Item 1. BUSINESS.
General
We are a leading North American manufacturer and international marketer of two highly integrated product lines, chlorovinyls and aromatics. In our chlorovinyls business, we are:
•the third largest North American producer of vinyl chloride monomer, or VCM,
•the third largest North American producer of vinyl suspension resins and
•the second largest North American producer of vinyl compounds.
In our aromatics business, we are:
•one of the largest North American producers of cumene, and
•a leading North American producer and marketer of phenol.
Our manufacturing processes also include the production of caustic soda and acetone. The primary products we sell externally include vinyl resins, vinyl compounds and caustic soda in our chlorovinyls business and phenol and acetone in our aromatics business. These products are used globally in a wide variety of end-use applications, including construction and renovation, engineered plastics, pulp and paper production, chemical intermediates, pharmaceuticals and consumer products. We believe our vertical integration, world scale facilities, operating efficiencies, facility locations and the productivity of our employees provide us with a competitive cost position in our primary markets.
For selected financial information concerning our chlorovinyls and aromatics product lines and our domestic and international sales, see Note 20 to our consolidated financial statements included in Item 8.
Acquisitions, Discontinued Operations and Plant Shutdowns
On November 12, 1999, we completed the purchase of substantially all of the assets and working capital of the vinyls business of CONDEA Vista Company (now Sasol North America, Inc). Assets acquired in the purchase include:
•one VCM facility with annual capacity of 950 million pounds;
•50% ownership of PHH Monomers, L.L.C., a manufacturing joint venture that operates a VCM facility with capacity to produce 1.15 billion pounds of VCM annually, which entitles us to one-half of the production capacity, or 575 million pounds;
•two vinyl resin facilities with combined annual capacity of 1.5 billion pounds; and
•vinyl compound facilities with an annual combined capacity of 265 million pounds.
Additionally, we entered into a long-term supply contract with CONDEA Vista for the supply of ethylene and assumed a chlorine supply contract with PPG Industries, Inc., our joint venture partner in PHH Monomers, for the acquired VCM facilities.
On May 11, 1998, we acquired North American Plastics, Inc., a manufacturer of flexible PVC compounds with two manufacturing locations in Mississippi having a combined annual production capacity of 190 million pounds.
On August 31, 2000, we ceased manufacturing vinyl compounds at the Mansfield, Massachusetts facility leased from the CONDEA Vista Company and on October 12, 2001, we ceased manufacturing vinyl compounds at the Jeffersontown, Kentucky facility. Manufacturing of compounds was transferred to our other compound plants. A lease termination and release agreement pertaining to the Mansfield site was
executed between CONDEA Vista and Georgia Gulf Corporation on May 21, 2001. The cost associated with closing the facility and removing equipment was immaterial. The Jeffersontown property is currently for sale.
During 1998 the methanol market suffered from overcapacity and low-cost imports with significant increases in global supply in areas of the world with low-cost natural gas. As a result, several domestic methanol producers including Georgia Gulf, idled their methanol plants. We ceased operating our methanol plant in December 1998. During 1999, we met our contractual obligations to supply methanol to our customers by purchasing imported methanol. Although the shutdown of several methanol plants resulted in a supply contraction and an increase in spot prices during the first half of 1999, several new overseas methanol plants began production late in the year. This additional supply added further pressure to the sales price of methanol. As a result of these trends, in September 1999, we announced that we would exit the methanol business entirely at the end of 1999. As a result, we incurred a charge against earnings of $7.6 million, net of tax benefits, during the third quarter of 1999 to write-off certain methanol assets and to accrue losses related to our methanol buy and resale program through the end of 1999.
Products and Markets
The following table shows our total annual production capacities as of December 31, 2001 in each of our product lines:
Chlorovinyls
Vinyl Compounds. These formulations provide specific end-use properties that allow vinyl compounds to be processed directly into our customers' finished products. All of our production is sold to third parties. We produce flexible and rigid compounds used in the following products and process applications.
Flexible vinyl compounds. Our flexible vinyl compounds are used in wire and cable insulation and jacketing, automotive modular window encapsulation, custom strips and profiles, automotive trim and body side molding, and flexible tubing. In 2001, the largest end-uses of our products were automotive (25%) and telecom (20%).
Rigid vinyl compounds. Our rigid vinyl compounds are used in a wide range of applications and production processes. Our injection molding compounds are used in the production of computer housings and keyboards, electrical outlet boxes and pipe fittings. Our extrusion compounds are used in window and furniture profiles and sheets for household fixtures and decorative overlays. Our blow molding compounds are primarily used for both food-grade and general-purpose bottles used to package cosmetics, shampoos, charcoal lighter fluid, water and edible oils. We also supply chlorinated vinyl compounds to the extrusion and injection molding markets, mainly for hot water pipe and pipe
fittings. In 2001, the largest end-uses of our products were fittings (43%) and profiles and sheets (20%).
Vinyl Resins. Vinyl resins are among the most widely used plastics in the world today, and we supply numerous grades of vinyl resins to a broad number of end-use markets. During 2001, about 79% of our vinyl resin production was sold to customers who use our resins to formulate vinyl compounds which are then heated and shaped utilizing various extrusion and molding processes to create finished products. In 2001, the largest end-uses of our products were pipe and pipe fittings (29%), home siding and windows (21%), and wire and cable coatings (10%). We used about 21% of our production of vinyl resin internally during 2001 in the manufacture of our vinyl compounds.
VCM. During 2001, we used about 85% of our VCM production in the manufacture of our vinyl resins. VCM production not used internally is sold to other vinyl resin producers in domestic and international markets.
Chlor-alkali Products. Substantially all of the chlorine we produce is used internally in the production of VCM. As a co-product, caustic soda further diversifies our revenue base. We sell all of our caustic soda domestically and overseas to customers in numerous industries, with the pulp and paper and chemical industries constituting our largest markets. Our other markets for caustic soda include the alumina, soap and detergent, textile and water treatment industries.
Pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be disposed of," we assessed the recoverability of the remaining carrying value of the sodium chlorate plant when it became evident that it was technologically obsolete by industry standards and it could not currently comply with recently issued Louisiana environmental regulations. The estimated future undiscounted cash flows of the sodium chlorate plant did not justify the asset valuation that was recorded on our books. Pursuant to SFAS No. 121, a fair value analysis of the sodium chlorate plant indicated that it should be completely written off to reduce the carrying amount to its fair value. In addition to the impairment-related charges of $4.9 million, we accrued $0.5 million for post-closure related items. We intend to cease production of sodium chlorate in the third quarter of 2002.
Aromatics
Phenol. Our phenol is primarily sold to producers of phenolic resins and to manufacturers of engineered plastics. Phenolic resins are used extensively as adhesives for wood products such as plywood and chipped wood panels. Engineered plastics are used in compact discs, automobiles, household appliances, electronics and protective coating applications. We also sell phenol for use in insulation, electrical parts, oil additives and pharmaceuticals. In 2001, the largest end-uses of our products were phenolic resins (41%) and engineering plastics (30%).
Acetone. As a co-product of phenol, acetone further diversifies our revenue base. Acetone is primarily used as a key ingredient in acrylic resins and as an ingredient for surface coating resins for automotive and architectural markets. Acetone is also an intermediate for the production of engineered plastics and several major industrial solvents. Other uses range from solvents for automotive and industrial applications to pharmaceuticals and cosmetics.
Cumene. About 68% of our cumene was consumed internally during 2001 to produce phenol and acetone. Cumene production not used internally is sold to other phenol and acetone manufacturers.
Production, Raw Materials and Facilities
Our operations are vertically integrated as a result of our production of some of our key raw materials and intermediates used in the manufacture of our products. Our operational integration enhances our
control over production costs and capacity utilization rates, as compared to our non-integrated competitors.
In our chlorovinyls product line, we produce chlorine and its co-product caustic soda by electrolysis of salt brine. We produce VCM by reacting purchased ethylene with chlorine produced internally or purchased from third parties; our internal production of VCM exceeds our internal demand requirements. We produce vinyl resin by polymerization of our internally supplied VCM in a batch reactor process. We formulate our vinyl compounds by blending our vinyl resins with various additives such as plasticizers, impact modifiers, stabilizers and pigments, most of which are purchased. We also have the capacity to produce ethylene dichloride, an intermediate in the manufacture of VCM, for external sales. In our aromatics product line, we produce cumene utilizing benzene and propylene purchased from third parties, which we react using low cost zeolite catalyst technology. We produce phenol by reacting internally produced cumene under high temperatures and pressure. We produce acetone as a co-product in our production of phenol.
The important raw materials we purchase from third parties include chlorine, natural gas, ethylene, compound additives, benzene and propylene. The majority of our purchases of chlorine, ethylene, propylene, and benzene are made under long-term agreements, and we purchase natural gas both in the open market and under long-term contracts. We have not experienced a major disruption in our supplies of raw materials over the past five years, and we believe we have reliable sources of supply under normal market conditions. We cannot, however, predict the likelihood or impact of any future raw material shortages. Any shortages could have a material adverse impact on our results of operations. For instance, 2001 started with natural gas prices at all-time highs, and even though natural gas prices were lower by year end, total expense for natural gas for 2001 was significantly higher than 2000.
Plaquemine, Louisiana Facilities. Our operations at these facilities include the production of chlorine, caustic soda, sodium chlorate, VCM, vinyl resins, phenol and acetone. We produce chlorine and its co-product caustic soda at our chlor-alkali facility by electrolysis of salt brine. We have a long-term lease on a nearby salt dome with reserves in excess of twenty years, from which we supply our salt brine requirements. We use substantially all of our chlorine production in the manufacture of VCM at this facility and we sell substantially all of our caustic soda production externally. We also use sodium hypochlorite, a by-product from our chlor-alkali production process, to produce sodium chlorate for sale to third parties. Although, as indicated above, we intend to cease production of sodium chlorate in the third quarter of 2002. All of the ethylene requirements for our VCM production are supplied by pipeline. Most of our Plaquemine VCM production is consumed on-site in our vinyl resin production or shipped to our other vinyl resin facilities with the remainder sold to third parties. Our cumene requirements for the production of phenol and its co-product acetone are shipped from our Pasadena, Texas facility by dedicated barges.
Our 250-megawatt co-generation facility supplies all of the electricity and steam needs at our Plaquemine facilities, and it also provides us with the capability to generate excess electricity for sale to the local utility. We also own an on-site air separation unit operated by a third party that provides all of the facility's nitrogen and oxygen gas requirements.
Lake Charles, Louisiana Facilities. We produce VCM at our Lake Charles, Louisiana facility and, through our joint venture with PPG Industries have the right to 50% of the VCM production of PHH Monomers, which is located in close proximity to our Lake Charles VCM facility. The chlorine needs of our Lake Charles VCM facility and the PHH Monomers' facility are supplied by pipeline, under a long-term contract with PPG Industries, who is also our partner in PHH Monomers. Ethylene is supplied to both facilities by pipeline from the adjacent CONDEA Vista ethylene facility and by pipeline from other third parties. The majority of our ethylene requirements for our Lake Charles VCM facility are supplied under a take-or-pay contract which expires November 12, 2006, and PHH Monomers is supplied under a requirements-based contract. These chlorine and ethylene contracts are primarily market price-based.
VCM from these facilities supplies our Aberdeen, Mississippi and Oklahoma City, Oklahoma vinyl resin facilities. A portion of VCM produced at the Lake Charles facilities is sold in domestic and export markets.
Pasadena, Texas Facilities. At our Pasadena, Texas facilities we produce cumene, phenol, its co-product acetone and alpha-methylstyrene, a saleable by-product of our phenol production. We produce cumene utilizing purchased benzene and propylene that we react using low cost zeolite catalyst technology. Our cumene facility is integrated by pipeline with our phenol and acetone facility at Pasadena. We consume a portion of our cumene production at this facility in phenol and acetone production, with the remainder shipped to the Plaquemine phenol and acetone facility and sold to third parties. We purchase propylene and benzene at market prices from various suppliers connected by multiple transportation modes to our cumene facility. A portion of the benzene is supplied under contracts at market prices, and the propylene is provided from numerous refineries at market prices. Based on current industry capacity, we believe we have adequate access to benzene and propylene under normal conditions.
Aberdeen, Mississippi and Oklahoma City, Oklahoma Facilities. We produce vinyl resins at both our Aberdeen, Mississippi and Oklahoma facilities from VCM supplied by railcar from our various VCM facilities. In addition, the Aberdeen facility produces plasticizers, some of which are consumed in internal vinyl compound production with the remainder sold to third parties.
Vinyl Compound Facilities. We operate five compound facilities located in proximity of our vinyl resin operations. All of our vinyl compound facilities are supplied from our vinyl resin facilities by railcar, truck or pipeline. These operations consumed about 21% of our annual vinyl resin production during 2001. We purchase our compound additive needs from various sources at market prices.
Sales and Marketing
Our sales and marketing program is aimed at supporting our existing customers and expanding and diversifying our customer base. Our sales and marketing force consists of 33 employees. In addition, distributors are used to market products to our smaller customers. This sales force is organized by product line and region. We have a product development and technical service staff that primarily supports our vinyl resin and vinyl compound businesses. This staff works closely with customers to qualify existing Georgia Gulf products for use by our customers. They also work to develop new products for the customers' existing and new requirements. Our products are sold primarily to domestic industrial companies, and no single customer accounted for more than 10% of our sales of chlorovinyls or aromatics for the years ended December 31, 2001, 2000 and 1999. In addition to our domestic sales, we export some of our products, including our VCM and vinyl resins, vinyl compounds, caustic soda and aromatics products. Export sales accounted for about 13% of total sales for 2001, 11% for 2000, and 14% for 1999. The principal international markets we sell to are Canada, Mexico, Latin America, Europe and Asia.
Competition
We experience competition from numerous manufacturers in all of our product lines. Some of our competitors have substantially greater financial resources and are more highly diversified than we are. We compete on a variety of factors such as price, product quality, delivery and technical service. We believe that we are well-positioned to compete as a result of integrated product lines, the operational efficiency of our plants and the location of our facilities near major water and/or rail transportation terminals.
