<PAGE> 1
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 JUNE 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: (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 June 30, 1997 there were 23,185,828 shares of common stock outstanding.
There is only one class of common stock.
<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 Six Months Ended
June 30, June 30,
----------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Sales $ 333.0 $ 311.8 $ 634.0 $ 557.5
Operating costs and expenses:
Cost of sales 291.0 280.1 572.8 519.9
Selling and administrative 12.5 13.3 23.9 25.7
Employee separation 15.0 -- 15.0 --
-------- -------- -------- --------
Operating income 14.5 18.4 22.3 11.9
Interest expense (2.4) (2.6) (5.6) (5.5)
Interest income .2 .3 .2 1.0
Other (expense) income, net (1.9) .4 (2.9) .2
-------- -------- -------- --------
Income before income taxes 10.4 16.5 14.0 7.6
Income tax expense (4.3) (6.4) (5.6) (3.1)
-------- -------- -------- --------
Net income $ 6.1 $ 10.1 $ 8.4 $ 4.5
======== ======== ======== ========
Earnings per share of common stock:
Net income $ .26 $ .40 $ .36 $ .18
======== ======== ======== ========
Number of shares used to compute
earnings per share 23.6 25.2 23.6 25.2
Dividends paid per share
of common stock: $ .125 $ .125 $ .25 $ .25
</TABLE>
<PAGE> 3
THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 45.0 $ 17.9
Accounts receivable, less allowance for doubtful
receivables ($2.7 in 1997 and in 1996) 91.2 72.7
Inventories:
Finished products and in-process 108.9 102.2
Raw materials and supplies 35.6 36.3
-------- --------
144.5 138.5
LIFO reserve (34.7) (33.4)
-------- --------
109.8 105.1
Deferred income taxes 18.1 18.1
Prepaid expenses 13.3 20.0
-------- --------
Total current assets 277.4 233.8
Property:
Land, buildings, machinery and equipment 1,191.8 1,179.9
Allowances for depreciation and amortization (747.9) (722.7)
-------- --------
Property, net 443.9 457.2
Deferred charges and other assets 78.1 45.9
-------- --------
Total assets $ 799.4 $ 736.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank debt $ 50.3 $ 18.9
Accounts payable 145.7 126.4
Accrued expenses 52.5 57.6
Current portion of long-term debt .7 .7
-------- --------
Total current liabilities 249.2 203.6
Long-term debt 136.9 137.2
Deferred income taxes 34.0 33.0
Postretirement benefits other than pensions 86.7 86.7
Other non-current liabilities 72.9 54.0
-------- --------
Total liabilities 579.7 514.5
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 294.7 296.1
Common stock held in treasury (4.7 shares in 1997
and 4.6 shares in 1996) (117.8) (115.7)
Retained earnings 65.0 62.4
Cumulative translation adjustment (20.7) (18.6)
Equity adjustment to recognize minimum pension liability (3.3) (3.3)
Unearned portion of restricted stock awards (1.0) (1.3)
-------- --------
Total stockholders' equity 219.7 222.4
-------- --------
Total liabilities and stockholders' equity $ 799.4 $ 736.9
======== ========
</TABLE>
<PAGE> 4
THE GEON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1997 1996
------- ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8.4 $ 4.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Employee separation 15.0 --
Depreciation and amortization 26.2 28.1
Provision for deferred income taxes 1.0 2.7
Change in assets and liabilities:
Accounts receivable (17.7) (32.4)
Inventories (3.6) .2
Accounts payable 19.0 8.9
Accrued expenses (2.0) 3.0
Income taxes payable (3.1) .4
Other 14.1 (13.2)
----- -----
Net cash provided by operating activities 57.3 2.2
INVESTING ACTIVITIES
Purchases of property (16.2) (32.5)
Investment in and advances to equity affiliates (34.9) (5.2)
----- -----
NET CASH PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES 6.2 (35.5)
FINANCING ACTIVITIES
Increase in short-term debt 30.9 .6
Repayment of long-term debt (.3) (.3)
Repurchase of common stock (4.1) (4.9)
Dividends (5.8) (6.2)
Proceeds from issuance of common stock -- .4
----- -----
Net cash provided (used) by financing activities 20.7 (10.4)
EFFECT OF EXCHANGE RATE CHANGES ON CASH .2 .4
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27.1 (45.5)
CASH AND CASH EQUIVALENTS AT JANUARY 1 17.9 61.1
----- -----
CASH AND CASH EQUIVALENTS AT JUNE 30 $45.0 $15.6
===== =====
</TABLE>
During the six months of 1997, the Company received net income tax refunds of
$2.7 million compared to the first six months of 1996 in which the Company paid
net income taxes of $0.6 million. Cash payments for interest, including amounts
capitalized, were $5.9 million for the first six months of 1997 and $5.4 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 six month periods ended June 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 June 30, 1997, 800,000
shares have been repurchased. During the second quarter of 1997 200,000 shares
were repurchased. 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 Company and its
venture partner pursue a 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 six month periods ended June 30, 1997 and
the disclosures under the new pronouncement.
