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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2001
Commission File Number: 333-70011
GEO SPECIALTY CHEMICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1708689
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
GEO Specialty Chemicals, Inc.
28601 Chagrin Boulevard, Suite 210
Cleveland, Ohio 44122
(Address, including Zip Code, of Principal Executive Offices)
(216) 464-5564
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (l) has filed all reports
required to be filed by Section 13 or l5(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.
Shares of Class A Voting Common Stock, $1.00 par value, as of May 8, 2001:
135.835
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of May 8,
2001: none
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PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
GEO SPECIALTY CHEMICALS, INC.
(In thousands except share data)
(IN THOUSANDS)
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
ASSETS (unaudited)
Current assets:
Cash $ 11,746 $ 7,930
Trade accounts receivable, net of allowance of $442 and $425
at March 31, 2001 and December 31, 2000, respectively 31,077 26,957
Other receivables 1,173 1,427
Inventory 17,051 18,213
Prepaid expenses and other current assets 1,856 975
Deferred taxes 1,103 1,064
-------------- --------------
Total current assets 64,006 56,566
Property and equipment, net 93,846 94,337
Other assets
Intangible assets, net 5,093 5,329
Goodwill, net 32,798 33,527
Other accounts receivable 49 120
Other 127 155
-------------- --------------
38,067 39,131
$ 195,919 $ 190,034
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 17,784 $ 13,072
Other accounts payable 248 272
Income taxes payable 3,951 2,208
Accrued expenses and other current liabilities 6,450 9,551
-------------- --------------
Total current liabilities 28,433 25,103
Long-term liabilities
Revolving line of credit 10,000 10,000
Long-term debt 120,000 120,000
Other long-term liabilities 5,218 5,091
Other accounts payable 183 337
Deferred taxes 3,102 3,317
-------------- --------------
Total long-term liabilities 138,503 138,745
Shareholders' equity
Class A Voting Common Stock, $1.00 par value,
1,035 shares authorized, 135.835 shares issued
and outstanding at March 31, 2001 and
December 31, 2000
Class B Nonvoting Common Stock, $1.00 par value,
215 authorized, 0 outstanding at March 31, 2001
and December 31, 2000
Additional paid-in capital 20,901 20,901
Retained earnings 9,901 7,104
Accumulated other comprehensive loss (1,819) (1,819)
-------------- --------------
28,983 26,186
$ 195,919 $ 190,034
============== ==============
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JANUARY 1 THROUGH JANUARY 1 THROUGH
MARCH 31, 2001 MARCH 31, 2000
----------------- -----------------
Net sales $ 50,534 $ 41,830
Cost of sales 36,214 32,483
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Gross profit 14,320 9,347
Selling, general and administrative expenses 5,844 5,512
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Income from operations 8,476 3,835
Other expense
Net interest expense (3,409) (3,734)
Foreign currency exchange loss (100) (252)
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Income (loss) before taxes 4,967 (151)
Provision for taxes (benefit) 2,170 (21)
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Net income (loss) $ 2,797 $ (130)
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See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JANUARY 1 THROUGH JANUARY 1 THROUGH
MARCH 31, 2001 MARCH 31, 2000
----------------- -----------------
Cash flows from operating activities
Net income (loss) $ 2,797 $ (130)
Adjustments to reconcile net income (loss) to net cash
from operating activities
Depreciation, depletion and amortization 3,489 3,099
Deferred income taxes (254) (177)
Change in assets and liabilities
Trade accounts receivable (4,120) (205)
Other accounts receivable 324 423
Inventories 1,161 2,212
Prepaid expenses and other assets (885) (297)
Accounts payable 3,354 (4,258)
Other liabilities (50) 75
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Net cash from operating activities 5,816 742
Cash flows from investing activities
Purchases of property, plant and equipment (2,000) (1,728)
Cash flows from financing activities
Revolving lines of credit borrowings, net - 6,000
-------------- -----------
Net cash from financing activities - 6,000
Effect of exchange rate changes - (49)
Net change in cash 3,816 4,965
Cash at beginning of period 7,930 4,696
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Cash at end of period $ 11,746 $ 9,661
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Supplemental disclosure of cash flow information
Cash paid for
Interest $ 6,352 $ 6,523
Taxes 100 -
See accompanying notes to consolidated financial statements.
GEO SPECIALTY CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: GEO Specialty Chemicals, Inc. was incorporated in the
state of Ohio for the purpose of owning and operating specialty chemical
businesses. GEO produces a variety of specialty chemical products for use in
various major chemical markets. GEO produces more than 300 products which are
used primarily in the construction, paper, water treatment, oil field and
electronics industries. GEO sells these products to customers located throughout
the United States and in foreign markets.