Environmental Regulation
Our operations are subject to increasingly stringent federal, state and local laws and regulations relating to environmental quality. These regulations are enforced principally by the United States Environmental Protection Agency and comparable state agencies. These regulations govern the management of
solid hazardous waste, emissions into the air and discharges into surface and underground waters, and the manufacture of chemical substances.
There are several serious environmental issues concerning the VCM facility we acquired from CONDEA Vista at Lake Charles, Louisiana. Substantial investigation of the groundwater at the site has been conducted, and groundwater contamination was first identified in 1981. Groundwater remediation through the installation of groundwater recovery wells began in 1984. The site currently contains about 90 monitoring wells and 18 recovery wells. A further investigation to determine the full extent of the contamination is currently being planned. It is possible that offsite groundwater recovery will be required, in addition to groundwater monitoring. Soil remediation could also be required.
Investigations are currently underway by federal environmental authorities concerning contamination of an estuary near the Lake Charles VCM facility we acquired known as the Calcasieu Estuary. It is likely that this estuary will be listed as a Superfund site and be the subject of a natural resource damage recovery claim. It is estimated that there are about 200 potentially responsible parties associated with the estuary contamination. CONDEA Vista is included among these parties with respect to its Lake Charles facilities, including the VCM facility we acquired. The estimated cost for investigation and remediation of the estuary is unknown and could be quite costly. Also, Superfund statutes may impose joint and several liability for the cost of investigations and remedial actions on any company that generated the waste, arranged for disposal of the waste, transported the waste to the disposal site, selected the disposal site, or presently or formerly owned, leased or operated the disposal site or a site otherwise contaminated by hazardous substances. Any or all of the responsible parties may be required to bear all of the costs of cleanup regardless of fault, legality of the original disposal or ownership of the disposal site. Currently, we discharge our wastewater to CONDEA Vista who has a permit to discharge treated wastewater into the estuary.
Additionally, offsite groundwater contamination was identified in 1990 in the Mossville subdivision located west of the VCM facility we acquired at Lake Charles. Over 80 lawsuits were filed by the Mossville residents in 1995 and 1996. The lawsuits alleged personal and property damages due to groundwater contamination. Most of the lawsuits were settled by the end of 1998, and the vinyls business of CONDEA Vista incurred a charge in 1998 of $42.1 million relating to these settlements. In addition, many of the residences in the Mossville subdivision have been purchased by CONDEA Vista.
CONDEA Vista has agreed to retain responsibility for substantially all environmental liabilities and remediation activity relating to the vinyls business we acquired from them, including the Lake Charles, Louisiana VCM facility. For all matters of environmental contamination that are currently known, we may make a claim for indemnification at any time; for environmental matters that are unknown, we must generally make claims for indemnification before November 12, 2009. Further, Georgia Gulf's agreement with CONDEA Vista provides that CONDEA Vista will be subject to the presumption that all later discovered on-site environmental contamination arose before closing, and is therefore CONDEA Vista's responsibility; this presumption may only be rebutted if CONDEA Vista can show that we caused the environmental contamination by a major, unaddressed release.
At the Lake Charles VCM facility, CONDEA Vista will continue to conduct the ongoing remediation at its expense until November 12, 2009. After November 12, 2009, we will be responsible for remediation costs up to $150,000 of expense per year, as well as costs in any year in excess of this annual amount up to an aggregate one-time amount of $2,250,000. We will be responsible for remediation costs at the other acquired facilities until the level of expense we incur meets the specified amount for each facility which in the aggregate equals $700,000. The indemnity given by CONDEA Vista also includes off-site contamination created before November 12, 2009, including CONDEA Vista's contribution to any claim based upon contamination of the Calcasieu Estuary.
The property owned by CONDEA Vista in Mansfield, Massachusetts, for which we negotiated an early lease termination, has been the subject of ongoing environmental investigations under an order with
the Massachusetts Department of Environmental Protection. Groundwater investigations continue at the Mansfield property to address identified on-site groundwater contamination and investigate the possible off-site migration of contaminated groundwater. It is also possible that the United States Environmental Protection Agency may list the property as a Superfund site. The environmental investigations and actions are associated with the past operations at the property and were not assumed in our lease of the property. In addition, CONDEA Vista has indemnified us for claims related to this environmental contamination beyond an aggregate threshold amount of $250,000, including coverage for potential joint and several liability under the environmental statutes. The lease termination calls for our payment of the unspent portion of the aggregate threshold amount. Upon removal of manufacturing equipment and termination of the lease, the site with buildings and infrastructure equipment reverted to CONDEA Vista.
As for employee and independent contractor exposure claims, CONDEA Vista is responsible for exposures before November 12, 2009, and we are responsible for exposures after November 12, 2009 on a pro rata basis determined by years of employment or service before and after November 12, 1999 by any claimant. There is, however, a presumption for claims brought before November 12, 2004 by current or former CONDEA Vista employees and contractors that, absent a showing of new acute exposure after November 12, 1999, all responsibility will be deemed to have arisen before November 12, 1999 and will be solely CONDEA Vista's.
Except as described above, we believe that we are in material compliance with all current environmental laws and regulations. We estimate that any expenses incurred in maintaining compliance with these requirements will not materially affect earnings or cause us to exceed our level of anticipated capital expenditures. However, there can be no assurance that regulatory requirements will not change, and it is not possible to accurately predict the aggregate cost of compliance resulting from any such changes.
Employees
As of December 31, 2001, we had 1,232 full-time employees. Approximately 164 of our employees are unionized under two collective bargaining agreements that expire in 2003 and 2005. We believe our relationships with our employees are good.
Risk Factors
The chemical industry is cyclical and volatile, which affects our profitability.
•Our industry experiences alternating periods of tight supply and overcapacity.
Our historical operating results reflect the cyclical and volatile nature of the chemical industry. Historically, periods of tight supply have resulted in increased prices and profit margins and have been followed by periods of substantial capacity addition, resulting in oversupply and declining prices and profit margins. As a result of changes in demand for our products, our earnings fluctuate significantly, not only from year to year but also from quarter to quarter. Capacity expansions or the announcement of these expansions have generally led to a decline in the pricing of our products in the affected product line. We cannot assure you that future growth in product demand will be sufficient to utilize any additional capacity.
•Raw materials costs and other external factors beyond our control can cause wide fluctuations in our margins.
The cost of our raw materials and other costs may not correlate with changes in the prices we receive for our products, either in the direction of the price change or in absolute magnitude. Raw materials costs represent a substantial part of our manufacturing costs. Most of the raw materials we use are commodities and the price of each can fluctuate widely for a variety of reasons, including changes in availability because of major capacity additions or significant facility operating problems. For instance, 2001 started with natural gas prices at all-time highs, and even though natural gas prices were lower by year end, total expense for natural gas for 2001 was significantly higher than 2000. Other external factors beyond our control can cause volatility in raw material prices, demand for our products, product prices, sales volumes and margins. These factors include general economic conditions, the level of business activity in the industries that use our products, competitors' actions, international events and circumstances, and governmental regulation in the United States and abroad. These factors can also magnify the impact of economic cycles on our business. A number of our products are highly dependent on markets that are particularly cyclical, such as the construction, paper and pulp, and automotive markets.
•The cyclicality and volatility of the chemical industry affects our capacity utilization and causes fluctuations in our results of operations.
The operating rates at our facilities will impact the comparison of period-to-period results. Different facilities may have differing operating rates from period to period depending on many factors, such as feedstock costs, transportation costs, and supply and demand for the product produced at the facility during that period. As a result, individual facilities may be operated below or above rated capacities in any period. We may idle a facility for an extended period of time because an oversupply of a certain product or a lack of demand for that product makes production uneconomical. The expenses of the shutdown and restart of facilities may adversely affect quarterly results when these events occur. In addition, a temporary shutdown may become permanent, resulting in a write-down or write-off of the related assets.
The chemical industry is highly competitive, with some of our competitors having greater financial resources than we have; competition may adversely affect our results of operations.
The chemical industry is highly competitive; we compete with many chemical companies, a substantial number of whom are larger and have greater financial resources than Georgia Gulf. Moreover, barriers to entry, other than capital availability, are low in most product segments of our business. Capacity additions or technological advances by existing or future competitors also create greater competition, particularly in pricing. We cannot assure you we will have access to the financing necessary to upgrade our facilities in response to technological advances or other competitive developments.
Extensive environmental, health and safety laws and regulations impact our operations and assets; compliance with these regulations could adversely affect our results of operations.
Our operations on and ownership of real property are subject to extensive environmental, health and safety regulation at both the national and local level. The nature of the chemical industry exposes Georgia Gulf to risks of liability under these laws and regulations due to the production, storage, transportation and sale of materials that can cause contamination or personal injury if released into the environment. Environmental laws may have a significant effect on the costs of transportation and storage of raw materials and finished products, as well as the costs of the storage and disposal of wastes. We may incur substantial costs, including fines, damages, criminal or civil sanctions, remediation costs, or experience interruptions in our operations for violations arising under these laws.
Also, Superfund statutes may impose joint and several liability for the cost of investigations and remedial actions on any company that generated the waste, arranged for disposal of the waste, transported the waste to the disposal site, selected the disposal site, or presently or formerly owned, leased or operated
the disposal site or a site otherwise contaminated by hazardous substances. Any or all of the responsible parties may be required to bear all of the costs of cleanup, regardless of fault, legality of the original disposal or ownership of the disposal site. A number of environmental liabilities have been associated with the facilities at Lake Charles, Louisiana and Mansfield, Massachusetts that we acquired or leased as part of the acquisition of the vinyls business of CONDEA Vista Company and which may be designated as Superfund sites as described in "Environmental Regulation" above. Any or all responsible parties, including us, may be required to bear all of the costs of cleanup regardless of fault, legality of the original disposal, or ownership of the disposal site. Although CONDEA Vista retained substantially all financial responsibility for environmental liabilities that relate to the facilities we acquired from them and which arose before the closing of that acquisition, we cannot assure you that CONDEA Vista will be able to satisfy its obligations in this regard, particularly in light of the long period of time in which environmental liabilities may arise under the environmental laws. If CONDEA Vista fails to do so, then we could be held responsible.
Our policy is to accrue costs relating to environmental matters when it is probable that these costs will be required and can be reasonably estimated. However, estimated costs for future environmental compliance and remediation may be too low or we may not be able to quantify the potential costs. We expect to continue to be subject to increasingly stringent environmental and health and safety laws and regulations. It is difficult to predict the future interpretation and development of these laws and regulations or their impact on our future earnings and operations. We anticipate that compliance will continue to require increased capital expenditures and operating costs. Any increase in these costs could adversely affect our financial performance.
Hazards associated with chemical manufacturing may occur, which would adversely affect our results of operations.
The usual hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes may occur in Georgia Gulf's operations. These hazards could lead to an interruption or suspension of operations and have an adverse effect on the productivity and profitability of a particular manufacturing facility or on Georgia Gulf as a whole. These hazards include:
•pipeline and storage tank leaks and ruptures;
•explosions and fires;
•terrorist acts;
•inclement weather and natural disasters;
•mechanical failure;
•unscheduled downtime;
•labor difficulties;
•transportation interruptions;
•remediation complications; and
•chemical spills and other discharges or releases of toxic or hazardous substances or gases.
These hazards may cause personal injury and loss of life, severe damage to or destruction of property and equipment, and environmental damage; any of these could lead to claims under the environmental laws. In addition, individuals could seek damages for alleged personal injury or property damage due to exposure to chemicals at our facilities or to chemicals otherwise owned or controlled by Georgia Gulf. Furthermore, Georgia Gulf is also subject to present and future claims with respect to workplace exposure, workers' compensation and other matters. Although we maintain property, business interruption and
casualty insurance of the types and in the amounts that we believe are customary for the industry, we are not fully insured against all potential hazards incident to our business.
We rely heavily on third party transportation, which subjects us to risks that we cannot control; these risks may adversely affect our operations.
We rely heavily on railroads and shipping companies to transport raw materials to our manufacturing facilities and to ship finished product to our customers. Rail and shipping operations are subject to various hazards, including extreme weather conditions, work stoppages and operating hazards. If we are delayed or unable to ship finished product or unable to obtain raw materials as a result of the railroads' or shipping companies' failure to operate properly, or if there were significant changes in the cost of these services, we may not be able to arrange efficient alternatives and timely means to obtain raw materials or ship our goods, which could result in an adverse effect on our revenues and costs of operations.
We have a substantial amount of indebtedness, which could limit our business and operations.
At December 31, 2001, we had approximately $624.1 million of indebtedness outstanding. In addition, we had approximately $95.0 million of additional credit available under our revolving credit facility. As a result, Georgia Gulf is highly leveraged. This high level of indebtedness could have important consequences to our operations, including:
•we may have difficulty borrowing money in the future for working capital, capital expenditures, acquisitions or other purposes;
•we will need to use a large portion of our available cash for debt service, which will reduce the amount of money available to finance our operations and other business activities;
•some of our debt, including the debt under our senior credit facility, has variable rates of interest, which exposes us to the risk of increased interest rates; and
•we may have a much higher level of debt than some of our competitors, which may put us at a competitive disadvantage; make us more vulnerable to economic downturns and adverse developments in our business; and reduce our flexibility in responding to changing business and economic conditions.
We expect to obtain the money to pay our expenses and to pay principal and interest on our debt from our cash flow and from additional loans under our senior credit facility. Our ability to meet these requirements will depend on our future financial performance. We cannot be sure that our cash flow will be sufficient to allow us to pay principal and interest on our debt as well as meet our other obligations. If we do not have enough money to do so, we may be required to refinance all or part of our debt, sell assets or borrow more money. We cannot assure you that we will be able to do so on commercially reasonable terms, if at all. In addition, the terms of our existing or future debt agreements, including our senior credit facility and the indenture related to our 103/8% senior subordinated notes, may restrict us from pursuing any of these alternatives.
We may encounter difficulties in integrating the assets of businesses we acquire, which may adversely affect our results of operations.
