SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED September 30, 1996
COMMISSION FILE NUMBER 1-5222
M. A. HANNA COMPANY
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 34-0232435
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 36-5000, 200 PUBLIC SQUARE, CLEVELAND, OHIO 44114-2304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 216-589-4000
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Common Shares Outstanding, as of the close of the period
covered by this report 51,764,482.
<PAGE>
M. A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income -
Nine Months ended September 30, 1996 and 1995 2
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Consolidated Statements of
Cash Flows - Nine Months Ended
September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Interim Financial Condition and Results
of Operations. 7-9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
-1-
<PAGE>
PART 1
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
<CAPTION> (Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Net Sales $531,928 $464,078 $1,566,727 $1,440,145
Costs and Expenses
Cost of goods sold 436,151 379,046 1,280,899 1,174,532
Selling, general and administrative 60,870 52,653 180,649 164,599
Interest on debt 4,351 6,142 15,582 20,295
Amortization of intangibles 3,585 3,505 10,660 10,473
Other - net 558 (620) 1,628 (7,493)
505,515 440,726 1,489,418 1,362,406
Income from Continuing Operations Before
Extraordinary Item and Income Taxes 26,413 23,352 77,309 77,739
Income taxes 10,971 10,041 32,856 33,054
Income from Continuing Operations Before
Extraordinary Item 15,442 13,311 44,453 44,685
Income from Discontinued Operations - - - 45,337
Income Before Extraordinary Item 15,442 13,311 44,453 90,022
Extraordinary Item - - (5,352) -
Net Income $ 15,442 $ 13,311 $ 39,101 $ 90,022
Net Income per Share of Common Stock
Primary
Continuing operations $ .34 $ .28 $ .96 $ .96
Discontinued operations - - - .97
Extraordinary item - - (.11) -
Net income $ .34 $ .28 $ .85 $ 1.93
Fully diluted
Continuing operations $ .33 $ .28 $ .94 $ .93
Discontinued operations - - - .95
Extraordinary item - - (.11) -
Net income $ .33 $ .28 $ .83 $ 1.88
Dividends per common share $ .100 $ .090 $ .297 $ .270
</TABLE>
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<PAGE>
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
September December
30, 1996 31, 1995
<CAPTION> (Dollars in thousands)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 38,167 $ 111,235
Receivables 322,708 268,016
Inventories:
Finished products 122,753 126,411
Raw materials and supplies 49,415 40,390
172,168 166,801
Prepaid expenses 7,810 5,693
Deferred income taxes 24,136 22,867
Total current assets 564,989 574,612
Property, Plant and Equipment 428,699 393,314
Less allowances for depreciation 195,881 166,293
232,818 227,021
Other Assets
Goodwill and other intangibles 345,750 321,778
Investments and other assets 73,138 73,067
Deferred income taxes 36,047 35,118
454,935 429,963
$1,252,742 $1,231,596
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks $ 1,777 $ 1,328
Trade payables and accrued expenses 372,837 333,176
Current portion of long-term debt 648 747
Total current liabilities 375,262 335,251
Other Liabilities 179,798 179,580
Long-term Debt
Senior notes 124,960 227,270
Other 60,913 4,717
185,873 231,987
Stockholders' Equity
Preferred stock, without par value
Authorized 5,000,000 shares
Issued -0- shares - -
Common stock, par value $1
Authorized 100,000,000 shares
Issued 65,186,623 shares at September 30, 1996 and
43,274,273 shares at December 31, 1995 65,186 43,274
Capital surplus 333,681 324,273
Retained earnings 407,258 381,709
Associates ownership trust (139,988) (121,363)
Cost of treasury stock (13,422,141 shares at September 30, 1996
and 8,631,355 shares at December 31, 1995) (147,575) (137,181)
Minimum pension liability adjustment (7,522) (7,522)
Accumulated translation adjustment 769 1,588
511,809 484,778
$1,252,742 $1,231,596
</TABLE>
-3-
<PAGE>
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
1996 1995
(Dollars in thousands)
Cash Provided from (Used for) Operating Activities
Net income $ 39,101 $ 90,022
Discontinued operations - 4,797
Depreciation and amortization 38,067 35,581
Companies carried at equity:
Income (3,889) (5,015)
Dividends received 4,541 6,052
Changes in operating assets and liabilities:
Receivables (28,468) (32,519)
Inventories 6,423 (19,034)
Prepaid expenses (1,613) (647)
Trade payables and accrued expenses 12,383 8,901
Gain from sales of assets - (84,427)
Restructuring payments (10,801) (13,806)
Other 7,501 12,442
Extraordinary charge 8,774 -
Net operating activities 72,019 2,347
Cash Provided from (Used for) Investing Activities
Capital expenditures (24,529) (44,415)
Acquisitions of businesses, less cash acquired (48,605) -
Acquisition payments (712) (2,338)
Sales of assets 11,820 223,500
Purchase of short-term securities - (69,703)
Other 6,805 9,640
Net investing activities (55,221) 116,684
Cash Provided from (Used for) Financing Activities
Cash dividends paid (13,552) (12,522)
Proceeds from the sale of common stock 7,466 1,586
Purchase of shares for treasury (10,928) (9,021)
Increase in debt 81,996 57,314
Reduction in debt (155,154) (118,039)
Net financing activities (90,172) (80,682)
Effect of exchange rate changes on cash 306 1,694
Cash and Cash Equivalents
Increase (decrease) (73,068) 40,043
Beginning of period 111,235 23,105
End of period $ 38,167 $ 63,148
Cash paid during period
Interest $ 21,546 $ 26,214
Income taxes 20,374 65,739
-4-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions
to Form 10-Q and in the opinion of the Company include all
adjustments necessary to present fairly the results of
operations, financial position, and changes in cash flow.
Reference should be made to the footnotes included in the 1995
Annual Report.
The results of operations for the interim periods are not
necessarily indicative of the results expected for the full year.
Acquisitions
In January 1996, the Company announced the successful completion
of its tender offer for the outstanding stock of CIMCO, Inc., a
producer of thermoplastic compounds and plastic components.
Consistent with its strategy as an intermediary between the
polymer producer and the end product manufacturer, the Company
announced that it would sell CIMCO's plastic components business,
which has been reported as a discontinued operation in the
accompanying financial statements. The sale of this business was
consummated in the second quarter. In March 1996, the Company
acquired Victor International Plastics Ltd., a leading producer
of color masterbatch in the United Kingdom. Both acquisitions
were accounted for using the purchase method of accounting. Had
the acquisitions been made at the beginning of 1995, reported pro
forma results of operations for 1996 and 1995 would not be
materially different.
Discontinued Operations
Income from discontinued operations in 1995 includes earnings
from Day International, a producer of end products for the
printing and textiles industries, which was sold in the second
quarter of 1995.
Net Income Per Share of Common Stock
Primary net income per share of common stock is computed by
dividing net income applicable to common stock by the average
number of shares outstanding during the period (45,885,704 and
46,861,770 for the three month periods ended September 30, 1996
and 1995, respectively, and 45,913,379 and 46,722,410 for the
nine month periods ended September 30, 1996 and 1995,
respectively). Shares of common stock held by the Associates
Ownership Trust ("AOT") enter into the determination of the
average number of shares outstanding as the shares are released
-5-
<PAGE>
from the AOT to fund a portion of the Company's obligations under
certain of its employee compensation and benefit plans.
The number of shares used to compute fully dilutive net income
per share is based on the number of shares used for primary net
income per share increased by the common stock equivalents which
would arise from the exercise of stock options. The average
number of shares used in the computation were 47,020,190 and
47,813,537 for the three month periods ended September 30, 1996
and 1995, respectively, and 47,092,914 and 47,770,262 for the
nine month periods ended September 30, 1996 and 1995,
respectively.
The Company effected a three-for-two stock split for shareholders
of record on May 24, 1996 in the form of a stock dividend. All
per share amounts have been restated to reflect the three-for-two
stock split.