GEO operates in an environment with many financial and operating risks,
including, but not limited to, intense competition, fluctuations in cost and
supply of raw materials, technological changes, and environmental matters. The
Company has a high level of indebtedness, which creates liquidity and debt
service risks.
INTERIM RESULTS (UNAUDITED): The accompanying balance sheet at March 31,
2001 and the statements of operations for the three month periods ended March
31, 2001 and 2000 are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting of only normal recurring adjustments,
necessary for the fair presentation of the results of the interim periods. The
data disclosed in these notes to the financial statements for those interim
periods are also unaudited. The results of operations for the three months ended
March 31, 2001 are not necessarily indicative of the results expected for the
full calendar year. Because all of the disclosures required by generally
accepted accounting principles are not included, these interim statements should
be read in conjunction with GEO's financial statements for the year ended
December 31, 2000, and the notes thereto, which are included in GEO's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of GEO and its wholly-owned subsidiaries, GEO Specialty
Chemicals Ltd., GEO Holdings (Europe) SARL, GEO Gallium S.A., and Ingal Stade
GmbH. All significant intercompany balances and transactions have been
eliminated.
FOREIGN CURRENCY TRANSLATION: Effective January 1, 2001, GEO's wholly-owned
subsidiaries, GEO Holdings (Europe) SARL, GEO Gallium S.A., and Ingal Stade GmbH
changed their functional currency from the French franc to the U.S. dollar, due
to various economic factors. This change did not have a material effect on the
financial statements.
NOTE 2 -- ACQUISITIONS
On September 8, 1999, GEO purchased from Rhodia Chimie, S. A., the former
chemical unit of the French multinational corporation Rhone-Poulenc, all the
outstanding shares of its wholly-owned French subsidiary. This subsidiary owns
both the French operating assets of the gallium purification business and the
outstanding stock of a German corporation that carries on a gallium extraction
operation in Stade, Germany. These products are sold to customers worldwide.
As part of the acquisition, GEO was also granted a three-year option to
acquire a currently dormant gallium extraction facility near Pinjarra, Australia
for approximately $1,600.
NOTE 3 -- INVENTORIES
Inventories consist of the following components:
March 31, December 31,
2001 2000
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Raw materials............................ $ 5,818 $ 6,223
Work in progress......................... 2,824 3,696
Finished goods........................... 8,409 8,294
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$ 17,051 $ 18,213
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NOTE 4 -- NEW ACCOUNTING STANDARDS
Beginning January 1, 2001, Statement on Financial Accounting Standards No.
133 (the "Statement") on derivatives requires all derivatives to be recorded at
fair value in the balance sheet. Unless designated as hedges, changes in these
fair values are recorded in the income statement. Fair value changes involving
hedges are generally recorded by offsetting gains and losses on the hedge and on
the hedged item, even if the fair value of the hedged item is not otherwise
recorded. Since GEO has no significant derivative instruments or hedging
activities, adoption of the Statement has not had a material effect on GEO's
financial statements.
NOTE 5 -- SUBSEQUENT EVENTS
On April 19, 2001, GEO sold its paper chemicals business to ONDEO Nalco
Co., a subsidiary of Suez Lyonnaise des Eaux. GEO retained all its manufacturing
facilities, and will supply paper coating products to ONDEO Nalco under a long-
term supply agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
The following table sets forth certain operations data of GEO expressed in
millions of dollars and as a percentage of net sales:
THREE MONTHS ENDED MARCH 31,
2000 2001
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$ % $ %
----- ------ ----- ------
Net sales $41.8 100.0% $50.5 100.0%
Gross profit 9.3 22.4 14.3 28.3
Operating income 3.8 9.2 8.5 16.8
Net income (loss) (0.1) (0.3) 2.8 5.5
EBITDA 6.9 16.6 11.8 23.4
Net interest expense 3.7 8.9 3.4 6.7
Capital expenditures 1.4 3.3 2.0 4.0
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Net Sales. Net sales for the three months ended March 31, 2001 were $50.5
million, representing an $8.7 million or 20.8% increase compared with net sales
of $41.8 million during the same period in 2000. The increase in net sales was
attributable primarily to (1) gallium sales to the global electronics industry,
up $7.2 million due to a 25+% increase in volume and approximately a 60%
increase in unit prices, (2) higher additive sales volumes to the construction
industry which generated $1.1 million additional revenue compared to the same
period in 2000 and (3) higher sales volumes of water treating additives and clay
products which generated approximately $1.0 million more revenue. Partially
offsetting these increases was a decline in coating additive sales volume,
particularly in Europe, resulting in a $0.9 drop in sales.