We cannot be sure that we will be able to successfully integrate any acquisitions into our operations without substantial costs, delays or other problems. The integration of any business we acquire may be disruptive to our business and may result in a significant diversion of management attention and operational resources. In addition, we may suffer a loss of key employees, customers or suppliers, loss of revenues, increases in costs or other difficulties.
Our participation in joint ventures exposes us to risks of shared control.
As part of the vinyls business we acquired from CONDEA Vista Company, we purchased a 50% interest in a manufacturing joint venture, the remainder of which is controlled by PPG Industries, Inc., which also supplies chlorine to the facility operated by the joint venture. We may enter into additional joint ventures in the future. The nature of a joint venture requires us to share control with unaffiliated third parties. If our joint venture partners do not fulfill their obligations, the affected joint venture may not be able to operate according to its business plan. In that case, our operations may be adversely affected or we may be required to increase our level of commitment to the joint venture. Also, differences in views among joint venture participants may result in delayed decisions or failures to agree on major issues. Any differences in our views or problems with respect to the operations of our joint ventures could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We rely on outside suppliers for specified feedstocks and services.
In connection with our acquisition of the vinyls business of CONDEA Vista Company, we entered into agreements with CONDEA Vista to provide specified feedstocks for the Lake Charles facility. Moreover, this facility is dependent upon CONDEA Vista's infrastructure for services such as waste water and ground water treatment, site remediation, fire water supply and rail car management. Any failure of CONDEA Vista to perform those agreements could adversely affect the operation of the affected facilities and our results of operations. The agreements relating to these feedstocks and services had initial terms of one to ten years. Although most of these agreements provide for automatic renewal, they may be terminated after specified notice periods. If we were required to obtain an alternate source for these feedstocks or services, we may not be able to obtain pricing on as favorable terms. Additionally, we may be forced to pay additional transportation costs or to invest in capital projects for pipelines or alternate facilities to accommodate railcar or other delivery or to replace other services.
We also obtain a significant portion of our other raw materials from a few key suppliers. If any of these suppliers is unable to meet its obligations under present supply agreements, we may be forced to pay higher prices to obtain the necessary raw materials. Any interruption of supply or any price increase of raw materials could have an adverse effect on our business and results of operations.
Sales made in international markets expose us to risks that may adversely affect our operations or financial condition.
During 2001, 13% of our revenues were generated in international markets. Substantially all of our international sales are made in U.S. dollars and, as a result, any increase in the value of the U.S. dollar relative to foreign currencies will increase the effective price of our products in international markets. Our international sales are also subject to other risks, including differing and changing legal and regulatory requirements in local jurisdictions; export duties and import quotas; domestic and foreign customs and tariffs or other trade barriers; potentially adverse tax consequences, including withholding taxes or taxes on other remittances; and foreign exchange restrictions. We cannot assure you that these factors will not have an adverse effect on our financial condition or results of operations.
Our senior credit facility and the indenture for our 103/8% senior subordinated notes impose significant operating and financial restrictions, which may prevent us from capitalizing on business opportunities and taking some actions. For example, in 2001 because we could not meet the debt incurrence test in the indenture related to our senior subordinated notes, we were forced to terminate our asset securitization program resulting in increased interest costs and less liquidity.
Our senior credit facility and the indenture for our 103/8% senior subordinated notes impose significant operating and financial restrictions on us. These restrictions will limit our ability to:
•incur additional indebtedness and liens;
•make capital expenditures;
•make investments and sell assets, including the stock of subsidiaries;
•make payments of dividends and other distributions;
•purchase Georgia Gulf stock;
•use the proceeds of the sale of specified assets;
•engage in business activities unrelated to our current business;
•enter into transactions with affiliates; or
•consolidate, merge or sell all or substantially all of our assets.
In addition, our senior credit facility also requires us to maintain specified financial ratios. We cannot assure you that these covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities. A breach of any of these covenants could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness. In addition, any acceleration of indebtedness under our senior credit facility will constitute a default under some of our other indebtedness.
Forward-Looking Statements
This Form 10-K and other communications to stockholders may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, our outlook for future periods, supply and demand, pricing trends and market forces within the chemical industry, cost reduction strategies and their results, planned capital expenditures, long-term objectives of management and other statements of expectations concerning matters that are not historical facts.
Predictions of future results contain a measure of uncertainty. Actual results could differ materially due to various factors. Factors that could change forward-looking statements are, among others, those contained in the "Risk Factors" section above as well as changes in the general economy, changes in demand for our products or increases in overall industry capacity that could affect production volumes and/or pricing, changes and/or cyclicality in the industries to which our products are sold, availability and pricing of raw materials, technological changes affecting production, difficulty in plant operations and product transportation, governmental and environmental regulations and other unforeseen circumstances. A number of these factors are discussed in this Form 10-K and in our other periodic filings with the Securities and Exchange Commission.
Item 2.
Item 2. PROPERTIES.
Our asset base was established from 1971 to the present with the construction of the Plaquemine, Louisiana, complex, the construction of the Pasadena, Texas cumene plant, and the purchase of the vinyl compound plants. There was also the purchase of the Bound Brook, New Jersey, phenol/acetone facility which was subsequently relocated to Pasadena, Texas, and modernized in 1990. In 1997, we completed construction of cogeneration and air separation plants in Plaquemine, Louisiana, in order to supply all of our requirements for electricity, oxygen and nitrogen at that location. The cogeneration plant was leased under an operating lease agreement until we purchased it in 1999. In 1998, we purchased North American Plastics, Inc., a manufacturer of flexible vinyl compounds with production facilities in Aberdeen and Madison, Mississippi. In 1999, we purchased substantially all of the assets of the vinyls business of CONDEA Vista Company, an integrated producer of VCM, vinyl resins and vinyl compounds with production facilities in Aberdeen, Mississippi, Lake Charles, Louisiana, Jeffersontown, Kentucky, Mansfield, Massachusetts, and Oklahoma City, Oklahoma. We have since ceased production in Mansfield, Massachusetts and Jeffersontown, Kentucky. A lease termination and release agreement pertaining to the Mansfield site was executed between CONDEA Vista and Georgia Gulf Corporation on May 21, 2001. The Jeffersontown property is currently for sale.
We continue to explore ways to expand both our plant capacities and product lines. We believe current and additional planned capacity will adequately meet anticipated demand requirements. Average capacity utilization of our production facilities was 75.5% in 2001.
The following table sets forth the location of each manufacturing facility we own, the products manufactured at each facility and the approximate processing capability of each, assuming normal plant operations, as of December 31, 2001:
Location
Products
Annual Capacity
Segment
Aberdeen, MS
Vinyl Resins
1.0 billion pounds
Chlorovinyls
Vinyl Compounds
(two locations)
225 million pounds
Chlorovinyls
Plasticizers
20 million pounds
Chlorovinyls
Gallman, MS
Vinyl Compounds
330 million pounds
Chlorovinyls
Lake Charles, LA
(two locations)
VCM
1.5 billion pounds(1)
Chlorovinyls
Madison, MS
Vinyl Compounds
245 million pounds
Chlorovinyls
Oklahoma City
Vinyl Resins
500 million pounds
Chlorovinyls
Pasadena, TX
Cumene
1.5 billion pounds
Aromatics
Phenol
160 million pounds
Aromatics
Acetone
100 million pounds
Aromatics
Plaquemine, LA
Chlorine
450 thousand tons
Chlorovinyls
Caustic Soda
500 thousand tons
Chlorovinyls
Sodium Chlorate
27 thousand tons
Chlorovinyls
VCM
1.6 billion pounds
Chlorovinyls
Vinyl Resins
1.2 billion pounds
Chlorovinyls
Phenol
500 million pounds
Aromatics
Acetone
308 million pounds
Aromatics
Tiptonville,TN
Vinyl Compounds
100 million pounds
Chlorovinyls
(1)Reflects 100 percent of the production at our owned facility in Lake Charles and our 50 percent share of PHH Monomers' 1,150 million pounds of total VCM capacity. Our manufacturing facilities are located near major water and/or rail transportation terminals, facilitating efficient delivery of raw materials and prompt shipment of finished products. In addition, we
have a fleet of about 3,481 railcars of which about 618 are owned and the remainder leased pursuant to operating leases with varying terms through the year 2014. The total lease expense for these railcars and other transportation equipment was approximately $17,677,000 for 2001.
We lease office space for our principal executive offices in Atlanta, Georgia, and for information services in Baton Rouge, Louisiana. Space is leased for sales and marketing offices in Houston, Texas, and Lawrenceville, New Jersey. Space for numerous storage terminals is leased throughout the United States, and in the Netherlands, Canada and Mexico.
Item 3.
Item 3. LEGAL PROCEEDINGS.
Georgia Gulf is a party to numerous individual and several class-action lawsuits filed against the company, among other parties, arising out of an incident that occurred in September 1996 in which workers were exposed to a chemical substance on our premises in Plaquemine, Louisiana. The substance was later identified to be a form of mustard agent, which occurred as a result of an unforeseen chemical reaction. All of the actions claim one or more forms of compensable damages, including past and future wages, past and future physical and emotional pain and suffering. The lawsuits were originally filed in Louisiana state court in Iberville Parish.
In September 1998, the state court trial judge granted the plaintiffs' motion permitting the filing of amended petitions that added the additional allegations that we had engaged in intentional conduct against the plaintiffs. Amended petitions making such allegations were filed. Our two insurers notified us that they were reserving their rights to deny coverage to the extent liability could be established due to such intentional conduct in accordance with their insurance policies. We disputed the insurers' reservation of rights. In December 1998, as required by the terms of the insurance policies, each insurer demanded arbitration of the issue of the insurers' duties relating to the intentional conduct allegations.
As a result of the arbitrations relating to the insurance issue, as permitted by federal statute, the insurers removed the cases to United States District Court in December 1998. The plaintiffs' motion to remand was denied in March 1999.
Following removal of these actions and unsuccessful attempts by plaintiffs to remand the cases, we were able to settle the claims of all but three worker plaintiffs (and their collaterals) who had filed suit prior to removal. These settlements included the vast majority of those claimants believed to be the most seriously injured. The settled cases are in the final processes of being dismissed with prejudice. Negotiations regarding the remaining claims of the three worker plaintiffs are ongoing.
Following these settlements, we were sued by approximately 400 additional plaintiff workers (and their collaterals) who claim that they were injured as a result of the incident. After negotiation, including a mediation, we reached an agreement for the settlement of these additional claims. This settlement, which is on a class basis, will resolve the claims of all workers who claim to have been exposed and injured as a result of the incident other than those workers who opt out of the class settlement. We are aware of two worker plaintiffs and one collateral who have filed suit in state court who have opted not to participate in the class settlement, as well as the three worker plaintiffs whose claims are pending in federal court (see discussion above).
We have also been notified that we may be added as a party to a currently pending suit in federal court brought by our present and former employees for injuries allegedly stemming from the incident. We believe that we possess a number of valid legal defenses to such claims, including worker's compensation immunity and statutes of limitations defenses.
Based on the present status of the proceedings, we believe the liability ultimately imposed on us will not have a material effect on our financial position or on our results of operations.
On July 31, 2000, Georgia Gulf Lake Charles, LLC, received a Complaint, Compliance Order and Notice of Opportunity for a Hearing from the United States Environmental Protection Agency, Region 6 ("EPA"), which arose from an inspection conducted by the EPA at the Lake Charles facility on December 6-8, 1999. The EPA is seeking to assess a fine of $701,605 and to require certain corrective actions to be taken as a result of various alleged violations of the United States Resource Conservation and Recovery Act, including failure to make adequate hazardous waste determinations, failure to adequately characterize wastes before disposal, and failure to obtain permits for operations of alleged hazardous waste facilities.
In July 2001, the Administrative Law Judge assigned to the case consolidated the case with a case the EPA had asserted against CONDEA Vista (now Sasol North America Inc.) involving common issues of law and fact. A case management order has been issued and the EPA has filed its prehearing exchange. Procedural motions relating to the prehearing exchange are pending. We believe the EPA's allegations are without merit. In addition to the administrative actions, we are participating in ongoing settlement discussions with the EPA. Under the terms of the asset purchase agreement by which we acquired the Lake Charles VCM plant from CONDEA Vista, we have notified CONDEA Vista of our claim that these potential penalties are properly the responsibility of CONDEA Vista, and we have requested indemnity from CONDEA Vista. We have not received a response to this request.
In addition, we are subject to other claims and legal actions that may arise in the ordinary course of business. We believe that the ultimate liability, if any, with respect to these other claims and legal actions will not have a material effect on our financial position or on our results of operations.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth quarter of 2001.
PART II
Item 5.
Item 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Georgia Gulf Corporation's common stock is listed on the New York Stock Exchange under the symbol "GGC." At March 27, 2002, there were 1,160 stockholders of record. The following table sets forth the New York Stock Exchange high, low and closing stock prices and dividend payments for Georgia Gulf's common stock for the periods indicated.
We intend, from time to time, to pay cash dividends on our common stock as our board of directors deems appropriate. Our ability to pay dividends may be limited by covenants in our senior credit facility (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources").
Item 6.
Item 6. SELECTED FINANCIAL DATA
Five-Year Selected Financial Data
In Thousands, Except Per Share Data, Ratios & Employees
*Our results include the impact of acquisitions and discontinued operation as discussed in notes 3 and 4 of the notes to the consolidated financial statements. (1)Shipping and handling costs were reclassified (beginning in 2000) by increasing cost of sales and net sales. Prior years have been reclassified to conform to the current presentation. (2)See asset write-off discussed in note 8 of the notes to the consolidated financial statements. (3)Provision (benefit) for income taxes for 2001 includes the effect of the favorable settlement of tax audits. (See note 15 of the notes to the consolidated financial statements.) (4)Prepaid pension benefit was reclassified in 2001 by increasing other assets and other accrued liabilities. Prior years have been reclassified to conform to the current presentation. (5)Does not include asset write-off of $4.9 million. (See note 8 of the notes to the consolidated financial statements). (6)EBITDA is commonly used by investors to measure a company's ability to service its indebtedness. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as a measure of performance or to cash flow as a measure of liquidity. For 2001, the asset write-off has been included as depreciation expense for the computation of EBITDA. For 1998, the loss on the interest rate hedge agreement has been included as interest expense for the computation of EBITDA and ratio of operating income to interest expense. For 1997, the pretax gain on the sale of Great River Oil & Gas Corporation has been excluded from earnings for the computation of EBITDA.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS.
