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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 March 31, 2000
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 May 15, 2000:
135.835
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of May 15,
2000: 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)
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
ASSETS
Current assets
Cash $ 9,661 $ 4,696
Trade accounts receivable, 26,959 26,896
net of allowance of $249 at March 31, 2000
and December 31, 1999
Other receivables 1,080 1,619
Inventory 21,012 23,788
Prepaid expenses and other assets 799 553
Deferred taxes 806 814
-------- --------
Total current assets 60,317 58,366
Property and equipment, net 95,837 96,628
Other assets
Intangible assets, net 5,928 6,099
Goodwill, net 35,109 36,515
Other accounts receivable 443 334
Other 729 224
-------- --------
Total other assets 42,209 43,172
-------- --------
Total assets $198,363 $198,166
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 13,656 $ 14,085
Other accounts payable 827 2,386
Income taxes payable 0 604
Accrued expenses and other current liabilities 6,814 8,927
-------- --------
Total current liabilities 21,297 26,002
Long-term liabilities
Revolving line of credit 29,000 23,000
Long-term debt 120,000 120,000
Other long-term liabilities 4,626 4,621
Other accounts payable 822 592
Deferred taxes 1,123 1,646
-------- --------
Total long-term liabilities 155,571 149,859
Total liabilities 176,868 175,861
See accompanying notes to consolidated financial statements.
Shareholders' equity
Class A Voting Common Stock, $1.00 par value, 1,035 authorized,
136 issued and outstanding at March 31, 2000 and December 31, 1999
Class B Nonvoting Common Stock, $1.00 par value, 215 authorized,
0 outstanding at March 31, 2000 and December 31, 1999
Additional paid-in capital 20,901 20,901
Retained earnings 1,890 2,020
Accumulated other comprehensive loss (1,296) (616)
-------- --------
Total shareholders' equity 21,495 22,305
-------- --------
Total liabilities and shareholders' equity $198,363 $198,166
======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
GEO Specialty Chemicals, Inc.
(IN THOUSANDS)
January 1 through January 1 through
March 31, 2000 March 31, 1999
------------------- -----------------
Net sales $41,830 $34,194
Cost of sales 32,483 26,628
-------- --------
Gross profit 9,347 7,566
Selling, general and administrative expenses 5,512 4,406
-------- --------
Income from operations 3,835 3,160
Other expense
Net interest expense (3,734) (3,086)
Foreign currency exchange loss (252) 0
Other expense 0 (5)
-------- --------
Income (loss) before taxes (151) 69
Provision for taxes (tax benefit) (21) 60
-------- --------
Net income (loss) ($130) $9
======== ========
Total comprehensive income (loss) ($810) $9
======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
GEO Specialty Chemicals, Inc.
(IN THOUSANDS)
January 1 through January 1 through
March 31, 2000 March 31, 1999
----------------- -----------------
Cash flows from operating activities
Net income $ (130) $ 9
Adjustments to reconcile net income
to net cash from operating activities
Depreciation, depletion and amortization 3,099 2,621
Deferred income tax expenses (177) 60
Change in assets and liabilities
Trade accounts receivable (205) (1,068)
Other accounts receivable 423 (260)
Inventories 2,212 1,353
Prepaid expenses and other assets (297) 169
Accounts payable (4,258) 210
Other liabilities 75 (56)
---------- ----------
Net cash from operating activities 742 3,038
Cash flow from investing activities
Purchases of property, plant and equipment (1,478) (1,386)
Acquisition of certain intangible assets and
equipment of Tetra Technologies Inc. (250) --
---------- ----------
Net cash flows from investing activities (1,728) (1,386)
Cash flows from financing activities
Borrowings under revolving line of credit 6,000 0
Payments on deferred financing costs 0 (64)
---------- ----------
Net cash from financing activities 6,000 (64)
Effect of exchange rate changes on cash
and cash equivalents (49) 0
Net change in cash 4,965 1,588
Cash at beginning of period 4,696 1,645
---------- ----------
Cash at end of period $ 9,661 $ 3,233
========== ==========
Supplemental disclosure of cash flow information
Cash paid for
Interest 6,523 6,109
See accompanying notes to consolidated financial statements.
GEO SPECIALTY CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
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 European 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.
INTERIM RESULTS (UNAUDITED): The accompanying consolidated balance sheet at
March 31, 2000 and the consolidated statements of operations and cash flows for
the three month periods ended March 31, 2000 and 1999 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 months ended March 31, 2000 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 the financial statements and notes thereto contained in GEO's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
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.
NOTE 2 -- INVENTORIES
Inventories consist of the following components:
March 31, 2000 December 31, 1999
-------------- -----------------
Raw materials $15,292 $12,633
Work in progress 54 2,688
Finished goods 5,666 8,467
------- -------
$21,012 $23,788
NOTE 3 -- COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of GEO's net income (loss) and foreign
exchange translation adjustments.
