materially due to various factors.
Factors that could change forward-looking statements are, among others:
- changes in the general economy;
- changes in demand for Georgia Gulf's products or increases in overall
industry capacity that could affect production volumes and/or pricing;
- changes and/or cyclicality in the industries to which Georgia Gulf's
products are sold;
- availability and pricing of raw materials;
- technological changes affecting production;
- difficulty in plant operations and product transportation;
- governmental and environmental regulations; and
- other unforseen circumstances.
A number of these factors are discussed in this Form 10-Q and in Georgia
Gulf's other periodic filings with the Securities and Exchange Commission,
including Georgia Gulf's annual report on Form 10-K for the year ended
December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For a discussion of certain market risks related to Georgia Gulf, see
Part I, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk",
in the Company's Annual Report on Form 10-K for the year ended December 31,
1998. There have been no significant developments with respect to the Company's
exposure to market risk except for the change in the fair value of interest rate
swaps disclosed in note 4 to the financial statements included herein.
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PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
Georgia Gulf is a party to numerous individual and several class-action
lawsuits filed against Georgia Gulf, among other parties, arising out of an
incident that occurred in September 1996 in which workers were exposed to a
chemical substance on Georgia Gulf's premises in Plaquemine, Louisiana. The
substance was later identified to be a form of mustard agent, a chemical which
is not manufactured as part of Georgia Gulf's ordinary operations, but instead
occurred as a result of an unforeseen chemical reaction. Georgia Gulf presently
believes there are approximately 2,000 plaintiffs, of which approximately 650
are workers claiming to have been on-site at the time of the incident. All of
the actions claim one or more forms of compensable damages, including past and
future wages, past and future physical and emotional pain and suffering, and
medical monitoring. The lawsuits were originally filed in Louisiana State Court
in Iberville Parish.
In September 1998, the plaintiffs filed amended petitions that added the
additional allegations that Georgia Gulf had engaged in intentional conduct
against the plaintiffs. These additional allegations raised a coverage issue
under Georgia Gulf's general liability insurance policies. In December 1998, as
required by the terms of the insurance policies, the insurers demanded
arbitration to determine whether coverage is required for the alleged
intentional conduct in addition to the coverage applicable to the other
allegations of the case. The date for the arbitration has not yet been
established.
As a result of the arbitration relating to the insurance issue, as permitted
by federal statute, the insurers removed the cases to United States District
Court in December 1998. By order entered March 2, 1999, the federal court denied
the plaintiff's motion to remand the cases back to state court and retained
federal jurisdiction.
Settlements have been reached with a majority of the original workers,
including those claimants believed to be the most severely injured. The majority
of cases have been dismissed or motions to dismiss are pending before the court.
Additionally, settlements have been reached or are being negotiated with other
parties named as defendants whereby such parties have made, or are being
requested to make, contributions to the recoveries made by the plaintiffs.
Negotiations for the resolution of the remaining claims are continuing.
Georgia Gulf is asserting and pursuing defenses to the claims. Based on the
present status of the proceedings, Georgia Gulf believes the liability
ultimately imposed will not have a material effect on the financial position or
on results of operations of Georgia Gulf.
In addition, Georgia Gulf is subject to other claims and legal actions may
arise in the ordinary course of business. Management believes that the ultimate
liability, if any, with respect to these other claims and legal actions, will
not have a material effect on the financial position or on results of operations
of Georgia Gulf.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A) Exhibits
2(A) Asset Purchase Agreement dated as of August 30, 1999, between CONDEA
Vista Company and Georgia Gulf Corporation.
B) Reports on Form 8-K.
During the quarter ended September 30, 1999, Georgia Gulf filed the
following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated August 30, 1999 (date of the
earliest event reported), filed on August 31, 1999, for the purpose of
reporting, under Item 5, Georgia Gulf's agreement to purchase the vinyls
business of CONDEA Vista Corporation.
2. Current Report on Form 8-K dated September 2, 1999 (date of
earliest event reported), filed on September 3, 1999, for the purpose of
reporting, under Item 5, Georgia Gulf's exit from the methanol business.
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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.
GEORGIA GULF CORPORATION
(Registrant)
Date October 27, 1999 /s/ EDWARD A. SCHMITT
-------------------------------------- --------------------------------------------
Edward A. Schmitt
President and Chief Executive Officer
(Principal Executive Officer)
Date October 27, 1999 /s/ RICHARD B. MARCHESE
-------------------------------------- --------------------------------------------
Richard B. Marchese
Vice President Finance, Chief Financial
Officer and Treasurer (Principal Financial
Officer)
14