<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 2000. COMMISSION FILE NUMBER 1-11804
THE GEON COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1730488
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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, 2000 there were 23,832,625 shares of common stock outstanding.
There is only one class of common stock.
<PAGE> 2
Part I. Financial Information
Item I. Financial Statements
<TABLE>
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended
March 31,
-----------------------
2000 1999
------ ------
<S> <C> <C>
Sales $345.5 $325.8
Operating costs and expenses:
Cost of sales 300.8 264.7
Selling and administrative expenses 24.2 21.7
Depreciation and amortization 9.5 15.0
Employee separation and plant phase-out -- 1.1
Income (loss) from equity affiliates 18.7 (1.5)
------ ------
Operating income 29.7 21.8
Interest expense (7.0) (3.6)
Interest income 0.5 0.3
Other income (expense), net (0.6) (0.4)
------ ------
Income before income taxes and cumulative effect of
a change in accounting 22.6 18.1
Income tax expense (8.8) (7.0)
------ ------
Income, before cumulative effect of a change in accounting 13.8 11.1
Cumulative effect of change in accounting, net of income
tax benefit of $0.9 million -- (1.5)
------ ------
Net income $ 13.8 $ 9.6
====== ======
Basic earnings per share of common stock:
Basic earnings per share before cumulative effect of
accounting change $ 0.59 $ 0.48
Cumulative effect of change in accounting for start-up costs -- (.06)
------ ------
Basic earnings per share $ 0.59 $ 0.42
====== ======
Diluted earnings per share of common stock:
Diluted earnings per share before cumulative effect of
accounting change $ 0.57 $ 0.46
Cumulative effect of change in accounting -- (.06)
------ ------
Diluted earnings per share $ 0.57 $ 0.40
====== ======
Number of shares used to compute earnings per share:
Basic 23.5 23.1
Diluted 24.2 24.0
Dividends paid per share of common stock: $0.125 $0.125
</TABLE>
See Accompanying Notes to the Unaudited
Condensed Consolidated Financial Statements
1
<PAGE> 3
<TABLE>
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<CAPTION>
March 31,
2000 December 31,
ASSETS (Unaudited) 1999
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 40.4 $ 51.2
Accounts receivable, net 142.0 105.4
Inventories 169.5 168.2
Deferred income taxes 27.8 27.2
Prepaid expenses 6.1 5.7
-------- --------
Total current assets 385.8 357.7
Property, net 342.5 338.4
Investment in equity affiliates 273.8 265.1
Goodwill and other intangible assets, net 176.0 183.1
Deferred charges and other assets 18.8 18.3
-------- --------
Total assets $1,196.9 $1,162.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank debt $ 256.1 $ 222.0
Accounts payable 140.5 148.3
Accrued expenses 57.6 70.0
Current portion of long-term debt .4 .4
-------- --------
Total current liabilities 454.6 440.7
Long-term debt 130.7 130.9
Deferred income taxes 115.1 106.5
Postretirement benefits other than pensions 83.7 83.9
Other non-current liabilities 60.8 60.2
Minority interest in consolidated subsidiary 6.2 5.7
-------- --------
Total liabilities 851.1 827.9
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 343.0 331.9
-------- --------
Total stockholders' equity 345.8 334.7
-------- --------
Total liabilities and stockholders' equity $1,196.9 $1,162.6
======== ========
</TABLE>
See Accompanying Notes to the Unaudited
Condensed Consolidated Financial Statements
2
<PAGE> 4
<TABLE>
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 13.8 $ 9.6
Adjustments to reconcile net income to net
cash used by operating activities:
Employee separation and plant phase-out -- 1.1
Depreciation and amortization 9.5 15.0
(Income) loss from equity affiliates (18.7) 1.5
Provision for deferred income taxes 8.5 3.4
Change in assets and liabilities:
Accounts receivable (36.6) (41.7)
Inventories (1.4) (4.3)
Accounts payable (7.8) 1.6
Accrued expenses and other (13.3) (5.5)
------ ------
Net cash used by operating activities (46.0) (19.3)
INVESTING ACTIVITIES
Purchases of property (6.3) (10.2)
