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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, 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
November 14, 2000: 135.835.
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of
November 14, 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)
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------- -------------------------
(unaudited)
ASSETS
Current assets
Cash $ 6,218 $ 4,696
Trade accounts receivable, net of allowance 36,487 26,896
of $336 and $249 at September 30, 2000 and
December 31, 1999, respectively
Other receivables 1,110 1,619
Inventory 17,125 23,788
Prepaid expenses and other current assets 800 553
Deferred taxes 874 814
-------- --------
Total current assets 62,614 58,366
Property and equipment, net 94,402 96,628
Other assets
Intangible assets, net 5,423 6,099
Goodwill, net 34,190 36,515
Other accounts receivable 122 334
Other 193 224
-------- --------
Total other assets 39,928 43,172
-------- --------
Total assets $196,944 $198,166
======== ========
See accompanying notes to consolidated financial statements.
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------ -------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
Current liabilities
Accounts payable $ 13,252 $ 14,085
Other accounts payable 239 2,386
Income taxes payable 1,930 604
Accrued expenses and other current
liabilities 6,677 8,927
-------- --------
Total current liabilities 22,098 26,002
Long-term liabilities
Revolving line of credit 22,000 23,000
Long-term debt 120,000 120,000
Other long-term liabilities 4,744 4,621
Other accounts payable 530 592
Deferred taxes 2,002 1,646
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Total long-term liabilities 149,276 149,859
-------- --------
Total liabilities $171,374 $175,861
Shareholders' equity
Class A Voting Common Stock, $1.00 par value,
1,035 shares authorized, 135.835 shares issued
and outstanding at September 30, 2000 and
December 31, 1999
Class B Nonvoting Common Stock, $1.00 par value,
215 shares authorized, 0 shares outstanding at
September 30, 2000 and December 31, 1999
Additional paid-in capital 20,901 20,901
Retained earnings 7,316 2,020
Accumulated other comprehensive loss (2,647) (616)
-------- --------
Total shareholders' equity $ 25,570 $ 22,305
-------- --------
Total liabilities and shareholders' equity $196,944 $198,166
======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JULY 1 JULY 1 JAN. 1 JAN. 1
THROUGH THROUGH THROUGH THROUGH
SEPT 30, 2000 SEPT 30, 1999 SEPT 30, 2000 SEPT 30, 1999
------------- ------------- ------------- -------------
Net sales $53,867 $37,606 $142,275 $108,152
Cost of sales 36,475 28,136 103,909 82,172
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Gross profit 17,392 9,470 38,366 25,980
Selling, general and
administrative expenses 6,751 4,756 18,175 13,788
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Income from operations 10,641 4,714 20,191 12,192
Other expense
Net interest expense (3,840) (3,341) (11,387) (9,802)
Foreign currency
exchange income 461 0 42 0
Other (160) 6 (160) (28)
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Income before taxes 7,102 1,379 8,686 2,362
Provision for taxes 2,863 519 3,389 1,006
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Net income $ 4,239 $ 860 $ 5,297 $ 1,356
======= ======= ======== ========
Total comprehensive income $ 1,104 $ 860 $ 3,266 $ 1,356
======= ======= ======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JAN. 1 JAN. 1
THROUGH THROUGH
SEPT 30, 2000 SEPT 30, 1999
------------- -------------
Cash flows from operating activities
Net income $ 5,297 $ 1,356
Adjustments to reconcile net income
to net cash from operating
activities
Depreciation, depletion and
amortization 10,315 8,144
Deferred income tax expense 1,383 810
Change in assets and liabilities
Trade accounts receivable (10,648) (4,605)
Other accounts receivable 692 297
Inventories 5,328 559
Prepaid expense and other assets 518 47
Accounts payable (3,838) 1,597
Other liabilities 146 405
-------- --------
Net cash from operating activities 9,193 8,610
Cash flows from investing activities
Purchases of property, plant and
equipment (6,143) (3,769)
Acquisition of gallium business
from Rhodia Chimie, S.A., net
of assumed liabilities 0 (19,923)
Acquisition of certain intangible
assets and equipment of Tetra
Technologies Inc. (250) 0
-------- --------
Net cash flows from investing
activities (6,393) (23,692)
Cash flows from financing activities
Borrowings (repayments) under
revolving line of credit (net) (1,000) 21,000
Payments on long-term borrowing 0 (760)
Payments on deferred financing
costs 0 (399)
-------- --------
Net cash from financing activities (1,000) 19,841
Effect of exchange rate changes on
cash (278) 9
Net change in cash 1,522 4,768
Cash at beginning of period 4,696 1,645
Cash at end of period $ 6,218 $ 6,413
======== ========
Supplemental disclosure of cash flow
Information
Cash paid for
Interest, net $ 13,747 $ 12,254
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 some 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 September 30, 2000 and the consolidated statements of operations and cash
flows for the three and nine month periods ended September 30, 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 and nine
month periods ended September 30, 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 GEO's 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 - INVENTORY
Inventory consists of the following components:
September 30, 2000 December 31, 1999
------------------ -----------------
Raw materials $ 6,990 $12,633
Work in progress 1,748 2,688
Finished goods 8,387 8,467
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$17,125 $23,788
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NOTE 3 -- COMPREHENSIVE INCOME
Comprehensive income consists of GEO's net income 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.