Long-term Debt
In 1996, the Company repurchased $102,310,000 principal amount of
Senior Notes in the open market resulting in an extraordinary
charge of $8,774,000 ($5,352,000 after tax).
-6-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales increased $67.9 million in the third quarter of 1996
and $126.6 million in the first nine months of 1996 as compared
with the 1995 periods. Sales from processing businesses
increased $42.5 million in the third quarter of 1996 and $79.2
million in the first nine months of 1996 due to acquisitions made
in 1996 and higher pricing. Sales from distribution businesses
increased from $211.7 million in the third quarter of 1995 to
$239.0 million in the third quarter of 1996 and from $650.9
million in the first nine months of 1995 to $697.2 million in the
first nine months of 1996 due to higher unit volumes, partially
offset by lower pricing. Sales from other operations were
comparable with prior year levels.
Gross margins were 18.0% in the third quarter of 1996 and 18.2%
for the first nine months of 1996 compared with 18.3% and 18.4%,
respectively, for the comparable 1995 periods. Gross margins in
1995 were impacted by provisions for inventories valued by the
last-in first-out cost method of $1.2 million and $5.7 million
for the third quarter and first nine months, respectively.
Absent these provisions, gross margins would have been 18.6% and
18.8% in the third quarter and first nine months of 1995,
respectively. The deterioration in gross margins is due in part
to the mix of sales between processing and distribution business,
a lower absorption of fixed costs and the acquisitions made in
1996.
Selling, general and administrative expenses increased $8.2
million in the third quarter of 1996 and $16.0 million in the
first nine months of 1996 due in part to acquisitions made in
1996. However, as a percentage of sales, selling, general and
administrative costs were 11.4% in the third quarter of 1996 and
11.5% for the first nine months of 1996 compared with 11.3% and
11.4% respectively, for the comparable 1995 periods.
Interest on debt decreased $1.8 million in the third quarter of
1996 and $4.7 million in the first nine months of 1996 due to the
repayment in 1995 of the financing for the 1994 acquisition of
Th. Bergmann. In addition the Company repurchased $102.3 million
of its Senior Notes in the first nine months of 1996, resulting
in an after-tax extraordinary charge of $5.4 million.
Other - net in the first nine months of 1995 includes a gain of
$9.3 million from the sale of its 8% interest in Iron Ore Company
of Canada. The Company will continue to receive fees as managing
agent and from its interest in the sales agency through 1996.
The effective tax rate for the nine month period ended September
30, 1996 and 1995 was 42.5%. During the third quarter of 1996,
the Company lowered its effective tax rate to 42.5% from 43.0%,
resulting in an effective tax rate in the third quarter of 1996
of 41.5%.
-7-
<PAGE>
Income from discontinued operations in 1995 includes earnings
from Day International, a producer of end products for the
printing and textile industries. The business was sold in June
1995 with the Company recognizing a gain of $40.3 million.
Liquidity and Sources of Capital
Operating activities provided $72.9 million in the first nine
months of 1996. This amount includes the use of $11.3 million
for working capital and $10.8 million for the payment of
obligations related to prior restructurings. Investment
activities used $55.2 million, which includes $24.5 million for
capital expenditures and $48.6 million for the acquisition of
CIMCO and Victor International partially offset by proceeds from
the sale of the molding business of CIMCO of $11.8 million.
Financing activities used $90.2 million and include $73.2 million
for the reduction of outstanding indebtedness, $13.6 million for
dividends and $10.9 million for the purchase of shares for
treasury, partially offset by proceeds from the sale of common
stock of $7.5 million.
The Company has a credit agreement which provides commitments for
borrowings up to $200 million through June 1998. The arrangement
provides for interest rates to be determined at the time of
borrowing based on a choice of formulas specified in the
agreement. At September 30, 1996, there were $52.5 million of
outstanding borrowings supported by this agreement.