Investment in and advances to equity affiliates 10.0 3.4
------ ------
NET CASH USED BY OPERATING AND INVESTING ACTIVITIES (42.3) (26.1)
FINANCING ACTIVITIES
Increase in short-term debt 34.1 26.2
Repayment of long-term debt -- (2.0)
Dividends (3.1) (2.9)
Proceeds from issuance of common stock 0.5 0.8
------ ------
Net cash provided by financing activities 31.5 22.1
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- 0.1
------ ------
DECREASE IN CASH AND CASH EQUIVALENTS (10.8) (3.9)
CASH AND CASH EQUIVALENTS AT JANUARY 1 51.2 14.4
------ ------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 40.4 $ 10.5
====== ======
</TABLE>
See Accompanying Notes to the Unaudited
Condensed Consolidated Financial Statements
3
<PAGE> 5
<TABLE>
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in Millions, Shares in Thousands)
<CAPTION>
COMMON COMMON ACCUMULATED
SHARES ADDITIONAL STOCK OTHER NON-
COMMON HELD IN COMMON PAID-IN RETAINED HELD IN OWNER EQUITY
SHARES TREASURY TOTAL STOCK CAPITAL EARNINGS TREASURY CHANGES
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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) 2.1 (2.8) 4.8 0.1
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)
=======================================================================================
BALANCE JANUARY 1, 2000 27,974 4,245 $334.7 $2.8 $297.3 $168.3 $(104.5) $(29.2)
Non-owner equity changes:
Net income 13.8 13.8
Other non-owner equity changes:
Translation adjustment (0.6) (0.6)
------
Total non-owner equity changes 13.2
Stock based compensation and exercise
of options -- (119) 1.0 (2.2) 3.1 0.1
Cash dividends (3.1) (3.1)
---------------------------------------------------------------------------------------
BALANCE MARCH 31, 2000 27,974 4,126 $345.8 $2.8 $295.1 $179.0 $(101.4) $(29.7)
=======================================================================================
</TABLE>
See Accompanying Notes to the Unaudited
Condensed Consolidated Financial Statements
4
<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, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. 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, 1999.
On April 30, 1999, the Company completed transactions with Occidental Chemical
Corporation (OxyChem) which included the formation of Oxy Vinyls, LP
(OxyVinyls), a limited partnership in which Geon has 24% ownership, the
formation of a small powder compounding partnership which is 90% owned by Geon
and the acquisition by Geon of OxyChem's compounding and film operations.
Substantially all of Geon's Resin and Intermediates segment's (see description
of segments in the following paragraph) operating assets and liabilities were
contributed to OxyVinyls in this transaction. In addition, the Company completed
the acquisitions of O'Sullivan Corporation (O'Sullivan), Acrol Holdings Limited
(Acrol) and Dennis Chemical Company, Inc. (Dennis Chemical) in 1999. These
transactions, which are described in detail in the Company's 1999 Annual Report
on Form 10-K, impact the comparability of financial statements.
Geon's operations are primarily located in the United States and Canada in two
business segments. The "Performance Polymers and Services" (PP&S) segment
includes compounds, including three 50% owned compound joint ventures, a 90%
owned powder compounding joint venture, specialty resins, formulators,
engineered films, analytical testing services performed by Polymer Diagnostics
Inc., and Decillion, a 40% owned joint venture with Owens Corning, Inc.
Prior to the formation of OxyVinyls, the "Resin and Intermediates" (R&I) segment
included the consolidated results of the Company's suspension and mass resin and
vinyl chloride monomer (VCM) operations, substantially all of which were
contributed to OxyVinyls on April 30, 1999. After April 30, 1999, the R&I
segment also includes Geon's 24% interest in OxyVinyls, accounted for under the
equity method of accounting. Also included in the R&I segment are 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 and
compound operation. See Note G for further information on the Company's two
business segments.
