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FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1996. COMMISSION FILE NUMBER 1-11804
THE GEON COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1730488
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Geon Center, Avon Lake, Ohio 44012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 930-1000
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
----- -----
As of June 30, 1996 there were 24,593,931 shares of common stock outstanding.
There is only one class of common stock.
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THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1996 1995 1996 1995
---------- ----------- --------- ---------
Sales $ 311.8 $ 357.6 $ 557.5 $ 693.8
Operating costs and expenses:
Cost of sales 280.1 298.0 519.9 582.1
Selling and administrative expenses 13.3 14.0 25.7 26.9
Employee separation and plant phase-out charges -- 56.5 -- 56.5
-------- -------- -------- --------
Operating income (loss) 18.4 (10.9) 11.9 28.3
Interest expense (2.6) (1.6) (5.5) (3.3)
Interest income .3 .2 1.0 .6
Other income (expense), net .4 (2.0) .2 (4.1)
-------- -------- -------- --------
Income (loss) before income taxes 16.5 (14.3) 7.6 21.5
Income tax (expense) benefit (6.4) 6.3 (3.1) (8.1)
-------- -------- -------- --------
Net income (loss) $ 10.1 $ (8.0) $ 4.5 13.4
======== ======== ======== ========
Earnings per share:
Net income (loss) $ .40 $ (.31) $ .18 $ .51
======== ======== ======== ========
Number of shares used to compute earnings per share 25.2 26.2 25.2 26.5
Dividends paid per common share: $ .125 $ .125 $ .25 $ .25
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THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
June 30, December 31,
ASSETS 1996 1995
-------- --------
Current assets:
Cash and cash equivalents $ 15.6 $ 61.1
Accounts receivable, less allowance for doubtful
receivables ($2.3 in 1996 and $2.1 in 1995) 134.2 102.3
Inventories:
Finished products and in-process 83.0 94.4
Raw materials and supplies 40.0 27.4
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123.0 121.8
LIFO reserve (30.2) (29.6)
-------- --------
92.8 92.2
Deferred income taxes 14.0 14.0
Prepaid expenses 15.7 13.4
-------- --------
Total current assets 272.3 283.0
Property:
Land, buildings, machinery and equipment 1,156.0 1,131.9
Allowances for depreciation and amortization (709.0) (687.2)
-------- --------
Property, net 447.0 444.7
Deferred charges and other assets 34.7 24.3
-------- --------
Total assets $ 754.0 $ 752.0
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank debt $ 9.6 $ 8.6
Accounts payable 133.7 125.8
Accrued expenses 61.4 58.0
Current portion of long-term debt .7 .7
-------- --------
Total current liabilities 205.4 193.1
Long-term debt 137.6 137.9
Deferred income taxes 39.2 37.3
Postretirement benefits other than pensions 86.6 86.7
Other non-current liabilities 79.9 88.1
-------- --------
Total liabilities 548.7 543.1
Stockholders' equity:
Preferred stock, 10.0 shares authorized, no shares issued -- --
Common stock, $.10 par, authorized 100.0 shares;
issued 27.9 shares in 1996 and in 1995 2.8 2.8
Additional paid-in capital 271.7 273.9
Common stock held in treasury (3.3 shares in 1996
and 3.2 shares in 1995) (88.1) (86.6)
Retained earnings 60.6 62.3
Cumulative translation adjustment (18.3) (19.1)
Equity adjustment to recognize minimum pension liability (19.7) (19.7)
Unearned portion of restricted stock awards (3.7) (4.7)
-------- --------
Total stockholders' equity 205.3 208.9
-------- --------
Total liabilities and stockholders' equity $ 754.0 $ 752.0
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THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
Six Months Ended
June 30,
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1996 1995
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OPERATING ACTIVITIES
Net income $ 4.5 $ 13.4
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Employee separation and plant phase-out -- 56.5
Depreciation and amortization 28.1 30.0
Provision (credit) for deferred income taxes 2.7 (9.6)
Change in assets and liabilities:
Accounts receivable (32.4) 7.6
Inventories .2 (20.4)
Accounts payable 8.9 (19.6)
Accrued expenses 3.0 (2.0)
Income taxes payable .4 (2.4)
Other (18.4) 13.3
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Net cash (used) provided by operating activities (3.0) 66.8
INVESTING ACTIVITIES
Purchases of property (32.5) (29.5)
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NET CASH (USED) PROVIDED BY OPERATING AND INVESTING ACTIVITIES (35.5) 37.3
FINANCING ACTIVITIES
Increase (decrease) in short-term debt .6 (3.8)
Repayment of long-term debt (.3) (.3)
Repurchase of common stock (4.9) (37.3)
Dividends (6.2) (6.5)
Proceeds from issuance of common stock .4 .2
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Net cash used by financing activities (10.4) (47.7)
EFFECT OF EXCHANGE RATE CHANGES ON CASH .4 --
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DECREASE IN CASH AND CASH EQUIVALENTS (45.5) (10.4)
CASH AND CASH EQUIVALENTS AT JANUARY 1 61.1 47.5
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CASH AND CASH EQUIVALENTS AT JUNE 30 $ 15.6 $ 37.1
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During the first six months of 1996 and 1995 the Company paid net income taxes
of $1.9 and $21.1, respectively. Cash payments for interest including amounts
capitalized were $5.4 for the first six months of 1996 and $4.0 for the same
period of 1995.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Note A
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The accompanying unaudited consolidated financial statements of The Geon Company
(Company or Geon) have been prepared in accordance with generally accepted
accounting principles for interim financial information and 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 financial presentation have been included. Operating results for the three
month and six month periods ended June 30, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996. For
further information refer to the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1995. Certain amounts for 1995 have been reclassified to conform to
the 1996 presentation.
