GEO SPECIALTY CHEMICALS INC - 10-Q - Quarterly Report
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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 June 30, 2002
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.
3201 Enterprise Parkway, Suite 490
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 August 5,
2002: 135.835.
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of August 5,
2002: none.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, 2002 DECEMBER 31, 2001
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(unaudited)
ASSETS
Current assets
Cash $ 6,260 $ 19,782
Trade accounts receivable, net of allowance 28,800 24,292
of $528 and $556 at June 30, 2002 and
December 31, 2001, respectively
Other receivables 859 788
Inventory 28,886 28,921
Prepaid expenses and other current assets 3,035 1,601
Deferred taxes 1,553 1,401
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Total current assets 69,393 76,785
Property and equipment, net 103,657 108,522
Other assets
Intangible assets, net 10,742 11,990
Goodwill, net 86,997 86,973
Other accounts receivable 692 92
Deferred taxes 1,987 449
Other 1,713 1,692
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Total other assets 102,131 101,196
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Total assets $ 275,181 $ 286,503
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(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, 2002 DECEMBER 31, 2001
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LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
Current liabilities
Current portion of long-term debt $ 975 $ 1,050
Accounts payable 14,288 14,127
Other accounts payable 95 112
Income taxes payable 153 2,927
Accrued expenses and other current
liabilities 11,524 10,856
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Total current liabilities 27,035 29,072
Long-term liabilities
Revolving line of credit - -
Senior subordinated notes 120,000 120,000
Fair value adjustment (1,343) (4,611)
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Fair value of senior subordinated notes 118,657 115,389
Term B facility 96,525 103,950
Other long-term liabilities 8,049 8,983
Other accounts payable - 252
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Total long-term liabilities 223,231 228,574
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Total liabilities $ 250,266 $ 257,646
Shareholders' Equity
Class A Voting Common Stock, $1 par value,
1,035 shares authorized, 135.835 shares issued and
outstanding at June 30, 2002 and December 31,
2001
Class B Nonvoting Common Stock, $1 par value,
215 shares authorized, 0 shares outstanding at
June 30, 2002 and December 31, 2001
Additional paid-in capital 20,901 20,901
Retained earnings 6,137 8,829
Accumulated other comprehensive loss (2,123) (873)
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Total shareholders' equity $ 24,915 $ 28,857
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Total liabilities and shareholders' equity $ 275,181 $ 286,503
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See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
APRIL 1 APRIL 1 JAN. 1 JAN. 1
THROUGH THROUGH THROUGH THROUGH
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
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Net sales $ 43,509 $ 50,776 $ 83,937 $ 101,311
Costs of sales 35,025 37,049 68,583 73,264
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Gross profit 8,484 13,727 15,354 28,047
Selling general and administrative
expenses 4,689 5,766 9,523 11,610
Other expenses (income) (33) - (33) -
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Income from operations 3,828 7,961 5,864 16,437
Other expense
Net interest expense (5,203) (4,085) (9,490) (7,494)
Foreign currency exchange gain (1,115) 98 (1,283) (2)
(loss)
Other 526 2,766 827 2,766
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Income (loss) before taxes (1,964) 6,740 (4,082) 11,707
Provision for taxes (754) 2,770 (1,390) 4,940
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Net income (loss) $ (1,210) $ 3,970 $ (2,692) $ 6,767
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Total comprehensive income (loss) $ (4,169) $ 3,970 $ (3,942) $ 6,767
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See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JAN 1 JAN 1
THROUGH THROUGH
JUNE 30, 2002 JUNE 30, 2001
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Cash flows from operating activities
Net income (loss) $ (2,692) $ 6,767
Adjustments to reconcile net income
(loss) to net cash from operating
activities
Depreciation, depletion and amortization 7,999 7,559
Gain on sale of Paper business - (2,766)
Deferred income tax (benefit) (975) 294
Gain on derivative instruments (556)
Change in assets and liabilities
Trade accounts receivable (4,508) (5,027)
Other accounts receivable (671) (1,660)
35 (366)
Inventories
Prepaid expense and other assets (237) (1,549)
Accounts payable (2,214) 4,822
Other liabilities 130 105
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Net cash from operating activities (3,689) 8,179
Cash flows from investing activities
Purchases of property, plant and equipment (2,053) (3,530)
Proceeds from sale of Paper
Business - 8,500
Purchase of assets of Peroxy
Chemicals business from Hercules,
Inc. - (93,137)
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Net cash flows from investing activities (2,053) (88,167)
Cash flows from financing activities
Borrowings (repayments) under
revolving line of credit (net) - (10,000)
Payments on Term B notes (7,500) -
Borrowings on Term B notes - 105,000
Payments on deferred financing
Costs (280) (4,431)
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Net cash from financing activities (7,780) 90,569
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Net change in cash (13,522) 10,581
Cash at beginning of period 19,782 7,930
Cash at end of period 6,260 18,511
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Supplemental disclosure of cash flow
Information
Cash paid for
Interest $ 9,015 $ 6,997
Taxes 3,485 1,855
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. (the Company or GEO) 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. These products are used primarily in the construction, paper, water
treatment, electronic, automotive and oil field industries. GEO sells these
products to customers located worldwide.
