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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 September 30, 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 November 12,
2001: 135.835.
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of November
12, 2001: none.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
(unaudited)
ASSETS
Current assets
Cash $ 15,373 $ 7,930
Trade accounts receivable, net of allowance 31,692 26,957
of $552 and $425 at September 30, 2001 and
December 31, 2000, respectively
Other receivables 910 1,427
Inventory 25,464 18,213
Prepaid expenses and other current assets 1,966 975
Deferred taxes 1,070 1,064
-------- --------
Total current assets 76,475 56,566
Property and equipment, net 111,515 94,337
Other assets
Intangible assets, net 9,050 5,329
Goodwill, net 91,342 33,527
Other accounts receivable 42 120
Other 1,326 155
-------- --------
Total other assets 101,760 39,131
-------- --------
Total assets $289,750 $190,034
======== ========
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
Current liabilities
Current portion of long-term debt $ 1,050 $ --
Accounts payable 12,912 13,072
Other accounts payable 192 272
Income taxes payable 4,304 2,208
Accrued expenses and other current
Liabilities 7,809 9,551
-------- --------
Total current liabilities 26,267 25,103
Long-term liabilities
Revolving line of credit - 10,000
Long-term debt 223,950 120,000
Other long-term liabilities 5,980 5,091
Other accounts payable - 337
Deferred taxes 1,371 3,317
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Total long-term liabilities 231,301 138,745
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Total liabilities $257,568 $163,848
Shareholders' equity
Class A Voting Common Stock, $1.00 par value,
1,035 shares authorized, 135.835 shares issued
and outstanding at September 30, 2001 and
December 31, 2000
Class B Nonvoting Common Stock, $1 par value, 215
shares authorized, 0 shares outstanding at
September 30, 2001 and December 31, 2000
Additional paid-in capital 20,901 20,901
Retained earnings 13,581 7,104
Accumulated other comprehensive loss (2,300) (1,819)
-------- --------
Total shareholders' equity $ 32,182 $ 26,186
-------- --------
Total liabilities and shareholders' equity $289,750 $190,034
======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JULY 1 JULY 1 JAN. 1 JAN. 1
THROUGH THROUGH THROUGH THROUGH
SEPT. 30, 2001 SEPT. 30, 2000 SEPT. 30, 2001 SEPT. 30, 2000
-------------- -------------- -------------- --------------
Net sales $45,981 $53,867 $147,292 $142,275
Costs of sales 36,500 36,475 109,764 103,909
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Gross profit 9,481 17,392 37,528 38,366
Selling general and
administrative expenses 6,047 6,751 17,657 18,175
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Income from operations 3,434 10,641 19,871 20,191
Other expense
Net interest expense (5,280) (3,840) (12,774) (11,387)
Foreign currency
exchange gain 20 461 18 42
Other - (160) 2,766 (160)
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Income (loss) before taxes (1,826) 7,102 9,881 8,686
Income tax provision (benefit) (1,536) 2,863 3,404 3,389
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Net income (loss) $ (290) $ 4,239 $ 6,477 $ 5,297
======= ======= ======== ========
Total comprehensive income
(loss) $ (771) $ 1,104 $ 5,996 $ 3,266
======= ======= ======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JAN. 1 JAN. 1
THROUGH THROUGH
SEPT. 30, 2001 SEPT. 30, 2001
-------------- --------------
Cash flows from operating activities
Net income $ 6,477 $ 5,297
Adjustments to reconcile net income
to net cash from operating
activities
Depreciation, depletion and 12,646 10,315
amortization
Gain on sale of Paper business (2,766) -
Deferred income tax expense (1,699) 1,383
Change in assets and liabilities, net of effects from acquisition and
disposition of assets
Trade accounts receivable (3,609) (10,648)
Other accounts receivable 1,357 693
Inventories (2,152) 5,328
Prepaid expense and other assets (780) 518
Accounts payable (323) (3,838)
Other liabilities (536) 146
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Net cash from operating activities 8,615 9,194
Cash flows from investing activities
Purchases of property, plant and (5,541) (6,393)
equipment
Proceeds from sale of Paper
business 8,500 -
Purchase of assets of Peroxy
Chemicals business from Hercules
Incorporated (93,137) -
Project expenditures related to
Pinjarra, Australia Capital Project (1,326) -
Net cash flows from investing -------- ---------
activities (91,504) (6,393)
Cash flows from financing activities
Repayments under revolving line
of credit (net) (10,000) (1,000)
Borrowings on Term B facility 105,000 -
Payments on deferred financing
costs (4,668) -
-------- --------
Net cash from financing activities 90,332 (1,000)
Effect of exchange rate changes on
cash - (278)
Net change in cash 7,443 1,523
Cash at beginning of period 7,930 4,696
Cash at end of period 15,373 6,219
======== ========
Supplemental disclosure of cash flow
Information
Cash paid for
Interest $ 13,072 $ 13,747
Taxes 3,323 514
In conjunction with the acquisition of the Peroxy Chemicals business from
Hercules Incorporated liabilities were assumed as follows:
Fair value of assets acquired $ 93,513
Cash paid (93,137)
----------
Liabilities assumed $ 376
==========
See accompanying notes to consolidated financial statements.
