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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1998. 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: (440) 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 April 30, 1998 there were 23,303,345 shares of common stock outstanding.
There is only one class of common stock.
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Part I. Financial Information
Item 1. Financial Statements
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
-------------------------
1998 1997
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Sales $ 324.5 $ 301.0
Operating costs and expenses:
Cost of sales 283.4 268.4
Selling and administrative expenses 17.0 11.3
Depreciation and amortization 14.5 13.5
-------- --------
Operating income 9.6 7.8
Interest expense (3.8) (3.2)
Interest income .6 --
Other income (expense), net 3.4 (1.0)
-------- --------
Income before income taxes 9.8 3.6
Income tax expense (4.0) (1.3)
-------- --------
Net income $ 5.8 $ 2.3
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Earnings per share of common stock:
Basic $ .25 $ .10
Diluted $ .25 $ .10
Number of shares used to compute earnings per share:
Basic 22.9 23.0
Diluted 23.5 23.6
Dividends paid per share of common stock: $ .125 $ .125
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THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
March 31,
1998 December 31,
ASSETS (Unaudited) 1997
----------- -----------
Current assets:
Cash and cash equivalents $ 35.3 $ 49.1
Accounts receivable, net 94.6 110.8
Inventories 127.9 122.4
Deferred income taxes 20.8 20.7
Prepaid expenses 7.4 10.5
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Total current assets 286.0 313.5
Property, net 450.1 456.6
Deferred charges and other assets 110.6 102.8
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Total assets $ 846.7 $ 872.9
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank debt $ 99.1 $ 90.4
Accounts payable 128.6 159.1
Accrued expenses 52.3 63.3
Current portion of long-term debt .8 .8
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Total current liabilities 280.8 313.6
Long-term debt 136.1 136.4
Deferred income taxes 37.2 35.8
Postretirement benefits other than pensions 85.9 86.2
Other non-current liabilities 78.9 77.1
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Total liabilities 618.9 649.1
Stockholders' equity:
Preferred stock, 10.0 shares authorized, no shares issued -- --
Common stock, $.10 par, authorized 100.0 shares;
issued 28.0 shares in 1998 and 27.9 in 1997 2.8 2.8
Other stockholders' equity 225.0 221.0
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Total stockholders' equity 227.8 223.8
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Total liabilities and stockholders' equity $ 846.7 $ 872.9
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THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
Three Months Ended,
March 31,
-------------------------
1998 1997
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OPERATING ACTIVITIES
Net income $ 5.8 $ 2.3
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Depreciation and amortization 14.5 13.5
Provision for deferred income taxes 2.2 1.8
Change in assets and liabilities:
Accounts receivable 16.3 (18.0)
Inventories (5.0) (8.1)
Accounts payable (30.5) 17.3
Accrued expenses and other (13.1) (.7)
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Net cash (used) provided by operating activities (9.8) 8.1
INVESTING ACTIVITIES
Purchases of property (6.2) (9.6)
Investment in and advances to equity affiliates (4.2) (11.3)
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NET CASH USED BY OPERATING AND INVESTING ACTIVITIES (20.2) (12.8)
FINANCING ACTIVITIES
Increase in short-term debt 8.7 19.4
Repayment of long-term debt (.3) (.3)
Dividends (2.9) (2.9)
Proceeds from issuance of common stock .1 --
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Net cash provided by financing activities 5.6 16.2
EFFECT OF EXCHANGE RATE CHANGES ON CASH .8 --
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13.8) 3.4
CASH AND CASH EQUIVALENTS AT JANUARY 1 49.1 17.9
-------- --------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 35.3 $ 21.3
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THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in Millions, Shares in Thousands)
COMMON COMMON ACCUMULATED
SHARES ADDITIONAL STOCK OTHER NON-
COMMON HELD IN COMMON PAID-IN RETAINED HELD IN OWNER EQUITY
SHARES TREASURY TOTAL STOCK CAPITAL EARNINGS TREASURY CHANGES OTHER
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 1997 27,877 4,559 $222.4 $2.8 $296.1 $62.4 $(115.7) $(21.9) $(1.3)
Non-owner equity changes:
Net income 2.3 2.3
Other non-owner equity changes:
Translation adjustment (1.2) (1.2)
Total non-owner equity changes 1.1
Stock based compensation and
exercise of options 0.2 (2.0) 2.0 0.2
Cash dividends (2.9) (2.9)
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BALANCE MARCH 31, 1997 27,877 4,559 $220.8 $2.8 $294.1 $61.8 $(113.7) $(23.1) $(1.1)
===============================================================================================
BALANCE JANUARY 1, 1998 27,877 4,700 $223.8 $2.8 $295.8 $73.3 $(118.0) $(29.3) $(0.8)
