<PAGE> 1
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 QUARTERLY PERIOD ENDED MARCH 31, 1999. 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 April 30, 1999 there were 23,557,999 shares of common stock outstanding.
There is only one class of common stock.
<PAGE> 2
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Sales $ 325.8 $ 324.5
Operations costs and expenses:
Cost of sales 264.7 283.4
Selling and administrative expenses 21.7 17.0
Depreciation and amortization 15.0 14.5
Employee separation and plant phase-out 1.1 --
Income (loss) from equity affiliates (1.5) 3.1
-------- --------
Operating income 21.8 12.7
Interest expense (3.6) (3.8)
Interest income .3 .6
Other income (expense), net (.4) .3
-------- --------
Income before income taxes and cumulative effect of
a change in accounting 18.1 9.8
Income tax expense (7.0) (4.0)
-------- --------
Net income, before cumulative effect of a change in accounting 11.1 5.8
Cumulative effect of change in accounting for start-up costs,
net of income tax benefit of $0.9 million (1.5) --
-------- --------
Net income $ 9.6 $ 5.8
======== ========
Basic earnings per share of common stock:
Basic earnings per share before cumulative effect
of accounting change $ .48 $ .25
Cumulative effect of change in accounting for start-up costs (.06) --
-------- --------
Basic earnings per share $ .42 $ .25
======== ========
Diluted earnings per share of common stock:
Diluted earnings per share before cumulative effect
of accounting change $ .46 $ .25
Cumulative effect of change in accounting for start-up costs (.06) --
-------- --------
Diluted earnings per share $ .40 $ .25
======== ========
Number of shares used to compute earnings per share:
Basic 23.1 22.9
Diluted 24.0 23.5
Dividends paid per share of common stock: $ .125 $ .125
</TABLE>
2
<PAGE> 3
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
ASSETS (Unaudited) 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9.0 $ 14.4
Accounts receivable, net 113.5 70.8
Inventories 119.0 113.9
Deferred income taxes 24.5 24.6
Prepaid expenses 9.9 11.0
------ ------
Total current assets 275.9 234.7
Property, net 442.1 443.5
Investment in equity affiliates 16.4 19.8
Goodwill, net 81.6 81.5
Deferred charges and other assets 22.3 22.5
------ ------
Total assets $838.3 $802.0
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank debt $ 77.9 $ 50.9
Accounts payable 131.2 129.1
Accrued expenses 71.3 76.0
Current portion of long-term debt .4 .8
------ ------
Total current liabilities 280.8 256.8
Long-term debt 133.8 135.4
Deferred income taxes 36.5 32.8
Postretirement benefits other than pensions 84.7 85.1
Other non-current liabilities 78.1 77.8
------ ------
Total liabilities 613.9 587.9
Stockholders' equity:
Preferred stock, 10.0 shares authorized, no shares issued -- --
Common stock, $.10 par, authorized 100.0 shares;
issued 28.0 shares in 1999 and 1998 2.8 2.8
Other stockholders' equity 221.6 211.3
------ ------
Total stockholders' equity 224.4 214.1
------ ------
Total liabilities and stockholders' equity $838.3 $802.0
====== ======
</TABLE>
3
<PAGE> 4
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended,
March 31,
-------------------
1999 1998
------ -----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9.6 $ 5.8
Adjustments to reconcile net income to net
cash used by operating activities:
Employee separation and plant phase-out 1.1 --
Depreciation and amortization 15.0 14.5
Provision for deferred income taxes 3.4 2.2
Change in assets and liabilities:
Accounts receivable (41.7) 16.3
Inventories (4.3) (5.0)
Accounts payable 1.6 (30.5)
Accrued expenses and other (5.5) (13.1)
----- -----
Net cash used by operating activities (20.8) (9.8)
INVESTING ACTIVITIES
Purchases of property (10.2) (6.2)
Investment in and advances to equity affiliates 3.4 (4.2)
----- -----
NET CASH USED BY OPERATING AND INVESTING ACTIVITIES (27.6) (20.2)
FINANCING ACTIVITIES
Increase in short-term debt 26.2 8.7
Repayment of long-term debt (2.0) (.3)
Dividends (2.9) (2.9)
Proceeds from issuance of common stock .8 .1
----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 22.1 5.6
EFFECT OF EXCHANGE RATE CHANGES ON CASH .1 .8
----- -----
DECREASE IN CASH AND CASH EQUIVALENTS (5.4) (13.8)
CASH AND CASH EQUIVALENTS AT JANUARY 1 14.4 49.1
----- -----
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 9.0 $35.3
===== =====
</TABLE>
4
<PAGE> 5
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in Millions, Shares in Thousands)
<TABLE>
<CAPTION>