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 1999 2000 1999
------ ------ ------ ------
$ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- -----
Net sales $53.9 100.0% $37.6 100.0% $142.3 100.0% $108.2 100.0%
Gross profit 17.4 32.3 9.5 25.3 38.4 27.0 26.0 24.0
Operating income 10.6 19.8 4.7 12.5 20.2 14.2 12.2 11.3
Net income (loss) 4.2 7.9 0.9 2.4 5.3 3.7 1.4 1.3
EBITDA 14.1 26.2 7.4 19.7 30.0 21.1 19.8 18.3
Net interest expense 3.9 7.2 3.3 8.8 11.4 8.0 9.8 9.1
Capital expenditures 2.0 3.7 1.3 3.5 6.1 4.3 3.8 3.5
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Net Sales. Net sales for the three months ended September 30, 2000 were $53.9
million, representing a $16.3 million or 43.4% increase compared to $37.6
million of net sales during the same period in 1999. Most of the increase was
attributable to the Gallium acquisition and the exceptionally strong demand for
gallium during the period, including a one significant shipment, as gallium
products accounted for $13.6 million of the increase in net sales. Excluding the
impact of the Gallium acquisition, net sales were higher by $2.7 million. This
increase was driven primarily by increased sales of $1.5 million for coating
additives and $1.1 million of aluminum compounds for industrial water treating.
Gross Profit. Gross profit for the three months ended September 30, 2000 was
$17.4 million, or 32.3% of net sales, representing a $7.9 million or 83.2%
increase compared with gross profit of $9.5 million, or 25.3% of net sales,
during the same period in 1999. The Gallium business accounted for most of the
increase due to the full quarter effect of the Gallium acquisition coupled with
the exceptionally strong demand for gallium. Excluding the impact of the Gallium
acquisition and the strong demand for gallium, gross profit decreased slightly
despite higher sales as variable costs (i.e., raw materials and freight) were
less favorable relative to sales in all business units, resulting in a $2.9
million negative impact, and plant operating expenses were $0.5 million due
primarily to higher utility costs.
Operating Income. Operating income for the three months ended September 30, 2000
was $10.6 million, or 19.8% of net sales, representing a $5.9 million or 125.5%
increase compared with operating income of $4.7 million, or 12.5% of net sales,
during the same period in 1999. The increase was due to the contribution of the
Gallium business net of additional amortization of goodwill and other long-term
assets associated with the acquisition.
Net Income. Net income for the three months ended September 30, 2000 was $4.2
million, or 7.9% of net sales, representing a $3.3 million or 366.7% increase
compared with net income of $0.9 million, or 2.4% of net sales, during the same
period in 1999. The increase in net income was attributable to the Gallium
business.
EBITDA. EBITDA for the three months ended September 30, 2000 was $14.1 million,
or 26.2% of net sales, representing a $6.7 million or 90.5% increase compared
with EBITDA of $7.4 million, or 19.7% of net sales,during the same period in
1999. EBITDA contributed by the Gallium business more than offset the $1.5
million decrease in the rest of the business. Paper chemicals represented 50% of
the decrease in the rest of the business.
Net Interest Expense. Net interest expense for the three months ended September
30, 2000 was $3.9 million, or 7.2% of net sales, representing a $0.6 million or
18.2% increase from the net interest expense of $3.3 million, or 8.8% of net
sales, during the same period in 1999. The increase in net interest expense was
attributable to additional indebtedness related to the Gallium acquisition.
Capital Expenditures. Capital expenditures for the three months ended September
30, 2000 were $2.0 million or a $0.7 million increase compared to $1.3 million
of capital expenditures during the same period in 1999. Most of the increase in
capital expenditures was related to capacity increases in gallium and coating
additives.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net Sales. Net sales for the nine months ended September 30, 2000 were $142.3
million, representing a $34.1 million or 31.5% increase compared with net sales
of $108.2 million during the same period in 1999. The increase in net sales was
primarily attributable to the impact of the acquisition of the Gallium business
from Rhodia Chimie S.A., which occurred on September 1, 1999. Net sales of the
Gallium business, which produces high purity materials used in the electronics
industry, were $28.1 million in the first nine months of 2000. Excluding the
impact of the Gallium acquisition, GEO's net sales increased by $7.4 million or
7.0% compared to the same period in 1999. This increase was due primarily to
improved sales of aluminum compounds used in industrial and municipal water
treatment applications.