GEO SPECIALTY CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
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. GEO
has a high level of indebtedness, which creates liquidity and debt service
risks.
INTERIM RESULTS (UNAUDITED): The accompanying consolidated balance sheet at
September 30, 2001 and the consolidated statements of operations and cash flows
for the three and nine month periods ended September 30, 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 consolidated financial statements for those interim periods are
also unaudited. The consolidated results of operations for the three and nine
month periods ended September 30, 2001 are not necessarily indicative of the
results expected for the full calendar year. Because all of the disclosures
required by accounting principles generally accepted in the United States 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.
FINANCIAL INSTRUMENTS: Foreign currency option agreements are accounted for as
a hedge of a firm commitment or anticipated transaction when designated and
effective as a hedge of such items. The effective portion of the gain or loss on
the financial instrument is reported in other comprehensive income (loss) and
the ineffective portion is reported in current earnings. If it becomes probable
that the original forecasted transaction will not occur, the net gain or loss
recorded in comprehensive income (loss) shall be immediately reclassified into
earnings.
NOTE 2 -- DISPOSITION OF ASSETS
On April 19, 2001, GEO sold to ONDEO Nalco Company (Nalco) certain assets of its
Paper Chemicals business for $8,500 in cash plus the assumption by Nalco of
certain liabilities associated with the Paper Chemicals business. GEO recognized
a pre-tax gain of approximately $2,766 on the sale. Annual revenues for the
paper chemicals business as of December 31, 2000 were $26,315.
The Asset Purchase Agreement with Nalco provides for GEO to receive additional
consideration from Nalco if certain sales volumes are achieved by Nalco on
specific products sold during the first two years following the closing. The
maximum additional consideration that can be received by GEO over the two-year
period is $2,000.
In connection with the sale, GEO entered into various supply agreements with
Nalco, pursuant to which GEO will produce specific coating products over a
period of the next five years.
NOTE 3 -- ACQUISITIONS
On May 31, 2001, GEO purchased from Hercules Incorporated (Hercules)
substantially all of the assets, net of certain assumed liabilities, of
Hercules' Peroxy Chemicals division. The assets acquired include accounts
receivable, inventory, buildings and machinery and equipment. The Peroxide
business produces various organic peroxide products used in the vulcanization,
catalysis and processing of polymers and elastometric compounds. The purchase
price was $93,137, allocated as follows:
Current assets $11,200
Land 300
Buildings 2,313
Property and equipment 18,710
Liabilities assumed (376)
Excess of cost over
fair value 60,990
-------
Purchase price $93,137
The $60,990 intangible asset and goodwill will be amortized over 15 years until
January 1, 2002 at which time amortization of goodwill will cease upon
implementation of Financial Accounting Standard No. 142. The goodwill will then
be evaluated annually for impairment.
In connection with the purchase, GEO has entered into two tolling agreements
with Hercules, pursuant to which Hercules will produce certain peroxy products
for GEO on a tolling basis for an initial term of one year.