5
<PAGE> 7
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 damages or other remedies. 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 $43 million at March 31, 2000, 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 $15 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 N to the Consolidated Financial
Statements included in the Company's 1999 Annual Report on Form 10K.
NOTE C - INVENTORIES
- --------------------
Components of inventories are as follows:
<TABLE>
<CAPTION>
March 31,
(Dollars in millions) 2000 December 31, 1999
--------- -----------------
<S> <C> <C>
Finished products and in-process inventories $100.3 $ 96.3
Raw materials and supplies 93.3 92.0
------ ------
193.3 188.3
LIFO Reserve (24.1) (20.1)
------ ------
$169.5 $168.2
====== ======
</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 Sunbelt chlor-alkali joint venture totaled $1.5
million, net of an income tax benefit, and were written off as a cumulative
effect of a change in accounting on January 1, 1999.
6
<PAGE> 8
NOTE E - INVESTMENT IN EQUITY AFFILIATE
- ---------------------------------------
The following table presents summarized balance sheet information of OxyVinyls
as of March 31, 2000 and December 31, 1999 and summarized results of operations
for the first quarter of 2000 (there were no operations in the first quarter of
1999). The Company owns 24% of OxyVinyls and recognizes 24% of its operating
results in earnings under the equity method of accounting.
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in millions) 2000 1999
--------- ------------
<S> <C> <C>
Current assets $ 403.3 $ 367.7
Noncurrent assets 984.4 1,021.1
-------- --------
Total assets 1,387.7 1,388.8
-------- --------
Current liabilities 207.7 272.0
Noncurrent liabilities 120.5 102.5
-------- --------
Total liabilities 328.2 374.5
-------- --------
Partnership capital $1,059.5 $1,014.3
======== ========
<CAPTION>
Three months
ended March
31, 2000
------------
<S> <C>
Net Sales $ 493.7
Operating Income 81.4
Partnership income reported by OxyVinyls 79.4
Geon's ownership of OxyVinyls X 24%
--------
Geon's share of OxyVinyls' earnings 19.1
Amortization of the difference between Geon's investment
and its underlying share of OxyVinyls' equity 0.1
--------
Earnings of equity affiliate recorded by Geon $ 19.2
========
</TABLE>
NOTE F - EMPLOYEE SEPARATION AND PLANT PHASE-OUT
- ------------------------------------------------
As more fully discussed in the Company's 1999 Annual Report to Stockholders,
during 1999, the Company recorded net employee separation and plant phase-out
charges totaling $0.5 million plus $1.2 million of additional depreciation
expense related to the consolidation of its compounding operations, which began
in the fourth quarter of 1998. The plan included the closure of two
manufacturing facilities and the partial closing of manufacturing lines at other
plants. The consolidation resulted in the write-off of software, machinery and
equipment; separation costs associated with the elimination of 201 positions;
and costs associated with demolition and lease termination. As of December 31,
1999, all 201 positions had been eliminated and all manufacturing lines and
facilities had been closed. During the first quarter of 2000, the Company paid
approximately $0.8 million related of site demolition costs and $0.8 million of
employee separation costs. At March 31, 2000, the Company has remaining accruals
related to the compound restructuring totaling $1.1 million which are expected
to be paid for employee separation and site demolition costs by the end of 2000.
7
<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. The accounting policies of each business segment are consistent with
those described in the "Summary of Significant Accounting Policies."
Inter-segment sales are accounted for at prices that generally approximate those
for similar transactions with unaffiliated customers. The elimination of
inter-segment sales revenue is for sales from the R&I segment to the PP&S
segment prior to the formation of OxyVinyls and is included in the "Other"
segment. Certain other corporate expenses and eliminations are also included in
the "Other" segment. Business segment assets consist primarily of customer
receivables, inventories, net property and goodwill. Cash, sales of accounts
receivable and certain other assets not identified with a specific segment are
included in the "Other" segment.
