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FORM 10-Q
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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 MARCH 31, 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: (216) 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 March 31, 1997 there were 23,384,568 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
March 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Sales $ 301.0 $ 245.7
Operating costs and expenses:
Cost of sales 281.8 239.8
Selling and administrative expenses 11.4 12.4
------- -------
Operating income (loss) 7.8 (6.5)
Interest expense (3.2) (2.9)
Interest income -- .7
Other expense, net (1.0) (.2)
------- -------
Income (loss) before income taxes 3.6 (8.9)
Income tax (expense) benefit (1.3) 3.3
------- -------
Net income (loss) $ 2.3 $ (5.6)
======= =======
Earnings per share of common stock:
Net income (loss) $ .10 $ (.22)
======= =======
Number of shares used to compute earnings per share 23.6 25.2
Dividends paid per common share of common stock: $ .125 $ .125
</TABLE>
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THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21.3 $ 17.9
Accounts receivable, less allowance for doubtful
receivables ($2.7 in 1997 and in 1996) 90.7 72.7
Inventories:
Finished products and in-process 108.5 102.2
Raw materials and supplies 39.6 36.3
-------- --------
148.1 138.5
LIFO reserve (34.5) (33.4)
-------- --------
113.6 105.1
Deferred income taxes 18.1 18.1
Prepaid expenses 18.9 20.0
-------- --------
Total current assets 262.6 233.8
Property:
Land, buildings, machinery and equipment 1,187.3 1,179.9
Allowances for depreciation and amortization (735.4) (722.7)
-------- --------
Property, net 451.9 457.2
Deferred charges and other assets 57.5 45.9
-------- --------
Total assets $ 772.0 $ 736.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank debt $ 38.5 $ 18.9
Accounts payable 144.1 126.4
Accrued expenses 54.3 57.6
Current portion of long-term debt .7 .7
-------- --------
Total current liabilities 237.6 203.6
Long-term debt 136.9 137.2
Deferred income taxes 33.3 33.0
Postretirement benefits other than pensions 86.9 86.7
Other non-current liabilities 56.5 54.0
-------- --------
Total liabilities 551.2 514.5
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 294.1 296.1
Common stock held in treasury (4.5 shares in 1997
and 4.6 shares in 1996) (113.7) (115.7)
Retained earnings 61.8 62.4
Cumulative translation adjustment (19.8) (18.6)
Equity adjustment to recognize minimum pension liability (3.3) (3.3)
Unearned portion of restricted stock awards (1.1) (1.3)
-------- --------
Total stockholders' equity 220.8 222.4
-------- --------
Total liabilities and stockholders' equity $ 772.0 $ 736.9
======== ========
</TABLE>
<PAGE> 4
THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2.3 $ (5.6)
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Depreciation and amortization 13.5 13.9
Provision (credit) for deferred income taxes 1.8 (1.5)
Change in assets and liabilities:
Accounts receivable (18.0) (12.7)
Inventories (8.1) 1.6
Accounts payable 17.3 (2.6)
Accrued expenses (0.4) 13.2
Income taxes payable (2.9) .9
Other 2.6 (1.1)
------- -------
Net cash provided by operating activities 8.1 6.1
INVESTING ACTIVITIES
Purchases of property (9.6) (13.2)
Investment in and advances to equity affiliates (11.3) (.6)
------- -------
NET CASH USED BY OPERATING AND INVESTING ACTIVITIES (12.8) (7.7)
FINANCING ACTIVITIES
Increase in short-term debt 19.4 3.6
Repayment of long-term debt (.3) (.3)
Dividends (2.9) (3.1)
Proceeds from issuance of common stock -- .2
------- -------
Net cash provided by financing activities 16.2 .4
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- .3
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3.4 (7.0)
CASH AND CASH EQUIVALENTS AT JANUARY 1 17.9 61.1
------- -------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 21.3 $ 54.1
======= =======
</TABLE>
During the first three months of 1997, the Company paid net income taxes of $3.3
million compared to the first three months of 1996 in which the Company received
net income tax refunds of $2.2 million. Cash payments for interest, including
amounts capitalized, were $0.7 million for the first three months of 1997 and
$0.6 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 period ended March 31, 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 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 March 31, 1997, 600,000
shares have been repurchased. No shares were repurchased in the first quarter of
1997. Future purchases will be dependent on the price of Geon common stock and
the Company's cash flow.
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 is expected in late 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 venture pursues
its own financing.
Note E
- ------
On May 2, 1997, the Company announced that it would take a $15 million pre-tax
charge in the second quarter of 1997 primarily for employee separation costs.
Most position reductions will occur at the Company's Avon Lake, Ohio
headquarters through 1998.
Note F
- ------
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 months ended March 31, 1997 and the disclosures under
the new pronouncement.
<PAGE> 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Industry Conditions:
- --------------------
Based on The Society of Plastics Industry's March 1997 data, North American
(U.S. and Canada) producer shipments of polyvinyl chloride (PVC), including
exports, are estimated to have been 10% higher in the first quarter of 1997 over
both the first quarter of 1996 and the fourth quarter of 1996.
Capacity utilization (shipments/capacity) for North America was estimated at 97%
of effective capacity (90% of nameplate) during the first quarter of 1997. In
the first quarter and fourth quarter of 1996 shipments were 95% and 92% of
effective capacity, respectively. North American capacity in the first quarter
of 1997 is estimated to have increased 9% since last year's first quarter.
Industry operating margins (price less raw materials) for the largest PVC resin
market applications increased approximately 0.5 cents per pound in the first
quarter compared to the previous quarter and decreased 0.5 cents per pound
compared to the same period in 1996. This change in operating margins was the
result of higher average selling prices being largely offset by both higher
chlorine and ethylene costs. The selling price of general purpose resins
averaged approximately 1.5 and 4.0 cents per pound higher than the fourth
quarter and first quarter of 1996, respectively.