During the second quarter of 1996, the Company filed a shelf
registration statement with the Securities and Exchange
Commission to sell up to $300 million of debt securities. It is
anticipated that the net proceeds from the sale would be used for
general corporate purposes, which could include repayment of
indebtedness, repurchase of the Company's common stock, additions
to working capital, capital expenditures or acquisitions. At
September 30, 1996, the Company has not sold any debt securities.
The current ratio was 1.5:1 at September 30, 1996 compared with
1.7:1 at December 31, 1995. Debt to total capital was 26.6% at
September 30, 1996 and 32.4% at December 31, 1995.
Environmental Matters
The Company is subject to various laws and regulations concerning
environmental matters. The Company is committed to a long-term
environmental protection program that reduces releases of
hazardous materials into the environment as well as to the
remediation of identified existing environmental concerns.
Claims have been made against a subsidiary of the Company for
costs of environmental remediation measures taken or to be taken
in connection with operations that have been sold or closed.
These include the clean-up of Superfund sites and participation
with other companies in the clean-up of hazardous waste disposal
sites, several of which have been designated as Superfund sites.
Reserves for such liabilities have been established and no
insurance recoveries have been anticipated in the determination
of reserves. In management's opinion, the aforementioned claims
will be resolved without material adverse effect on the financial
position or results of operations of the Company.
-8-
<PAGE>
Other
Any forward-looking statements included in this quarterly report
are based on current expectations. Any statements in this report
that are not historical in nature are forward-looking statements.
Actual results may differ materially depending on business
conditions and growth in the plastics and rubber industries and
general economy, foreign political and economic developments,
availability and pricing of raw materials, changes in product
mix, shifts in market demand, and changes in prevailing interest
rates.
-9-
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
12.1 Computation of Ratio of Earnings to Fixed Charges.
b.) No reports on Form 8-K were filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
M. A. HANNA COMPANY (Registrant)
/s/ Thomas E. Lindsey
Thomas E. Lindsey
Controller
(Principal Accounting Officer)
Date: October 25, 1996
-10-
Exhibit 12.1
M.A. Hanna Company
Ratio of Earnings to Fixed Charges
(in thousands)
<TABLE>
Nine Months
Ended
September 30 Year Ended December 31
<CAPTION> 1996 1995 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated pre-tax income
from continuing operations $ 77,309 $ 77,739 $ 98,821 $ 66,222 $37,654 $27,005 $(16,195)
Adjustments
Fixed charges - excluding
capitalized interest
Consolidated interest expense 15,582 20,295 26,278 28,549 32,258 32,509 23,221
Interest portion of rental expense 4,856 4,410 5,942 5,624 5,281 4,729 4,905
Total fixed charges 20,438 24,705 32,220 34,173 37,539 37,238 28,126
Adjusted earnings $97,747 $102,444 $131,041 $100,395 $75,193 $64,243 $11,931
Ratio of earnings to fixed charges 4.78 4.15 4.07 2.94 2.00 1.73 0.42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 38,167
<SECURITIES> 0
<RECEIVABLES> 333,468
<ALLOWANCES> 10,760
<INVENTORY> 172,168
<CURRENT-ASSETS> 564,989
<PP&E> 428,699
<DEPRECIATION> 195,881
<TOTAL-ASSETS> 1,252,742
<CURRENT-LIABILITIES> 375,262
<BONDS> 185,873
0
0
<COMMON> 65,186
<OTHER-SE> 446,623
<TOTAL-LIABILITY-AND-EQUITY> 1,252,742
<SALES> 1,566,727
<TOTAL-REVENUES> 1,566,727
<CGS> 1,280,899
<TOTAL-COSTS> 1,280,899
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,430
<INTEREST-EXPENSE> 15,582
<INCOME-PRETAX> 77,309
<INCOME-TAX> 32,856
<INCOME-CONTINUING> 44,453
<DISCONTINUED> 0
<EXTRAORDINARY> (5,352)
<CHANGES> 0
<NET-INCOME> 39,101
<EPS-PRIMARY> .85
<EPS-DILUTED> .83
</TABLE>