<TABLE>
<CAPTION>
(Dollars in millions) TOTAL PP&S R&I OTHER
-------- ------ ------ ------
<S> <C> <C> <C> <C>
QUARTER ENDED MARCH 31, 2000:
Net Sales $ 345.5 $345.5 $ -- $ --
Operating income (loss) 29.7 17.2 16.5 (4.0)
Depreciation and amortization 9.5 9.5 -- --
-------- ------ ------ ------
Operating income before depreciation and amortization $ 39.2 $ 26.7 $ 16.5 $ (4.0)
======== ====== ====== ======
Total assets $1,196.9 $930.2 $269.7 $ (3.0)
Capital expenditures 6.3 6.3 -- --
<CAPTION>
(Dollars 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 (excluding $0.6 million related to
compound 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 --
</TABLE>
8
<PAGE> 10
NOTE H - WEIGHTED-AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE:
<TABLE>
<CAPTION>
Three months ended
March 31,
(in millions) 2000 1999
---- ----
<S> <C> <C>
Weighted-average shares - Basic:
Weighted-average shares outstanding 23.9 23.5
Less unearned portion of restricted stock
awards included in outstanding shares (.4) (.4)
---- ----
23.5 23.1
---- ----
Weighted-average shares - Diluted:
Weighted-average shares outstanding 23.9 23.5
Plus dilutive impact of stock options and
stock awards .3 .5
---- ----
24.2 24.0
==== ====
</TABLE>
NOTE I - SUBSEQUENT EVENTS:
- --------------------------
On May 7, 2000, The Geon Company and M.A. Hanna Company executed an agreement
and Plan of Consolidation under which both Companies will consolidate into a new
Ohio Corporation. M. A. Hanna is a leading international specialty polymers
company with 1999 revenues of over $2.3 billion and business segments in rubber
processing, plastics processing and distribution. The consolidation will take
place in the form of a cashless stock swap. Each outstanding share of Geon stock
will be converted into two shares of the new corporation. Consummation of the
transaction is subject to approval by the shareholders of both companies and
regulatory approvals and is expected to be consummated in the third quarter of
2000.
On April 20, 2000, the Company announced that it plans to close the Geon
engineered films plant in Newton Upper Falls, Massachusetts, by mid-2001. The
plant, which employs 80 people, will transition its production to Geon's four
other engineered films facilities prior to closing. The facility was once part
of O'Sullivan Corporation, which Geon purchased in July 1999. Geon expects to
incur a pre-tax charge in the second quarter of $3.4 million, as well as $0.5
million associated with accelerated depreciation through mid-2001. The Company
will record costs of approximately $1.6 million, at closing and upon the
property's sale in 2001, associated principally with site preparation for
disposal. Additional expenses are likely to be incurred as products are
transitioned to other engineered films facilities. The Company anticipates that
proceeds from the sale of the property will exceed all costs associated with
closing the facility.
On April 27, 2000, the Company announced that it had reached an agreement in
principle to purchase a 50 percent interest in the polyvinyl chloride (PVC)
compound business of Thai Plastic & Chemicals Company Limited (TPC). The joint
venture, TPC-Geon Company, Limited, will manufacture PVC compounds, including
TPC and Geon proprietary products, and offer a broad range of products for
applications such as wire and cable jacketing, pipe fittings, bottles, cap liner
and integrated circuit tubes. The transaction has been approved by both boards
of directors and, subject to negotiation of documents, is projected to close in
early July 2000. The joint venture will manufacture and market PVC compounds to
customers in the ASEAN Pact
9
<PAGE> 11
countries of Southeast Asia, the People's Republic of China, Hong Kong, Macoa
and Taiwan. TCP-Geon is projected to initially have annual sales of
approximately $30 million.
As disclosed in the Company's 2000 Proxy Statement, and approved by shareholders
at the April 19, 2000 Annual Shareholders Meeting, non-employee members of the
Company's Board of Directors will no longer be provided with pension benefits.