Gross Profit. Gross profit for the three months ended March 31, 2001 was $14.3
million, or 28.3% of net sales, representing a $5.0 million or 53.8% increase
compared to a gross profit of $9.3 million, or 22.4% of net sales, during the
same
period in 2000. The increase in gross profit was attributable to the gallium
business due to the increase in sales volume and prices previously noted.
Excluding the gallium business, gross profits declined by $1.8 million or
24.1%. Unfavorable factors compared to the same period in 2000 contributing to
the decline were the lower sales of coating additives resulting in $0.6 million
less margin, higher plant costs of $0.5 million due in part to an increase in
utility costs and the remaining $0.7 million due to higher raw material costs,
especially natural gas, methanol, caustic soda and naphthalene, offset partially
by margins generated by the increase in sales volume of additive products sold
to the construction and water treating markets.
Operating Income. Operating income for the three months ended March 31, 2001 was
$8.5 million, or 16.8% of net sales, representing a $4.7 million or 123.7%
increase compared with an operating income of $3.8 million, or 9.2% of net
sales, during the same period in 2000. The increase in operating income
was attributable to the overall increase in gross margin noted previously
reduced by a $0.3 million or 6.0% increase in selling, general and
administrative expenses. Half of the increase in these expenses was related to
the gallium business, especially related to staffing, and the remainder
reflected general increases compared to the same period in 2000.
Net Income. Net income (loss) for the three months ended March 31, 2001 was $2.8
million or 5.5% of net sales representing a $2.9 million increase compared with
the slight loss of $0.1 million during the same period in 2000. The increase in
net income was primarily due to the increase in operating profit previously
noted and a reduction of interest expenses of $0.3 million reflecting a
substantially lower revolving loan balance compared to the same period in 2000.
Partially offsetting these improvements in income was a $2.2 million increase in
the provision for income taxes.
EBITDA. EBITDA for the three months ended March 31, 2001 was $11.8 million, or
23.4% of net sales, representing a $4.9 million or 70.7% increase compared to an
EBITDA of $6.9 million, or 16.6% of net sales, during the same period in 2000.
The increase in EBITDA was attributable to the performance of the gallium
business noted previously.
Net Interest Expense. Net interest expense, excluding amortization of deferred
financing costs, for the three months ended March 31, 2001 was $3.2 million, a
decrease of $0.3 million compared to the same period in 2000. The decrease was
due to a more than 50% decline in the average revolver loan balance compared to
the same period in 2000. As of the end of March, 2001 the revolver loan balance
was $10.0 million compared to $29.0 million at the end of March 2000.
Capital Expenditures. Capital expenditures for the three months ended March 31,
2001 were $2.0 million compared to $1.4 million of capital expenditures during
the same period in 2000. During the first three months of 2001, expenditures
related to a major upgrade in GEO's financial software platform were
capitalized. In addition to the $1.4 million of capital expenditures during the
first three months of 2000, the Company acquired for $0.3 million certain
intangible assets and equipment from Tetra Technologies Inc. related to aluminum
compounds.
LIQUIDITY AND CAPITAL RESOURCES
GEO's primary cash needs are for working capital, capital expenditures and debt
service. GEO has financed these needs from internally generated cash flow, in
addition to periodic draws on its existing credit facility.
GEO has a letter of understanding with Alcoa of Australia concerning the restart
of the gallium extraction facility in Pinjarra, Australia. GEO has an option to
acquire this extraction plant from Rhodia Chimie S.A. as part of its acquisition
of the gallium business in September, 1999. To date, GEO has spent $1.6 million
and expects to spend approximately $40 million to build extraction capacity in
Australia. The amounts spent are relative to preliminary engineering and
deposits on orders for long lead time equipment and machinery needed for the
extraction plant.
Net cash provided from operations for the three months ended March 31, 2000 and
2001 was $0.7 million and $5.8 million, respectively. The $5.1 million change
was due primarily to the increase in net income of $2.9 million, an increase in
non-cash charges of $0.4 million and a favorable change in net working capital
due mostly to higher current liabilities, particularly trade and income taxes
payable. Also during the first three months of 2000 the defined contribution
pension was funded, $0.7 million, so that the plan could be terminated. The
replacement profit-sharing plan was not funded as of the end of March, 2001. The
accrued liability for this plan at the end of March, 2001 was $0.7 million.
As of March 31, 2001, GEO had borrowings of $10.0 million outstanding under its
revolving credit facility. These borrowings were made largely to fund the
acquisition of the gallium business in September, 1999. As of March 31, 2001,
GEO had $35.0 million of borrowing availability under its revolving credit
facility that provides for a maximum of $45.0 million of revolving
debt. Subsequent to March 31, 2001, as of May 4, GEO reduced its borrowings
under the revolving credit facility by $8.0 million, thereby increasing its
availability to $43.0 million. Borrowings under the revolving credit facility
bear interest, at GEO's option, at:
. 1.25% above the higher of the adjusted certificate of deposit rate plus
0.5% or the prime lending rate of Bankers Trust Company; or
. an adjusted Eurodollar rate plus 2.25%.