COMMON COMMON ACCUMULATED
SHARES ADDITIONAL STOCK OTHER NON-
COMMON HELD IN TOTAL COMMON PAID-IN RETAINED HELD IN OWNER EQUITY
SHARES TREASURY STOCK CAPITAL EARNINGS TREASURY CHANGES
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1998 27,877 4,700 $223.8 $2.8 $295.8 $73.3 $(118.0) $(30.1)
Non-owner equity changes:
Net income 5.8 5.8
Other non-owner equity changes:
Translation adjustment 2.2 2.2
----
Total non-owner equity changes 8.0
Stock based compensation and
exercise of options 97.0 (29.0) (1.1) (2.6) 1.4 .1
Cash dividends (2.9) (2.9)
-------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1998 27,974 4,671 $227.8 $2.8 $293.2 $76.2 $(116.6) $(27.8)
===========================================================================================
BALANCE JANUARY 1, 1999 27,974 4,622 $214.1 $2.8 $296.1 $75.4 $(115.1) $(45.1)
Non-owner equity changes:
Net income 9.6 9.6
Other non-owner equity changes:
Translation adjustment 1.5 1.5
----
Total non-owner equity changes 11.1
Stock based compensation and exercise
of options (161.0) 2.1 (2.8) 4.8 .1
Cash dividends (2.9) (2.9)
-------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1999 27,974 4,461 $224.4 $2.8 $293.3 $82.1 $(110.3) $(43.5)
===========================================================================================
</TABLE>
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of The
Geon Company (Company or Geon) have been prepared in accordance with generally
accepted accounting principles for interim financial information, 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, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. 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, 1998. Certain amounts for 1998 have been
reclassified to conform to the 1999 interim period presentation.
Geon's operations are primarily located in the United States and Canada in two
business segments. The "Performance Polymers and Services" segment includes
polyvinyl chloride (PVC) compounds, including two 50% owned compound joint
ventures, specialty resins, plastisol formulators and analytical testing
services. The "Resin and Intermediates" segment includes suspension and mass
resins, vinyl chloride monomer (VCM), a precursor to PVC, the Company's 50%
equity holding in the Sunbelt chlor-alkali joint venture and the Company's 37.4%
holding in Australian Vinyls Corporation (AVC), an Australian PVC operation.
NOTE B - COMMITMENTS AND CONTINGENCIES
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 will not have a material adverse
effect on the Company's consolidated financial position.
The Company has accrued for environmental liabilities based upon estimates
prepared by its environmental engineers and consultants to cover probable future
environmental expenditures related to previously contaminated sites. The accrual
totaling approximately $45 million at March 31, 1999, represents the Company's
best estimate for the remaining remediation costs based upon information and
technology currently available. Depending upon the results of future testing and
the ultimate remediation alternatives to be undertaken at these sites, it is
possible that the ultimate costs to be incurred could be more than the accrual
recorded by as much as $14 million. The Company's estimate of the liability may
be revised as new regulations, technologies or additional information is
obtained. Additional information related to the Company's environmental
liabilities is included in Note L to the Consolidated Financial Statements
included in the Company's 1998 Annual Report on Form 10K.
NOTE C - INVENTORIES
Components of inventories at March 31, 1999 and December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in millions) 1999 1998
-------- -----------
<S> <C> <C>
Finished products and in-process inventories $ 86.8 $ 94.3
Raw materials and supplies 46.7 34.2
------ ------
133.5 128.5
LIFO Reserve (14.5) (14.6)
------ ------
$119.0 $113.9
====== ======
</TABLE>
NOTE D - CHANGE IN ACCOUNTING METHOD
Effective January 1, 1999, the Company adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities." The SOP required that
unamortized start-up costs be written off at the time of adoption and future
start-up costs be expensed as incurred. The Company's portion of unamortized
start-up costs related to the
6
<PAGE> 7
Sunbelt chlor-alkali joint venture totaled $1.5 million, net of an income tax
benefit, and was written off as the cumulative effect of a change in accounting
on January 1, 1999.