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GEO operates in an environment with many financial and operating
risks, including, but not limited to, intense competition, fluctuations in cost
and supply of raw materials, technological changes, and environmental matters.
The Company has a high level of indebtedness, which creates liquidity and debt
service risks.
INTERIM RESULTS (UNAUDITED): The accompanying consolidated balance
sheet at June 30, 2002 and the consolidated statements of operations and cash
flows for the three and six month periods ended June 30, 2002 and 2001 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 six
month periods ended June 30, 2002 are not necessarily indicative of the results
expected for the full calendar year. Because all of the disclosures required by
generally accepted accounting principles are not included, these interim
statements should be read in conjunction with GEO's financial statements for the
year ended December 31, 2001, and the notes thereto, which are included in GEOs'
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 22, 2002.
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.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) consists of GEO's net
income (loss), the effects of foreign exchange translation adjustments and the
effective gain or losses on financial instruments.
NOTE 2 - FINANCIAL INSTRUMENTS
GEO adopted the Statement of Financial Accounting Standard (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities on January 1, 2001.
Accordingly all interest rate swaps and foreign currency option agreements are
accounted for as hedges of the related liability, firm commitment or anticipated
transaction when designated and effective 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. The Company formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives used are highly effective in offsetting
changes in cash flows or fair value of the hedged item. If it becomes probable
that the original hedge forecasted transaction will not occur, the net gain
(loss) recorded in comprehensive income (loss) shall be immediately reclassified
into current earnings. The Company does not use derivative financial instruments
for trading or other speculative purposes and does not use leveraged derivative
instruments.
On November 15, 2001, the Company entered into two interest rate derivative
contracts with Citibank N.A. The purpose of the contracts is to hedge the
Company's interest expense by availing itself of the prevailing interest rate
conditions reflected by a steep yield curve and the Company's tax situation.
Both derivative contracts were for a notional amount of $90.0 million. Under one
contract, the "floating to fixed" contract, the Company agreed to pay Citibank
the equivalent of 3.67% annually through August 1, 2004 with payments being made
on each February 1 and August 1 during the contract period. Citibank agreed to
pay the Company the six-month LIBOR rate, reset on the first day of each
semi-annual payment date during the contract period. This contract corresponds
to the Company's Term B floating rate debt.
Under the other contract, the "fixed to floating" contract, the Company agreed
to pay Citibank the equivalent of the six-month LIBOR rate as of the last
business day prior to the payment date plus 5.05%. Citibank agreed to pay the
Company during the same period 10.125%. The payment dates are February 1 and
August 1 of each year until August, 2008. As part of this transaction the
Company sold to Citibank the right to cancel the contract on any payment date
commencing August 1, 2004. This contract corresponds to the Senior Subordinated
Notes which have a fixed interest rate of 10.125%. Due to the timing of the
cancellation provision of the swap contract, the contract is not considered to
be 100% effective.
The Company has accounted for these interest rate derivative contracts pursuant
to FAS 133. The "floating to fixed" contract has been treated as a cash flow
hedge with 100% effectiveness. As of June 30, 2002 and December 31, 2001 the
fair value of the hedge was $1.3 million and $0.6 million, respectively. This
amount was recorded in other
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comprehensive income, net of tax and was offset by a reduction in other
long-term liabilities in the accompanying consolidated balance sheet.