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
- ------
On July 16, 1997, The BFGoodrich Company (BFG) announced that it entered into a
definitive agreement with the Westlake Group to purchase BFG's chlor-alkali and
olefins facilities in Calvert City Kentucky. BFG stated the sale is expected to
be completed during the third quarter of 1997, subject to certain regulatory
filings and normal closing matters. Should BFG sell the Calvert City facilities
to Westlake Group, Geon's obligations under a "put" agreement, as disclosed in
the Geon Company's 1996 Annual Report, will lapse.
<PAGE> 6
Note H
- ------
On August 1, 1997, agreements were finalized and operations of a new joint
venture, Australian Vinyls Coporation Limited, 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's
Australian PVC operations total assets at June 30, 1997 were approximately $44
million.
<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 June 1997 data, North American (U.S.
and Canada) producer shipments of polyvinyl chloride (PVC), including exports,
are estimated to have been 3% lower in the second quarter of 1997 versus the
first quarter of 1997 and were about 1% higher than in the same quarter in 1996.
For the first six months of 1997, North American shipments are 5% higher than in
the same period of last year. Exports from North America year-to-date (which
represented about 9% of total shipments) were 8% more than a year ago.
Capacity utilization (shipments/capacity) for North America was estimated at 94%
of effective capacity (87% of nameplate) during the second quarter of 1997 as
compared to second quarter 1996 when producer effective capacity was at full
utilization. In the first quarter of 1997, shipments were 97% of effective
capacity. North American capacity in the second quarter of 1997 is estimated to
have increased 8% over the past twelve months.
Industry operating margins (price less raw materials) for the largest PVC resin
market applications increased approximately 2.5 cents per pound in the second
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
second quarter versus the first quarter of 1997 was primarily the result of
higher average selling prices which averaged approximately 3.0 cents per pound
higher for the period. For the first six months, industry operating margins
averaged 0.5 cent per pound below 1996 with higher selling prices being more
than offset by higher ethylene and chlorine costs.
Recent industry ethylene supply disruptions may delay anticipated reductions in
pricing until the end of the third quarter. While chlorine demand remains
strong, prices during the third quarter are expected to approximate the second
quarter. An improved demand outlook is projected for the third quarter, however,
the North American resin pricing outlook is uncertain as downward pressure
exists early in the third quarter. Quoted August 1997 export pricing is
approximately 3.5 cents per pound below the June 1997 level.
Results of Operations:
- ----------------------
The Company had sales of $333.0 million in the second quarter versus $311.8
million in the same quarter of 1996. Operating income was $29.5 million in the
second quarter of 1997 excluding a special charge of $15.0 million ($9.2 million
after-tax) for employee separation costs. During the same period a year ago
operating income was $18.4 million. In the first quarter of 1997 Geon had sales
of $301.0 million and operating income of $7.8 million. Net income for the
second quarter of 1997 and 1996 was $6.1 million and $10.1 million,
respectively.
The Company's second quarter 1997 resin shipments were 1% and 4% below the first
quarter of 1997 and second quarter 1996, respectively, as demand moderated and
customers reduced inventories in the second quarter of 1997. The Company's
average spread between resin prices and raw material costs (ethylene and
chlorine) versus the first quarter of 1997 and the same period last year was
in-line with the industry. Compound sales volume in the second quarter of 1997
was approximately 10% above the same period a year ago.
The Company continues efforts to reduce its cost and announced in May 1997 it
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 though 1998.
For the first six months of 1997, sales were $634.0 million and net income was
$17.6 million before the above special charge. For the same period of 1996 the
Company had sales of $557.5 million and net income of $4.5 million.