NOTE E - FORMATION OF OXY VINYLS, LP AND PVC POWDER BLENDS, LP Effective May 1,
1999, the Company completed transactions with Occidental Chemical Corporation
(OxyChem) to form two limited partnerships, a PVC limited partnership named
OxyVinyls, LP (OxyVinyls) and a compounding partnership named PVC Powder Blends,
LP. Geon contributed to OxyVinyls five PVC suspension and mass resin plants and
one VCM plant as well as related assets and all of the outstanding capital stock
of LaPorte Chemicals Corporation, a subsidiary of The Geon Company. In exchange,
Geon received a 24% interest in OxyVinyls and OxyVinyls assumed certain
liabilities and obligations of Geon, including agreements under which Geon
leased a portion of a VCM plant located in LaPorte, Texas, as well as certain
industrial revenue bond debt of Geon. OxyChem contributed to OxyVinyls one PVC
plant, one VCM plant, a 50% interest in OxyMar, a Texas general partnership that
operates a VCM plant, and a chlor-alkali chemical complex, together with related
assets. In exchange, OxyChem received a 76% interest in OxyVinyls, and OxyVinyls
assumed certain liabilities and obligations of OxyChem, including certain OxyMar
debt.
Geon contributed to PVC Powder Blends, LP substantially all of its powder/dry
blend compounding assets, located at Plaquemine, Louisiana, and its powder
compound business. In exchange, Geon received a 90% interest in PVC Powder
Blends, LP, and PVC Powder Blends, LP assumed certain liabilities and
obligations of Geon. OxyChem contributed to PVC Powder Blends, LP substantially
all of its compounding assets and powder compound business located at Pasadena,
Texas as well as a separate tolling arrangement. In exchange, OxyChem received a
10% interest in PVC Powder Blends, LP, and PVC Powder Blends, LP assumed certain
liabilities and obligations of OxyChem.
In conjunction with the joint venture transactions, Geon will realize
approximately $104 million through retention of certain working capital and the
distribution of cash from Oxy Vinyls. OxyChem also transferred to Geon for $27
million a PVC flexible film and pellet compounding plant located in Burlington,
New Jersey, and its specialty pellet compound business located in Pasadena,
Texas, in addition to inventory, customer lists, contracts and other associated
rights.
In conjunction with the transactions above, Geon entered into a resin purchase
agreement and a VCM purchase agreement with OxyVinyls under which it will
purchase a substantial portion of its PVC resin and VCM. The agreements have an
initial term of 15 years with renewal options. The Company has also entered into
various service agreements with the partnerships.
The Company will account for its interest in OxyVinyls as an equity investment.
PVC Powder Blends, LP will be consolidated.
The Company will report a significant gain in the second quarter as a result of
the completion of these transactions.
NOTE F- COMPOUND RESTRUCTURING
In the first quarter of 1999 the Company recorded compound restructuring costs
of $1.7 million ($0.6 million of which is recorded as additional depreciation
expense and $1.1 million of which is recorded as employee separation and plant
phase-out) relating to the consolidation of the Company's compounding
manufacturing operations which was announced and began in the fourth quarter of
1998. This plan includes the closing of two manufacturing plants and the partial
closing of production lines at other manufacturing plants. The affected
facilities are those of the former Synergistics Industries Limited operations
that the Company acquired in the fourth quarter of 1997. The total restructuring
costs in the first quarter of 1999 include accelerated depreciation of $0.6
million on software assets at the affected sites which are to be taken out of
service by the end of the second quarter of 1999, and employee separation and
plant phase-out costs of $1.1 million. The Company previously recorded $14.6
million related to this plan of consolidation in the fourth quarter of 1998 and
expects to record additional costs of approximately $6.0 in the second quarter
of 1999, following the consummation of the transaction with OxyChem and the
formation of PVC Powder Blends, LP at which time the Conroe, Texas compounding
facility will be closed. The plan of consolidation includes the elimination of
approximately 250 positions, 180 of which were accrued for in the fourth quarter
1998 charge. During the first quarter of 1999, 85 of these 180 individuals were
terminated and the remaining 95 terminations are expected to be completed by the
end of 1999. The costs associated with the remaining 70 position eliminations
will be included in the charge to be taken in the second
7
<PAGE> 8
quarter of 1999. The estimated costs to be recognized in the second quarter of
1999 are as follows: (a) an additional $0.6 million of accelerated depreciation
related to the software assets discussed above; (b) $1.4 million of disposition
costs, which will be expensed as incurred, consisting of moving and relocation
costs and the cost of archiving and converting files from computers and software
disposed as part of the consolidation of the compounding operations; and (c)
costs associated with the closing of the Conroe, Texas, compounding facility
totaling $4.0 million that will be recorded as a reduction of the gain on the
OxyChem transactions. The Conroe closure costs are comprised of write-offs of
fixed assets with a net book value of $2.0 million and other assets with a
carrying value of $0.5 million, and cash employee separation costs of
approximately $1.5 million, relating to the termination of 70 individuals. All
sites and production lines are projected to be closed by the end of 1999.