Note B
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There are pending or threatened against the Company or its subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to commercial, product liability and
environmental matters, which seek remedies or damages. The Company believes that
any liability that may finally be determined should not have a material adverse
effect on the Company's consolidated financial position.
Note C
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On August 1, 1996 the Board of Directors authorized the Company to repurchase up
to 2.5 million shares of Geon common stock. Future purchases will be dependent
on the Company's earnings, cash flow and market price of its common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Industry Conditions:
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Based on The Society of Plastics Industry's June 1996 data, North American (U.S.
and Canada) producer shipments of polyvinyl chloride (PVC), including exports,
are estimated to have been 8% higher in the second quarter of 1996 over the
first quarter of 1996 and were about 17% higher than in the same quarter in
1995. For the first six months of 1996, North American shipments are 10% higher
than the same period of last year. Exports from North America year-to-date
(which represented about 10% of total shipments) were 3% less than a year ago.
Capacity utilization (shipments/capacity) for North America was estimated at 99%
of effective capacity (92% of nameplate) during the second quarter of 1996, with
inventories declining as shipments exceeded production by 3%. In the first
quarter of 1996 and second quarter 1995 shipments were 95% and 93% of effective
capacity, respectively. North American capacity in the second quarter of 1996 is
estimated to have increased 3% compared to the previous quarter and 6% since
last year's second quarter.
Chlorine prices decreased approximately 3% in the second quarter of 1996 versus
a year ago. Ethylene prices, increased 12% in the second quarter of 1996 from
the previous quarter but were 17% lower than the same period of the prior year.
The spread between PVC resin prices in the largest PVC resin markets and
ethylene and chlorine prices is estimated to have been 2.5 cents per pound
higher in the second quarter of 1996 as compared to the previous quarter and 7.5
cents per pound lower than the second quarter of 1995. Ethylene and chlorine
prices are likely to increase in the third quarter. In 1996 domestic PVC resin
producers have generally realized a 7 cent per pound increase over the February
through June period. Another 4 cent per pound resin price increase has been
announced to be phased in during the third quarter.
Results of Operations:
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The Company had sales of $311.8 million in the second quarter versus $357.6
million in the same quarter of 1995. Operating income was $18.4 million in the
second quarter of 1996. During the same period a year ago operating income was
$45.6 million, excluding a special charge of $56.5 million ($34.5 million
after-tax) for employee separation and plant phase-out charges to reconfigure
the Company's compounding operations. In the first quarter of 1996 Geon had
sales of $245.7 million and an operating loss of $6.5 million. Net income (loss)
for the second quarter of 1996 and 1995 was $10.1 million and $(8.0) million,
respectively.
The Company's second quarter 1996 resin shipments were 25% and 26% above the
first quarter of 1996 (which were constrained by plant operational problems) and
second quarter of 1995, respectively. The Company's average spread between resin
prices and raw material costs (ethylene and chlorine) improved approximately 1.5
cents per pound from the first quarter of 1996 and was 7.5 cents per pound below
the same period last year. Compound sales volume in the second quarter of 1996
was approximately 21% above the same period a year ago.
In April 1996 Geon started up its 800 million pound VCM expansion thereby
producing VCM from purchased ethylene and chlorine and reducing purchases of
VCM.
During the second quarter of last year, the Company was able to sell VCM into
the export market at a substantial premium to domestic prices. This benefited
the second quarter of 1995 operating income, when compared to the second quarter
of 1996, by approximately $10 million.
In the first six months of 1996, sales were $557.5 million and net income $4.5
million. For the same period of 1995 the Company had sales of $693.8 million
and net income of $47.9 million before the after-tax effect of the one-time
charge mentioned above.
Interest & Other Expense:
- -------------------------
Interest expense of $2.6 million during the second quarter of 1996 increased
from $1.6 million during the same period in 1995. The increase reflects interest
expense on higher average debt levels and higher interest rates associated with
the Company's long-term public debt offering in December 1995. Other income
(expense), net
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improved in the second quarter 1996 as compared to the same
period in 1995 mainly from the effects of favorable foreign currency rates and
lower costs associated with the sale of accounts receivable.