Overview
Georgia Gulf is a leading manufacturer and marketer of two highly integrated chemical product lines, chlorovinyls and aromatics. The primary chlorovinyl products include chlorine, caustic soda, vinyl chloride monomer ("VCM"), vinyl resins and vinyl compounds. For the year ended December 31, 2001, we consumed 100 percent of our chlorine production in making VCM, sold all of our caustic soda production, consumed 85 percent of our VCM production in manufacturing vinyl resin and used 21 percent of our vinyl resin in the manufacture of vinyl compounds. The remainder of our VCM, vinyl resin and all of our vinyl compounds were sold to third parties. The primary aromatic products include cumene, phenol and acetone. For the year ended December 31, 2001, approximately 32 percent of our cumene was sold to third parties with the balance used internally in the manufacture of phenol and acetone. All of our phenol and acetone was sold to third parties.
Our business, and the chemical industry in general, is cyclical in nature and is affected by domestic and, to a lesser extent, worldwide economic conditions. The level of domestic chemical sales tends to reflect fluctuations in downstream markets that are affected by consumer spending for durable goods and construction. Global capacity also materially affects the prices of chemical products. Generally, in periods of high operating rates, prices rise, and as a result new capacity is announced. Since world-scale size plants are generally the most cost-competitive, new increases in capacity tend to be on a large scale and are often undertaken by existing industry participants. Usually, as new capacity is added, prices decline until increases in demand improve operating rates and the new capacity is consumed, or in some instances, until less efficient producers withdraw from the market. As the additional supply is absorbed, operating rates rise, prices increase and the cycle repeats. In addition, profitability and margins are materially affected by the cost of raw materials and other important supplies. Our primary raw materials include salt, natural gas, ethylene, chlorine, benzene, propylene and compound additives.
In 2001, the chlorovinyl business experienced reduced demand, which led to lower prices and excess supply. In vinyl resins, inventory reductions by customers and the recent addition of a new world-scale plant caused a further supply and demand imbalance. Lower demand for vinyl resin led to reduced pricing for VCM and vinyl resin that was not offset by decreasing raw material costs, primarily ethylene. The reduced demand for chlorine caused its co-product, caustic soda, to return to a more favorable position, which resulted in higher selling prices. 2001 started with natural gas prices at all-time highs, and even though natural gas prices were lower by year end, total exposure for natural gas for 2001 was significantly higher than 2000.
Decreased demand in the aromatics business resulted in lower pricing and volumes across all products during 2001. The most recent industry capacity addition started production in 2001. Since no capacity increases have been announced in this segment we believe profitability should increase as demand increases.
Acquisition of the Vinyls Business of CONDEA Vista Company
On November 12, 1999, we completed the purchase of substantially all of the assets of the vinyls business of CONDEA Vista Company. Consideration for the purchase included $260.0 million in cash and a $10.0 million two-year noninterest-bearing note to the seller. During the second quarter of 2000 we paid CONDEA Vista Company approximately $16.3 million, representing an adjustment to the purchase price for actual working capital on the closing date. (See note 3 of the notes to the consolidated financial statements). The acquisition was accounted for as a purchase, and the purchase price approximated the fair market value of the assets acquired. The vinyls business is a producer of VCM, vinyl resins and vinyl compounds. Assets acquired in the purchase included: one VCM facility with an annual capacity of 950 million pounds; 50 percent ownership of PHH Monomers, L.L.C., a manufacturing joint venture that
operates a VCM facility with capacity to produce 1.15 billion pounds of VCM annually, which entitles the vinyls business to one-half of the production capacity, or 575 million pounds; two vinyl resin facilities with combined annual capacity of 1.5 billion pounds; and three vinyl compound facilities with combined annual capacity of 265 million pounds. Subsequently, we have shut down the two smallest compound facilities without impacting overall compound capacity.
Additionally, we entered into a long-term supply contract with CONDEA Vista for the supply of ethylene and assumed a chlorine supply contract with PPG Industries, Inc., our joint venture partner in PHH Monomers, for the acquired VCM facilities. We have included the results of operations for the vinyls business in our consolidated financial statements since the date of acquisition.
North American Plastics Acquisition
On May 11, 1998, we acquired North American Plastics, Inc., a privately held manufacturer of flexible vinyl compounds with two manufacturing locations in Mississippi having a combined annual production capacity of 190 million pounds. Total consideration consisted of $99.9 million in cash and the assumption of $0.5 million in debt. We financed the cash portion of the acquisition through borrowings under our previous revolving credit facility. The transaction was accounted for as a purchase, and the consideration exchanged exceeded the fair market value of the net tangible assets of North American Plastics by $86.7 million. We allocated this excess to goodwill, which is being amortized on a straight-line basis over a period of 35 years. Pursuant to our January 1, 2002 adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," we will no longer amortize goodwill. (See note 2 of the notes to the consolidated financial statements). We have included the results of operations for North American Plastics in our consolidated financial statements since the date of acquisition.
Discontinuation of Methanol Operation
During 1999, the methanol market suffered from overcapacity and low-cost imports with significant increases in global supply in areas of the world with low cost natural gas. As a result, several domestic methanol producers, including us, idled their methanol plants. We had ceased operating our methanol plant in December 1998. During 1999, we met our contractual obligations to supply methanol to our customers by purchasing imported methanol. Although the shutdown of several methanol plants resulted in a supply contraction and an increase in spot prices during the first half of 1999, several new overseas methanol plants began production late in the year. This additional supply added further pressure on the sales price of methanol. As a result of these trends, in September 1999, we announced that we would exit the methanol business entirely at the end of 1999. As a result, we incurred a charge against earnings of $7.6 million, net of tax benefits, during the third quarter of 1999 to write off certain methanol assets and to accrue losses related to our methanol buy and resale program through the end of the year.
Cogeneration and Air Separation Facilities
In 1997, construction was completed on a cogeneration facility and an air separation plant, both located at our Plaquemine, Louisiana complex. These facilities have reduced the cost of electricity, nitrogen and oxygen that we use in the production of our products and that we previously purchased from third parties. Prior to November 12, 1999, we operated the cogeneration facility under an operating lease arrangement. On that date, we terminated the lease by exercising our option to purchase the cogeneration facility for approximately $103.3 million.
Results of Operations-Georgia Gulf
The following table sets forth our statement of operations data for the three years ended December 31, 2001, 2000 and 1999 and the percentage of net sales of each line item for the periods presented.
(1)Shipping and handling costs were reclassified (beginning in 2000) by increasing cost of sales and net sales. Prior years have been reclassified to conform to the current year presentation.
(2)See asset write-off discussed in note 8 of the notes to the consolidated financial statements.
(3)Provision (benefit) for income taxes for 2001 includes the effect of the favorable settlement of tax audits. See note 15 of the notes to the consolidated financial statements. Year Ended December 31, 2001 Compared With Year Ended December 31, 2000
Net Sales-For the year ended December 31, 2001, net sales were $1,205.9 million, a decrease of 24 percent compared to $1,581.6 million for 2000. This decrease was due to a 14 percent decrease in sales volumes and an 11 percent lower overall average selling price, largely attributable to the vinyl resin and compounds businesses.
Net sales of chlorovinyls totaled $983.4 million for the year ended December 31, 2001, a decrease of 21 percent compared with net sales of $1,244.7 million for the prior year. Sales volume decreased by 9 percent primarily as a result of a decrease in demand for vinyl resin and vinyl compounds. Lower average sales prices of 14 percent resulted from softening demand for vinyl products which more than offset a 123 percent increase in caustic soda prices.
Net sales of aromatics were $222.5 million for the year ended December 31, 2001, a decrease of 34 percent compared to $336.9 million for 2000. This decrease was primarily the result of a 29 percent deterioration in sales volumes and 7 percent lower average selling prices for cumene and acetone.
Cost of Sales-Cost of sales were $1,125.4 million for the year ended December 31, 2001, a decrease of 18 percent when compared with $1,368.0 million for 2000. Decreased sales volumes, particularly in the aromatics business, were the primary cause of this decrease. Also contributing to the decrease were lower prices for all raw materials. As a percentage of sales, cost of sales increased to 93 percent in 2001 compared to 87 percent for 2000. This increase was caused by increased energy costs and overall sales price decreases more than offsetting the decreases of raw materials costs.
Asset Write-off and Other Related Charges-We wrote-off the sodium chlorate plant and accrued post-closure costs for a total nonrecurring charge of $5.4 million during 2001. (See note 8 of the notes to consolidated financial statements).
Selling, General and Administrative Expenses-Selling, general and administrative expenses totaled $44.7 million for the year ended December 31, 2001, a decrease of 2 percent from $45.6 million in 2000. Insurance settlements, lower profit sharing expenses, and a decreased loss on the sale of accounts receivable more than offset increased legal and professional fees during 2001.
Operating Income-Operating income totaled $30.4 million for the year ended December 31, 2001, a decrease of 82 percent from $168.0 million in 2000. Lower operating income in chlorovinyls was the primary factor in the decrease. As a percentage of net sales, operating profit decreased to 3 percent of net sales for 2001 compared to 11 percent in 2000. This reduction was the result of overall sales price decreases more than offsetting decreases in raw materials costs.
Chlorovinyls operating income for 2001 totaled $62.0 million (including the asset write-off and other related charges of $5.4 million), a decrease of 68 percent from 2000. The most significant factors in this decrease were declines in vinyl resin sales prices and volumes, which were not offset by lower raw materials costs and higher selling prices for caustic soda.
Aromatics reported an operating loss of $15.7 million for 2001, an increase of 62 percent from the operating loss of $9.7 million in 2000. This increased loss is primarily due to lower sales volumes.
Net Interest Expense-Net interest expense decreased to $57.3 million for the year ended December 31, 2001 from $67.7 million in 2000. This decrease was primarily attributable to lower overall debt balances and lower interest rates in 2001.
Benefit from Income Taxes-The benefit from income taxes was $14.9 million for the year ended December 31, 2001 compared with a provision for $36.1 million in 2000. The benefit from income taxes resulted from incurring a loss before income taxes of $27.0 million and the favorable settlement of tax audits during 2001.
Net Income (loss)-Net loss totaled $12.0 million for the year ended December 31, 2001 versus net income of $64.2 million for the year ended December 31, 2000. The discussion above enumerates the reasons for the change.
Year Ended December 31, 2000 Compared With Year Ended December 31, 1999
Net Sales-For the year ended December 31, 2000, net sales totaled $1,581.6 million compared with $908.9 million for 1999. This increase resulted from the inclusion of a full year's sales from the vinyls business acquired from CONDEA Vista in late 1999 as well as a 29 percent increase in average selling prices over 1999 prices.
Sales of chlorovinyls totaled $1,244.7 million for the year ended December 31, 2000 compared with $672.9 million in the prior year. While a 24 percent average price increase contributed to the increase in sales so did a 49 percent increase in volume. A majority of the volume increase resulted from the vinyls business acquired from CONDEA Vista in late 1999.
Sales of aromatics increased to $336.9 million for the year ended December 31, 2000 compared with $236.1 million in 1999. Average prices increased by 32 percent during 2000 while volumes increased 8 percent when compared with 1999. Phenol sales volumes declined 10 percent from 1999 volumes while overall cumene sales volumes increased by 81 percent.
Cost of Sales-Cost of sales equaled $1,368.0 million for the year ended December 31, 2000 compared with $765.3 million in 1999. The increase resulted from higher raw materials prices for both aromatics and chlorovinyls during 2000 as well as the additional costs resulting from operating the plants acquired from
CONDEA Vista for a full year. Cost of sales increased to 86.5 percent of sales in 2000 compared with 84.2 percent in 1999.
Selling, General and Administrative Expenses-Selling, general and administrative expenses totaled $45.6 million for the year ended December 31, 2000, an increase of 12 percent from $40.8 million in 1999. Approximately half of the increase resulted from increased management incentive expense.
Operating Income-Operating income totaled $168.0 million for the year ended December 31, 2000, an increase of 63 percent from $102.8 million in 1999. This increase resulted from improvements in chlorovinyls operating income offset in part by a loss in aromatics.
Chlorovinyls operating income for 2000 totaled $192.3 million, an increase of 95 percent from 1999. The increase resulted from higher sales prices and increased volumes.
Aromatics reported an operating loss of $9.7 million for 2000 compared with operating income of $15.2 million in 1999. Increased volumes for cumene and increased sales pricing for the entire segment did not offset declining phenol and acetone volumes, and increased raw materials costs.
Net Interest Expense-Net interest expense increased to $67.7 million for the year ended December 31, 2000 from $34.8 million in 1999. The increase is attributable to the increased borrowings used for the purchase of the cogeneration plant and the vinyls business from CONDEA Vista.
Provision for Income Taxes-The provision for income taxes was $36.1 million for the year ended December 31, 2000 compared with $24.8 million in 1999. The 46 percent increase corresponds to the increase in pretax income for the period. The effective tax rate declined slightly in 2000 compared with 1999.
Income from Continuing Operations-Income from continuing operations for the year ended December 31, 2000 was $64.2 million, an increase of 49 percent from the $43.2 million recorded for 1999. Income from continuing operations increased as a result of both greater sales volumes and higher sales prices which more than offset increased raw materials costs and interest expense. The inclusion of the vinyls business acquired from CONDEA Vista for a full year contributed to the improvement.
Loss from Discontinued Operation-The discontinued methanol operation contributed a $2.5 million loss in 1999. In addition, during 1999, a one-time charge of $7.6 million was recognized net of taxes in connection with the write-off of certain methanol assets and estimated future losses on servicing the remaining methanol contracts through 1999.
Net Income-Net income totaled $64.2 million for the year ended December 31, 2000, a 95 percent increase over 1999. The discussion above enumerates the reasons for the increase.