The activity related to the fourth quarter 1998 and first quarter 1999 charges
for the consolidation of the Company's compounding operations are as follows:
<TABLE>
<CAPTION>
Fourth First
Quarter Quarter
1998 1999 Nature of Expense
------------ ------------ ----------------------------------
<S> <C> <C> <C>
Total charges relating to:
Employee separation and plant phase-out:
Asset write-offs $5.3 $0.4 Non-cash
Employee separation 5.0 0.2 Cash
Site closure costs:
Demolition 3.3 - Cash
Legal and professional fees 1.0 0.5 Cash
------------ ------------
14.6 1.1
Depreciation and amortization expense:
Accelerated depreciation - 0.6 Non-cash, included in depreciation
and amortization expense
------------ ------------
Total charges 14.6 1.7
------------ ------------
Activity related to the charges:
Fourth Quarter 1998:
Assets written off (5.3) - Non-cash
Employee separation paid (0.7) - Cash
------------ ------------
8.6 -
First Quarter 1999:
Assets written off - (0.4) Non-cash
Employee separation paid (0.5) - Cash
Accelerated depreciation - (0.6) Non-cash
Legal and professional costs paid - (0.5) Cash
------------ ------------
Restructuring accruals at March 31, 1999 $8.1 $0.2
============ ============
</TABLE>
8
<PAGE> 9
NOTE G - SEGMENT INFORMATION
The Company operates primarily in two business segments, the Performance
Polymers & Services segment (PP&S) and the Resin and Intermediates (R&I)
segment. Inter-segment sales are accounted for at prices that generally
approximate those for similar transactions with unaffiliated customers. The
elimination of inter-segment sales is primarily for sales from the R&I segment
to the PP&S segment, and is included in the Other segment. Certain other
corporate expenses and eliminations are also included in the Other segment.
<TABLE>
<CAPTION>
($ in millions) TOTAL PP&S R&I OTHER
----- ------ ------ -----
<S> <C> <C> <C> <C>
QUARTER ENDED MARCH 31, 1999:
Net Sales $325.8 $217.6 $141.2 $(33.0)
Operating income (loss) 21.8 22.8 (1.1) 0.1
Employee separation and plant phase-out 1.1 1.1 - -
Other restructuring costs - accelerated
depreciation 0.6 0.6 - -
------ ------ ------ ------
Operating income (loss) before restructuring
costs 23.5 24.5 (1.1) 0.1
Depreciation and amortization (before
restructuring) 14.4 6.9 7.5 -
------ ------ ------ ------
Operating income before depreciation,
amortization and restructuring costs $ 37.9 $ 31.4 $ 6.4 $ 0.1
====== ====== ====== ======
Total assets $838.3 $495.0 $378.4 $(35.1)
Capital Expenditures 10.2 7.6 2.6 -
QUARTER ENDED MARCH 31, 1998:
Net Sales $324.5 $200.4 $162.2 $(38.1)
Operating income (loss) 12.7 16.6 (3.5) (0.4)
Depreciation and amortization 14.5 6.9 7.5 0.1
------ ------ ------ ------
Operating income (loss) before depreciation
and amortization $ 27.2 $ 23.5 $ 4.0 $ (0.3)
====== ====== ====== ======
Total assets $846.7 $444.1 $393.3 $ 9.3
Capital Expenditures 6.2 2.6 3.6 -
</TABLE>
9
<PAGE> 10
NOTE H. WEIGHTED-AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE:
<TABLE>
<CAPTION>
Quarter ended
March 31,
---------------
($ in millions) 1999 1998
---------------
<S> <C> <C>
Weighted-average shares - Basic:
Weighted-average shares outstanding 23.5 23.3
Less unearned portion of restricted stock
awards included in outstanding shares (.4) (.4)
---------------
23.1 22.9
---------------
Weighted-average shares - Diluted:
Weighted-average shares outstanding 23.5 23.3
Plus dilutive impact of stock options and
stock awards .5 .2
---------------
24.0 23.5
===============
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During the first quarter of 1999 the Federal Trade Commission informed the
Company that it had terminated its investigation related to the joint venture
transactions with a recommendation for no further action. The joint venture
transactions received shareholder approval on April 19, 1999, and the newly
formed partnerships began operations on May 1, 1999. As discussed in Note E to
the Condensed Consolidated Financial Statements, Geon's North American commodity
PVC/VCM operations included in the R&I business segment were contributed to
OxyVinyls in exchange for a 24% interest in the joint venture. Second quarter
results will include the consolidation of the commodity PVC/VCM operations for
one month (April 1999), after which the Company will report the earnings of the
OxyVinyls as earnings from equity affiliates in the R&I business segment.