Taxes:
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The second quarter of 1996 included an income tax expense of $6.4 million on
pre-tax income of $16.5 million as compared to an income tax benefit of $6.3
million in the second quarter of 1995 on a pre-tax loss of $14.3 million. For
the first half of 1996 income tax expense was $3.1 million on pre-tax income of
$7.6 million as compared to income tax expense of $8.1 million on pre-tax income
of $21.5 million during the same period 1995. Changes in effective tax rates
between the periods noted above were primarily attributable to the accrual of
dividend withholding taxes on foreign subsidiaries' undistributed earnings.
Capital Resources and Liquidity:
- --------------------------------
During the six months ended June 30, 1996, the Company used $3.0 million of net
cash from operating and investing activities compared to providing $66.8 million
during the same period of 1995. This change is primarily attributable to lower
earnings before any special charge and a $12 million pension payment in the
second quarter of 1996. Partially offsetting these uses was net operating
working capital (accounts receivable plus inventories less accounts payable)
which increased $9.1 million less in 1996 versus 1995.
Investing activities include the purchase of property of $32.5 million during
the first six months of 1996 which approximated the same period in 1995. Capital
expenditures for the full year of 1996 are projected to approximate 1995.
Financing activities in the first six months of 1996 primarily reflects the
payment of dividends and the repurchase of 200,000 shares of common stock
authorized under a February 1995 Board of Directors resolution. In July 1996 the
Company repurchased an additional 656,400 shares, completing the Board of
Directors February 1995 repurchase authorization leaving 23.9 million shares
outstanding. On August 1, 1996 the Company announced that the Board of Directors
authorized an additional repurchase of 2.5 million shares. The timing of any
stock repurchase depends on the Company's earnings, cash flow and market price
of its stock common stock.
The Company believes that the projected cash to be provided by operations, the
existing working capital facilities and other available permitted borrowings
will provide sufficient funds to support dividends, debt service requirements
and normal capital expenditures plus expenditures associated with the previously
announced chlor-alkali plant with mechanical completion planned for in late
1997.
Environmental Matters:
- ----------------------
The Company is subject to various federal, state and local environmental laws
and regulations concerning emissions to the air, discharges to waterways, the
release of materials into the environment, the generation, handling, storage,
transportation, treatment and disposal of waste materials or otherwise relating
to the protection of the environment.
The Company maintains a disciplined environmental and industrial safety and
health compliance program and conducts internal and external regulatory audits
at its plants in order to identify and categorize potential environmental
exposures and to ensure compliance with applicable environmental, health and
safety laws and regulations. This is an effort which has required and may
continue to require process or operational modifications, the installation of
pollution control devices and cleanups.
The Company estimates capital expenditures related to the limiting and
monitoring of hazardous and non-hazardous wastes during 1996 and 1997 to
approximate $2 million to $4 million.
The Company believes that compliance with current governmental regulations will
not have a material adverse effect on its capital expenditures, earnings, cash
flow or liquidity. At June 30, 1996, the Company had accruals totaling
approximately $27.9 million to cover future environmental remediation
expenditures. Environmental remediation expenditures are estimated to be $5
million to $8 million in 1996.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 10, 1993, Westlake Monomers Corporation (Westlake)
brought an action against the Company and The B.F.Goodrich
Company (BFG) generally alleging that certain of Westlake's
rights pursuant to a right of first refusal agreement between BFG
and Westlake covering specified assets, generally comprised of
those located at Calvert City, Kentucky were triggered by the
Initial Public Offering of the Company by BFG in April 1993. With
the lawsuit stayed, and the issues referred to arbitration for
resolution, on October 31, 1994, the arbitrator indicated that
the right of first refusal was triggered, but the decision did
not specify a remedy. On March 29, 1995 BFG announced that the
arbitrator in that case ruled that Westlake does not have the
right to buy common shares in The Geon Company as part of an
existing right of first refusal. As discussed in the Company's
Form 10-K, BFG has previously agreed to indemnify the Company
with respect to any liabilities and expenses arising from the
Westlake lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 2,
1996. As described in the 1996 Proxy Statement, the following
action was taken:
a) The nine nominees for directors were elected. The votes for
Director votes were as follows:
Number of Shares Number of Shares
Voted For Vote Withheld
---------------- ----------------
James K. Baker 22,057,517 53,274
Gale Duff-Bloom 22,041,119 69,672
J. A. Fred Brothers 22,053,181 57,610
J. Douglas Campbell 22,057,517 53,274
Harry A. Hammerly 22,057,517 53,274
D. Larry Moore 22,057,387 53,404
John D. Ong 21,861,126 249,665
William F. Patient 22,047,356 63,435
R. Geoffrey P. Styles 22,057,137 53,654
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3a - Amendments to the By-Laws of The Geon Company
Exhibit 3b - Amended and Restated By-Laws of The Geon Company
(b) Exhibit 11 - Statement re Computation of Per Share Earnings
(c) Exhibit 27 - Financial Data Schedule
(d) Reports on Form 8-K
None.
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SIGNATURE
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.
August 7, 1996 THE GEON COMPANY
/s/ T. A. Waltermire
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T. A. Waltermire
Chief Financial Officer,
(Principal Financial Officer)
/s/ G. P. Smith
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G. P. Smith
Controller and Assistant Treasurer
(Principal Accounting Officer)
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