1
- --------------------------------------------------------------------------------
FORM 10-Q
--------------------------------
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 SEPTEMBER 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 September 30, 1996 there were 23,811,736 shares of common stock
outstanding. There is only one class of common stock.
- --------------------------------------------------------------------------------
2
THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- --------- ---------
Sales $ 307.8 $ 310.2 $ 865.3 $ 1,004.0
Operating costs and expenses:
Cost of sales 280.4 271.3 800.3 853.4
Selling and administrative expenses 14.0 12.3 39.7 39.2
Employee separation and plant phase-out charges -- -- -- 56.5
--------- --------- --------- ---------
Operating income 13.4 26.6 25.3 54.9
Interest expense (2.8) (1.4) (8.3) (4.7)
Interest income .2 .4 1.2 1.0
Other expense, net (.5) (2.4) (.3) (6.5)
--------- --------- --------- -------
Income before income taxes 10.3 23.2 17.9 44.7
Income tax expense (4.2) (8.8) (7.3) (16.9)
--------- --------- --------- -------
Net income $ 6.1 $ 14.4 $ 10.6 27.8
========= ========= ========= =======
Earnings per share:
Net income $ .25 $ .56 $ .43 $ 1.06
========= ========= ========= =======
Number of shares used to compute earnings per share 24.3 25.5 24.9 26.2
Dividends paid per common share: $ .125 $ .125 $ .375 $ .375
Page 2 of 9 Pages
3
THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
September 30, December 31,
ASSETS 1996 1995
------------ --------------
Current assets:
Cash and cash equivalents $ 16.9 $ 61.1
Accounts receivable, less allowance for doubtful
receivables ($2.4 in 1996 and $2.1 in 1995) 112.9 102.3
Inventories:
Finished products and in-process 90.4 94.4
Raw materials and supplies 37.5 27.4
------------ ------------
127.9 121.8
LIFO reserve (31.4) (29.6)
------------ ------------
96.5 92.2
Deferred income taxes 14.1 14.0
Prepaid expenses 15.4 13.4
------------ ------------
Total current assets 255.8 283.0
Property:
Land, buildings, machinery and equipment 1,177.0 1,131.9
Allowances for depreciation and amortization (722.9) (687.2)
------------ ------------
Property, net 454.1 444.7
Deferred charges and other assets 37.5 24.3
------------ ------------
Total assets $ 747.4 $ 752.0
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank debt $ 16.6 $ 8.6
Accounts payable 130.7 125.8
Accrued expenses 60.5 58.0
Current portion of long-term debt .7 .7
------------ ------------
Total current liabilities 208.5 193.1
Long-term debt 137.4 137.9
Deferred income taxes 39.5 37.3
Postretirement benefits other than pensions 86.8 86.7
Other non-current liabilities 82.3 88.1
------------ ------------
Total liabilities 554.5 543.1
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 272.3 273.9
Common stock held in treasury (4.1 shares in 1996
and 3.2 shares in 1995) (105.0) (86.6)
Retained earnings 63.7 62.3
Cumulative translation adjustment (18.0) (19.1)
Equity adjustment to recognize minimum pension liability (19.7) (19.7)
Unearned portion of restricted stock awards (3.2) (4.7)
------------ ------------
Total stockholders' equity 192.9 208.9
------------ ------------
Total liabilities and stockholders' equity $ 747.4 $ 752.0
============ ============
Page 3 of 9 Pages
4
THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
Nine Months Ended
September 30,
--------------------------
1996 1995
-------- ---------
OPERATING ACTIVITIES
Net income $10.6 $27.8
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Employee separation and plant phase-out -- 56.5
Depreciation and amortization 41.6 44.0
Provision (credit) for deferred income taxes 3.0 (1.5)
Change in assets and liabilities:
Accounts receivable (10.0) 31.7
Inventories (3.4) (12.7)
Accounts payable 5.4 (42.7)
Accrued expenses (.6) (6.1)
Income taxes payable 3.1 (10.8)
Other (8.7) (8.7)
----- -----
Net cash provided by operating activities 41.0 77.5
INVESTING ACTIVITIES
Purchases of property (53.5) (45.5)
Investment in chlor-alkali joint venture (8.5) --
----- -----
NET CASH (USED) PROVIDED BY OPERATING AND INVESTING ACTIVITIES (21.0) 32.0
FINANCING ACTIVITIES
Increase in short-term debt 7.5 3.5
Repayment of long-term debt (.5) (.2)
Repurchase of common stock (21.8) (43.8)
Dividends (9.2) (9.6)
Proceeds from issuance of common stock .4 1.5
----- -----
Net cash used by financing activities (23.6) (48.6)
EFFECT OF EXCHANGE RATE CHANGES ON CASH .4 .7
----- -----
DECREASE IN CASH AND CASH EQUIVALENTS (44.2) (15.9)
CASH AND CASH EQUIVALENTS AT JANUARY 1 61.1 47.5
----- -----
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $16.9 $31.6
===== =====
During the first nine months of 1996 and 1995 the Company paid net income taxes
of $2.3 and $34.9, respectively. Cash payments for interest including amounts
capitalized were $6.0 for the first nine months of 1996 and $5.9 for the same
period of 1995.
