<PAGE> 1
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FORM 10-Q
----------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1997. COMMISSION FILE NUMBER 1-11804
THE GEON COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1730488
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Geon Center, Avon Lake, Ohio 44012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (440) 930-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of November 12, 1997 there were 23,193,529 shares of common stock
outstanding. There is only one class of common stock.
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<PAGE> 2
Part I. Financial Information
Item 1. Financial Statements
THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 303.7 $ 307.8 $ 937.7 $ 865.3
Operating costs and expenses:
Cost of sales 273.7 280.4 846.5 800.3
Selling and administrative 11.7 14.0 35.6 39.7
Employee separation -- -- 15.0 --
-------- -------- -------- --------
Operating income 18.3 13.4 40.6 25.3
Interest expense (2.8) (2.8) (8.4) (8.3)
Interest income .2 .2 .4 1.2
Other expense, net (1.6) (.5) (4.5) (.3)
-------- -------- -------- --------
Income before income taxes 14.1 10.3 28.1 17.9
Income tax expense (3.5) (4.2) (9.1) (7.3)
-------- -------- -------- --------
Net income $ 10.6 $ 6.1 $ 19.0 $ 10.6
======== ======== ======== ========
Earnings per share of common stock:
Net income $ .45 $ .25 $ .81 $ .43
======== ======== ======== ========
Number of shares used to compute
earnings per share 23.3 24.3 23.5 24.9
Dividends paid per share
of common stock: $ .125 $ .125 $ .375 $ .375
</TABLE>
<PAGE> 3
THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25.5 $ 17.9
Accounts receivable, less allowance for doubtful
receivables ($2.4 in 1997 and $2.7 in 1996) 87.4 72.7
Inventories:
Finished products and in-process 91.6 102.2
Raw materials and supplies 35.8 36.3
-------- --------
127.4 138.5
LIFO reserve (33.9) (33.4)
-------- --------
93.5 105.1
Deferred income taxes 19.6 18.1
Prepaid expenses 12.1 20.0
-------- --------
Total current assets 238.1 233.8
Property:
Land, buildings, machinery and equipment 1,160.2 1,179.9
Allowances for depreciation and amortization (732.3) (722.7)
-------- --------
Property, net 427.9 457.2
Deferred charges and other assets 127.6 45.9
-------- --------
Total assets $ 793.6 $ 736.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank debt $ 53.1 $ 18.9
Accounts payable 130.1 126.4
Accrued expenses 55.0 57.6
Current portion of long-term debt .7 .7
-------- --------
Total current liabilities 238.9 203.6
Long-term debt 136.7 137.2
Deferred income taxes 38.6 33.0
Postretirement benefits other than pensions 86.7 86.7
Other non-current liabilities 65.6 54.0
-------- --------
Total liabilities 566.5 514.5
Stockholders' equity:
Preferred stock, 10.0 shares authorized, no shares issued -- --
Common stock, $.10 par, authorized 100.0 shares;
issued 27.9 shares in 1997 and in 1996 2.8 2.8
Additional paid-in capital 299.0 296.1
Common stock held in treasury (4.7 shares in 1997
and 4.6 shares in 1996) (117.8) (115.7)
Retained earnings 68.6 62.4
Cumulative translation adjustment (21.3) (18.6)
Equity adjustment to recognize minimum pension liability (3.3) (3.3)
Unearned portion of restricted stock awards (.9) (1.3)
-------- --------
Total stockholders' equity 227.1 222.4
-------- --------
Total liabilities and stockholders' equity $ 793.6 $ 736.9
======== ========
</TABLE>
<PAGE> 4
THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 19.0 $ 10.6
Adjustments to reconcile net income to net
cash provided by operating activities:
Employee separation 15.0 --
Depreciation and amortization 39.4 41.6
Provision for deferred income taxes 4.1 3.0
Change in assets and liabilities:
Accounts receivable (9.9) (10.0)
Inventories .8 (3.4)
Accounts payable 4.1 5.4
Accrued expenses 1.7 (.6)
Income taxes payable (3.3) 3.1
Other 11.5 (8.2)
------- -------
Net cash provided by operating activities 82.4 41.5
INVESTING ACTIVITIES
Purchases of property (28.5) (53.5)
Investment in and advances to equity affiliates (66.6) (9.0)
------- -------
NET CASH USED BY OPERATING AND INVESTING ACTIVITIES (12.7) (21.0)
FINANCING ACTIVITIES
Increase in short-term debt 34.2 7.5
Repayment of long-term debt (.5) (.5)
Repurchase of common stock (4.1) (21.8)
Dividends (8.7) (9.2)
Proceeds from issuance of common stock -- .4
------- -------
Net cash provided (used) by financing activities 20.9 (23.6)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (.6) .4
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7.6 (44.2)
CASH AND CASH EQUIVALENTS AT JANUARY 1 17.9 61.1
------- -------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 25.5 $ 16.9
======= =======
</TABLE>
During the nine months of 1997 and 1996, the Company paid net income tax refunds
of $1.9 million and $2.2 million, respectively. Cash payments for interest,
including amounts capitalized, were $7.0 million for the first nine months of
1997 and $6.0 million for the same period of 1996.