The "fixed to floating" contract has been treated as a fair value hedge. As of
June 30, 2002 and December 31, 2001, the fair market value of the hedge was $1.3
million and $4.3 million, respectively, at which time, based on the change in
the fair value of the risk being hedged, a portion of this hedge was deemed to
be ineffective. Thus in accordance with FAS 133 the fair market value of the
hedge was recorded and was reflected in the other long-term liabilities on the
accompanying consolidated balance sheet. The change in the fair value of the
risk being hedged was recorded and is reflected as a $1.3 million and $4.6
million reduction in the fair value of the senior subordinated notes as of June
30, 2002 and December 31, 2001, respectively. The change in the ineffective
portion of $0 million and $0.3 million is reflected in current earnings (loss)
as of June 30, 2002 and December 31, 2001, respectively.
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 financial 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 2001, GEO 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 those contracts at no cost. These contracts mature
through December 31, 2002. In accordance with FAS 133 as of December 31, 2001
these contracts were deemed to be 100% effective and the effective gain was
reflected in other comprehensive income. In April of 2002, one set of the
contracts was sold for a $0.43 million gain, which is included in other income
from operations. Due to the fact that the other contracts expire in 2002 and the
Pinjarra project has been deferred until 2003, these contracts were deemed to be
ineffective as of January 1, 2002. Thus in accordance with SFAS 133 the
ineffective gain on these contracts is reflected in current earnings. The fair
value of the ineffective contracts was $0.8 million and $0.06 million as of June
30, 2002 and December 31, 2001, respectively, and is included in other income
after operations.
NOTE 3 -- GOODWILL AND OTHER INTANGIBLE ASSETS
GEO adopted FAS 142, "Goodwill and Other Intangible Assets", on January 1, 2002.
This statement resulted in the cessation of goodwill amortization. All of the
provisions of this statement will be applied to future fiscal years, to all
goodwill and intangible assets recognized in GEO's statement of financial
position, regardless of when these assets were initially recognized.
As of June 30, 2002, GEO has goodwill and intangible assets (net of
amortization) of $97.7 million. For the six months ended June 30, 2002, GEO
recorded $1.1 million in amortization expense associated with the intangible
assets. For the six months ended June 30, 2001, GEO recognized $2.3 million in
amortization expense relating to goodwill and intangible assets of which $1.5
million directly related to goodwill amortization. The following adjusts
reported net income (loss) to exclude goodwill amortization.
(IN THOUSANDS)
APRIL 1 APRIL 1 JAN. 1 JAN. 1
THROUGH THROUGH THROUGH THROUGH
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
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Reported net income (loss) $ (1,210) $ 3,970 $ (2,692) $ 6,767
Addback goodwill amortization - 752 - 1,450
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Adjusted net income (loss) $ (1,210) $ 4,722 $ (2,692) $ 8,217
NOTE 4 -- CREDIT FACILITY AND LONG-TERM BORROWINGS
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On May 14, 2002, the Senior Credit Agreement originally entered into in May,
2001, with Bankers Trust Company, Saloman Smith Barney Inc. (CitiGroup) and
various other financial institutions, was amended. Pursuant to the amendment,
the Term Loan B Facility was reduced from $105.0 million to $97.5 million and
the Revolving Credit Facility was reduced from $40.0 million to $20.0 million.
The interest margins on the Term Loan B Facility and the Revolving Credit
Facility were increased and another line reflecting a higher leverage ratio was
added to the pricing grid for each facility.
As part of the amendment, effective March 31, 2002, certain covenants of the
senior credit facility were changed for the period January 1, 2002 until
December 31, 2003. During this 24 month period less rigorous leverage and
interest coverage ratios are effective. Also amended was the maximum allowed
capital expenditures covenant which was reduced from $13.0 million to $10.0
million annually. In addition, restrictions were placed on any capital
expenditures pertaining to the Company's Pinjarra project during the 24 month
period.
Several other sections of the Senior Credit Agreement were amended. These
amendments were primarily made to limit the Company's ability to make
acquisitions without the approval of the lenders, provide for the use of
additional shareholder or other subordinating lending for certain major
projects, reduce the amount of cash the Company can retain from divestments and
to clarify certain definitions and reporting requirements.
In connection with the amendment, GEO was also required to make a $7.5 million
principal payment on the Term B loan on May 15, 2002.
NOTE 5 - INVENTORY
Inventory consists of the following components (in thousands):
June 30, 2002 December 31, 2001
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Raw materials $ 8,628 $ 8,753
Work in progress 79 59
Finished goods 20,179 20,109
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$ 28,886 $ 28,921
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Management's Discussion and Analysis of Financial Condition and Results of
Operations -
Results of Operations
The following table sets forth certain operations data of GEO for the second
quarter of 2001 and 2002 and the first six months of 2001 and 2002 expressed in
millions of dollars and as a percentage of net sales for the respective periods.