Liquidity and Capital Resources
The primary focus for 2001 was to continue to apply cash flow towards reducing the debt incurred in acquiring the vinyls business from CONDEA Vista Company and the purchase of the cogeneration plant. During 2001, total debt was reduced by $8.2 million. In addition, we repurchased the $75 million interest in our receivables when we terminated the asset securitization program (discussed below).
For the year ended December 31, 2001, we generated $41.2 million of cash flow from operating activities as compared with $163.1 million during the year ended December 31, 2000. The major source of cash flow for 2001 was the non-cash provision of $72.6 million for depreciation and amortization. Total working capital at December 31, 2001 was $87.6 million versus $94.9 million at December 31, 2000. Significant changes in working capital for 2001 included a decrease in trade accounts receivable, inventories and accounts payable. The decrease in trade accounts receivable was primarily attributable to the decrease in overall sales volume and prices, which more than offset the $75.0 million increase in trade accounts receivable due to the termination of the asset securitization program (discussed further below
and in note 5 of the notes to the consolidated financial statements). Inventories decreased as a result of lower quantities kept on hand and lower raw materials costs. The decrease in accounts payable was attributable to the timing of certain payments and lower trade payable balances related to decreased raw materials prices and volumes.
We used $17.8 million in cash for investing activities, primarily capital expenditures, for the year ended December 31, 2001. For the year ended December 31, 2000, we used $21.7 million of cash for investing activities, also primarily for capital expenditures. For the year ended December 31, 1999, we used $380.7 million of cash for investing activities primarily in three areas: $14.4 million for capital expenditures, $103.3 million to purchase the cogeneration plant we previously leased and $263.0 million for the vinyls business of CONDEA Vista Company. We estimate total capital expenditures for 2002 will approximate $25.0 million.
Financing activities consumed $15.4 million of cash during 2001 primarily by reducing total debt $8.2 million and making dividend payments of $10.1 million. This was offset by cash proceeds from stock issued under stock option and employee stock purchase plans totaling $3.0 million.
On June 30, 2001, we entered into amendment no. 2 to the senior credit facility dated as of November 12, 1999. The amendment modified the existing financial covenants relating to the leverage ratio and the interest coverage ratio through December 31, 2002. The amendment also increased the applicable interest margin in cases where the leverage ratio is greater than 5.0:1 by 25 basis points or .25 percent. We were required to pay an amendment fee equal to .25 percent of the sum of the revolving facility, outstanding term loans and unused commitments as of June 30, 2001.
At December 31, 2001, our debt consisted of a $288.0 million senior credit facility, $100.0 million principal amount of 75/8 percent notes, $200.0 million principal amount of 103/8 percent senior subordinated notes, and $36.1 million in other debt. In addition, we have a $100.0 million revolving credit agreement, which had no borrowings against it at the end of 2001. Debt under the senior credit facility and the 75/8 percent notes is secured by substantially all of our assets, including real and personal property, inventory, accounts receivable and other intangibles.
During 2001 we terminated our asset securitization program. We had entered into an agreement pursuant to which we sold an undivided ownership interest in a pool of our trade receivables through a wholly owned subsidiary to a third party (the "Securitization"). As collections satisfied accounts receivable in the pool, we distributed the proceeds to the purchaser and sold ownership interests in new receivables. On July 17, 2001 the sale of additional accounts receivable was restricted pursuant to a provision contained in our indenture governing our senior subordinated notes. Therefore, we repurchased the outstanding interest ($60,000,000 as of July 17, 2001) in our receivables by utilizing the availability of the revolving portion of our senior credit facility. On July 20, 2001 GGRC Corp., as Seller, and Georgia Gulf Corporation and Georgia Gulf Chemicals and Vinyls, LLC, as Initial Servicers, and Blue Ridge Funding Corporation, as Purchaser, and Wachovia Bank, N.A., as Administrative Agent terminated the Securitization. Pursuant to the termination agreement, we are permitted to request that the Securitization be reinstated with identical terms and conditions upon written notice to, and subject to acceptance by, the administrative agent.
We declared dividends of $0.32 per share, or $10.1 million during 2001.
We lease railcars, storage terminals, computer equipment, automobiles and warehouse and office space under noncancelable operating leases with varying maturities through the year 2014. Future minimum payments under these noncancelable operating leases as of December 31, 2001 are $17.0 million in 2002, $12.4 million in 2003, $8.7 million in 2004, $6.9 million in 2005, $6.2 million in 2006 and $21.6 million thereafter.
We have take-or-pay agreements for the purchase of ethylene, with various terms extending through 2014. The aggregate amount of the fixed and determinable portion of the required payments under these
agreements as of December 31, 2001 was $7.1 million for each of the years 2002 through 2007 and $4.6 million for 2008. Additionally, in connection with the acquisition of the vinyls business of CONDEA Vista, we have agreed to purchase 600 million pounds of ethylene on a take-or-pay basis at market prices from CONDEA Vista annually through 2002, followed by an optional reduction in the required purchases of 100 million pounds per year for the final four years of the agreement.
Under our senior credit facility and the indentures related to the 75/8 percent notes and the 103/8 percent notes, we are subject to certain restrictive covenants, the most significant of which require us to maintain certain financial ratios. Our ability to meet these covenants, satisfy our debt obligations and to pay principal and interest on our debt, fund working capital, and make anticipated capital expenditures will depend on our future performance, which is subject to general macroeconomic conditions and other factors, some of which are beyond our control. Management believes that based on current and projected levels of operations and conditions in our markets, cash flow from operations, together with our cash and cash equivalents of $10.0 million, and the availability to borrow an additional $95.0 million under the revolving credit facility, at December 31, 2001, will be adequate for the foreseeable future to make required payments of principal (see note 10 of the notes to the consolidated financial statements) and interest on our debt, meet certain restrictive covenants which require us to maintain certain financial ratios, and fund our working capital and capital expenditure requirements. However, if the economic recovery does not occur as we anticipate by mid-year, we may not be able to meet certain restrictive covenants and maintain compliance with certain financial ratios. In that event we would attempt to obtain waivers or covenant relief from our lenders. Although we have successfully negotiated covenant relief in the past, there can be no assurance we can do so in the future.
Georgia Gulf Corporation conducts its business operations through its wholly owned subsidiaries as reflected in the consolidated financial statements. As Georgia Gulf Corporation is essentially a holding company it must rely on distributions, loans and other intercompany cash flows from its wholly owned subsidiaries to generate the funds necessary to satisfy the repayment of its existing debt. Provisions in the senior credit facility limit payments of dividends, distributions, loans or advances to Georgia Gulf Corporation by its subsidiaries.
Inflation
The most significant component of our cost of sales is raw materials, which include basic commodity items. The cost of raw materials is based primarily on market forces and has not been significantly affected by inflation. Inflation has not had a material impact on our sales or income from operations.
New Accounting Pronouncements
During June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for by a single method-the purchase method. The adoption of SFAS No. 141 did not have an impact on our financial statements for the year ended December 31, 2001. On January 1, 2002, we adopted SFAS No. 142. SFAS No. 142 requires companies to cease amortizing existing (as of June 30, 2001) goodwill after December 31, 2001. SFAS No. 142 also prohibits the amortization of goodwill resulting from acquisitions completed after June 30, 2001. Additionally, SFAS No. 142 specifies that companies will be required to periodically test existing goodwill and some intangible assets for impairment. In accordance with SFAS No. 142 we have six months subsequent to the adoption of the Statement to complete the first step of the transitional goodwill impairment test. Pursuant to the adoption of SFAS No. 142 we have established our reporting units based on our reporting structure and assigned goodwill in a reasonable and supportable manner. We expect to complete the transitional test within the six month period and will report the results of that testing subsequent to its completion. Pursuant to the adoption of SFAS 142 we will annually test goodwill for impairment on the anniversary of our transitional goodwill
impairment test. We presently anticipate the impact of adopting SFAS 142 will be to eliminate $2.5 million in annual amortization expense.
During June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that a liability for an asset retirement obligation be recognized in the period incurred at fair value, if a reasonable estimate of fair value can be made. Any associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. We will adopt SFAS No. 143 on January 1, 2003. Management does not believe the adoption of SFAS 143 will have a material effect on our consolidated financial statements.
During August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 clarifies financial accounting and reporting for assets held for sale, scheduled for abandonment or other disposal, and recognition of impairment losses related to the carrying value of long-lived assets. We will adopt SFAS 144 on January 1, 2002. Management does not believe the adoption of SFAS 144 will have a material effect on our consolidated financial statements.
Critical Accounting Policies
Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective, or complex judgements. Different amounts would be reported under different operating conditions or under alternative assumptions. We have evaluated the accounting policies used in the preparation of the accompanying financial statements and related notes and believe those policies to be reasonable and appropriate. We believe the following to be our most critical accounting policies applied in the preparation of our financial statements.
In our determination of the allowance for doubtful accounts, and consistent with our accounting policy, we estimate the amount of accounts receivable that we believe may not be collected and we record an expense of that amount when a collectibility issue arises. Estimating this amount requires management to analyze the financial strength of our customers, and, in its analysis, management combines the use of the company's historical experience in general as well as a specific review of those customers that are deemed to be particularly risky. By its nature, such an estimate is highly subjective and it is possible that the amount of accounts receivable that the company is unable to collect may be greater than or less than the amount initially estimated.
In our determination of the estimates relating to ongoing environmental costs and legal proceedings (see note 16 of the notes to the consolidated financial statements), as applied and disclosed in our consolidated financial statements, we consult with our advisors (consultants, engineers and attorneys). The results provide us with the information on which we base our judgments on these matters and under which we accrue a loss when it has been determined that it is probable that a liability has been incurred and the amount is reasonably estimable. While we believe that the amounts recorded in the accompanying financial statements related to these contingencies are based on the best estimates and judgments available to us, our actual outcomes could differ from our estimates.
We periodically evaluate long-lived assets (including goodwill) for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and the operational performance of our businesses. Actual impairment losses incurred could vary significantly from amounts that we estimate. Additionally, future events could cause us to conclude that impairment indicators exist and that associated long-lived assets of our businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
Accounting for employee benefit plans involves estimating the cost of benefits that are to be provided in the future and attempting to match, for each employee, that estimated cost to the period worked. To accomplish this, extensive use is made of advice from actuaries and assumptions are made about inflation,
investment returns, mortality, employee turnover, and discount rates (see note 14 of the notes to the consolidated financial statements) that ultimately impact amounts recorded. While we believe that the amounts recorded in the accompanying financial statements related to these benefit plans are based on the best estimates and judgments available to us, our actual outcomes could differ from our estimates.
Environmental
Our operations are subject to increasingly stringent federal, state and local laws and regulations relating to environmental quality. These regulations, which are enforced principally by the United States Environmental Protection Agency and comparable state agencies, govern the management of solid hazardous waste, emissions into the air and discharges into surface and underground waters, and the manufacture of chemical substances.
We believe that we are in material compliance with all the current environmental laws and regulations. We estimate that any expenses incurred in maintaining compliance with these requirements will not materially affect earnings or cause us to exceed our level of anticipated capital expenditures. However, there can be no assurance that regulatory requirements will not change, and therefore, it is not possible to accurately predict the aggregate cost of compliance resulting from any such changes.
Item 7a.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to certain market risks related to long-term financing and related derivative financial instruments, foreign currency exchange rates and commodity prices. We have policies and procedures to mitigate the potential loss arising from adverse changes in these risk factors.
Interest Rate Sensitivity-The following table is a "forward-looking" statement that provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and financing obligations. Our policy is to manage interest rates through use of a combination of fixed and floating rate debt. We do not use interest rate swap agreements or any other derivatives for trading purposes. For financing obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected contractual maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contracts. The information and cash flows are presented in U.S. dollars, which is our reporting currency.
Foreign Currency Exchange Rate Sensitivity-Substantially all of our sales are denominated in U.S. dollars. The foreign currency exchange rate risk relates to annual sales of less than $7.7 million.
Commodity Price Sensitivity-The availability and price of our raw materials are subject to fluctuations due to unpredictable factors in global supply and demand. To reduce price risk caused by market fluctuations, from time to time, we execute raw material purchase contracts, which are generally less than one year in duration. As of December 31, 2001, there were no material forward raw material purchase contracts open.
Item 8.
Item 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.
Report of Independent Public Accountants
To Georgia Gulf Corporation:
We have audited the accompanying consolidated balance sheets of Georgia Gulf Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Georgia Gulf Corporation and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Atlanta, Georgia
February 15, 2002
Report of Management
To the Stockholders of Georgia Gulf Corporation:
The accompanying consolidated financial statements of Georgia Gulf Corporation and subsidiaries are the responsibility of and have been prepared by the Company in conformity with accounting principles generally accepted in the United States. The financial information displayed in other sections of this 2001 Annual Report is consistent with the consolidated financial statements.
The integrity and the objectivity of the data in these consolidated financial statements, including estimates and judgments relating to matters not concluded by year-end, are the responsibility of management. We maintain accounting systems and related internal controls to provide reasonable assurance that financial records are reliable for preparing the consolidated financial statements and for maintaining accountability for assets. The system of internal controls also provides reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management's authorization. Periodic reviews of the systems and of internal controls are performed by our internal audit department.
The Audit Committee of the Board of Directors, composed solely of directors who are not officers or employees of Georgia Gulf, has the responsibility of meeting periodically with management, our internal auditors and Arthur Andersen LLP, our independent public accountants that are approved by the stockholders, to review the scope and results of the annual audit and the general overall effectiveness of the internal accounting control system. The independent public accountants and our internal auditors have direct access to the Audit Committee, with or without the presence of management, to discuss the scope and results of their audits, as well as any comments they may have related to the adequacy of the internal accounting control system and the quality of financial reporting.
Richard B. Marchese
Vice President Finance, Chief Financial Officer and Treasurer
Consolidated Balance Sheets
Georgia Gulf Corporation and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Income
Georgia Gulf Corporation and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
Georgia Gulf Corporation and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Stockholders' Equity
Georgia Gulf Corporation and Subsidiaries
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
Georgia Gulf Corporation and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation-The consolidated financial statements include the accounts of Georgia Gulf Corporation and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.