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note A
- ------
The accompanying unaudited consolidated financial statements of The Geon Company
(Company or Geon) have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair financial presentation have been included. Operating results for the three
month and nine month periods ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. For further information, refer to the consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1996. Certain amounts for 1996 have been reclassified to
conform to the 1997 interim period presentation.
Note B
- ------
There are pending or threatened against the Company or its subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to employment, commercial, product liability and
environmental matters, which seek remedies or damages. The Company believes that
any liability that may finally be determined should not have a material adverse
effect on the Company's consolidated financial position.
Note C
- ------
On August 1, 1996, the Board of Directors authorized the Company to repurchase
up to 2.5 million shares of Geon common stock. As of September 30, 1997, 800,000
shares have been repurchased. No additional shares were repurchased during the
third quarter of 1997. Future purchases will be dependent on the price of Geon
common stock, the Company's cash flow and management's discretion.
Note D
- ------
The Company has a 50% participation in a joint venture to construct and operate
a chlor-alkali plant. In the initial phase, the plant will have an annual
capacity of 250,000 tons of chlorine and 275,000 tons of caustic soda.
Mechanical completion and the start-up of production are expected in the fourth
quarter of 1997. The new unit will initially supply approximately 35% of Geon's
captive chlorine needs. The plant's construction is being financed by the
venture partners as the Company and its venture partner pursue private placement
financing by the joint venture of approximately $200 million.
Note E
- ------
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share (EPS)," which requires the disclosure of basic and
diluted EPS, as defined therein. No material difference is expected between the
reported EPS for the three month or nine month periods ended September 30, 1997
and the disclosures under the new pronouncement.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which requires that an enterprise classify items of other comprehensive
income, as defined therein, by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The Company intends to comply with the provisions of this Statement upon
its required adoption in 1998 and is currently studying the effects of adopting
this statement.
In June 1997, the FASB also issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way public business enterprises report information about operating
segments in annual financial statements and which requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company is currently studying the potential effects of adoption
of this statement which is required in 1998.
<PAGE> 6
Note F
- ------
In the second quarter of 1997, the Company recorded a $15 million pre-tax charge
primarily for employee separation costs. Most position reductions will occur at
the Company's Avon Lake, Ohio headquarters through 1998.
Note G
- ------
In August 1997, The BFGoodrich Company (BFG) completed the sale of its
chlor-alkali and olefins facilities in Calvert City , Kentucky to the Westlake
Group. With the completion of the sale, the Company's obligation to purchase the
Calvert City, Kentucky facilities from BFG under a "put" agreement, as disclosed
in The Geon Company's 1996 Annual Report, has lapsed.
Note H
- ------
On August 1, 1997, agreements were finalized and operations of a new joint
venture, Australian Vinyls Corporation Limited (AVC), commenced. The joint
venture resulted from the merger of Geon's and ICI Australia Limited's
Australian PVC operations. During the first six months of 1997 Geon's Australian
PVC operations had sales of $42.2 million and operating income of $.8 million.
Geon has an approximate 37% ownership interest in AVC which is recorded on an
equity basis.
Note I
- ------
On October 30, 1997 the Company acquired 100% of the voting common shares and
more than 95% of the outstanding Class A non-voting shares of Synergistics
Industries Limited (Synergistics) of Mississauga, Ontario, Canada. The $85
million purchase of Synergistics will be accounted for as a purchase. The
purchase of Synergistics was financed with a new $97 million short-term
acquisition facility, which was entered into in October 1997.
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Industry Conditions:
- --------------------
Based on The Society of Plastics Industry's August 1997 data, North American
(U.S. and Canada) producer shipments of polyvinyl chloride (PVC), including
exports, are estimated to have been flat in the third quarter of 1997 as
compared to the previous quarter and were about 5% higher than in the same
quarter of 1996. For the first nine months of 1997, North American shipments
were 5% higher than in the same period of last year. Exports from North America
year-to-date (which represented about 10% of total industry shipments) increased
27% as compared to a year ago.
Capacity utilization (shipments/capacity) for North America was estimated at 93%
of effective capacity (86% of nameplate) during the third quarter of 1997 or
down 2% versus the same quarter last year. In the second quarter of 1997,
shipments were 94% of effective capacity. North American capacity in the first
nine months of 1997 is estimated to have increased 8% over the same period of
1996.