NOTE 4 -- CREDIT FACILITY AND LONG-TERM BORROWINGS
In conjunction with the acquisition of the Peroxy Chemicals business from
Hercules, as discussed in Note 3, GEO entered into an Amended and Restated
Credit Agreement with Bankers Trust Company, Salomon Smith Barney Inc. and
various other financial institutions (the Lenders), pursuant to which the
Lenders have extended credit facilities in the amount of $145,000 (the Credit
Facility) to GEO, consisting of (A) a Term Loan B Facility in the amount of
$105,000, maturing on December 31, 2007 and bearing interest, at GEO's option,
at a Reserved Adjusted Eurocurrency Rate plus 3.25% to 4.00%, depending on GEO's
leverage ratio, or a Base Rate plus 2.25% to 3.00%, depending on GEO's leverage
ratio, and (B) a $40,000 Revolving Credit Facility, maturing on June 30, 2005
and bearing interest, at GEO's option, at a Reserved Adjusted Eurocurrency Rate
plus 2.25% to 3.50%, depending on
GEO's leverage ratio, or a Base Rate plus 1.25% to 2.50%, depending on GEO's
leverage ratio. The Term Loan B facility funds were utilized for the acquisition
of the Peroxy Chemicals business and related costs incurred in conjunction with
the acquisition, as well as to refinance GEO's existing revolving credit
facility and for working capital and general corporate purposes.
The Term Loan B Facility requires annual principal repayments of $1,050 as of
June 30, 2002 and June 30, 2003. Thereafter, semiannual payments of $5,000 are
required through December 31, 2007, at which time a balloon payment of the
remaining principal balance will be due.
All tangible and intangible assets of GEO, including GEO's ownership interest in
its subsidiaries, secure GEO's obligations under the Credit Facility. The Credit
Facility is senior in right of payment to GEO's outstanding Senior Subordinated
Notes.
The Credit Facility requires GEO to meet certain affirmative and negative
covenants, which include certain restrictions on future indebtedness, capital
expenditures and dividend payments and to meet certain interest-coverage and
leverage ratios.
NOTE 5 -- INVENTORY
Inventory consists of the following components:
September 30, 2001 December 31, 2000
------------------ -----------------
Raw materials $ 8,981 $ 6,223
Work in progress 2,457 3,696
Finished goods 14,026 8,294
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$25,464 $18,213
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NOTE 6 -- NEW ACCOUNTING PRONOUNCEMENTS
The adoption of Financial Accounting Standard No. 133, Accounting for
Derivatives Instruments and Hedging Activities, was required as of January 1,
2001. The standard established methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. As of September 30, 2001, GEO had entered into derivative
instruments. See Note 8 below.
The Financial Accounting Standards Board also issued FAS No. 141, Business
Combinations, and FAS No. 142, Goodwill and Other Intangible Assets in June
2001.
Under FAS 141, the pooling method may no longer be used for business
combinations announced after June 30, 2001. The statement also requires that in
any prior business combination, if an intangible asset was recorded but was
reported as goodwill, the carrying amount of the intangible asset should now be
separately reported. If an intangible was recorded that does not now meet the
requirement to be an identified intangible this amount should be included in
goodwill.
FAS No. 142, Goodwill and Other Intangible Assets, eliminates the periodic
amortization of goodwill from all future and prior business combinations
beginning January 1, 2002. Upon adoption, goodwill should be evaluated for
impairment. The impairment test shall include valuing the fair value of the
reporting entity and comparing its carrying amount (including allocated
goodwill), with any excess of purchase price over new fair value estimate.
The useful life of intangible acquired assets acquired before July 1, 2001
should be reassessed upon adoption of this statement. Intangibles with an
indefinite useful life must be tested for impairment upon adoption and annually
thereafter at the reporting unit level.
GEO is required to adopt this standard on January 1, 2002. GEO is currently
evaluating the effects of the implementation of these standards. As of
September 30, 2001, GEO has goodwill and other intangible assets (net of
amortization) of $100,392.