NOTE 4 -- NEW ACCOUNTING STANDARDS
Beginning January 1, 2001, Statement on Financial Accounting Standards No.
133 (the "Statement") on derivatives will require all derivatives to be recorded
at fair value in the balance sheet. Unless designated as hedges, changes in
these fair values will be recorded in the income statement. Fair value changes
involving hedges will generally be recorded by offsetting gains and losses on
the hedge and on the hedged item, even if the fair value of the hedged item is
not otherwise recorded. Since GEO has no significant derivative instruments, or
hedging activities, adoption of the Statement is not expected to have a material
effect on GEO's financial statements, but the effect will depend on derivative
holdings when this standard applies.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 for the
respective period:
Three Months Ended March 31,
-----------------------------------------------
2000 1999
------------------ --------------------
$ % $ %
------- ------ ----- ------
Net sales $41.8 100.0% $34.2 100.0%
Gross profit 9.3 22.2 7.6 22.2
Operating income 3.8 9.1 3.2 9.4
Net income (loss) (0.1) (0.2) 0.0 0.0
EBITDA 6.9 16.5 5.8 17.0
Net interest expense 3.7 8.9 3.1 9.1
Capital expenditures 1.4 3.3 1.4 4.1
Net Sales. Net sales for the three months ended March 31, 2000 were
$41.8 million, representing a $7.6 million or 22.2% increase compared to net
sales of $34.2 million during the same period in 1999. The increase in net sales
was attributable to the impact of the acquisition of the Gallium business of
Rhodia Chimie S.A. which occurred on September 8, 1999. Net sales of the Gallium
group, which produces highly purified virgin gallium used in the semi-conductor
and optoelectronics industries, were $5.7 million in the first three months of
2000. Excluding the impact of the Gallium acquisition, GEO's net sales increased
by $1.9 million or 5.6% compared to the same period in 1999. Most of this
increase occurred in aluminum chemicals, used primarily in water treatment,
which were up by $1.6 million, additives and clay products sold to the oil and
gas industry, which were up by $0.8 million, and sales of additives to the
coatings markets, which were up by $0.5 million. Partially offsetting these
increases were sales of performance chemicals to the paper industry which
decreased by $1.3 million compared to the same period in 1999.
Gross Profit. Gross profit for the three months ended March 31, 2000 was
$9.3 million, or 22.2% of net sales, representing a $1.7 million or 22.4%
increase compared to a gross profit of $7.6 million or 22.2% of net sales during
the same period in 1999. The increase in gross profit was primarily attributable
to the Gallium acquisition. The increase in gross profit reflects the effect of
the Gallium business, which generated $1.9 million of gross profit. Excluding
the effect of the Gallium acquisition, gross profit declined slightly due to
higher freight expenses and plant operating expenses, which were partially
offset by lower raw material costs. As a percent of net sales, gross profit
remained the same at 22.2%.
Operating Income. Operating income for the three months ended March 31,
2000 was $3.8 million, or 9.1% of net sales, representing a $0.6 million or
18.8% increase compared with an operating income of $3.2 million, or 9.4% of net
sales, during the same period in 1999. The increase in operating income was
primarily attributable to the Gallium acquisition, which generated $1.4 million
of operating income. Partially offsetting the contribution from the Gallium
business was increased amortization and administrative-related depreciation
charges of $0.3 million and an increase in selling and administrative costs of
$0.5 million.
Net Income (Loss). Net income (loss) for the three months ended March 31,
2000 was $(0.1) million, representing a $0.1 million decline compared with the
break-even level of net income during the same period in 1999. The decrease in
net income was due primarily to a $0.7 million increase in net interest expense,
reflecting additional debt and lower interest bearing cash balances resulting
from the Gallium acquisition and initial funding of the Gallium business.
Additionally, income taxes were $0.1 million higher than the same period in
1999.
EBITDA. EBITDA for the three months ended March 31, 2000 was $6.9 million,
or 16.5% of net sales, representing a $1.1 million or 19.0% increase compared to
an EBITDA of $5.8 million, or 17.0% of net sales, during the same period in
1999. The increase in EBITDA was attributable to the Gallium acquisition, which
generated $1.7 million of EBITDA during the first three months of 2000.
This increase was partially offset by reduced net sales to the paper industry
and higher production costs in the TRIMET business.
Net Interest Expense. Net interest expense, excluding amortization of
deferred financing costs, for the three months ended March 31, 2000 was $3.7
million, or 8.9% of net sales, an increase of $0.6 million compared to net
interest expense of $3.1 million, or 9.1% of net sales, during the same period
in 1999. The increase in net interest expense was due to the additional debt
incurred, and the decline in operating cash, in connection with the funding and
assimilation of the Gallium business.