Non-owner equity changes:
Net income 5.8 5.8
Other non-owner equity changes:
Translation adjustment 2.2 2.2
Total non-owner equity changes 8.0
Stock based compensation and
exercise of options 97.0 (29.0) (1.1) (2.6) 1.4 0.1
Cash dividends (2.9) (2.9)
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BALANCE MARCH 31, 1998 27,974 4,671 $227.8 $2.8 $293.2 $76.2 $(116.6) $(27.1) $(0.7)
===============================================================================================
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Note A
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The accompanying unaudited condensed 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 period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. 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, 1997. Certain amounts for 1997 have been reclassified to
conform to the 1998 interim period 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 employment, 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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Components of inventories at March 31, 1998 and December 31, 1997 are as follows:
March 31, December 31,
(Dollars in millions) 1998 1997
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Finished products and in-process inventories $105.9 $107.8
Raw materials and supplies 49.8 48.7
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155.7 156.5
LIFO Reserve (27.8) (34.1)
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$127.9 $122.4
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Note D
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In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," (SFAS 130). The pronouncement requires that an enterprise classify
items of other comprehensive income or "non-owner equity changes" as referred to
by the Company, by their nature in a financial statement and display the
accumulated non-owner equity changes separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. The
Company adopted SFAS 130 on January 1, 1998. Certain reclassifications have been
made to the March 31, 1997 and December 31, 1997 financial statements to conform
to the requirements of this Pronouncement.
Note E
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In March 1998, the Company announced an agreement with Bayer Corporation under
which Bayer will utilize a pipeline to transport anhydrous chlorine (HCl) from
its plant in Baytown, Texas to Geon's VCM plant in LaPorte, Texas. Geon is
constructing an oxychlorination facility at LaPorte to consume the anhydrous
hydrogen from Bayer.
In April 1998, the Company announced an agreement, pending regulatory approvals,
to acquire Plast-O-Meric, a vinyl and polyurethane products company located in
Sussex, Wisconsin. Plast-O-Meric had sales of $73 million in 1997.
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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 industry data, North American (U.S. and Canada) producer shipments of
polyvinyl chloride (PVC), including exports, are estimated to have increased 6%
in the first quarter of 1998 as compared to the previous quarter and were about
1.5% higher than in the same quarter of 1997. Exports increased 29% over the
same period a year ago, and were 5% below the fourth quarter of 1997. A decline
in export shipments to the Far East was largely offset by increased shipments to
other world markets, in particular, South America, Africa and the Middle East.
Capacity utilization (shipments/capacity) for North America was estimated at 92%
of effective capacity (85% of nameplate) during the first quarter of 1998, a
decline of 6% from the same period a year ago, which is largely attributable to
a 6% increase in capacity in the first quarter of 1998. Utilization was
unchanged from the fourth quarter of 1997.
Industry operating margins (sales price less large buyer ethylene and market
chlorine costs as reported in industry trade journals and newsletters) for the
largest PVC resin market applications decreased approximately 0.5 cent per pound
in the first quarter of 1998 compared to the previous quarter and decreased 1.0
cent per pound compared to the same period in 1997. This change in resin
operating margins in the first quarter versus the fourth quarter of 1997 was
primarily due to lower average selling prices, of approximately 2.0 cents per
pound, partially offset by lower chlorine and ethylene costs.
The second quarter of 1998 began with resin operating margins at historic lows.
Producers are seeking to expand operating margins through higher pricing and
have announced a 3.0 cents per pound increase for implementation in May 1998. At
current capacity utilization rates (PVC market demand compared to industry
capacity levels) it is uncertain whether this increase will be realized.
Inventories of PVC resin held by processors are at comparatively low levels, as
a consequence, resin demand could be bolstered as processors replenish their
inventory position in order to meet the demands of the expected seasonal peak in
construction activity. Raw material prices for both chlorine and ethylene
purchases are projected to continue to decline during the second quarter.