Nature of Operations-We are a manufacturer and international marketer of chemical products. Our products are primarily intermediate chemicals sold for further processing into a wide variety of end-use applications, including plastic pipe and pipe fittings, siding and window frames, bonding agents for wood products, high-quality plastics, acrylic sheeting and coatings for wire and cable.
Use of Estimates-Management is required to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes prepared in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
Cash and Cash Equivalents-Marketable securities that are highly liquid with an original maturity of three months or less are considered to be the equivalent of cash for purposes of financial statement presentation.
Inventories-Inventories are valued at the lower of cost (first-in, first-out) or market. Costs include raw materials, direct labor and manufacturing overhead. Market is based on current replacement cost for raw materials and supplies and on net realizable value for finished goods.
Property, Plant and Equipment-Property, plant and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred, and major renewals and improvements are capitalized. Interest expense attributable to funds used in financing the construction of major plant and equipment is capitalized. Interest expense capitalized during 2001, 2000 and 1999 was $1,029,000, $1,171,000 and $948,000, respectively. Depreciation is computed using the straight-line method over the estimated useful lives of the assets for book purposes, with accelerated methods being used for income tax purposes. Depreciation expense totaled approximately $71,190,000 (including the $4.9 million asset write-off), $66,500,000 and $47,300,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
The estimated useful lives of the assets are as follows:
Goodwill-Goodwill of $86,725,000 was capitalized in connection with the acquisition of North American Plastics, Inc. in 1998. The goodwill is being amortized over a 35-year period. Goodwill amortized to cost of sales during 2001, 2000 and 1999 was $2,478,000, $2,478,000 and $2,478,000, respectively. Accumulated amortization of goodwill totaled approximately $9,005,000 and $6,527,000 at December 31, 2001 and 2000, respectively. Effective January 1, 2002, with the adoption of Statement of Financial Accounting Standards ("SFAS") 142, we will no longer amortize goodwill (see note 2).
Other Assets-Other assets primarily consist of advances for long-term raw materials purchase contracts and debt issuance costs (see note 9). Advances for long-term raw materials purchase contracts are being amortized as additional raw materials costs over the 15-year life of the related contracts in proportion to raw materials delivery. Debt issuance costs are being amortized to interest expense using the effective interest rate method over the term of the related indebtedness.
Long-Lived Assets-We evaluate long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is probable that undiscounted future cash flows will not be sufficient to recover an asset's carrying amount, the asset will be written down to its fair value (See note 8).
Financial Instruments-We do not use derivatives for trading purposes. Interest rate swap and cap agreements, forms of derivatives, are used to manage interest costs on certain portions of our long-term debt (see note 18). Accumulated other comprehensive income in the statements of stockholders' equity includes unrealized gains and losses (net of tax) in the fair value of certain derivative instruments that qualify for hedge accounting. If subsequent to being hedged underlying transactions are no longer likely to occur, the related derivative gains and losses are recognized currently as income or expense. Amounts paid or received on the interest rate swap agreements are recorded to interest expense as incurred. As of December 31, 2001 and 2000, the interest rate swap agreement was the only derivative financial instrument outstanding.
Revenue Recognition-Revenue is recognized when an agreement exists, product is shipped, prices are determinable and collectibility is reasonably assured.
Shipping and Handling Costs-All amounts billed to a customer in a sale transaction related to shipping and handling are classified as revenue. Shipping and handling fees billed to customers increased sales and cost of goods sold by $54.9 million in 2001, $62.5 million in 2000 and $51.2 million in 1999.
Environmental Expenditures-Environmental expenditures related to current operations or future revenues are expensed or capitalized consistent with our capitalization policy. Expenditures that relate to an existing condition caused by past operations and that do not contribute to future revenues are expensed. Liabilities are recognized when environmental assessments or cleanups are probable and the costs can be reasonably estimated.
Earnings Per Share-Basic earnings per share are computed based on the weighted average number of common shares outstanding during the respective periods. Diluted earnings per share are computed based on the weighted average number of common shares outstanding, adjusted for dilutive potential issuances of common stock. A reconciliation of the number of shares used for computing basic and diluted earnings per share is presented in note 19.
Stock-Based Compensation-Stock-based compensation is recognized using the intrinsic value method. Pro forma net income and earnings per share impacts are presented in note 13 as if the fair value method had been applied.
Comprehensive Income-SFAS No. 130, "Reporting Comprehensive Income," requires additional disclosure and presentation of amounts comprising comprehensive income beyond net income. As a result, comprehensive income is presented net of tax within the accompanying statements of stockholders' equity for the year ending December 31, 2001. There are no differences between comprehensive income and net income for the years ended December 31, 2000 and December 31, 1999.
2. NEW ACCOUNTING PRONOUNCEMENTS
During June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that all business combinations initiated after June 30, 2001 be accounted for by a single method-the purchase method. The adoption of SFAS No. 141 did not impact our financial statements as of December 31, 2001. On January 1, 2002, we adopted SFAS No. 142. SFAS No. 142 requires companies to cease amortizing existing (as of June 30, 2001) goodwill after December 31, 2001. SFAS No. 142 also prohibits the amortization of goodwill resulting from acquisitions completed after June 30, 2001. Additionally, SFAS No. 142 specifies that companies will be required to periodically test existing goodwill and some intangible assets for asset impairment. In accordance with SFAS No. 142 we have six months subsequent to the adoption of the Statement to complete the first step of the transitional goodwill impairment test. Pursuant to the adoption of SFAS No. 142 we have established our reporting units based on our reporting structure and assigned goodwill in a reasonable and supportable manner. We expect to complete the transitional test within the six month period and will report the results of that testing subsequent to its completion. Pursuant to the adoption of SFAS 142 we will annually test goodwill for impairment on the anniversary of our transitional goodwill impairment test. We presently anticipate the impact of adopting SFAS 142 will be to eliminate $2.5 million in annual amortization expense.
During June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that a liability for an asset retirement obligation be recognized in the period incurred at fair value, if a reasonable estimate of fair value can be made. Any associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. We will adopt SFAS No. 143 on January 1, 2003. Management does not believe the adoption of SFAS 143 will have a material effect on our consolidated financial statements.
During August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 clarifies financial accounting and reporting for assets held for sale, scheduled for abandonment or other disposal, and recognition of impairment losses related to the carrying value of long-lived assets. We will adopt SFAS 144 on January 1, 2002. Management does not believe the adoption of SFAS 144 will have a material effect on our consolidated financial statements.
3. ACQUISITIONS
On November 12, 1999, we completed the acquisition of the assets of the vinyls business of CONDEA Vista Company. The purchase included substantially all of the assets and net working capital of the vinyls business as of the date of acquisition. The acquisition was accounted for as a purchase, and the results of the vinyls business's operations have been included in our consolidated financial statements from the date of acquisition. The preliminary purchase price, including related fees and expenses, consisted of $263,000,000 of cash and the issuance of a $10,000,000 two-year, noninterest-bearing note payable to CONDEA Vista Company. The note was recorded at its net present value of $7,750,000 at the date of acquisition. During the second quarter of 2000, we paid CONDEA Vista Company approximately $16,286,000, representing an adjustment to the purchase price for actual working capital on the closing date. The final purchase price approximated the fair market value of the net assets acquired.
The following unaudited pro forma combined information presents the combined results of operations as if the acquisition had occurred at the beginning of fiscal 1999. The unaudited pro forma combined
information is based upon the historical consolidated financial statements of Georgia Gulf and the vinyls business. Pro forma results include interest expense on debt incurred to finance the acquisition.
In our opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of fiscal 1999 or of future operations of the combined companies under our ownership and management.
4. DISCONTINUED OPERATION
On September 2, 1999, we announced our decision to exit the methanol business at the end of 1999. In connection with the discontinuance of the methanol business, we incurred a one-time charge of $7,631,000, net of income tax benefits, related to the write-off of the methanol plant assets, net of expected proceeds, and an accrual for estimated losses during the phase-out period. The methanol plant remains idle and we intend to dismantle the facility at some time in the future. All methanol sales contracts were assigned, and our methanol customer list has been sold. Proceeds from sales of the methanol railcars, customer list and other discontinued plant assets approximated $2,900,000. The disposition of the methanol operations represents the disposal of a business segment under Accounting Principles Board ("APB") Opinion No. 30. Accordingly, results of this operation have been classified as discontinued, and prior periods have been restated, including the reallocation of fixed overhead charges to other business segments. For business segment reporting purposes, the methanol business results were previously classified as the segment "Gas Chemicals."
Sales and income from the discontinued operation are as follows:
5. RECEIVABLES
During 2001 we terminated our asset securitization program. We had entered into an agreement pursuant to which we sold an undivided percentage ownership interest in a defined pool of our trade receivables on a revolving basis through a wholly-owned subsidiary to a third party (the "Securitization"). As collections reduced accounts receivable included in the pool, we sold ownership interests in new
receivables to bring the ownership interests sold up to $75,000,000, as permitted by the Securitization. Prior to May 24, 2000, the Securitization permitted the sale of $50,000,000. In conjunction with the sale of receivables, we recorded losses of $2,200,000, $4,539,000 and $2,793,000 for 2001, 2000 and 1999, respectively, which are included as selling and administrative expenses in the accompanying consolidated statements of income. The losses were determined by applying a discount factor, as prescribed under the Securitization, to the monthly balance in the ownership interest sold.
On July 17, 2001 the sale of additional accounts receivable was restricted pursuant to a provision contained in our indenture governing our 103/8 percent senior subordinated notes. Therefore, we repurchased the outstanding interest ($60,000,000 as of July 17, 2001) in our receivables by utilizing the availability of the revolving portion of our senior credit facility. On July 20, 2001 GGRC Corp., as Seller, and Georgia Gulf Corporation and Georgia Gulf Chemicals and Vinyls, LLC, as Initial Servicers, and Blue Ridge Funding Corporation, as Purchaser, and Wachovia Bank, N.A., as administrative agent terminated the Securitization. Pursuant to the termination agreement, we are permitted to request that the Securitization be reinstated with identical terms and conditions upon written notice to, and subject to acceptance by, the administrative agent. During 2001, we received approximately $694.6 million from the revolving sales of receivables under the Securitization.
6. INVENTORIES
The major classes of inventories were as follows:
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
8. ASSET WRITE-OFF AND OTHER RELATED CHARGES
Pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be disposed of," we assessed the recoverability of the remaining carrying value of the sodium chlorate plant when it became evident that it was technologically obsolete by industry standards and it could not currently comply with recently issued Louisiana environmental regulations. The estimated future undiscounted cash flows of the
sodium chlorate plant did not justify the asset valuation that was recorded on our books. Pursuant to SFAS No. 121, a fair value analysis of the sodium chlorate plant indicated that it should be completely written off to reduce the carrying amount to its fair value. In addition to the impairment-related charges of $4.9 million, we accrued $0.5 million for post-closure related items.
9. OTHER ASSETS
Other assets, net of accumulated amortization, consisted of the following:
Debt issuance costs amortized as interest expense during 2001, 2000 and 1999 were $3,261,000, $3,931,000 and $675,000, respectively.
10. LONG-TERM DEBT
Long-term debt consisted of the following:
On November 12, 1999, we entered into a new senior credit facility and issued $200,000,000 of eight-year unsecured 103/8 percent notes. The senior credit facility included a tranche A term loan of $225,000,000, a tranche B term loan of $200,000,000 and a revolving credit facility of up to $100,000,000. The net proceeds from these transactions were used to fund the acquisition of the vinyls business (see note 3), replace the prior unsecured revolving credit facility and term loan, purchase assets leased pursuant to the cogeneration facility lease (see note 16) and pay related fees and expenses of approximately $16,598,000.
On June 30, 2001, we entered into amendment no. 2 to the senior credit facility dated as of November 12, 1999. The amendment modified the existing financial covenants relating to the leverage ratio and the interest coverage ratio through December 31, 2002. The amendment also increased the
applicable interest margin in cases where the leverage ratio is greater than 5.0:1 by 25 basis points or .25 percent. We were required to pay an amendment fee equal to .25 percent of the sum of the revolving facility, outstanding term loans, and unused commitments on June 30, 2001.
Under the senior credit facility, the tranche A term loan and the revolving credit facility mature November 12, 2005 and the tranche B term loan matures November 12, 2006. As of December 31, 2001, $95.0 million was available for borrowing under the terms of the senior credit facility. An annual commitment fee, which ranges from 0.375 percent to 0.5 percent (currently 0.5 percent), is required to be paid on the undrawn portion of the commitments under the senior credit facility. For any of the loans under the senior credit facility, we may choose to pay interest based on the prime rate of the JP Morgan Chase Bank plus the applicable pricing margin or London Interbank Offered Rate ("LIBOR") plus the applicable pricing margin. For 2001 and 2000, the average interest rate for the tranche A term loan were 6.74 percent and 8.75 percent, for the tranche B term loan were 7.11 percent and 9.19 percent and for the revolving credit facility were 7.79 percent and 10.55 percent, respectively. The senior credit facility is secured by substantially all of our assets, including real and personal property, inventory, accounts receivable and intangibles.
We have $100,000,000 principal amount of 75/8 percent notes outstanding, which are due November 2005. Interest on the notes is payable semiannually on May 15 and November 15 of each year. The notes are not redeemable prior to maturity. In accordance with the indenture relating to the 75/8 percent notes, at the closing of the senior credit facility, the 75/8 percent notes became secured equally and ratably with the senior credit facility. The 75/8 percent notes are secured by substantially all of our assets, including real and personal property, inventory, accounts receivable and intangibles.
In November 1999, we issued $200,000,000 of unsecured 103/8 percent notes, which are due November 2007. Interest on the notes is payable on May 1 and November 1 of each year, commencing May 1, 2000. Prior to November 1, 2002, we may on any one or more occasions redeem up to 35 percent of the original principal amount of the notes with the net cash proceeds of one or more equity offerings at a redemption price of 110.375 percent of the principal amount of the notes. On or after November 1, 2003, we may redeem the notes in whole or part, initially at 105.188 percent of their principal amount, and thereafter at prices declining annually to 100 percent on or after November 1, 2006.