Three Months Ended June 30, Six Months Ended June 30,
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2001 2002 2001 2002
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$ % $ % $ % $ %
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Net sales $50.7 100.0% $43.5 100.0% $101.3 100.0% $83.9 100.0%
Gross profit 13.7 27.0 8.5 19.5 28.0 27.7 15.4 18.4
Operating income 8.0 15.7 3.8 8.7 16.4 16.2 5.9 7.0
Net income (loss) 3.9 7.6 (1.2) (2.8) 6.8 6.7 (2.7) (3.2)
EBITDA 11.8 23.2 7.5 17.2 23.6 23.3 13.2 15.7
Net interest expense 4.1 8.0 5.2 12.0 7.5 7.4 9.5 11.3
Capital expenditures 1.5 3.0 1.3 3.0 3.5 3.5 2.1 2.5
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
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Net Sales. Net sales for the three months ended June 30, 2002 were $43.5
million, representing a $7.2 million or 14.2% decrease compared to $50.7 million
of net sales during the same period in 2001. Most of the decrease in net sales
was attributable to a $9.8 million or 91.2% decline in gallium revenues and a
$1.8 million decline in paper chemical revenue. The additional two months
business of organic peroxide sales contributed $5.1 million of additional sales
compared to the same three month period in 2001. Most of the remaining overall
difference, a $0.7 million increase, was due to a 9.2% increase in net sales to
the construction market.
Gross Profit. Gross profit for the three months ended June 30, 2002 was $8.5
million, or 19.5% of net sales, representing a $5.2 million or 38.0% decrease
compared with gross profit of $13.7 million, or 27.0% of net sales, during the
same period in 2001. The gross profit of the gallium business declined $7.3
million or 100% due primarily to the sharp reduction in both sales volume and
prices during the period compared to the same period in 2001. The additional
revenue of organic peroxide generated $1.6 million of gross profit. The improved
sales to the construction industry and lower production costs account for the
remaining $0.5 million improvement. The major decline in gross profit as a
percent of net sales compared to the second quarter of 2001 was almost
exclusively related to the mix impact of the drop in gallium sales. Excluding
gallium, gross profits relative to sales were either flat to improved in most
markets due to lower variable costs (i.e. freight and raw materials) and lower
plant costs.
Operating Income. Operating income for the three months ended June 30, 2002 was
$3.8 million, or 8.7% of net sales, representing a $4.2 million or 52.5%
decrease compared with operating income of $8.0 million, or 15.8% of net sales,
during the same period in 2001. The decrease was due to the performance of the
gallium business, contributing $7.2 million less in operating income. Partially
offsetting the gallium related decline were a $1.1 million additional
contribution from the organic peroxide unit, improvements of $0.5 million from
construction chemicals and the ongoing paper chemical supply arrangement with
ONDEO Nalco, and a $0.9 million reduction in goodwill amortization charges.
During the three month period ending June 30, 2002, two non-recurring offsetting
items occurred. The first event was a $0.4 million net gain on the sale of
Australian Dollar hedge contracts prompted by the deferral until 2003 of the
gallium capacity expansion project in Pinjarra, Australia. The second event was
a $0.4 million accrual to settle and terminate a supply contract to source
gallium from a supplier in Kazakstan which was executed in November, 2000.
Net Income. Net income for the three months ended June 30, 2002 was ($1.2)
million, or (2.8%) of net sales, representing a $5.1 million decrease compared
with net income of $3.9 million, or 7.7% of net sales, during the same period in
2001. The decrease in net income was primarily attributable to the decline in
operating income of $4.2 million, $1.0 million of interest and $0.1 million of
deferred financing cost amortization and an increase in financing expenses
related to the additional debt associated with the organic peroxide acquisition
at the end of April 2001. The non-operating net gains resulting primarily from
the divestment of the paper chemical business in April, 2001 of $2.8 million
were offset by a $3.5 favorable change in the income tax provision resulting
from the change in overall financial performance during the three month period
ending June 30, 2002. Also during the period, the Company recorded an unrealized
gain of $0.8 million related to Australian dollar hedge contracts. This gain was
offset by $1.1 million of foreign exchange losses related to the net assets of
the gallium business in Europe due to the depreciation of the Euro during the
period.