Capital Expenditures. Capital expenditures for the three months ended March
31, 2000 were $1.4 million, or 3.3% of net sales, compared to capital
expenditures of $1.4 million, or 4.1% of net sales, during the same period in
1999. Additionally, during the first three months of 2000, GEO acquired certain
intangible assets and equipment related to aluminum compounds from Tetra
Technologies Inc. for $0.3 million.
Liquidity and Capital Resources
GEO's primary cash needs are working capital, capital expenditures and debt
service. GEO has financed, and intends to continue to finance, these needs from
internally generated cash flow, in addition to periodic draws on its senior
revolving credit facility. As of March 31, 2000, GEO had no material commitments
for capital expenditures.
Net cash from operations was $3.0 million for the three months ended March
31, 1999 and $0.7 million for the three months ended March 31, 2000. The $2.3
million decrease in net cash from operations was due primarily to a reduction in
deferred income tax liability of $0.2 million and a reduction in the current
liability component of net working capital. Accounts payable and accrued
expenses were reduced during the three months ended March 31, 2000, as payments
were made to settle overdue vendor invoices from Henkel Corporation and several
freight companies. In addition, payments were made to fund the accrued 1999
obligations under GEO's defined contribution pension plan in connection with the
termination of the plan. This funding, which was $0.7 million, typically
occurred in the third quarter of the fiscal year.
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. GEO's senior revolving credit facility, which was
amended in connection with the Gallium acquisition, currently includes $45.0
million of available borrowing. The amended facility expires in 2003 and has no
interim amortization requirements. Borrowings under the senior revolving credit
facility bear interest, at GEO's option, at:
. 1.25% 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%.
As of March 31, 2000, GEO's interest rate under the senior revolving
credit facility was 8.6875%. The senior revolving credit facility contains
customary covenants which include the maintenance of certain financial ratios.
During the three months ended March 31, 2000, GEO borrowed an additional
$6.0 million under its senior revolving credit facility. This borrowing was made
to fund the reduction in current liabilities noted above and the semi-annual
interest payment related to GEO's outstanding senior subordinated notes. As of
March 31, 2000, GEO had $16.0 million of borrowing available under its senior
revolving credit facility. Between March 31 and May 15, 2000, GEO reduced its
borrowings under its senior revolving credit facility by $5.0 million, thereby
increasing the availability under the facility to $21.0 million.
As of March 31, 2000, GEO had a cash balance of $9.7 million, compared to
$3.2 million as of March 31, 1999. The cash balance was decreased between March
31 and May 15, 2000 in order to reduce the amount borrowed under GEO's senior
revolving credit facility, as noted above.
GEO believes that cash generated from operations, together with amounts
available under its 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,"
"could," "may," "will," "can," "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, its industry or others 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) loss of key
customers or increased competitive pressures; (2) changes in customer spending
levels; (3) increases in interest rates or GEO's cost of borrowing or a default
under any material debt agreement; (4) unavailability of funds for capital
expenditures or research and development; (5) GEO's inability to fund
acquisitions, find suitable acquisition candidates or integrate acquired
businesses; (6) changes in governmental, environmental or other regulations; and
(7) changes in general economic or market conditions. Given these uncertainties,
you should not place undue reliance upon such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
GEO does not engage in hedging or other market structure derivative trading
activities. Additionally, GEO's debt obligations are primarily fixed rate in
nature and, as such, are not sensitive to changes in interest rates. However,
GEO's senior revolving credit facility bears interest at a variable rate. GEO is
a party to an agreement, expiring on June 26, 2000, which provides for financial
stability in the event of fluctuations in exchange rates in respect of $15
million under GEO's senior revolving credit facility. The floor and cap under
this arrangement are based upon U.S. Dollar three-month LIBOR (as fixed by the
British Bankers Association) of 5.25% and 7.75%, respectively. If these
thresholds are breached, the arrangement will allow GEO to continue to cover its
interest obligations, in respect of up to $15 million under its senior revolving
credit facility, at the cap or floor level, notwithstanding the prevailing
market interest rate at that time. GEO does not believe that its market risk
financial instruments on March 31, 2000 would have a material effect 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 March 31, 2000, based upon market quotations, is approximately
$97.2 million. Based on a hypothetical immediate 100 basis point increase in
interest rates at March 31, 2000, the fair value of GEO's fixed rate long-term
notes would be impacted by a net decrease of $7.8 million. Conversely, a 100
basis point decrease in interest rates at March 31, 2000 would result in a net
increase in the fair value of GEO's fixed rate long-term notes of $8.5 million.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Article 5 of Regulation S-X,
Financial Data Schedule
(b) Reports on Form 8-K.
GEO filed no Current Reports on Form 8-K with the Securities and Exchange
Commission during the three month period ended March 31, 2000.
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: May 15, 2000 By: /s/ William P. Eckman
----------------------
William P. Eckman
Executive Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)