In addition, as discussed in Note E, the Companies also formed the PVC Powder
Blends, LP partnership which will be 90% owned by Geon. The operations of this
partnership will be consolidated into Geon, with the OxyChem portion recorded as
a minority interest. Also in conjunction with the joint venture transactions,
the Company acquired from OxyChem a PVC flexible film business and a specialty
PVC compound business that will be included in the Company's consolidated
results beginning May 1, 1999.
FIRST QUARTER 1999 RESULTS OF OPERATIONS - TOTAL COMPANY:
Sales in the first quarter of 1999 were $325.8 million or flat with 1998.
Comparing the first quarter of 1999 to last year overall volumes increased 15%,
including acquired businesses, and were offset by lower average selling prices,
primarily in PVC resin. The PP&S segment comprised approximately 67% of
consolidated sales in 1999 compared to 62% last year. Operating income,
excluding a $1.7 million pre-tax charge ($1.1 million employee separation and
plant phase-out plus $0.6 million of accelerated depreciation, see Note F for
further discussion) associated with the compound manufacturing asset
rationalization, was $23.5 million, an increase of 85% over the same period a
year ago. Included in operating income are earnings from equity affiliates.
Approximately 75% of the improvement in operating earnings was from the PP&S
segment.
Selling and administrative expenses increased by 28% from 1998, primarily due to
the plastisol formulator businesses acquired in the second and third quarters of
1998. Other income (expense) declined in 1999 from 1998, due to a reduction in
foreign currency gains. The effective income tax rate on income before the
cumulative effect of a change in accounting was 39% in 1999 versus 41% in 1998
reflecting the effect of a change in foreign versus domestic earnings and the
effect of permanent differences such as non-deductible goodwill on the lower
pre-tax earnings in 1998.
As discussed in Note D to the Condensed Consolidated Financial Statements, the
Company adopted SOP 98-5, "Reporting on the Costs of Start-up Activities,"
effective January 1, 1999. As a result, on January 1, 1999, the Company
wrote-off its share of the unamortized start-up costs of the Sunbelt
chlor-alkali venture resulting in a cumulative effect of a change in accounting
of $1.5 million ($2.4 million pre-tax).
Net income before the cumulative effect of a change in accounting and the
compound restructuring charge was $12.1 million, more than double the previous
year's net income of $5.8 million. Diluted earnings per share, before the
cumulative effect of a change in accounting and excluding the compound
restructuring were $0.50, compared with $0.25 for the first quarter of 1998.
11
<PAGE> 12
Performance Polymers & Services (PP&S)
- --------------------------------------
PP&S sales for the first quarter of 1999 were $217.6 million, an increase of
$17.2 million or 9% over 1998. Increased sales resulted from a 16% increase in
volumes offset by a 6% decline in average selling prices. The 1999 increased
volumes result from 2% organic growth (5% in the last two months of the quarter)
plus the acquired formulator business sales.
Operating income, before the restructuring cost previously described, was $24.5
million, an increase of $7.9 million or 48% over last year. Approximately 15% of
this increase in operating income was attributable to the acquired plastisol
formulators. The margin of average selling prices over material costs increased
3% from the same period a year ago as a result of lower raw material costs.
Plant conversion costs per sales unit, excluding acquisitions were flat with the
same quarter of 1998.