Interest & Other Expense:
- -------------------------
Interest expense of $2.4 million during the second quarter of 1997 was slightly
lower than interest expense of $2.6 million during the corresponding period in
1996. Other income (expense), net was an expense of $1.9 million during the
first half of 1997 as compared to income of $.4 million in 1996. The change in
other income (expense) is primarily due to currency translation and higher
levels of accounts receivable sales.
<PAGE> 8
Taxes:
- ------
The second quarter of 1997 included an income tax expense of $4.3 million on
pre-tax income of $10.4 million as compared to an income tax expense of $6.4
million in the second quarter of 1996 on a pre-tax income of $16.5 million. For
the first half of 1997 income tax expense was $5.6 million on pre-tax income of
$14.0 million as compared to income tax expense of $3.1 million on pre-tax
income of $7.6 during the same period 1996. Changes in effective tax rates
between the periods noted above were primarily attributable to the benefit from
a state income tax refund.
Capital Resources and Liquidity:
- --------------------------------
During the six months ended June 30, 1997, the Company provided $6.2 million of
net cash from operating and investing activities compared to using $35.5 million
during the same period of 1996. Operating activities reflect higher earnings
before the special charge and the timing of pension obligation funding. Also,
net operating working capital (accounts receivable plus inventory less accounts
payable) increased $21.0 million less in 1997 versus 1996.
Investing activities include the purchase of property of $16.2 million during
the first six months of 1997 or approximately half the 1996 level of spending.
Capital expenditures for the full year of 1997 are estimated to approximate $55
million compared to $73 million in 1996. Investing activities for 1997 also
include $34.9 million of investments in and advances to equity affiliates, which
includes a joint venture involved in 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 six 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 a August 1996 board of directors
resolution. As of June 30, 1997, 1.7 million shares remain authorized for
repurchase. 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 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.
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 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 June 30, 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> 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
The Company held its Annual Meeting of Stockholders on May 1,
1997. As described in the 1997 Proxy Statement, the following
action was taken:
a) The nine nominees for directors were elected. The votes for
the directors were as follows:
<TABLE>
<CAPTION>
Number of Shares Number of Share
Voted For Votes Withheld
---------------- ----------------
<S> <C> <C>
James K. Baker 21,068,267 269,566
Gale Duff-Bloom 21,086,852 250,981
J. A. Fred Brothers 21,093,295 244,538
J. Douglas Campbell 21,095,132 242,701
Harry A. Hammerly 21,092,753 295,080
D. Larry Moore 21,092,461 245,372
John D. Ong 20,755,444 582,389
William F. Patient 21,076,191 261,642
R. Geoffrey P. Styles 21,070,661 267,172
</TABLE>
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 May 1997, the Company filed an 8-K announcing a reduction in
personnel positions and recorded a $15 million pre-tax charge
against earnings in the second quarter.
In May 1997, the Company also filed an 8-K announcing the
appointment of Thomas A. Waltermire as Executive Vice President
and Chief Operating Officer with W. David Wilson replacing him as
Vice President and Chief Financial Officer.
<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.
August 13, 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> 1
EXHIBIT 11
The Geon Company
Primary Earnings Per Share
(In millions, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE:
Number of Shares:
- -----------------
Average shares of common stock outstanding 23.4 24.7 23.4 24.7
Net effect of dilutive stock options - based on treasury stock
method using average market price .2 .5 .2 .5
------ ------ ------ ------
Total common and common equivalent shares outstanding 23.6 25.2 23.6 25.2
====== ====== ====== ======
Net income per share of common stock $ .26 $ .40 $ .36 $ .18
====== ====== ====== ======
</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 June 30, 1997
was above the average for the six months ended June 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 JUNE 30,
1997 AND DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 10
<SECURITIES> 35
<RECEIVABLES> 91
<ALLOWANCES> 3
<INVENTORY> 110
<CURRENT-ASSETS> 277
<PP&E> 1192
<DEPRECIATION> 748
<TOTAL-ASSETS> 799
<CURRENT-LIABILITIES> 249
<BONDS> 137
<COMMON> 3
0
0
<OTHER-SE> 217
<TOTAL-LIABILITY-AND-EQUITY> 799
<SALES> 634
<TOTAL-REVENUES> 634
<CGS> 573
<TOTAL-COSTS> 612
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 14
<INCOME-TAX> 6
<INCOME-CONTINUING> 8
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