NOTE 7 -- COMPREHENSIVE INCOME
Comprehensive income (loss) consists of GEO's net income (loss) and foreign
exchange translation adjustments and the effective portion of any gain or loss
on financial instruments.
NOTE 8 -- FINANCIAL INSTRUMENTS
As a result of GEO's global operating activities, GEO is exposed to market risks
from changes in foreign currency exchange rates which may adversely affect GEO's
operating results and financial position. GEO's goal is to minimize its risks
from foreign currency exchange rate fluctuations through its normal operating
activities and, when deemed appropriate, through the use of derivative financial
instruments. GEO does not use derivative financial instruments for trading or
other speculative purposes and does not use leveraged derivative financial
instruments.
GEO's exposure to market risk for changes in foreign currency exchange rates
arises from financing activities between subsidiaries and firm commitments
arising from international transactions. GEO attempts to have such transaction
exposure hedged with internal natural offsets to the fullest extent possible
and, once these opportunities have been exhausted, through foreign currency
option agreements with third parties. During the third quarter of 2001, GEO,
with the approval of its Board of Directors, entered into option contracts that
collar the Australian dollar between .47 and .53 in relation to the U.S. dollar,
in anticipation of capital project expenditures in Pinjarra, Australia. GEO
entered into these contracts at no cost. These contracts mature through December
31, 2002. As of the end of the third quarter, GEO's options had a carrying value
of $0 and a fair value of ($734) due to the weakening of the Australian dollar
from the transaction date and the end of the quarter. As of November 8, 2001,
the fair value of GEO's options had risen to $134 due to the strengthening of
the Australian dollar against the U.S. dollar.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain consolidated operations data for GEO
expressed in millions of dollars and as a percentage of net sales:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -----------------------------------
2000 2001 2000 2001
--------------- -------------- ---------------- ---------------
$ % $ % $ % $ %
----- ----- ----- ----- ------ ------ ------ -----
Net sales $53.9 100.0% $46.0 100.0% $142.3 100.0% $147.3 100.0%
Gross profit 17.4 32.3 9.5 20.6 38.4 27.0 37.5 25.5
Operating income 10.6 19.8 3.4 7.4 20.2 14.2 19.9 13.5
Net income (loss) 4.2 7.9 (0.3) (0.6) 5.3 3.7 6.5 4.4
EBITDA 14.1 26.2 8.2 17.8 30.0 21.1 31.7 21.6
Net interest expense 3.9 7.2 5.3 11.5 11.4 8.0 12.8 8.7
Capital expenditures 2.0 3.7 1.9 4.1 6.1 4.3 5.5 3.8
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net Sales. Net sales for the three months ended September 30, 2001 were $46.0
million, representing a $7.9 million or 14.7% decrease compared to $53.9 million
of net sales during the same period in 2000. Most of the decrease in net sales
was attributable to the gallium business, which was down by $11.4 million. The
gallium business experienced exceptionally strong demand during the same period
in 2000, including one significant shipment for a new application. Most of the
decline in market demand for gallium was attributable to the weakness in the
global demand for cell phones. The impact of the major drop in cell phone
shipments since late 2000 has caused inventories to build throughout the supply
chain. The gallium business did not experience the full extent of this
unfavorable impact until the third quarter of 2001. The peroxy chemical
business, acquired in May of 2001, contributed $8.1 million in additional net
sales, offsetting the $3.7 million decrease in net sales related to the
divestment of the paper chemicals business. The remaining decrease of $0.9
million was due to weak net sales in the coatings market, off by $2.5 million or
27.5%, and slightly lower water treatment chemical sales, which were
off $0.8 million or 6.8%. The decrease in overall sales more than offset record
sales to the construction industry, which were up by $2.5 million or 21.4%.
Gross Profit. Gross profit for the three months ended September 30, 2001 was
$9.5 million, or 20.6% of net sales, representing a $7.9 million or 45.4%
decrease compared with gross profit of $17.4 million, or 32.3% of net sales,
during the same period in 2000. The gallium business, which experienced a sharp
drop in net sales, accounted for $7.8 million of the decrease in gross profit.