On November 12, 1999, we terminated our prior unsecured revolving credit facility and term loan. The interest rate on the revolving credit facility was based on LIBOR and averaged 5.51 percent for 1999. The average interest rate for the term loan agreement was 7.04 percent for 1999. The LIBOR-based variable interest rate on the term loan was fixed at a rate ranging from 6.71 percent to 7.04 percent using interest rate swap agreements.
Under the senior credit facility and the indentures related to the 75/8 percent notes and 103/8 percent notes, we are subject to certain restrictive covenants, the most significant of which require us to maintain certain financial ratios and limit our ability to pay dividends, make investments, grant liens, sell our assets and engage in certain other activities.
Scheduled maturities of long-term debt outstanding at December 31, 2001 are $38,677,000 in 2002, $22,310,000 in 2003, $24,568,000 in 2004, $124,568,000 in 2005, $187,388,000 in 2006 and $226,580,000 thereafter. Cash payments for interest during 2001, 2000 and 1999, excluding debt issuance costs, were $54,736,000, $63,123,000 and $31,133,000, respectively.
11. RELATED PARTY TRANSACTIONS
PHH Monomers, LLC (PHH), is our 50 percent-owned manufacturing joint venture with PPG Industries, Inc ("PPG"). Pursuant to the terms of the operating agreement and the manufacturing and services agreement, PPG is the operator of PHH. We pay for 50 percent of the raw materials ($76.4 million in 2001, $116.9 million in 2000 and $13.4 million in 1999) and processing costs ($23.4 million in 2001, 23.9 million in 2000 and $3.2 million in 1999) and we have the right to 50 percent of the vinyl chloride monomer ("VCM") production of PHH, which is located in close proximity to our Lake Charles VCM facility. PHH has a capacity of 1,150 million pounds. The chlorine needs of our Lake Charles VCM facility and the PHH Monomer's facility are supplied via pipeline, under a long-term contract with PPG. The chlorine contracts are primarily market price-based.
12. STOCKHOLDERS' EQUITY
During 2000 we repurchased 9,400 shares of common stock for $121,000. As of December 31, 2001, we had authorization to repurchase 5,216,200 additional shares under a common stock repurchase program that is currently suspended. During 2001 we did not repurchase any shares of our common stock.
Each outstanding share of common stock is accompanied by a preferred stock purchase right, which entitles the holder to purchase from us 1/100th of a share of Junior Participating Preferred Stock for $90.00, subject to adjustment in certain circumstances. The rights expire on April 27, 2010 and may be redeemed by us for $0.01 per right until the earlier to occur of (1) the tenth calendar day following announcement by us that a person or group (other than us or certain related persons) beneficially owns 15 percent or more of our outstanding shares of common stock (an "Acquiring Person") or (2) the tenth business day following the commencement of a tender or exchange offer that would result in a person or group becoming an Acquiring Person (the earliest of any such date, the "Distribution Date"). The rights first become exercisable on the Distribution Date. Subject to certain conditions, if a person or group becomes an Acquiring Person, each right will entitle its holder (other than the Acquiring Person) to receive, upon exercise, common stock having a market value equal to two times the right's exercise price. In addition, subject to certain conditions, if we are involved in a merger or certain other business combination transactions, each right will entitle its holder (other than an Acquiring Person) to receive, upon exercise, common stock of the acquiring company having a market value equal to two times the right's exercise price.
In connection with the stock purchase rights described above, 15,000,000 of the authorized shares of preferred stock are designated Junior Participating Preferred Stock. If issued, the Junior Participating Preferred Stock would be entitled, subject to the prior rights of any senior preferred stock, to a dividend equal to the greater of $0.01 or that which is paid on the common shares.
13. STOCK OPTION AND PURCHASE PLANS
Options to purchase our common stock have been granted to employees under a plan adopted in 1998. Under the 1998 Equity and Performance Incentive Plan, approved by our stockholders, we may grant options to purchase up to 2,000,000 shares to employees and non-employee directors. Option prices are equal to the closing price of our stock on the date of grant. Options vest over a one or three-year period from the date of grant and expire no more than ten years after the grant. Options to purchase our common stock under a 1990 plan expired during 2000.
A summary of stock option activity under all plans is as follows:
(1)Weighted average The following table summarizes information about stock options at December 31, 2001:
(1)Weighted average Our stockholders have approved a qualified, noncompensatory employee stock purchase plan, which allows employees to acquire shares of common stock through payroll deductions over a twelve-month period. The purchase price is equal to 85 percent of the fair market value of the common stock on either the first or last day of the subscription period, whichever is lower. Purchases under the plan are limited to 15 percent of an employee's base salary. In connection with this stock purchase plan, 823,180 shares of common stock are reserved for future issuances. Under this plan, 199,957, 236,953 and 218,453 shares of common stock were issued at $14.85, $14.85 and $13.36 per share during 2001, 2000 and 1999, respectively.
We account for our stock-based compensation plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and comply with SFAS No. 123, "Accounting for Stock-Based Compensation," for disclosure purposes. Under these provisions, no compensation was recognized in 2001, 2000 and 1999 for our stock option plans or our stock purchase plan.
For SFAS No. 123 purposes, the fair value of each stock option and stock purchase right for 2001, 2000 and 1999 has been estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions for 2001, 2000 and 1999, respectively: risk-free interest rates of 5.26 percent, 6.11 percent and 5.30 percent; dividend yields of 2.00 percent, 1.00 percent and 1.56 percent; and expected volatilities of 0.44, 0.44 and 0.46. The expected life of a right and option was assumed to be one year and nine years, respectively, for all years. The weighted average fair value of options granted was $8.00 and $7.64 for the years ended December 31, 2001 and 1999, respectively. Using these assumptions, the amount of compensation expense under the fair value method related to the stock option grants in 2001 and 1999 would have been $3,413,000 and $1,861,000 for 2001 and 1999, respectively. There were no stock option grants in 2000. Also using these assumptions, the compensation expense under the fair value method for the stock purchase plan rights for 2001, 2000 and 1999 would have been $1,152,000, $1,392,000 and $1,140,000, respectively. Had compensation expense been determined consistently with SFAS No. 123, utilizing the assumptions previously detailed, our net income (loss) and earnings (loss) per common share would have been the following pro forma amounts:
14. EMPLOYEE BENEFIT PLANS
We have certain pension, savings and profit sharing plans that cover substantially all of our employees. The expense incurred for these plans was approximately $4,707,000, $4,452,000 and $3,343,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Most employees are covered by defined contribution plans under which we make contributions to individual employee accounts and by defined benefit plans for which the benefits are based on years of service and the employee's compensation or for which the benefit is a specific monthly amount for each year of service. Our policy on funding the defined benefit plans is to contribute an amount within the range of the minimum required and the maximum tax-deductible contribution.
On a weighted average basis, the following assumptions were used in the accounting for the net periodic benefit costs of the defined benefit plans:
The amount of net periodic benefit cost recognized includes the following components:
The reconciliations of the beginning and ending balances of the benefit obligation for our defined benefit plans and the fair value of plan assets were as follows:
The funded status of our defined benefit plans and the amounts recognized in the statement of financial position were as follows:
15. INCOME TAXES
The provision (benefit) for income taxes was as follows:
The difference between the statutory federal income tax rate and our effective income tax rate is summarized as follows:
Cash payments for income taxes during 2001, 2000 and 1999 were $1,100,000, $32,201,000 and $6,474,000 respectively.
Our net deferred tax liability consisted of the following major items:
We believe, based on our history of operating expenses and expectations for the future, that future taxable income will be sufficient to fully utilize the deferred tax assets at December 31, 2001.
16. COMMITMENTS AND CONTINGENCIES
Leases-We lease railcars, storage terminals, computer equipment, automobiles and warehouse and office space under noncancelable operating leases with varying maturities through the year 2014. Future minimum payments under these noncancelable-operating leases as of December 31, 2001 were $17,010,000 for 2002, $12,396,000 for 2003, $8,734,000 for 2004, $6,865,000 for 2005, $6,164,000 for 2006 and $21,631,000 thereafter. Total lease expense was approximately $20,351,000, $21,483,000 and $22,892,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
On November 12, 1999, we exercised our option to purchase the 250-megawatt cogeneration facility located at our Plaquemine, Louisiana complex for a net cash purchase price of approximately $103,303,000. The cogeneration facility was previously leased under an operating lease. Lease expense relating to the cogeneration facility was approximately $9,904,000 for 1999.
Purchase Commitments-We have certain take-or-pay raw material purchase agreements with various terms extending through 2014. The aggregate amount of the fixed and determinable portion of the required payments under these agreements as of December 31, 2001 was $7,143,000 for each of the years 2001 through 2007 and $4,648,000 for the year 2008.
Legal Proceedings-Georgia Gulf is a party to numerous individual and several class-action lawsuits filed against the company, among other parties, arising out of an incident that occurred in September 1996 in which workers were exposed to a chemical substance on our premises in Plaquemine, Louisiana. The substance was later identified to be a form of mustard agent, which occurred as a result of an unforeseen chemical reaction. All of the actions claim one or more forms of compensable damages, including past and future wages, past and future physical and emotional pain and suffering. The lawsuits were originally filed in Louisiana state court in Iberville Parish.
In September 1998, the state court trial judge granted the plaintiffs' motion permitting the filing of amended petitions that added the additional allegations that we had engaged in intentional conduct against the plaintiffs. Amended petitions making such allegations were filed. Our two insurers notified us that they were reserving their rights to deny coverage to the extent liability could be established due to such intentional conduct in accordance with their insurance policies. We disputed the insurers' reservation of rights. In December 1998, as required by the terms of the insurance policies, each insurer demanded arbitration of the issue of the insurers' duties relating to the intentional conduct allegations.
As a result of the arbitrations relating to the insurance issue, as permitted by federal statute, the insurers removed the cases to United States District Court in December 1998. The plaintiffs' motion to remand was denied in March 1999.
Following removal of these actions and unsuccessful attempts by plaintiffs to remand the cases, we were able to settle the claims of all but three worker plaintiffs (and their collaterals) who had filed suit prior to removal. These settlements included the vast majority of those claimants believed to be the most seriously injured. The settled cases are in the final processes of being dismissed with prejudice. Negotiations regarding the remaining claims of the three worker plaintiffs are ongoing.
Following these settlements, we were sued by approximately 400 additional plaintiff workers (and their collaterals) who claim that they were injured as a result of the incident. After negotiation, including a mediation, we reached an agreement for the settlement of these additional claims. This settlement, which is on a class basis, will resolve the claims of all workers who claim to have been exposed and injured as a result of the incident other than those workers who opt out of the class settlement. We are aware of two worker plaintiffs and one collateral who have filed suit in state court who have opted not to participate in
the class settlement, as well as the three worker plaintiffs whose claims are pending in federal court (see discussion above).
We have also been notified that we may be added as a party to a currently pending suit in federal court brought by our present and former employees for injuries allegedly stemming from the incident. We believe that we possess a number of valid legal defenses to such claims, including worker's compensation immunity and statutes of limitations defenses.
Based on the present status of the proceedings, we believe the liability ultimately imposed on us will not have a material effect on our financial position or on our results of operations.
On July 31, 2000, Georgia Gulf Lake Charles, LLC, received a Complaint, Compliance Order and Notice of Opportunity for a Hearing from the United States Environmental Protection Agency, Region 6 ("EPA"), which arose from an inspection conducted by the EPA at the Lake Charles facility on December 6-8, 1999. The EPA is seeking to assess a fine of $701,605 and to require certain corrective actions to be taken as a result of various alleged violations of the United States Resource Conservation and Recovery Act, including failure to make adequate hazardous waste determinations, failure to adequately characterize wastes before disposal, and failure to obtain permits for operations of alleged hazardous waste facilities.
In July 2001, the Administrative Law Judge assigned to the case consolidated the case with a case the EPA had asserted against CONDEA Vista (now Sasol North America Inc.) involving common issues of law and fact. A case management order has been issued and the EPA has filed its prehearing exchange. Procedural motions relating to the prehearing exchange are pending. We believe the EPA's allegations are without merit. In addition to the administrative actions, we are participating in ongoing settlement discussions with the EPA. Under the terms of the asset purchase agreement by which we acquired the Lake Charles VCM plant from CONDEA Vista, we have notified CONDEA Vista of our claim that these potential penalties are properly the responsibility of CONDEA Vista, and we have requested indemnity from CONDEA Vista. We have not received a response to this request.
In addition, we are subject to other claims and legal actions that may arise in the ordinary course of business. We believe that the ultimate liability, if any, with respect to these other claims and legal actions will not have a material effect on our financial position or on our results of operations.
17. EXPORT SALES
Export sales were approximately 13 percent, 11 percent and 14 percent of our sales for the years ended December 31, 2001, 2000 and 1999, respectively. The principal international markets we serve include Canada, Mexico, Latin America, Europe and Asia.
18. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS No. 133 requires that we recognize all derivative instruments on the balance sheet at fair value, and changes in the derivative's fair value must be currently recognized in earnings or comprehensive income, depending on the designation of the derivative. If the derivative is designated a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in comprehensive income and is
recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings currently.
We maintain floating rate debt (i.e., senior credit facility), which exposes us to changes in interest rates going forward. On November 30, 2000, we entered into a new interest swap agreement for a notional amount of $100 million, which has been designated as a cash flow hedge to effectively convert a portion of our outstanding senior credit facility (Tranche B term loan) to a fixed rate basis, thus reducing the impact of interest rate changes on future income. This agreement involves the receipt of floating rate amounts in exchange for fixed rate interest payments at an interest rate of 6.273 percent over the life of the agreement without an exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the debt. Upon adoption of SFAS 133 on January 1, 2001, we recognized an unrealized loss of approximately $1.1 million related to the interest rate swap, which was recorded as part of long-term liabilities and accumulated other comprehensive income. The reclassification of amounts associated with the interest rate swap into the statement of income is anticipated to occur through the maturity date of the interest rate swap agreement, which expires November 29, 2002. The change in fair value of the interest rate swap from January 1, 2001 to December 31, 2001 was $2.6 million.