Results of Operations:
- ----------------------
The Company had sales of $324.5 million in the first quarter of 1998, an 8%
increase over sales for the first quarter of 1997 of $301.0 million. Net income
was $5.8 million or $3.5 million above the same period last year. The 1998
earnings before interest and taxes was $12.7 million or 63% above the same
quarter in 1997. The improved earnings are largely due to the acquisition of
Synergistics Industries Limited (Synergistics) commencing in November 1997 and
the December 1997 start-up of the Sunbelt Chlor-alkali joint venture. For the
fourth quarter of 1997, which included two months of Synergistics' results,
sales were $312.3 million and net income was $3.5 million.
The Company's first quarter 1998 suspension/mass resin shipments were
approximately 1% lower than the previous quarter and 4% below the same quarter
in 1997. The Company's average spread between resin prices and raw material
costs (ethylene and chlorine) as compared to the fourth quarter of 1997 and the
same period last year trended in line with industry movements. Performance
polymer shipments in the first quarter of 1998 increased 49% over first quarter
of 1997 due largely to the addition of Synergistics.
The increase in selling, general and administrative expenses of $5.7 million
over the same period last year is primarily the result of the addition of
Synergistics. Similarly, depreciation and amortization increased as a result of
the addition of Synergistics, including amortization expense related to
acquisition goodwill.
Interest & Other Expense:
- -------------------------
Interest expense for the first quarter of 1998 increased as a result of the
short-term debt employed to fund the Synergistics acquisition. Other income
(expense), net was income of $3.4 million in the first quarter of 1998 as
compared to expense of $1.0 million in 1997. The change is largely due to
earnings of equity affiliates, including the Sunbelt chlor-alkali joint venture.
In addition, favorable unrealized foreign currency translation increased other
income in 1998.
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Taxes:
- ------
For the first quarter of 1998, income tax expense was approximately 41% of
pre-tax income as compared with 36% for the first quarter of 1997. The increase
in the effective tax rate is due in part to non-deductible goodwill associated
with the Synergistics acquisition as well as the effect of a state income tax
refund in 1997.
Capital Resources and Liquidity:
- --------------------------------
During the three months ended March 31, 1998, the Company used $20.2 million of
net cash in operating and investing activities as compared to $12.8 million
during the same period of 1997. This reflects higher operating working capital
(accounts receivable plus inventory less accounts payable) and the timing of
payments for accrued tax liabilities. These uses of cash were partially offset
by higher earnings before non-cash charges (depreciation, amortization and
deferred taxes), lower capital expenditures and lower investments in and
advances to equity affiliates.
Investing activities include the purchase of property of $6.2 million during the
first three months of 1998 or $3.4 million below the same period of 1997.
Capital expenditures for the full year of 1998 are projected to be approximately
$70 million as compared to $51 million in 1997. Investing activities for the
first quarter of 1998 also include $4.2 million of investments in and advances
to equity affiliates as compared with $11.3 million in 1997. These primarily
relate to the chlor-alkali joint venture.
Financing activities in the first three months of 1998 primarily reflect an
increase in short-term bank debt related to increased investment in operating
working capital and the payment of dividends. As of March 31, 1998, 1.7 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, normal capital expenditures, the pending Plast-O-Meric acquisition
and expenditures, and advances associated with the Bayer HCL project based on
projected operations, 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 assure compliance with applicable environmental, health and
safety laws and regulations. This effort 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 1998
to approximate $3 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 March 31, 1998, the Company had accruals totaling
approximately $51 million to cover potential future environmental remediation
expenditures. Environmental remediation expenditures in 1998 are estimated to
approximate the level of 1997.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
Part II - Other Information
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Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
None.
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 11 - Statement re Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
In January 1998, the Company filed Amendments No. 1 and No. 2 to
Form 8-K on Form 8-K/A related to the acquisition of Synergistics
Industries Limited.
In February 1998, the Company filed an 8-K announcing that the
Board of Directors had named Thomas A. Waltermire as Executive
Vice President and Chief Operating Officer of Geon, with
responsibility for daily operations.
In March 1998, the Company filed an 8-K announcing an agreement
with Bayer Corporation under under which Bayer will utilize a
pipeline to transport anhydrous hydrogen chloride to Geon's
LaPorte, Texas facility.
In April 1998, the Company filed an 8-K announcing an agreement
to purchase Plast-O-Meric, a vinyl and polyurethane products
company.
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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.
May 15, 1998 THE GEON COMPANY
\s\W. D. WILSON
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W. D. Wilson
Vice President and Chief Financial Officer,
(Principal Financial Officer)
\s\G. P. SMITH
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G. P. Smith
Corporate Controller and Assistant Treasurer
(Principal Accounting Officer)