EBITDA. EBITDA for the three months ended June 30, 2002 was $7.5 million, or
17.2% of net sales, representing a $4.3 million or 36.4% decrease compared with
EBITDA of $11.8 million, or 23.3% of net sales, during the same period in 2001.
The EBITDA related to the gallium business declined by $7.1 million. The
additional EBITDA from the organic peroxide business was $1.4 million. The
increase in sales to the construction market and the arrangement to supply paper
chemicals to ONDEO Nalco generated $1.2 million of increased EBITDA. The
remaining difference of $0.2 million was due primarily to reduced corporate
expenses.
Net Interest Expense. Net interest expense for the three months ended June 30,
2002 was $5.2 million, or 12.0% of net sales, representing a $1.1 million or
26.8% increase from the net interest expense of $4.1 million, or 8.1% of net
sales, during the same period in 2001. This increase in net interest expense was
attributable to additional two months of indebtedness related to the peroxide
acquisition.
Capital Expenditures. Capital expenditures for the three months ended June 30,
2002 were $1.3 million or a $0.2 million decrease compared to $1.5 million of
capital expenditures during the same period in 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
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Net Sales. Net sales for the six months ended June 30, 2002 were $83.9 million,
representing a $17.4 million or 17.2% decrease compared with net sales of $101.3
million during the same period in 2001. The decrease in net sales was primarily
attributable to the gallium business which accounted for $22.1 million of the
decrease. The gallium business produces high purity materials used in cell
phones, and its decrease in net sales was driven by lower volume and prices
indicative of the depressed state of the telecommunications market. Also
contibuting to the decrease in net sales were the divestment of the paper
chemical business, resulting in a net loss of $5.1 million of revenues, and a
$4.2 million decrease in sales of aluminum chemicals due primarily to reduced
volumes of merchant clay for oil and gas uses. Partially offsetting the decrease
in net sales was a $13.8 million increase in organic peroxide products revenues
resulting from the acquisition of the business unit from Hercules at the end of
May 2001.
Gross Profit. Gross profit for the six months ended June 30, 2002 was $15.4
million, or 18.4% of net sales, representing a $12.6 million or 45.0% decrease
compared to gross profit of $28.0 million, or 27.7% of net sales, during the
same period in 2001. The decrease in gross profit was primarily attributable to
the gallium business which experienced a $15.9 million or a 99.2% loss in gross
profit due to the dramatic decrease in sales volume and prices. The divestment
of the paper chemical business caused a $1.6 million decrease in gross profit
compared to the six month period ended June 30, 2001. Partially offsetting these
decreases, as well as the lower gross profit contributed by aluminum chemicals,
were the net increase of $4.6 million in gross profit contributed by the organic
peroxide business and more favorable raw material costs and plant costs in
general.
Operating Income. Operating income for the six months ended June 30, 2002 was
$5.9 million, or 7.0% of net sales, representing a $10.5 million or 64.0%
decrease compared with operating income of $16.4 million, or 16.2% of net sales,
during the same period in 2001. The decrease in operating income was
attributable to the $12.6 million decline from the gallium business. A $2.1
million reduction in selling, general and administative costs lessened the
impact of the unfavorable change in gross profit. Of the amount, $1.0 million
was the result of reductions in operating expenses, $1.2 million was a result of
lower goodwill amortization charges while depreciation increased slightly, $0.1
million. The decline in operating expenses was mostly in the gallium business,
corporate costs and the net impact of divesting the paper chemicals unit and
acquiring the organic peroxide business.
Net Income (Loss). Net income for the six months ended June 30, 2002 was ($2.7)
million, or (3.2%) of net sales, representing a $9.5 million decrease compared
with net income of $6.8 million, or 6.7% of net sales, during the same period in
2001. The decrease in net income was due primarily to the decline in operating
income. Actual net interest expense increased by $1.8 million and amortization
of deferred financing costs increased by $0.2 million. Both of these increases
were attributable to the additional debt incurred to finance the organic
peroxide acquisition. Also during the period, the Company recorded an unrealized
gain of $0.8 million related to Australian dollar hedge contracts. This gain was
offset by $1.3 million of foreign exchange losses related to the net assets of
the gallium business in Europe due to the depreciation of the Euro during the
period.
EBITDA. EBITDA for the six months ended June 30, 2002 was $13.2 million, or
15.7% of net sales, representing a $10.4 million or 44.1% decrease compared to
EBITDA of $23.6 million, or 23.3% of net sales, during the same period in 2001.