In the second quarter of 2000, non-employee directors will receive a one-time
payment, and the Company will incur an after-tax charge of approximately
$0.5 million related to the termination of the Non-employee Directors Pension
Plan.
On May 5, 2000, The Company established The Geon Company Share Ownership Trust
(Trust). The Trust will serve as a vehicle to minimize, over time, future share
dilution by issuing shares associated with the exercise of stock options and by
funding other equity-related employee programs. The Trust was funded by an
initial contribution of 500,000 treasury shares. It is anticipated that future
contributions will result from share repurchases.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net income from operations in the first quarter of 2000 totaled $13.8 million,
14% higher than the same period in 1999 on a comparable basis. This earnings
improvement was due to the Company's strategy of expanding its Performance
Polymers and Services (PP&S) business through organic sales growth and strategic
acquisitions as well as an improvement in polyvinyl chloride (PVC) resin
margins.
The Company's strategy of becoming a much larger Performance Polymers and
Services Company resulted in a significant change in the profile of its business
operations in the first quarter of 2000 compared to the first quarter of 1999 as
discussed below.
With the April 30, 1999, formation of OxyVinyls, the Company's exposure to the
PVC and chlor-alkali industries changed significantly. Geon now owns 24% of
OxyVinyls which is a 4.5 billion pound PVC producer, compared with its previous
ownership of 100% of 2.4 billion pounds of PVC capacity. This effectively
reduced the Company's exposure to PVC capacity to approximately half what it was
prior to OxyVinyls formation. The Company's exposure to fluctuations in caustic
soda have increased with the OxyVinyls formation from approximately 150,000 tons
to 380,000 tons annually. OxyVinyls is accounted for under the equity method,
and is included in the R&I segment. Previously, the Company's PVC and VCM
operations were consolidated.
Also, as discussed in Note A, during the third quarter of 1999, the Company
acquired O'Sullivan, a manufacturer of engineered films, and two formulators,
Acrol and Dennis Chemical. The post-acquisition results of these acquired
companies are included in the Company's consolidated results of operations.
RESULTS OF OPERATIONS:
Total Company
- -------------
Total sales for the first quarter of 2000 were $345.5 million, an increase of
$19.7 million from the same period last year. The change in sales consisted of
an increase in PP&S sales of $127.9 million. The increase in PP&S sales was
partially offset by the elimination of the R&I sales due to formation of
OxyVinyls.
First quarter operating income was $29.7 million in 2000, compared to 1999
operating income of $23.5 million before a $1.7 million special charge related
to the consolidation of compound operations. The R&I segment operating income
improved $17.6 million, partially offset by a $7.3 million decrease in PP&S
operating income. Higher PVC resin costs and selling prices with expanding PVC
resin margins have caused a shift in earnings between the Company's two
segments. Overall, Geon's operating income return on sales increased to 8.6% in
2000 versus 8.1% in the first quarter of 1999. OxyVinyls principally represents
backward integration of a key PP&S raw material (i.e., PVC resin).
Selling, general and administrative expenses increased $2.5 million, principally
the result of additional expenses of businesses acquired. Depreciation and
amortization expense declined from $15.0 million in 1999 to $9.5 million in 2000
as a result of the contribution of a substantial portion of the Company's
property, plant and equipment to OxyVinyls upon its formation. The additional
depreciation of assets of acquired businesses and amortization of goodwill
partially offset this impact. Interest expense increased $3.6 million over the
first quarter of 1999 to $7.0 million in 2000 as a result of an increase in
short-term borrowings to fund the purchase of 1999 acquisitions. The first
quarter effective income tax rate was 38.9% in 2000, compared with 38.7% in
1999.
The Other segment in the first quarter includes stranded corporate overhead
costs from the OxyVinyls transaction of approximately $2 million. These stranded
costs are expected to support and be absorbed by future acquisitions in 2000.