As of March 31, 2001, GEO's interest rate under the revolving credit facility
was 7.5%. The senior revolving credit facility contains customary covenants
which include the maintenance of certain financial ratios. The $45.0 million
credit facility expires at the end of July, 2003.
As of March 31, 2001, GEO had a cash balance of $11.7 million compared to $9.6
million as of March 31, 2000. The cash balance was reduced subsequent to March
31, 2001 in order to reduce the amount borrowed under the revolving credit
facility.
GEO believes that cash generated from operations, together with amounts
available under the credit facility, will be adequate to meet its debt service
requirements, capital expenditures and working capital needs for the foreseeable
future, although no assurance can be given in this regard.
The overall effects of inflation on GEO's business during the periods discussed
have not been significant. GEO monitors the prices it charges for its products
on an ongoing basis and believes that it will be able to adjust those prices to
take into account any future changes in the rate of inflation. During the three
months ended March 31, 2001, the temporary increase in natural gas prices
unfavorably impacted GEO's results by approximately $1.0 million, directly or
indirectly, compared to the same period in 2000.
Disclosure Regarding Forward-Looking Statements Contained in this Report
Certain statements contained in this report, including statements
containing the words "believes," "anticipates," "intends," "expects," "should,"
"may," "will," "continue" and "estimate," and similar words, constitute
"forward-looking statements" under the federal securities laws. These forward-
looking statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of GEO or
its industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Important
factors that could cause actual results to differ materially from GEO's
expectations include the following: (1) GEO's inability to obtain financing for
an announced or any other transaction; (2) the failure of GEO to close an
announced or any other transaction due to the failure of conditions to closing
to be satisfied; (3) changes in general economic conditions that might impact
the demand for GEO's products, in the United States or in the foreign countries
where GEO sells products; (4) decreases in customer spending levels due to
general economic conditions or other factors affecting their volume of business;
(5) the increased risk during economic downturns that GEO's customers may
declare bankruptcy or experience payment difficulties; (6) increases in GEO's
cost of borrowing or a default or covenant violation under GEO's indenture or
other material debt agreement; (7) GEO's inability to effectively integrate
acquired businesses; (8) a decrease in the rate of growth of GEO's gallium or
other product sales; and (9) changes in environmental or other governmental
regulations or enforcement. Given these uncertainties, you should not place
undue reliance upon such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GEO does not engage in hedging or other market structure derivative trading
activities. Additionally, GEO's debt obligations are primarily fixed rate in
nature and, as such, are not sensitive to changes in interest rates. However,
GEO's revolving credit facility bears interest at a variable rate. GEO does not
believe that its market risk financial instruments on March 31, 2001 would have
a material effect on future operations or cash flow.
GEO's foreign operations are subject to the usual risks that may affect
such operations. The include, among other things, exchange controls and currency
restrictions, currency fluctuations, changes in local economic conditions,
unsettled political conditions and foreign government-sponsored boycotts for
GEO's products or services for noncommercial reasons. Most of the identifiable
assets associated with foreign operations are located in countries where GEO
believes such risks to be minimal. In addition, GEO does not consider the market
risk exposure relating to currency exchange to be material.
The fair value of GEO's fixed rate long-term notes is sensitive to changes
in interest rates. Interest rate changes would result in gains/losses in the
fair value of the notes due to differences between the market interest rates and
rates at the date of the note's issuance. Based on a hypothetical immediate 100
basis point increase in interest rates at March 31, 2001, the fair value of
GEO's fixed rate long-term notes would be impacted by a net decrease of $7.5
million. Conversely, a 100 basis point decrease in interest rates would result
in a net increase in the fair value of GEO's fixed rate long-term notes at March
31, 2001 of $8.1 million.
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On March 27, 2001, GEO entered into a Sale and Purchase Agreement with
Hercules Incorporated, a Delaware corporation with headquarters in Wilmington,
Delaware, pursuant to which GEO has agreed to acquire certain assets and rights
associated with Hercules' peroxy chemicals business. The parties anticipate
closing. The transaction during the second quarter of 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
GEO filed no Current Reports on Form 8-K with the Securities and Exchange
Commission during the three month period ended March 31, 2001.
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.
GEO SPECIALTY CHEMICALS, INC.
By: /s/ William P. Eckman
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Date: May 8, 2001 William P. Eckman
Executive Vice President and Chief
Financial Officer
(duly authorized officer and principal
financial officer)