Page 4 of 9 Pages
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
NOTE A
- ------
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 nine months periods ended September 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
- ------
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
- ------
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 price of Geon common stock and Company cash flow.
NOTE D
- ------
During the third quarter of 1996, Geon and Olin Corporation finalized terms of
the formation of a joint venture to build a chlor-alkali facility at Olin's
McIntosh, Alabama site. The first phase of the new plant is expected to be
completed in late 1997, with 250,000 short tons of chlorine capacity. The new
unit will initially supply approximately 35% of Geon's captive chlorine needs.
Page 5 of 9 Pages
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INDUSTRY CONDITIONS:
- --------------------
Based on The Society of Plastics Industry's September 1996 data, North American
(U.S. and Canada) producer shipments of polyvinyl chloride (PVC), including
exports, are estimated to have been 19% higher in the third quarter of 1996 over
the same quarter of 1995 and were about 4% lower than in the second quarter in
1996. For the first nine months of 1996, North American shipments are 13% higher
than the same period of last year. Exports from North America year-to-date
(which represent about 9% of total shipments) were 3% less than a year ago.
Capacity utilization (shipments/capacity) for North America was estimated at 95%
of effective capacity (88% of nameplate) during the third quarter of 1996. In
the second quarter of 1996 and third quarter 1995 shipments were 100% and 88% of
effective capacity. North American capacity in the third quarter of 1996 is
estimated to have increased 3% compared to the previous quarter and 8% since
last year's third quarter.
Chlorine prices were approximately the same in the third quarter of 1996 versus
a year ago. Ethylene prices, increased 11% in the third quarter of 1996 from the
previous quarter but were flat compared to the same period of the prior year.
The spread between PVC resin prices and purchased ethylene and chlorine in the
largest PVC resin markets is estimated to have been .5 cents per pound lower in
the third quarter of 1996 as compared to the previous quarter and 6.5 cents per
pound lower than the third quarter of 1995. Ethylene prices are likely to
increase in the fourth quarter as producers continue to push for higher pricing
to cover increasing feedstock (ethane and propane) costs while chlorine prices
should remain level with the third quarter. Pressure will continue on resin
sales prices as demand typically slows in late November through year end.
RESULTS OF OPERATIONS:
- ----------------------
The Company had sales of $307.8 million in the third quarter versus $310.2
million in the same quarter of 1995. Operating income was $13.4 million in the
third quarter of 1996. During the same period a year ago operating income was
$26.6 million. In the second quarter of 1996 Geon had sales of $311.8 million
and an operating income of $18.4 million. Net income for the third quarter of
1996 and 1995 was $6.1 million and $14.4 million, respectively.
The Company's third quarter 1996 resin shipments were 25% higher than the third
quarter of 1995 and were 8% lower than shipments in the second quarter of 1996.
The Company's average spread between resin prices and raw material costs
(ethylene and chlorine) declined in line with industry changes. Compound sales
volume in the third quarter of 1996 were approximately 15% above the same period
a year ago.
In the second quarter of 1996 Geon started up its 800 million pound LaPorte,
Texas VCM expansion, thereby producing VCM from purchased ethylene and chlorine
and reducing purchases of VCM. During the third quarter the Company experienced
some equipment problems related to the expansion which lowered operating income
approximately $2 million. Repairs were completed in the quarter with the plant
returning to full rates. During the third 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 1995 quarters operating income, when compared to
1996, by approximately $5 million.
In the first nine months of 1996, sales were $865.3 million and net income was
$10.6 million. For the same period of 1995 the Company had sales of $1,004.0
million and net income of $62.3 million before the after-tax effect of a special
charge of $34.5 million ($56.5 million before-tax) for employee separation and
plant phase-out charges to reconfigure the Company's compounding operations.
INTEREST & OTHER EXPENSE:
- -------------------------
Interest expense of $2.8 million during the third quarter of 1996 increased from
$1.4 million during the same period in 1995. The increase mainly reflects
interest expense on higher average debt levels associated with the Company's
debt refinancing in December 1995. Other expense, net decreased in the third
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.