The decrease in EBITDA was attributable to the gallium business, which
experienced a $15.5 million drop in EBITDA compared to the first six months of
2001. The organic peroxide business contributed $4.0 million of the $5.1 million
of increased EBITDA, which partially offset the impact of gallium's decreased
performance. The remaining difference was mostly generated by improved sales and
margins related to construction chemicals.
Net Interest Expense. Net interest expense for the six months ended June 30,
2002 was $9.5 million, or 11.3% of net sales, representing a $2.0 million or
26.7% increase compared to the net interest expense of $7.5 million, or 7.4% of
net sales, during the same period in 2001. As noted previously, actual interest
charges increased by $1.8 million and amortization related to deferred financing
costs increased by $0.2 million. These increases were related to carrying
additional debt for the organic peroxide acquisition for the entire six month
period in 2002 versus only one month in 2001.
Capital Expenditures. Capital expenditures for the six months ended June 30,
2002 were $2.1 million or a $1.4 million decrease compared to $3.5 million of
capital expenditures during the same period in 2001. The decrease in
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capital expenditures reflects the controls placed on capital projects in light
of market conditions, financial performance during the first six months of 2002
and restrictions under its amended credit facility.
Liquidity and Capital Resources
GEO's primary cash needs are for working capital, capital expenditures and debt
service. GEO has financed these needs from internally generated cash flow, in
addition to periodic draws on GEO's credit facility. As of June 30, 2002, GEO
had no material commitments for capital expenditures except as described below.
In December 2001, GEO entered into a ten-year exclusive agreement with Alcoa of
Australia concerning the restart of the gallium extraction facility in Pinjarra,
Australia. Pursuant to the agreement, GEO has 36 months to begin actions to
start gallium operations without incurring a penalty. GEO has an option to
acquire the shares of Rhodia Pinjarra Ltd., the current owner of the dormant
gallium extraction plant in Pinjarra. The option expires in September, 2002. As
of June 30 2002, GEO was working with Rhodia to finalize the details necessary
to execute the option as well as updating its due diligence and contacting
various Australian governmental authorities in anticipation of executing the
option prior to September, 2002. All other work by GEO on the Pinjarra project
was in suspension due to the weak condition of the global gallium market and
restrictions under its amended credit facility.
In July 2002, GEO entered into three-year renewable lease with the Port
Authority of Lake Charles, Louisiana. As part of the lease, GEO will upgrade a
dormant plant and manufacture sodium aluminate. The total expected expenditures
for this project are $0.9 million. The plant is expected to begin manufacturing
in early August, 2002.
Net cash provided from operations for the six month periods ending June 30, 2002
and 2001 was ($3.7) million and $8.2 million, respectively. The $11.9 million
decrease was due primarily to a decrease in net income of $9.7 million.
On May 14, 2002, GEO's senior credit agreement was amended effective March 31,
2002. As part of the amendment, the leverage, interest coverage and capital
expenditures covenenants were changed, the Term B loan was reduced from $105.0
million to $97.5 million and the revolving credit facility was reduced from
$40.0 million to $20.0 million. The amended revolving loan facility expires in
2005 and the Term B loan facility expires in December, 2007. The revolving loan
facility has no annual amortization requirement. The Term B loan has a $1.0
million per annum amortization requirement until June 30, 2004, when the first
semi-annual amortization payment of $4.6 million is due. The semi-annual $4.6
million payments are due until the expiration of the Term B loan when the total
of the remaining Term B balance is due. The Term B loan also has a mandatory
prepayment provision based on an annual calculation of excess cash flow. As part
of the May 14, 2002 amendment, interest margins paid under the Term B facility
and the revolving credit facility were increased and another line reflecting a
higher leverage ratio was added to the pricing grid corresponding to both
facilities. As of June 30, 2002, GEO had no borrowings outstanding on its $20.0
million revolving credit facility. Borrowings under the revolving credit
facility and Term B loan facility bear interest at GEO's option, at:
. 1.25% to 2.50% for the revolving facility and 2.25% to 3.00% for
the Term B facility, depending on GEO's leverage ratio, above
the higher of an 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 4.50% for the
revolving facility and 3.25% to 5.00% for the Term B facility
depending on GEO's leverage ratio.
As of June 30, 2002, GEO's interest rate under the Term B facility was 7.05%.