Net income increased to $13.8 million from $12.1 million (before special
charges). Special charges in the first quarter 1999 include the compound
restructuring charge of $1.7 million, pre-tax ($1.1 million employee separation
and plant phase-out plus $0.6 million of accelerated depreciation) and the
cumulative effect of a change in accounting for start-up costs of $1.5 million
after-tax.
11
<PAGE> 13
Performance Polymers & Services (PP&S)
- --------------------------------------
PP&S sales for the first quarter of 2000 were $345.5 million, an increase of
$127.9 million or 59% over 1999. Sales volumes increased 41% from first quarter
of 1999; approximately 33% of this growth is attributable to the acquisitions of
O'Sullivan (July 7, 1999), Acrol (July 7, 1999) and Dennis Chemical
(September 7, 1999). Organic sales growth of approximately 8% and a 1% average
selling price increase comprise the remaining increase. Organic growth in
compounds of 6% was driven by strong demand in window and pipe markets as well
as appliances and electrical devices with increased demand for custom molding
compounds. Formulator sales growth of 14% was driven by strong demand for
industrial plastisols, urethanes and automotive powders where sales volumes all
increased over 20% from a year ago. Organic growth in specialty resins of 8% was
driven by an increase in demand in formulations, general purpose, flooring and
automotive applications.
Operating income was $17.2 million versus $24.5 million, before special items,
in 1999, or a 30% decline. Raw material costs were approximately 23% higher in
the first quarter 2000 compared to 1999, totaling approximately $27 million,
primarily the result of the average market PVC resin selling price which has
increased by approximately 15.0 cents per pound. The increase in raw material
costs was partially offset by incremental operating income of acquisitions,
organic growth in shipments and higher average selling prices.
The compressed margins incurred by the PP&S businesses were more than offset by
Geon's investment in OxyVinyls which benefits from higher PVC resin selling
prices. When OxyVinyls is viewed as a strategic investment and upstream raw
material integration source to the PP&S business, with its profitability rolled
forward, the PP&S business would have had an operating income as a percentage of
sales of 10.5% in the first quarter of 2000. This return on sales was
essentially flat with the second half of 1999. The earnings stability benefit of
Geon's strategic raw material investment is being demonstrated.
As discussed in Note F, the PP&S segment recorded a charge of $1.7 million in
the first quarter of 1999 related to the compound consolidation ($0.6 million is
recorded as additional depreciation).
Resin and Intermediates (R&I)
- -----------------------------
The first quarter 2000 to 1999 comparison of operating results in the R&I
segment is impacted by the formation of OxyVinyls on April 30, 1999, and the
resulting changes in business structure, as previously discussed.
The R&I segment operating income for the first quarter of 2000 was $16.5
million, an improvement of $17.6 million over the same period in 1999. The
margin of PVC resin selling prices over ethylene and chlorine was approximately
6 cents per pound higher in the first quarter of 2000 versus the same period a
year ago which approximated the end of a cyclical trough in PVC resin operating
margins. The higher margins were the primary driver of the improved R&I results
in addition to approximately $4.8 million of cost reductions (Geon's share)
captured by OxyVinyls. The OxyVinyls synergies captured in the first quarter of
2000 approximated the $80 million per year run rate targeted at formation. In
addition, Sunbelt returned to profitability and had a $2.1 million improvement
in earnings (Geon's share), benefiting from an increase in chlorine selling
prices of approximately $100 per ton versus last year, partially offset by lower
caustic soda selling prices. An annual maintenance shutdown at Sunbelt (which
occurred in April last year) limited production and shipments in the first
quarter of 2000, and higher electricity costs in 2000 negatively impacted
Sunbelt's earnings.
CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operating and investing activities totaled $42.3 million in the
first quarter of 2000, compared with $26.1 in the first quarter of 1999. The use
of cash in operating activities increased by $26.7 million from the same period
last year, principally due to the non-cash earnings of equity affiliates of
$18.7 million in 2000, compared with a non-cash loss of $1.5 million in the
first quarter of 1999. Operating uses of cash include a seasonal increase in
operating working capital of $45.8 million for the first quarter of 2000, versus
an increase of $44.4 million in 1999.