During 2000, various interest swaps previously designated as hedges against our senior credit facility floating rate debt were canceled. The gain on the terminations amounted to $936,000 and will be amortized as an offset to interest expense over the term of the related indebtedness.
Following is a summary of financial instruments where the fair values differ from the recorded amounts as of December 31, 2001 and 2000:
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Debt-The fair values of the 75/8 percent notes and the 103/8 percent notes were based on quoted market prices. The carrying amounts of the senior credit facility, revolving credit loan and the term loan were assumed to approximate fair value due to the floating market interest rates to which the respective agreements are subject.
Interest Rate Swap Agreement-The fair value of the interest rate swap agreement was estimated by obtaining a quote from a broker.
19. EARNINGS PER SHARE
There are no adjustments to "Net income" or "Income from continuing operations" for the diluted earnings per share computations.
The following table reconciles the denominator for the basic and diluted earnings per share computations shown on the consolidated statements of income:
20. SEGMENT INFORMATION
In accordance with the requirements of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," we have identified two reportable segments through which we conduct our operating activities: chlorovinyls and aromatics. These two segments reflect the organization used by our management for internal reporting. The chlorovinyls segment is a highly integrated chain of products which includes chlorine, caustic soda, VCM and vinyl resins and compounds. The aromatics segment is also vertically integrated and includes cumene and the co-products phenol and acetone. A third product segment, gas chemicals, which included methanol was discontinued in the third quarter of 1999. See note 4 for a description of the discontinuance of our methanol operation.
Earnings of industry segments exclude interest income and expense, unallocated corporate expenses and general plant services, provision for income taxes, and income and expense items reflected as "other income (expense)" on our consolidated statements of income. Intersegment sales and transfers are insignificant.
Identifiable assets consist of plant and equipment used in the operations of the segment as well as inventory, receivables and other assets directly related to the segment. Corporate and general plant service assets include cash, certain corporate receivables, data processing equipment and spare parts inventory, as well as property (i.e., land) on which the manufacturing plants are located. We have no significant assets located outside of the United States.
Industry Segments
(1)Shipping and handling costs were reclassified (beginning in 2000) by increasing cost of sales and net sales. Prior years have been reclassified to conform to the current year presentation.
(2)Chlorovinyl's operating income for the year ended December 31, 2001, includes the asset write-off and related charges.
(3)Includes shared services, administrative and legal expense, along with the cost of our receivables program.
(4)Chlorovinyl's depreciation and amortization for the year ended December 31, 2001, with the asset write-off is $61,157. Geographic Areas
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly financial data for the periods indicated:
22. SUPPLEMENTAL GUARANTOR INFORMATION
Our payment obligations under our 103/8% senior subordinated notes are guaranteed by GG Terminal Management Corporation, Great River Oil & Gas Corporation, North American Plastics, LLC, Georgia Gulf Lake Charles, LLC and Georgia Gulf Chemicals & Vinyls, LLC, some of our wholly owned subsidiaries (the Guarantor Subsidiaries). The guarantees are full, unconditional and joint and several. The following condensed consolidating balance sheets, statements of income and statements of cash flows present the combined financial statements of the parent company, Guarantor Subsidiaries and our remaining subsidiaries (the Non-guarantor Subsidiaries). Separate financial statements of the Guarantor Subsidiaries are not presented because we have determined that they would not be material to investors.
In connection with the acquisition of the vinyls business from CONDEA Vista Company on November 12, 1999, we essentially became a holding company by transferring our operating assets and employees to our wholly owned subsidiary, Georgia Gulf Chemicals & Vinyls, LLC. Provisions in our senior credit facility limit payment of dividends, distributions, loans and advances to us by our subsidiaries.
Georgia Gulf Corporation and Subsidiaries
Supplemental Condensed Consolidating Balance Sheet
December 31, 2001
Georgia Gulf Corporation and Subsidiaries
Supplemental Condensed Consolidating Balance Sheet
December 31, 2000
Georgia Gulf Corporation and Subsidiaries
Supplemental Condensed Consolidating Income Statement
Year Ended December 31, 2001
Georgia Gulf Corporation and Subsidiaries
Supplemental Condensed Consolidating Income Statement
Year Ended December 31, 2000
Georgia Gulf Corporation and Subsidiaries
Supplemental Condensed Consolidating Income Statement
Year Ended December 31, 1999
Georgia Gulf Corporation and Subsidiaries
Supplemental Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2001
Georgia Gulf Corporation and Subsidiaries
Supplemental Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2000
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our proxy statement for the Annual Meeting of Stockholders to be held May 21, 2002 is hereby incorporated by reference in response to this item.
The following is additional information regarding our executive officers who are not directors, as of March 28, 2002:
Richard B. Marchese, 60, has served as Vice President Finance, Chief Financial Officer and Treasurer of Georgia Gulf since May 1989.
Joel I. Beerman, 52, has served as Vice President, General Counsel and Secretary since February 1994.
William H. Doherty, 47, has served as Vice President, Vinyl Compounds Group since December 1999. Before then, Mr. Doherty served as General Manager Vinyl Compounds since May 1998 and as Business Manager Vinyl Compounds from May 1992 until May 1998.
C. Douglas Shannon, 50, has served as Vice President, Chemicals Groups since December 1999. Before then, Mr. Shannon served as Director of Business Area Management Commodity Chemicals from July 1998 until December 1999. Since September 1993, Mr. Shannon has also served as Business Manager Electrochemicals and provided services in feedstock purchasing.
Mark J. Seal, 50, has served as Vice President, Polymer Group since August 1993.
Executive officers are elected by, and serve at the pleasure of, the board of directors.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Election of Directors" and "Executive Compensation" in our proxy statement for the Annual Meeting of Stockholders to be held on May 21, 2002 is hereby incorporated by reference in response to this item.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Principal Stockholders" and "Security Ownership of Management" in our proxy statement for the Annual Meeting of Stockholders to be held on May 21, 2002 is hereby incorporated by reference in response to this item.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We have not had any transactions required to be reported under this item for the calendar year 2001, or for the period from January 1, 2002 to the date of this report.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)The following documents are filed as a part of this Form 10-K:
(1)Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
Report of Management
Report of Independent Public Accountants
(2)Financial Statement Schedules:
Report of Independent Public Accountants on Financial Statement Schedule
The following financial statement schedule is for the years ended December 31, 2001, 2000 and 1999:
II Valuation and Qualifying Accounts
Schedules other than the one listed above are omitted because they are not required and are inapplicable or the information is otherwise shown in the Consolidated Financial Statements or related notes.
(3)Exhibits. Each management contract or compensatory plan or arrangement is preceded by an asterisk.
The following exhibits are filed as part of this Form 10-K:
Exhibit No.
Description
10.1
Second Amendment to the Employee Stock Purchase Plan
Consent of Independent Public Accountants
Management representation of Audit Assurance from Arthur Andersen LLP
The following exhibit is incorporated by reference to Georgia Gulf's Form 10-Q Report for the quarter ended June 30, 2001, filed August 14, 2001:
Exhibit No.
Description
10.1
Amendment No. 2, dated June 30, 2001 to the Credit Agreement dated as of November 12, 1999, among Georgia Gulf Corporation, the eligible subsidiaries party thereto and The Chase Manhattan Bank, as Administrative Agent.
10.2
Letter Agreement dated as of July 20, 2001, among GGRC Corp., as Seller, and Georgia Gulf Corporation and Georgia Gulf Chemicals and Vinyls, LLC, as Initial Servicers, and Blue Ridge Asset Funding Corporation, as Purchaser, and Wachovia Bank, N.A., as Administrative Agent.
The following exhibit is incorporated by reference to Georgia Gulf's Form 8-A amendment filed December 13, 2000:
Exhibit No.
Description
4.1
Amended and Restated Rights Agreement, dated as of December 5, 2000, between Georgia Gulf and EquiServe Trust Company, N.A.
The following exhibits are incorporated herein by reference to Georgia Gulf's 1999 Form 8-K Current Report dated November 18, 1999, filed November 19, 1999:
Exhibit No.
Description
4.1
Indenture dated as of November 12, 1999 between Georgia Gulf Corporation and SunTrust Bank, Atlanta, as trustee
10.1
Credit Agreement dated as of November 12, 1999 between Georgia Gulf Corporation, the Eligible Subsidiaries referred to therein, the Lenders party thereto, and The Chase Manhattan Bank as Administrative Agent, Syndication Agent and Collateral Agent
The following exhibit is incorporated herein by reference to Georgia Gulf's 1999 Form 10-Q Quarterly Report for the period ending September 30, 1999, filed October 28, 1999:
Exhibit No.
Description
2(a)
Asset Purchase Agreement dated as of August 30, 1999, between CONDEA Vista Company and Georgia Gulf Corporation
The following exhibit is incorporated herein by reference to Georgia Gulf's 1998 Form 10-Q Quarterly Report for the period ending June 30, 1998, filed August 13, 1998:
Exhibit No.
Description
10(a)
Stock Purchase Agreement, dated May 11, 1998, between Georgia Gulf and North American Plastics, Inc.
The following exhibit is incorporated herein by reference to Georgia Gulf's Form S-8 (File No. 33-59433) filed July 20, 1998:
Exhibit No.
Description
*4
Georgia Gulf Corporation 1998 Equity and Performance Incentive Plan
The following exhibit is incorporated herein by reference to Georgia Gulf's Form S-8 (File No. 33-64749) filed December 5, 1995:
Exhibit No.
Description
Georgia Gulf Corporation Employee Stock Purchase Plan
The following exhibit is incorporated herein by reference to Georgia Gulf's Form S-3 (File No. 33-63051) filed September 28, 1995:
Exhibit No.
Description
Indenture, dated as of November 15, 1995, between Georgia Gulf and LaSalle National Bank, as trustee (including form of Notes).
The following exhibits are incorporated herein by reference to Georgia Gulf's 1991 Form 10-K Annual Report filed March 30, 1992:
Exhibit No.
Description
3(a)
Certificate of Amendment of Certificate of Incorporation
3(b)
Amended and Restated By-Laws
*10
Georgia Gulf Corporation 1990 Incentive Equity Plan
The following exhibits are incorporated herein by reference to Georgia Gulf's Registration Statement on Form S-1 (File No. 33-9902) declared effective on December 17, 1986:
Exhibit No.
Description
3(a)
Certificate of Agreement of Merger, with Certificate of Incorporation of Georgia Gulf as Exhibit A thereto, dated December 31, 1984, and amendments thereto
10(g)
Agreement re: Liabilities among Georgia-Pacific, Georgia- Pacific Chemicals, Inc., and others dated, December 31, 1984
10(o)
Georgia Gulf Savings and Capital Growth Plan
10(p)
Georgia Gulf Salaried Employees Retirement Plan
10(q)
Georgia Gulf Hourly Employees Retirement Plan
*10(u)
Executive Retirement Agreements
10(v)
Salt Contract
The following exhibit is incorporated by reference to Georgia Gulf's 1999 Form 10-K Annual Report filed March 28, 2000.
Exhibit No.
Description
Subsidiaries of the Registrant
(b)Reports on Form 8-K During the fourth quarter of 2001, we filed no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ EDWARD A. SCHMITT Edward A. Schmitt
President, Chief Executive Officer and Director (Principal Executive Officer)
March 29, 2002
/s/ RICHARD B. MARCHESE Richard B. Marchese
Vice President Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
March 29, 2002
/s/ JOHN E. AKITT John E. Akitt
Director
March 29, 2002
/s/ JOHN D. BRYAN John D. Bryan
Director
March 29, 2002
/s/ DENNIS M. CHORBA Dennis M. Chorba
Director
March 29, 2002
/s/ PATRICK J. FLEMING Patrick J. Fleming
Director
March 29, 2002
/s/ CHARLES T. HARRIS III Charles T. Harris III
Director
March 29, 2002
/s/ JERRY R. SATRUM Jerry R. Satrum
Director
March 29, 2002
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To Georgia Gulf Corporation:
We have audited, in accordance with auditing standards generally accepted in the United States, the financial statements included in this Form 10-K and have issued our report thereon dated February 15, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 of this Form 10-K is the responsibility of Georgia Gulf's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 15, 2002
GEORGIA GULF CORPORATION AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
NOTES:
(1)Accounts receivable balances written off during the period.
INDEX TO EXHIBITS
(1)Page numbers appear on the manually signed Form 10-K's only.
TABLE OF CONTENTS PART I
PART I
Item 1. BUSINESS.
Item 2. PROPERTIES.
Item 3. LEGAL PROCEEDINGS.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
PART II
Item 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Item 6. SELECTED FINANCIAL DATA
Item 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA.
Report of Independent Public Accountants
Report of Management
Consolidated Balance Sheets Georgia Gulf Corporation and Subsidiaries
Consolidated Statements of Income Georgia Gulf Corporation and Subsidiaries
Consolidated Statements of Cash Flows Georgia Gulf Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity Georgia Gulf Corporation and Subsidiaries
Notes to Consolidated Financial Statements Georgia Gulf Corporation and Subsidiaries
Georgia Gulf Corporation and Subsidiaries Supplemental Condensed Consolidating Balance Sheet December 31, 2001
Georgia Gulf Corporation and Subsidiaries Supplemental Condensed Consolidating Balance Sheet December 31, 2000
Georgia Gulf Corporation and Subsidiaries Supplemental Condensed Consolidating Income Statement Year Ended December 31, 2001
Georgia Gulf Corporation and Subsidiaries Supplemental Condensed Consolidating Income Statement Year Ended December 31, 2000
Georgia Gulf Corporation and Subsidiaries Supplemental Condensed Consolidating Income Statement Year Ended December 31, 1999
Georgia Gulf Corporation and Subsidiaries Supplemental Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2001
Georgia Gulf Corporation and Subsidiaries Supplemental Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2000
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Item 11. EXECUTIVE COMPENSATION.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
SIGNATURES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
GEORGIA GULF CORPORATION AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
INDEX TO EXHIBITS