As discussed in Note F, the Company also expects to recognize a restructuring
charge in the second quarter of 1999 of approximately $6.0 million with the
previously announced closing of its Conroe, Texas facility following the May 1,
1999, formation of the powder compound joint venture with OxyChem. Certain
factors that may affect these forward-looking comments are discussed under
"Cautionary Note on Forward-Looking Statements".
Resin and Intermediates (R&I)
- -----------------------------
Based on industry data, North American (U.S. and Canada) producer shipments of
PVC, including exports, are estimated to have increased by 8% over first quarter
1998. Capacity utilization (shipments/capacity) for North America was estimated
at 95% of effective capacity (89% of nameplate) during the first quarter of
1999, an increase of 3 percentage points from the first quarter of 1998 as a
result of domestic economic growth. Capacity has remained essentially level over
the last year. Exports declined 34% from the same period last year as a result
of the strong domestic demand and increased domestic selling prices.
Average industry margins (the spread between PVC resin selling prices and large
buyer ethylene and chlorine costs as reported in industry trade journals and
newsletters) for the largest PVC resin market applications were unchanged on
average as compared to the first quarter of 1998. Average selling prices
decreased $0.05 per pound with lower average feedstock costs (ethylene and
chlorine) offsetting the selling price decrease.
Industry PVC resin operating margins began the second quarter of 1999 with
operating margins approximately 1.0 cents per pound above the same period last
year and further improvement in margins is anticipated as seasonal demand
increases and limited capacity additions cause upward pressure on selling
prices. Feedstock costs are likely to partially offset the improvement in
selling prices with some increase in ethylene cost likely and an increase in
chlorine possible. Certain factors that may affect these forward-looking
comments are discussed under "Cautionary Note on Forward-Looking Statements".
Geon R&I first quarter 1999 sales were $141.2 million, or a 13% decrease from
the same period of 1998. This sales change is comprised primarily of a 22%
decrease in average PVC resin selling prices and an 11% increase in PVC resin
volumes.
The R&I operating loss for the first quarter of 1999 was $1.1 million or a $2.4
million improvement versus the first quarter of 1998. The margin of average
selling prices over raw material costs was in line with the industry and
approximates last year's margin for the same period. Plant conversion cost per
sales unit decreased approximately 6% compared to a year ago. Included in the
operating loss for 1999 and 1998 is a loss from equity affiliates (Sunbelt and .
The decrease in earnings of equity affiliates primarily reflects the decrease in
Sunbelt's selling price of an ECU (combined chlorine and caustic soda selling
prices) as the chlor-alkali industry is in a cyclical trough.
12
<PAGE> 13
CAPITAL RESOURCES AND LIQUIDITY
Operating and investing activities used cash of $27.6 million in the first
quarter of 1999 compared to $20.2 million in the corresponding period of 1998.
Operations used $20.8 million of cash, primarily the result of a seasonal
increase in working capital in line with sales and production increases.
Investing activities included $10.2 million in property additions compared with
$6.2 million in 1998. This increase over 1998 is largely attributable to the
expansion and modernization of the Henry, Illinois, specialty resin plant that
was announced in the fourth quarter of 1998. Total capital expenditures in 1999
are expected to be $55 to $60 million.
Cash provided from financing activities in the first quarter of 1999 primarily
reflects the increase in short-term debt to finance the higher levels of working
capital. In addition, the Company paid dividends of $2.9 and repaid $2.0 million
of long-term debt. Approximately $1.7 million of long-term debt was repaid prior
to its scheduled maturity date to facilitate the transactions with OxyChem.
The Company will be realizing approximately $110 million in cash in the second
quarter of 1999 in connection with the OxyChem transaction. This cash benefit
will be realized through a cash distribution from the PVC partnership and the
retention and subsequent liquidation of working capital.
The Company believes it has sufficient funds to support dividends, debt service
requirements, normal capital and operating expenditures, and expenditures
related to expansion of its Henry, Illinois plant, based on projected
operations, existing working capital facilities and other available permitted
borrowings.