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 six months ended June 30, 2002, GEO repaid $7.5 million of its Term B
Loan facility. During the six month period ended June 30, 2002 cash paid for
interest was $9.5 million compared to $7.0 million during the same period in
2001.
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Cash paid for income taxes during the six months period ended June 30, 2002 was
$3.5 million compared to $1.9 million during the same period in 2001. Almost all
of the income tax payments made during both periods were attributable to the
gallium results of GEO Gallium S.A., a GEO subsidiary in France.
GEO has the follwing contractual and commercial commitment obligations as of
June 30, 2002 that can impact its liquidity:
Contractual Principal Payments Due by Period
Obligations (in thousands)
Total Less than 1 1-3 Years 4-5 Years After 5
----- ------------ --------- --------- -------
Year Years
---- -----
Long-Term Debt $217,500 975 14,904 18,571 183,050
Line of Credit - - - - -
Operating Leases 1,372 398 896 78 -
-------- ----- ------ ------ -------
Total Contractual Cash
Obligations $218,872 1,373 15,800 18,649 183,050
Other Commercial Amount of Commitment Expiration per Period
Commitments (in thousands)
Total
Amounts Less Than 1
------------
Committed Year 1-3 Years 4-5 Years Over 5 Years
--------- ---- --------- --------- ------------
Lines of Credit $20,000 - - - 20,000
Standby Letters of Credit - - - - -
------- ------ ------- ------- ------
Total Commercial Commitments $20,000 - - - 20,000
As of June 30, 2002, GEO had a cash balance of $6.3 million and $20.0 million
available under its revolving loan facility. This level of liquidity compares to
a cash balance of $18.5 million and $40.0 million of revolving loan availability
as of June 30, 2001. The cash balance decrease of $12.2 million was due mostly
to payments of $7.5 million made in the three month period ending June 30, 2002
on the Term B facility and a $3.5 million payment of 2001 income taxes in France
related to the gallium business.
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.
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Disclosure Regarding Forward-Looking Statements Contained in this Report
Some of the statements made 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. Some of the factors
that could cause actual results to differ materially from GEO's expectations
include the following: (1) changes in general economic conditions or the
conditions in specific market sectors 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 the conditions in specific market sectors 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 default or covenant
violation under GEO's indenture or other material debt agreement; (5) GEO's
inability to effect additional acquisitions or make capital expenditures or
other investments or expansions; (6) continued weakness in or worsening of the
telecommunications market or other markets that GEO serves; (7) GEO's inability
to effectively integrate, or maintain or grow the sales of, acquired businesses,
or its incurrence of greater than expected expenses in connection with operating
acquired businesses; (8) GEO's inability to repay or refinance its indebtedness
at such time as the principal amounts thereof become payable or are accelerated;
and (9) changes in environmental or other governmental regulations or
enforcement. Given these uncertainties, you should not place undue reliance upon
such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As a result of GEO's global operating activities, GEO is exposed to market risks
from changes in interest rates and 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 interest and foreign currency exchange rate
fluctuations through its normal operating activities and financing activities
and, when deemed appropriate, through the use of derivative financial
instruments. For a description of GEO's interest rate derivative contracts, see
Note 2 to the Consolidated Financial Statements included herein. GEO does not
use derivative financial instruments for trading or other speculative purposes
and does not use leveraged derivative financial instruments.
GEO's foreign operations are subject to the usual risks that may affect such
operations. They 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.
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 2001, GEO 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. Two of the contracts were terminated in April, 2002
and resulted in a gain of $433,000. At June 30, 2002, GEO's options had a
carrying value of $859,000 due to the strengthening of the Australian dollar
from the transaction date to the end of the current quarter.
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 June 30, 2002, based upon market quotations, is
approximately $96.0 million. Based on a hypothetical immediate 100 basis point
increase in interest rates at June 30, 2002, the fair value of GEO's fixed rate
long-term notes would be impacted by a net decrease of $5.7 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 June 30, 2002 of $6.1
million.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 99.1 Certification Pursuant to Section 1350 of Chapter 23
of Title 18 of the United States Code
Exhibit 99.2 Certification Pursuant to Section 1350 of Chapter 23
of Title 18 of the United States Code
(b) Reports on Form 8-K.
None.
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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: August 5, 2002 By: /s/ William P. Eckman
____________________________________________
William P. Eckman
Executive Vice President and Chief Financial
Officer (duly authorized officer and
principal financial officer)
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