Page 6 of 9 Pages
7
TAXES:
- ------
The third quarter of 1996 included an income tax expense of $4.2 million on
pre-tax income of $10.3 million as compared to an income tax expense of $8.8
million in the third quarter of 1995 on a pre-tax loss of $23.2 million. For the
first nine-months of 1996 income tax expense was $7.3 million on pre-tax income
of $17.9 million as compared to income tax expense of $16.9 million on pre-tax
income of $44.7 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 nine months ended September 30, 1996, the Company used $21.0 million
of net cash from operating and investing activities compared to providing $32.0
million during the same period of 1995. This change is primarily attributable to
lower earnings before any special charge.
Investing activities include the purchase of property of $53.5 million during
the first nine months of 1996 as compared to $45.5 million during the same
period in 1995. Capital expenditures for the full year of 1996 are estimated to
approximate $65 million or $5 million below 1995. Investing activities for 1996
include an $8.5 million investment in a joint venture constructing a
chlor-alkali plant which when completed in late 1997 will provide Geon with
approximately 35% of its captive chlorine requirements. During the first nine
months of 1996 operating working capital (accounts receivable plus inventory
less accounts payable) increased $8.0 million which was $15.7 million less than
the increase during the same period of 1995.
Financing activities in the first nine months of 1996 primarily reflects the
payment of dividends and the repurchase of 979,700 shares of common stock. As of
September 30, 1996 2.4 million shares are authorized for repurchase under an
August 1996 board of directors resolution. The timing of any stock repurchase
depends on the Company's cash flow and market price of its common stock
The Company believes it has sufficient funds to support dividends, debt service
requirements and normal capital expenditures plus expenditures associated with
the previously announced chlor-alkali plant based on projected operations, the
existing working capital facilities and other available permitted borrowings.
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 to approximate $4
million to $5 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 September 30, 1996, the Company had accruals totaling
approximately $27.2 million to cover future environmental remediation
expenditures. Environmental remediation expenditures are estimated to
approximate $6 million in 1996.
Page 7 of 9 Pages
8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
During the third quarter of 1996 The BFGoodrich Company ("BFG")
announced that Westlake Monomers Corporation terminated its right
to purchase BFG's Calvert Facilities at Calvert City, Kentucky.
Westlake's decision not to purchase the facilities and to
terminate its right of first refusal has the effect of
terminating all of its claims against The Geon Company in the
lawsuit brought against the Company and BFG. As previously
reported by the Company in its 1995 annual report, had BFG sold
the Calvert Facilities to Westlake, the Company's obligations
under the Put Agreement, whereby BFG has the right to require the
Company to purchase its Calvert Facilities between April 1, 2000
and March 31, 2003, at the then fair market value determined by
an independent appraisal would have lapsed. Given Westlake's
ultimate actions, however, BFG's rights under the Put Agreement
remain in effect in accordance with the terms of the Put
Agreement.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit 10(a) Sunbelt Chlor Alkali Partnership Agreement, by and
between 1997 Chloralkali Venture Inc., a wholly-owned subsidiary
of The Geon Company, and Olin Sunbelt, Inc. wholly-owned
subsidiary of the Olin Corporation, for the purpose of forming a
general partnership.
Exhibit 10(b) Chlorine Sales Agreement, by and between Sunbelt
Chlor Alkali Partnership, a general partnership organized under
the laws of the State of Delaware, and The Geon Company.
Exhibit 10(c) Intercompany guarantee agreement between the
Company on the one hand and Olin Corporation and Sunbelt Chlor
Alkali Partnership on the other hand.
Exhibit 10(d) Rate Swap Transaction as amended between The Geon
Company and NationsBank, N.A.
Exhibit 11 - Statement re Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On August 1, 1996 the Company filed on Form 8-K notice that its
Board of Directors authorized the Company to repurchase up to 2.5
million shares of Geon common stock, par value $0.10 per share.
The timing of any purchases will depend on the price of Geon
common stock and the Company's cash flow.
On August 26, 1996 the Company filed on Form 8-K notice that BFG
announced that Westlake Monomers Corporation exercised its right
to terminate an agreement to purchase BFG's Calvert Facilities at
Calvert City, Kentucky. As previously discussed in Part II Item I
Westlake's decision not to purchase the facilities has the effect
of terminating all of its claims against The Geon Company in the
lawsuit brought against the Company and BFG. Also as discussed,
BFG's rights under the Put Agreement remains in effect in
accordance with the terms of the Put Agreement.
On September 20, 1996 the Company filed on Form 8-K notice
anticipating third quarter 1996 earnings below the second quarter
as a result of lower resin margins and vinyl chloride monomer
manufacturing disruptions.
Page 8 of 9 Pages
9
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.
November 11, 1996 THE GEON COMPANY
\S\T.A. WALTERMIRE
------------------
T. A. Waltermire
Chief Financial Officer,
(Principal Financial Officer)
\S\G. P. SMITH
--------------
G. P. Smith
Controller and Assistant Treasurer
(Principal Accounting Officer)
Page 9 of 9 Pages