The net impact of the acquisition of the peroxy chemicals business and the
divestment of the paper chemicals business was a favorable $1.4 million. This
increase was offset by the weakness in sales to the coatings market and less
favorable raw material costs, i.e., napthalene, for construction materials.
Production costs which include utilities were essentially flat compared to the
third quarter of 2000.
Operating Income. Operating income for the three months ended September 30,
2001 was $3.4 million, or 7.4% of net sales, representing a $7.2 million or
67.9% decrease compared with operating income of $10.6 million, or 19.8% of net
sales, during the same period in 2000. The decline in the performance of the
gallium business resulted in a decline of $7.6 million. Partially offsetting the
drop in the performance of the gallium business were contributions to operating
income of the peroxy chemicals acquisition and the paper chemicals divestment
which were $1.0 million and $0.7 million, respectively. The favorable impact of
the paper chemicals divestment reflects the sizeable decrease in selling and
administrative expenses that were associated with that group. The remaining
decline of approximately $1.4 million was essentially due to the weakness in
coating additive sales.
Net Income (Loss). Net loss for the three months ended September 30, 2001 was
$0.3 million, or (0.6%) of net sales, representing a $4.5 million or 107%
decrease compared with net income of $4.2 million, or 7.9% of net sales, during
the same period in 2000. The decrease in net income was due to the drop in
operating income, mostly attributable to the gallium business, discussed
previously. Additionally, an increase of approximately $1.4 million in financing
expenses, interest and amortization of deferred financing fees relating to the
peroxy chemicals acquisition caused a decline in net income. Partially
offsetting these unfavorable effects was a $4.4 million reduction in the income
tax provision relative to the third quarter of 2000. Approximately $0.8 million
of the reduction in the tax provision for the period ended September 30, 2001
was due to an adjustment in foreign taxes.
EBITDA. EBITDA for the three months ended September 30, 2001 was $8.2 million,
or 17.8% of net sales, representing a $5.9 million or 41.4% decrease compared
with EBITDA of $14.1 million, or 26.2% of net sales, during the same period in
2000. The sharp decline in net sales of the gallium business resulted in a $7.6
million or 84.8% decrease in EBITDA contribution compared to the same period in
2000. The combined effect of the peroxy chemical acquisition and paper chemical
divestment was a favorable $2.9 million, or $2.3 million and $0.6 million,
respectively. The remaining difference, an unfavorable $1.1 million, was
attributable to the weak net sales performance of the coating additives chemical
business.
Net Interest Expense. Net interest expense for the three months ended September
30, 2001 was $5.3 million, or 11.5% of net sales, representing a $1.4 million or
35.9% increase from the net interest expense of $3.9 million, or 7.2% of net
sales, during the same period in 2000. The increase in net interest expense,
$1.3 million of interest cost and $0.1 million of amortization of deferred
financing costs, was attributable to additional indebtedness related to the
peroxy chemical acquisition.
Capital Expenditures. Capital expenditures for the three months ended
September 30, 2000 were $1.9 million, or 4.1% of net sales, representing a 0.1
million decrease compared to $2.0 million of capital expenditures during the
same period in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Net Sales. Net sales for the nine months ended September 30, 2001 were $147.3
million, representing a $5.0 million or 3.5% increase compared with net sales of
$142.3 million during the same period in 2000. The increase in net sales was
primarily attributable to the impact of the acquisition of the peroxy chemical
business from Hercules on May 31, 2001, as mentioned in Note 3. Net sales of the
peroxy chemical business, which produces additives for the wire and cable and
rubber industries, were $12.2 million for the four month period since the
acquisition. Excluding the impact of the peroxy chemicals acquisition, GEO's net
sales decreased by $7.2 million or 5.1% compared to the same period in 2001.
This decrease was due primarily to the disposition of certain assets of the
paper chemicals
business, mentioned in Note 2, which resulted in a net reduction of net sales of
$5.9 million. The remaining decline in net sales was attributable to weak end
markets for coating additives products and gallium, which generated shortfalls
in net sales of $5.1 million and $0.8 million, respectively, that were mostly
offset by very strong net sales of additives products used in the construction
industry.