Industry operating margins (price less large buyer ethylene and market chlorine
cost as reported in industry trade journals and newsletters) for the largest PVC
resin market applications decreased approximately 2.0 cents per pound in the
third quarter compared to the previous quarter and decreased 0.5 cent per pound
compared to the same period in 1996. This change in operating margins in the
third quarter versus the second quarter of 1997 was primarily the result of
lower average selling prices which averaged approximately 2.5 cents per pound
below the previous quarter. For the nine month period, our projection of
industry operating margins averaged 1.0 cent per pound below 1996 with higher
selling prices being more than offset by higher ethylene and chlorine costs.
The fourth quarter resin margin outlook is problematic as the resin price
picture remains unclear. The quarter, which began with strong demand, is
expected to see a seasonal slowing in late November through year end. A series
of resin price increases totaling four cents per pound over the course of the
quarter have been announced. However, the strength of PVC demand relative to
available supply will be an important factor on the ultimate level of resin
pricing. Ethylene pricing may decline from the third quarter reflecting lower
industry capacity utilization rates as new capacity comes on stream. However,
upward pressure on ethane and propane prices could negate a portion, or all of
this decline. Chlorine supply and demand are projected to remain balanced in the
fourth quarter of 1997.
Results of Operations:
- ----------------------
The Company had sales of $303.7 million in the third quarter of 1997 versus
$307.8 million in the same quarter of 1996. Operating income was $18.3 million
in the third quarter of 1997, or $4.9 million above the same period last year.
In the second quarter of 1997 Geon had sales of $333.0 million and operating
income of $29.5 million, excluding a special charge of $15.0 million for
employee separation costs. Net income for the third quarter of 1997 and of 1996
was $10.6 million and $6.1 million, respectively.
The Company's third quarter 1997 resin shipments were 4% and 8% higher than the
second quarter of 1997 and third quarter 1996, respectively. The Company's
average spread between resin prices and raw material costs (ethylene and
chlorine) as compared to the second quarter of 1997 was in-line with the
industry trade projections and moderately better than the industry trade
projections versus the same quarter last year. Compound sales volume in the
third quarter of 1997 was approximately 6% above the same period a year ago.
The Company continues to reduce its costs and announced in May 1997 that it had
recorded a $15 million pre-tax charge ($9.2 million after-tax), primarily for
employee separation costs. Most position reductions will occur at the Company's
headquarters and take place throughout 1998.
For the first nine months of 1997, sales were $937.7 million and net income was
$28.2 million before the above mentioned employee separation special charge. For
the same period of 1996, the Company had sales of $865.3 million and net income
of $10.6 million.
Interest & Other Expense:
- -------------------------
Interest expense of during the third quarter of 1997 and first nine months of
1997 was flat with the corresponding periods of 1996. Other expense, net was an
expense of $4.5 million during the first nine months of 1997 as
<PAGE> 8
compared to income of $0.3 million in 1996. The change in other expense, net, is
primarily due to unfavorable unrealized currency translation and to higher
balances within the Company's accounts receivable sales facility.
Taxes:
- ------
The third quarter of 1997 included an income tax expense of $3.5 million on
pre-tax income of $14.1 million as compared to an income tax expense of $4.2
million in the third quarter of 1996 on a pre-tax income of $10.3 million. The
third quarter 1997 income tax expense includes a $2.0 million benefit from an
adjustment to prior years federal income tax liability. Year-to-date 1997 income
tax expense was $9.1 million on pre-tax income of $28.1 million as compared to
income tax expense of $7.3 million on pre-tax income of $17.9 during the same
period of 1996. Changes in effective tax rates between the periods noted above
were primarily attributable to the adjustment of prior years income tax
liability and the benefit from a state income tax refund.
Capital Resources and Liquidity:
- --------------------------------
During the nine months ended September 30, 1997, the Company used $12.7 million
of net cash in operating and investing activities as compared to using $21.0
million during the same period of 1996. This improvement in operating cash flow
largely reflects higher operating earnings and lower capital expenditures,
offset primarily by investments in and advances to equity affiliates. Net
operating working capital (accounts receivable plus inventory less accounts
payable) increased $3.0 million less in 1997 than in 1996.
Investing activities include the purchase of property of $28.5 million during
the first nine months of 1997 or $25.0 million below the same period of 1996.
Capital expenditures for the full year of 1997 are estimated to be approximately
$50 million as compared to $73 million in 1996. Investing activities for the
first nine months of 1997 also include $66.6 million of investments in and
advances to equity affiliates, which includes a joint venture involved in
constructing a chlor-alkali plant.
Financing activities in the first nine months of 1997 primarily reflect an
increase in short-term bank debt, the payment of dividends and the repurchase of
200,000 shares of common stock authorized under an August 1996 Board of
Directors resolution. As of September 30, 1997, 1.7 million shares remain
authorized for repurchase.