YEAR 2000 (Y2K)
State of Readiness. Since 1997, the Company has been actively involved in
surveying, assessing, and correcting Year 2000 ("Y2K") problems with its
information technology structure. Geon's information technology structure
includes, among others, commercial business information systems, manufacturing
information systems, desktop computing networks, and data and communication
networks. Geon implemented a new integrated commercial business information
system in 1997 which is Y2K compliant and will support approximately 90% of the
current operations. Following the assessment of its information technology
structure, Geon identified its systems that it believed may be vulnerable to Y2K
failures and established a program to assess Y2K issues.
The Company's Y2K efforts are being carried out by Geon's Y2K compliance team
under the leadership of the Manager of Technical Support. The Manager of
Technical Support has assembled a group of seven individuals to oversee the
implementation of Geon's Y2K program and has appointed a person at each of
Geon's facilities, including those newly acquired, to address Y2K issues. The
Y2K compliance team maintains a reporting structure to ensure that progress is
made on Y2K issues and to ensure the reliability of risk and cost estimates
relating to Y2K problems.
The most critical non-information technology systems, such as automated process
control equipment, are relatively new and are being upgraded and maintained with
the help of Geon's various suppliers. To date, Geon's investigation of these
systems has not revealed any Y2K problems; however investigation in this area
continues.
In February 1997, Geon completed the installation of a new integrated commercial
business information system which is Y2K compliant and will support 90% of
Geon's current operations. The purchase and initial installation of Geon's new
commercial business information system cost approximately $20 million.
Currently, the Company is operating one older information system which has been
remediated. As a result of the installation of the new system and its
remediation efforts, Geon has completed all of its Y2K work with respect to its
commercial business information systems. The Company is also in the process of
remediating all of its technical infrastructure. The most critical
non-information technology systems include automated process control equipment
and equipment containing embedded chips. These systems are relatively new and
are being upgraded with the help of Geon's various suppliers.
13
<PAGE> 14
In addition to internal resources, the Company is utilizing external resources
to implement its Y2K program and to ensure that its risk and cost estimates are
reliable. Geon has contracted with outside consultants to verify Geon's
assessment of its Y2K problems and to assist it with remediation efforts.
The Company relies significantly upon third parties in the operation of its
business. As a result, as part of Geon's Y2K program, the purchasing and
production control department of each operating unit has made, and is making,
efforts to determine and assess the Y2K compliance of third parties with which
Geon does business. In particular, throughout 1998, Geon contacted and sent
questionnaires to all of its raw material suppliers to obtain information
relating to the status of such suppliers with respect to Y2K issues. Geon
received assurances from 75% of its raw material suppliers that they are or
would be Y2K compliant by July 1999. Geon has maintained ongoing correspondence
with its suppliers regarding Y2K issues and placed particular emphasis on
determining the Y2K readiness of its critical suppliers.
Due to the uncertainties associated with Y2K problems, Geon is in the process of
developing contingency plans in the event that its business or operations are
disrupted on January 1, 2000. As part of this plan, the Company expects to
adjust its inventory levels and mix of products and raw materials consistent
with good business practice based upon the risks that Geon believes exist. In
addition, Geon expects to develop a plan that outlines how one facility can
compensate for any disruption at another facility due to Y2K problems.
Completion. The Company's Y2K compliance team expects Geon's internal systems
and processes to be Y2K compliant by July 1999.
Cost. The Company anticipates incurring total out-of-pocket expenditures of
approximately $.75 million on Y2K issues. To date, Geon has incurred
out-of-pocket costs of approximately $.4 million on Y2K issues, plus internal
personnel time included in the scope of normal operations. Approximately 85% of
these funds have been expended in connection with remediation, and 15% of these
funds have been expended to replace portions of the information technology
structure. The funds used by Geon to address its Y2K problems are from the
general business budget, and all such costs are expensed as incurred.
Risks. If the Company's suppliers and customers are not Y2K compliant by January
1, 2000, such noncompliance could materially affect Geon's business, results of
operations, and financial condition. Geon may experience some random or
unforeseen supply chain disruptions that may affect its ability to produce and
distribute key products. In addition, the Company's business may be disrupted if
a significant number of its customers are unable to pay for products supplied to
them by Geon. Geon's worst case scenario is the inability of Geon to receive raw
materials or remove products from its facilities. In order for Y2K problems to
have a material effect on Geon, Geon believes that more than one of its
facilities would have to experience significant Y2K problems.