Gross Profit. Gross profit for the nine months ended September 30, 2001 was
$37.5 million, or 25.5% of net sales, representing a decrease of $0.9 million or
2.3% compared with gross profit of $38.4 million, or 27.0% of net sales, during
the same period in 2000. Excluding the impact of the peroxy chemical business,
gross profit declined by $5.1 million with the divestment of the paper chemicals
business accounting for $2.6 million of the decrease. The remainder of the
decline was mostly due to the weakness in sales of coating additive products.
Generally, the cost structure in terms of transportation costs, raw materials
and production expenses has been more favorable during the course of the last
several months, especially since the first three months of 2001, reflecting the
decline in crude oil, natural gas and utility expenses.
Operating Income. Operating income for the nine months ended September 30, 2001
was $19.9 million, or 13.5% of net sales, representing a decrease of $0.3
million or 1.5% compared with operating income of $20.2 million, or 14.2% of net
sales, during the same period in 2000. The decrease in operating income mostly
reflects the decline in gross profit. Excluding the impact of the peroxy
chemical acquisition, operating income was $2.6 million as lower selling,
general and administrative expenses partially offset the $5.1 million decrease
in gross profit. Most of the expense decrease was attributable to the divestment
of the paper chemicals business which had a $3.1 million favorable effect.
Net Income. Net income for the nine months ended September 30, 2001 was $6.5
million, or 4.4% of net sales, representing a $1.2 million increase compared
with net income of $5.3 million, or 3.7% of net sales, during the same period in
2000. The increase in net income was due primarily to the divestment of the
paper chemicals business which generated a $2.8 million non-operating gain.
Partially offsetting this gain were higher interest expenses of $1.4 million
related to the financing of the acquisition of the peroxy chemical business and
the $0.3 million decrease in operating income previously noted.
EBITDA. EBITDA for the nine months ended September 30, 2001 was $31.7 million,
or 21.6% of net sales, representing a $1.7 million or 5.7% increase compared to
EBITDA of $30.0 million, or 21.1% of net sales, during the same period in 2000.
The increase in EBITDA was attributable to the peroxy chemical acquisition and
the exceptionally strong demand for gallium in the first half of 2001. This
increase was partially offset by the unfavorable impact of higher raw material,
freight and production costs during the first quarter of 2001 and the weakness
in net sales of coating additives throughout 2001.
Net Interest Expense. Net interest expense for the nine months ended
September 30, 2001 was $12.8 million, or 8.7% of net sales, an increase of $1.4
million or 12.3% compared to net interest expense of $11.4 million, or 8.0% of
net sales, during the same period in 2000. The increase in net interest expense
was due to the additional debt incurred to fund the peroxy chemical acquisition.
As of September 30, 2001, GEO's net debt level was higher by $71.8 million
compared to the debt level on September 30, 2000.
Capital Expenditures. Capital expenditures for the nine months ended September
30, 2001 were $5.5 million, or 3.8% of net sales, representing a $0.6 million
decrease compared to $6.1 million of capital expenditures during the same period
in 2000. The most significant reason for the decrease was the absence of capital
expenditures for additional production capacity in the coating additive and
gallium facilities installed during 2000.
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 and
periodic draws on its revolving credit facility. As of September 30, 2001, GEO
had no material commitments for capital expenditures, although GEO has
publically announced its intention to invest approximately $40.0 million to
renovate and upgrade a gallium extraction facility in Pinjarra, Australia. Due
to the decline in the demand for gallium in the third quarter of 2001, GEO has
opted to scale back the anticipated investment to $30 million and delay most of
the project expenditures until the second quarter of 2002.
Net cash provided from operations for the nine month periods ending
September 30, 2001 and 2000 was $8.6 million and $9.2 million, respectively.