The Company believes it has sufficient funds to support dividends, debt service
requirements and normal capital expenditures plus expenditures and advances
associated with the chlor-alkali joint-venture based on projected operations,
existing working capital facilities and other available permitted borrowings.
The Company and its venture partner are pursuing a financing by the chlor-alkali
joint venture of approximately $200 million. In October 1997, the Company
entered into a new short-term acquisition facility of approximately $97 million
to finance the purchase of Synergistics Industries Limited's shares.
Environmental Matters:
- ----------------------
The Company is subject to various federal, state and local environmental laws
and regulations concerning emissions to the air, discharges to waterways, the
release of materials into the environment, the generation, handling, storage,
transportation, treatment and disposal of waste materials or otherwise relating
to the protection of the environment.
The Company maintains a disciplined environmental and industrial safety and
health compliance program and conducts internal and external regulatory audits
at its plants in order to identify and categorize potential environmental
exposures and to assure compliance with applicable environmental, health and
safety laws and regulations. This effort has required and may continue to
require process or operational modifications, the installation of pollution
control devices and cleanups. The Company estimates capital expenditures related
to the limiting and monitoring of hazardous and non-hazardous wastes during 1997
to approximate $2 million to $4 million.
The Company believes that compliance with current governmental regulations will
not have a material adverse effect on its capital expenditures, earnings, cash
flow or liquidity. At September 30, 1997, the Company had accruals totaling
approximately $27 million to cover potential future environmental remediation
expenditures. Environmental remediation expenditures in 1997 are estimated to
approximate the level of 1996.
<PAGE> 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
Part II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit 11 - Statement re Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
In July 1997, the Company filed an 8-K announcing that it had
formed a wholly owned subsidiary, Polymer Diagnostics, Inc.
Also in July 1997, the Company announced that it had finalized
the joint venture (Australian Vinyls Corporation Limited) between
its Australian polyvinyl chloride operations and the PVC
operations of ICI Australia Limited.
In August 1997, the Company filed an 8-K announcing its
obligation to purchase the Calvert City, Kentucky, Chlor-alkali
and olefins facilities from The BFGoodrich Company under a "put"
agreement had lapsed.
In September 1997, the Company filed an 8-K announcing that it
has obtained a U.S. District Court judgement to prevent Universal
Vinyl Corporation from infringing a patent Geon holds on
pearlescent compounds used in the production of vinyl vertical
window blinds. Additionally, the Federal Court for the Southern
District of Florida awarded Geon triple damages of $4.3 million
for past willful infringement.
<PAGE> 10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 13, 1997 THE GEON COMPANY
\S\W. D. WILSON
---------------
W. D. Wilson
Vice President and Chief Financial Officer,
(Principal Financial Officer)
\S\G. P. SMITH
--------------
G. P. Smith
Controller and Assistant Treasurer
(Principal Accounting Officer)
<PAGE> 1
EXHIBIT 11
The Geon Company
Primary Earnings Per Share
(In millions, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE:
Number of Shares:
-----------------
Average shares of common stock outstanding 23.2 24.0 23.3 24.5
Net effect of dilutive stock options - based on treasury stock
method using average market price .1 .3 .2 .4
------ ------ ------ ------
Total common and common equivalent shares outstanding 23.3 24.3 23.5 24.9
====== ====== ====== ======
Net income per share of common stock $ .45 $ .25 $ .81 $ .43
====== ====== ====== ======
</TABLE>
The unaudited earnings per share for all periods presented were computed
based on the weighted average number of shares of common stock outstanding
and common stock equivalents. The market price of common stock as on
September 30, 1997 was below the average for the nine months ended September
30, 1997. Therefore, in a fully dilutive earnings per share calculation, the
impact of stock options would be anti-dilutive.
While the market price of common stock as of September 30, 1997 was above
the average for the three months ended September 30, 1997, the dilutive
impact was immaterial.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS OF THE GEON COMPANY AND SUBSIDIARIES AS OF SEPTEMBER
30, 1997 AND DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 15
<SECURITIES> 10
<RECEIVABLES> 87
<ALLOWANCES> 2
<INVENTORY> 94
<CURRENT-ASSETS> 238
<PP&E> 1,160
<DEPRECIATION> 732
<TOTAL-ASSETS> 794
<CURRENT-LIABILITIES> 239
<BONDS> 137
0
0
<COMMON> 3
<OTHER-SE> 224
<TOTAL-LIABILITY-AND-EQUITY> 794
<SALES> 938
<TOTAL-REVENUES> 938
<CGS> 861
<TOTAL-COSTS> 897
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 28
<INCOME-TAX> 9
<INCOME-CONTINUING> 19
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
</TABLE>