Forward-Looking Statements. The data on which the Company believes it will
complete its Y2K compliance efforts and the expenses related to Geon's Y2K
compliance efforts are based upon management's best estimates, which are based
on assumptions of future events, including the availability of certain
resources, third party modification plans, and other factors. There can be no
assurances that these results and estimates will be achieved, and the actual
results could materially differ from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability of personnel trained in this area and the ability to locate and
correct all relevant computer codes. In addition, there can be no assurances
that the systems or products of third parties on which Geon relies will be
timely converted or that a material failure by a third party, or a conversion
that is incompatible with Geon's systems, would not have a material adverse
effect on Geon.
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.
14
<PAGE> 15
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 1999
to approximate $3 million to $5 million. Certain factors that may affect these
forward-looking comments are discussed under "Cautionary Note on Forward-Looking
Statements".
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, 1999, the Company had accruals totaling
approximately $45 million to cover potential future environmental remediation
expenditures. Environmental remediation expenditures in 1999 are estimated to
approximate the level of 1998 which totaled $5.3 million.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This Quarterly Report contains statements concerning trends and other
forward-looking information affecting or relating to the Company and its
industry, including, but not limited to, statements concerning the future
development of the Company's business following the completion of the proposed
transactions with OxyChem, the future operations of the proposed joint venture
entities, and the synergies expected to result therefrom, that are intended to
qualify for the protections afforded "forward-looking statements" under the
Private Securities Litigation Reform Act of 1995. Actual results could differ
materially from such statements for a variety of factors, including but not
limited to (1) unanticipated changes in world, regional, or U.S. PVC consumption
growth rates affecting the Company's markets; (2) unanticipated changes in
global industry capacity or in the rate at which anticipated changes in industry
capacity come online in the PVC, VCM & chlor-alkali industries; (3) fluctuations
in raw material prices and supply, in particular fluctuations outside the normal
range of industry cycles; (4) unanticipated delays in achieving or inability to
achieve cost reduction and employee productivity goals; (5) unanticipated
production outages or material costs associated with scheduled or unscheduled
maintenance programs; (6) the impact on the North American vinyl markets and
supply/demand balance resulting from the economic situation in the Far East; (7)
the ability to obtain financing at anticipated rates; (8) inability to achieve
or delays in achieving savings related to business consolidation and
restructuring programs; (9) unanticipated expenditures required in conjunction
with year 2000 compliance; (10) unanticipated delay in realizing, or inability
to realize, expected costs savings from the proposed transactions; (11)
unanticipated costs or difficulties related to completion of the proposed
transactions or the operation of the joint venture entities; (12) inability to
complete the proposed transactions; (13) lack of day to day operating control,
including procurement of raw material feedstock, of the proposed resin
partnership; (14) lack of direct control over the reliability of delivery and
quality of the primary raw materials (PVC & VCM) utilized in the Company's
products; and (15) partial control over investment decisions and dividend
distribution policy of the proposed resin partnership.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest
rates on debt obligations and from changes in foreign currency
exchange rates. Information related to these risks and the
Company's management of the exposure is included in
"Management's Analysis - Consolidated Balance Sheets" in the
1998 Annual Report on 10K under the caption "Market Risk
Disclosures."
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:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on January 29, 1999 announcing the appointment of
key executives of the Decillion joint venture with Owens
Corning.
Form 8-K filed on February 4, 1999 announcing the Federal Trade
Commission's decision to terminate its investigation related to
the joint venture transactions and its recommendation for no
further action.
Form 8-K/A filed on February 16, 1999, amending information
previously included in the 8-K filed in connection with the
acquisition of Synergistics Industries Limited on October 31,
1997. This amendment restated certain financial information of
Synergistics Industries Limited from U.S. dollars to Canadian
dollars and added the conformed signature of the independent
auditors which was inadvertently omitted from the previous
amendment.
Form 8-K filed on March 18, 1999, announcing the date for the
Special Meeting of Geon Stockholders to be held on April 19,
1999.
16
<PAGE> 17
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 17, 1999 THE GEON COMPANY
/s/ W. D. Wilson
Vice President and Chief Financial Officer,
(Principal Financial Officer)
/s/ G. P. Smith
Corporate Controller and Assistant Treasurer
(Principal Accounting Officer)
17
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<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets of The Geon Company and Subsidiaries as of March 31,
1999 and December 31, 1998 and the restated statements of income for the three
month periods ended March 31, 1999 and 1998 and is qualified in its entirety by
reference to such Financial Statements.
</LEGEND>
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