12
<PAGE> 14
Investing activities include $10.0 million of cash distributions from equity
affiliates compared with $3.4 million of distributions in 1999. Distributions of
cash are primarily from OxyVinyls in 2000, and from Sunbelt in 1999. Capital
expenditures totaled $6.3 million in the first quarter of 2000, compared with
$10.2 million in 1999. For the year 2000, capital expenditures are expected to
total approximately $50 million.
Cash provided by financing activities in the first quarter 2000 and 1999
primarily reflects short-term borrowings used to fund the seasonal increase in
working capital. In addition, the Company paid dividends of $3.1 million in the
first quarter of 2000. Financing activities in 1999 also reflect the repayment
of $2.0 million of long-term debt prior to its maturity date and to facilitate
the formation of OxyVinyls.
At March 31, 2000, the Company has available short-term financing under existing
agreements of approximately $200 million. A $150 million revolving credit
facility expiring at the end of May 2000 is expected to be renewed. The
Company's outstanding short-term borrowings are primarily related to the
purchase price of acquisition in 1999 and Geon has been actively pursuing
refinancing of a portion of its short-term financing to long-term public debt.
Current market conditions in the public debt market have not been favorable;
therefore, the Company postponed its intended public debt offering. Management
will continue to monitor the market with the intention of issuing debt when the
debt market is more favorable. The Company has incurred costs totaling
approximately $1.5 million related to this intended debt offering. If the
Company decides to delay the issuance of debt indefinitely these costs will be
written off.
The Company believes it has sufficient funds to support dividends, debt service
requirements, and normal capital and operating expenditures under existing
credit facilities and other available permitted borrowings. The Company has
assurances for banks and other lenders that short-term facilities to support
operating and acquisition needs will be renewed or extended until long-term
financing can be obtained at more favorable terms.
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 2000
to approximate $3 million to $4 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 $43 million to cover potential future environmental remediation
expenditures, based on the best estimates prepared by its environmental
engineers and consultant to cover probable future environmental expenditures
related to previously contaminated sites. 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 by as much as $15 million. The Company's estimate of the liability
may be revised as new regulations, technologies or additional information
13
<PAGE> 15
is obtained. Further information related to the Company's environmental
liabilities is included in Note N to the Consolidated Financial Statements
included in the Company's 1999 Annual Report on Form 10-K.
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 that are intended to qualify for protection afforded "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by the use of forward-looking
terms, such as "may," "intends," "will," "expects," "anticipates," "estimates,"
or the negative thereof or other variations thereon or comparable terminology.
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) inability to achieve, or delays in achieving
savings related to business consolidation and restructuring programs;
(6) unanticipated production outages or material costs associated with scheduled
or unscheduled maintenance programs; (7) unanticipated delays in realizing,
or inability to realize, expected costs savings from acquisitions;
(8) unanticipated costs or difficulties related to completion of proposed
transactions or the operation of the joint venture entities; (9) lack of day to
day operating control, including procurement of raw material feedstock, of Oxy
Vinyls LP; (10) 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 (11) partial control over investment decisions and dividend
distribution policy of the Oxy Vinyls LP; (12) inability to renew revolving
credit facilities at market rates, resulting in proportionately higher interest
expense; (13) inability to successfully integrate M.A. Hanna and Geon; (14)
costs related to the proposed merger in excess of expectations; (15) failure of
Geon or M.A. Hanna stockholders to approve the proposed transaction; (16)
inability to obtain, or meet conditions imposed for governmental approvals for
the merger.
14
<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 1999 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:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 27 - Financial Data Schedule
(d) Reports on Form 8-K from January 1, 2000 through March 31,
2000: None
15
<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 15, 2000 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)
16
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS OF THE GEON COMPANY AND SUBSIDIAIRES AS OF MARCH 31,
2000 AND DECEMBER 31, 1999 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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