No ethylene price changes have been announced to date for the second quarter of
1997. Chlorine demand remains strong and producers have announced increases of
$30 per ton effective April 1997. PVC price increases of 4 to 6 cents per pound
for the second quarter of 1997 have been announced by the Company and most
producers for the domestic pipe and general purpose resin markets, following
price increases of generally 5 cents per pound over the February and March
period.
Results of Operations:
- ----------------------
The Company had sales of $301.0 million in the first quarter or 23% above the
same quarter last year. Operating income was $7.8 million in the first quarter
of 1997 compared to an operating loss of $6.5 million for the first quarter of
1996. For the first quarter of 1997, net income was $2.3 million verses a net
loss of $5.6 million for the same period of 1996. During the fourth quarter of
1996, the Company had sales and net income of $279.1 million and $1.6 million,
respectively.
The Company's average spread between resin prices and raw material costs
(ethylene and chlorine) was essentially flat as compared to the first quarter of
1996, which is slightly better than the pipe and general purpose market change.
Compared to the fourth quarter of 1996 the change in the Company's average
spread between resin prices and raw material costs was in line with the
industry. The Company's first quarter 1997 resin shipments were 20% and 9%
higher than the first quarter and fourth quarter of 1996, respectively. Compound
shipments in the first quarter of 1997 increased 9% and 5% over the first and
fourth quarters of 1996, respectively. The 1996 first quarter operating income
was adversely impacted by certain manufacturing operating problems, which
resulted in lost production, higher operating maintenance cost and the purchase
of replacement materials at a higher cost.
Interest & Other Expense:
- -------------------------
Interest expense of $3.2 million during the first quarter of 1997 increased from
$2.9 million during the same period of 1996. The increase primarily reflects
interest expense on higher average short-term bank debt levels. Other expense,
net increased in the first quarter 1997 as compared to the same period of 1996
primarily as a result of higher costs associated with the sale of accounts
receivable.
Taxes:
- ------
The first quarter of 1997 included an income tax expense of $1.3 million on
pre-tax income of $3.6 million as compared to an income tax benefit of $3.3
million in the first quarter of 1996 on a pre-tax loss of $8.9 million. Changes
in effective tax rates between the periods noted above were primarily
attributable to the benefit from a state income tax refund.
<PAGE> 7
Capital Resources and Liquidity:
- --------------------------------
During the three months ended March 31, 1997, the Company used $12.8 million of
net cash from operating and investing activities compared to a use of $7.7
million during the same period of 1996. Operating activities reflect higher net
income and a lower seasonal increase in operating working capital (accounts
receivable plus inventory less accounts payable) offset by an increase in
investing activities.
Investing activities include the purchase of property of $9.6 million during the
first three months of 1997 as compared to $13.2 during the same period in 1996.
Capital expenditures for the full year of 1997 are estimated to approximate $60
million compared to $73 million in 1996. Investing activities for 1997 also
include $11.3 of investments in and advances to equity affiliates, which
includes a joint venture constructing a chlor-alkali plant. The chlor-alkali
plant, when completed in late 1997, will provide Geon with approximately 35% of
its chlorine requirements.
Financing activities in the first three months of 1997 primarily reflect an
increase in short-term bank debt and the payment of dividends. As of March 31,
1997, 1.9 million shares are authorized for repurchase under an August 1996
board of directors resolution. The timing of any stock repurchase depends on the
Company's cash flow and market price of its common stock
The Company believes it has sufficient funds to support dividends, debt service
requirements and normal capital expenditures plus expenditures and advances
associated with the previously announced chlor-alkali plant based on projected
operations, existing working capital facilities and other available permitted
borrowings.
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 ensure compliance with applicable environmental, health and
safety laws and regulations. This is an effort which 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 March 31, 1997, the Company had accruals totaling
approximately $27 million to cover future environmental remediation
expenditures. Environmental remediation expenditures in 1997 are estimated to
approximate the level of 1996.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
<PAGE> 8
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.
May 7, 1997 THE GEON COMPANY
\S\W. D. WILSON
---------------------------------
W. D. Wilson
Chief Financial Officer,
(Principal Financial Officer)
\S\G. P. SMITH
---------------------------------
G. P. Smith
Controller and Assistant Treasurer
(Principal Accounting Officer)
<PAGE> 9
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
None
<PAGE> 1
EXHIBIT 11
(In millions, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
------- --------
<S> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE:
Number of Shares:
-----------------
Average shares of common stock outstanding 23.4 24.7
Net effect of dilutive stock options - based on treasury stock
method using average market price .2 .5
----- -----
Total common and common equivalent shares outstanding 23.6 25.2
----- -----
Net income (loss) per share of common stock $0.10 $(.22)
===== =====
</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. While the market price of common stock as of
March 31, 1997 was above the average for the three months ended March 31,
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 MARCH 31,
1997 AND DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 16
<SECURITIES> 5
<RECEIVABLES> 91
<ALLOWANCES> 3
<INVENTORY> 114
<CURRENT-ASSETS> 263
<PP&E> 1187
<DEPRECIATION> 735
<TOTAL-ASSETS> 772
<CURRENT-LIABILITIES> 238
<BONDS> 137
<COMMON> 3
0
0
<OTHER-SE> 218
<TOTAL-LIABILITY-AND-EQUITY> 772
<SALES> 301
<TOTAL-REVENUES> 301
<CGS> 282
<TOTAL-COSTS> 293
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 4
<INCOME-TAX> 1
<INCOME-CONTINUING> 3
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