Gross Profit. Gross profit for the nine months ended September 30, 2000 was
$38.4 million, or 27.0% of net sales, representing a $12.4 million or 47.7%
increase compared with gross profit of $26.0 million, or 24.0% of net sales,
during the same period in 1999. The increase in gross profit was primarily
attributable to the Gallium acquisition. Excluding the impact of the Gallium
acquisition, gross profit declined by $1.5 million due to slightly higher raw
material costs as well as higher freight and production, especially utility,
expenses. The higher gross profit as a percent of net sales reflects the impact
of the Gallium business on the overall sales mix.
Operating Income. Operating income for the nine months ended September 30, 2000
was $20.2 million, or 14.2% of net sales, representing an $8.0 million or 65.6%
increase compared with operating income of $12.2 million, or 11.3% of net sales,
during the same period in 1999. The increase in operating income was
attributable to the Gallium acquisition. Excluding the impact of the Gallium
acquisition, operating income was lower due to lower gross margin and higher
selling and administrative expenses.
Net Income (Loss). Net income for the nine months ended September 30, 2000 was
$5.3 million, or 3.7% of net sales, representing a $3.9 million or 278.6%
increase compared with net income of $1.4 million, or 1.3% of net sales, during
the same period in 1999. The increase in net income was due primarily to the
additional operating income generated by the Gallium acquisition, partially
offset by the negative impact of the weak Euro, additional net interest expense
related to the Gallium acquisition, the lower operating profit contribution of
the remaining parts of the business and a higher provision for income taxes,
$5.3 million versus $1.4 million.
EBITDA. EBITDA for the nine months ended September 30, 2000 was $30.0 million,
or 21.1% of net sales, representing a $10.2 million or 51.5% increase compared
to EBITDA of $19.8 million, or 18.3% of net sales, during the same period in
1999. The increase in EBITDA was attributable to the Gallium acquisition and the
exceptionally strong demand for gallium since early in 2000. This increase was
partially offset by the unfavorable impact of higher raw material, freight,
production and selling expenses and the decline of the Euro noted previously.
Net Interest Expense. Net interest expense for the nine months ended September
30, 2000 was $11.4 million, or 8.0% of net sales, an increase of $1.6 million or
16.3% compared to net interest expense of $9.8 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 to fund the Gallium acquisition. As of September
30, 2000, GEO's debt level was higher by $1.0 million compared to the debt level
on September 30, 1999.
Capital Expenditures. Capital expenditures for the nine months ended September
30, 2000 were $6.1 million or a $2.3 million increase compared to $3.8 million
of capital expenditures during the same period in 1999. The increase in capital
expenditures reflects the additional production capacity being added in the
Trimet and Gallium units.
Liquidity and Capital Resources
GEO's primary cash needs are 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 existing credit facility. As of September
30, 2000, GEO had no material commitments for capital expenditures.
Net cash provided from operations for the nine month periods ending September
30, 2000 and 1999 was $9.2 million and $8.6 million, respectively. The $0.6
million improvement was attributable primarily to increases in net income of
$3.9 million, depreciation and amortization of $2.2 million, and deferred taxes
of $0.6 million, partially offset by an increase in net working capital,
especially trade accounts receivable related to gallium exports of $6.1 million.
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 September 30, 2000, GEO's interest rate under the senior revolving credit
facility was 8.875%. The senior revolving credit facility contains customary
covenants which include the maintenance of certain financial ratios.
During the nine months ended September 30, 2000, GEO borrowed an additional $7.5
million under its senior revolving credit facility. This borrowing was made to
fund the reduction in current liabilities and the semi-annual interest payment
related to GEO's outstanding senior subordinated notes. Between March 31 and
September 30, 2000, GEO reduced its borrowings under its senior revolving credit
facility by $8.5 million, thereby increasing the availability under the facility
to $23.0.
As of September 30, 2000, GEO had a cash balance of $6.2 million, compared to
$6.4 million as of September 30, 1999. The cash balance was decreased between
March 31 and September 30, 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 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) loss of key executives or other key
employees; (2) increased competition; (3) decreases in customer spending levels;
(4) increases in interest rates or GEO's cost of borrowing; (5) unavailability
of funds for capital expenditures, research and development or acquisitions; (6)
difficulty in fully integrating acquired businesses or maximizing efficiences in
connection with acquisitions; (7) decreases in the rates of growth of any of
GEO's businesses; (8) changes in law or governmental regulations; (9) foreign
currency fluctuations; and (10) 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
does not believe that its market risk financial instruments on September 30,
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 September 30, 2000, based upon market quotations, is
approximately $99.6 million. Based on a hypothetical immediate 100 basis point
increase in interest rates at September 30, 2000, the fair value of GEO's fixed
rate long-term notes would be impacted by a net decrease of $7.6 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,
2000 of $8.2 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 September 30, 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: November 14, 2000 By: /s/ William P. Eckman
------------------------------------
William P. Eckman
Executive Vice President and Chief Financial
Officer (duly authorized officer and principal
financial officer)