In connection with the Trimet acquisition on July 31, 1998, GEO refinanced its
existing senior debt by issuing $120.0 million of 10 1/8% Senior Subordinated
Notes due 2008. On May 31, 2001, GEO amended its senior credit agreement in
conjunction with the acquisition of the peroxide chemicals business from
Hercules Incorporated. Under the amended credit agreement, GEO's revolving loan
credit facility was reduced from $45.0 million to $40.0 million. GEO also
borrowed under the amended senior credit agreement $105.0 million through a Term
B loan facility which was syndicated to more than 20 banks and institutional
investors. The amended revolving loan facility expires in 2005 and the Term B
loan facility expires in December 2007. The revolving credit facility has no
annual amortization requirement. The Term B loan facility has a 1% per cent per
annum amortization requirement until June 30, 2004 when the first semiannual
amortization payment of $5.0 million is due. The semiannual $5.0 million
payments are due until the expiration of the Term B loan when the total of the
remaining Term B balance is due. Finally, the Term B loan also has a mandatory
prepayment provision based on an annual calculation of excess cash flow.
Borrowing under the revolving credit facility and the Term B credit facility
bear interest, at GEO's option, at:
. 1.25% to 2.50% (depending on GEO's leverage ratio) for the revolving
facility and 2.25% to 3.00% (depending on GEO's leverage ratio) for
the Term B facility 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% to 3.50% (depending on GEO's
leverage ratio) for the revolving facility and 3.25% to 4.00%
(depending on GEO's leverage ratio) for the Term B facility.
As of September 30, 2001, GEO's interest rate under the Term B facility was
6.625%. GEO did not have any draws outstanding on its senior revolving credit
facility as of September 30, 2001. The overall senior credit agreement, which
includes both the revolving credit facility and the Term B facility, contains
customary covenants, including the maintenance of certain financial ratios.
During the nine months ended September 30, 2001, GEO repaid $10.0 million of its
senior revolving credit facility. On May 31, 2001, GEO borrowed the full amount
of $105.0 million of its Term B facility. This borrowing was made to fund the
acquisition of the peroxide chemical business and fund various transaction and
financing fees related to the acquisition.
As of September 30, 2001, GEO had a cash balance of $15.4 million and $40.0
million available under its senior revolving facility. This level of liquidity
compares to a cash balance of $6.2 million and $23.0 million of revolving credit
availability as of September 30, 2000. The cash balance declined by $3.1 million
during the three month period ended September 30, 2001.
GEO believes that cash generated from operations, together with amounts
available under the senior revolving 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.
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) 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; (2) decreases in customer spending levels due to
general economic conditions or other factors affecting their volume of business;
(3) the increased risk during economic downturns that GEO's customers may
declare bankruptcy or experience payment difficulties; (4) increases in GEO's
cost of borrowing or a default or covenant violation under GEO's indenture or
other material debt agreement; (5) GEO's inability to effectively integrate
acquired businesses; (6) a decrease in the rate of growth of GEO's gallium or
other product sales; and (7) 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 DISCLOSURE ABOUT MARKET RISK.
GEO has engaged in hedging or other market structure derivative activities as of
September 30, 2001. See Notes 1 and 8 to the financial statements. GEO's debt
obligations are partially at fixed interest rates and at variable rates. GEO
does not believe that its market risk financial instruments on September 30,
2001 will have a material impact on future operations or cash flow.
GEO's foreign operations are subject to the usual risks that may affect such
operations. These include, among other things, exchange controls and currency
restrictions, currency fluctuations, changes in local economic conditions,
unsettled political conditions, and foreign government-sponsored boycotts of
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 issuance of the notes. The fair value of GEO's long-
term debt as of September 30, 2001, based upon market quotations, is
approximately $105.6 million. Based on a hypothetical immediate 100 basis point
increase in interest rates at September 30, 2001, the fair value of GEO's fixed
rate long-term notes would be impacted by a net decrease of $7.1 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 September 30,
2001 of $7.6 million.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
GEO filed a report on Form 8-K/A with the Securities and Exchange
Commission on August 14, 2001 relating to the Peroxy Chemicals
acquisition.
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.
Date: November 12, 2001 By: /s/ William P. Eckman
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William P. Eckman
Executive Vice President and Chief
Financial Officer (duly authorized
officer and principal financial officer)