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, 1997
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 50,722,270.
<PAGE>
M. A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income -
Three Months and Nine Months ended
September 30, 1997 and 1996 2
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Consolidated Statements of
Cash Flows - Nine Months Ended
September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Interim Financial Condition and Results
of Operations. 7-8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
-1-
<PAGE>
PART 1
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Net Sales $561,418 $531,928 $1,644,429 $1,566,727
Costs and Expenses
Cost of goods sold 457,511 436,151 1,333,025 1,280,899
Selling, general and administrative 66,109 60,870 200,294 180,649
Interest on debt 5,976 4,351 16,507 15,582
Amortization of intangibles 3,348 3,585 10,500 10,660
Other - net (200) 558 (316) 1,628
532,744 505,515 1,560,010 1,489,418
Income Before Income Taxes
and Extraordinary Charge 28,674 26,413 84,419 77,309
Income taxes 12,043 10,971 35,456 32,856
Income Before Extraordinary Charge 16,631 15,442 48,963 44,453
Extraordinary Charge - - - (5,352)
Net Income $ 16,631 $ 15,442 $ 48,963 $ 39,101
Net Income per Share of Common Stock
Primary
Income before extraordinary charge $ .37 $ .34 $ 1.08 $ .96
Extraordinary charge - - - (.11)
Net income $ .37 $ .34 $ 1.08 $ .85
Fully diluted
Income before extraordinary charge $ .36 $ .33 $ 1.05 $ .94
Extraordinary charge - - - (.11)
Net income $ .36 $ .33 $ 1.05 $ .83
Dividends per common share $ .105 $ .100 $ .315 $ .297
</TABLE>
-2-
<PAGE>
<TABLE>
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September December
30, 1997 31, 1996
(Dollars in thousands)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 33,696 $ 30,028
Receivables 354,595 293,625
Inventories:
Finished products 153,403 134,655
Raw materials and supplies 50,899 44,509
204,302 179,164
Prepaid expenses 10,779 7,679
Deferred income taxes 22,155 23,043
Total current assets 625,527 533,539
Property, Plant and Equipment 484,609 452,668
Less allowances for depreciation 219,846 198,261
264,763 254,407
Other Assets
Goodwill and other intangibles 416,660 355,538
Investments and other assets 70,939 70,678
Deferred income taxes 34,939 36,617
522,538 462,833
$1,412,828 $1,250,779
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks $ 2,922 $ 2,304
Trade payables and accrued expenses 373,085 348,608
Current portion of long-term debt 446 1,027
Total current liabilities 376,453 351,939
Other Liabilities 177,006 182,852
Long-term Debt
Senior notes 124,960 124,960
Medium-term notes 100,000 20,000
Other 100,590 62,745
325,550 207,705
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 65,619,821 shares at September 30, 1997 and
65,261,907 shares at December 31, 1996 65,620 65,262
Capital surplus 363,421 329,543
Retained earnings 452,045 417,228
Associates ownership trust (152,654) (134,704)
Cost of treasury stock (14,897,551 shares at September 30, 1997
and 14,272,092 shares at December 31, 1996) (181,249) (165,675)
Minimum pension liability adjustment (5,018) (5,018)
Accumulated translation adjustment (8,346) 1,647
533,819 508,283
$1,412,828 $1,250,779
</TABLE>
-3-
<PAGE>
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
1997 1996
(Dollars in thousands)
Cash Provided from (Used for) Operating Activities
Net income $ 48,963 $ 39,101
Depreciation and amortization 39,352 38,067
Companies carried at equity:
Income (3,397) (3,889)
Dividends received 4,367 4,541
Changes in operating assets and liabilities:
Receivables (67,823) (28,468)
Inventories (21,330) 6,423
Prepaid expenses (3,313) (1,613)
Trade payables and accrued expenses 27,438 12,383
Restructuring payments (4,996) (10,801)
Gain on sale of assets (3,250) -
Restructuring charges 3,050 -
Other 5,587 7,501
Extraordinary charge - 8,774
Net operating activities 24,648 72,019
Cash Provided from (Used for) Investing Activities
Capital expenditures (29,827) (24,529)
Acquisitions of businesses, less cash acquired (95,929) (48,605)
Acquisition payments (14,959) (712)
Sales of assets 6,361 11,820
Other 8,222 6,805
Net investing activities (126,132) (55,221)
Cash Provided from (Used for) Financing Activities
Cash dividends paid (14,146) (13,552)
Proceeds from the sale of common stock 3,608 7,466
Purchase of shares for treasury (11,081) (10,928)
Increase in debt 206,199 81,996
Reduction in debt (77,192) (155,154)
Net financing activities 107,388 (90,172)
Effect of exchange rate changes on cash (2,236) 306
Cash and Cash Equivalents
Increase (decrease) 3,668 (73,068)
Beginning of period 30,028 111,235
End of period $ 33,696 $ 38,167
Cash paid during period
Interest $ 17,557 $ 21,546
Income taxes 27,266 20,374
-4-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
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 in
accordance with generally accepted accounting principles.
Reference should be made to the footnotes included in the 1996
Annual Report.
The results of operations for the interim periods are not
necessarily indicative of the results expected for the full year.
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 130 "Reporting Comprehensive Income" and
Statement No. 131 "Disclosures about Segments of an Enterprise
and Related Information". The Company is analyzing the impact of
these standards.
Acquisitions
In February 1997, the Company purchased Enviro Care Compounds, a
producer of halogen-free flame retardant plastic compounds based
in Norway; in May 1997, the Company purchased the former Sadolin
Masterbatch, a plastic color and additive concentrate business
based in Denmark; and in September 1997, the Company acquired the
manufacturing business of Harwick Chemical Manufacturing
Corporation. Newly acquired Harwick supplies chemical
dispersions, specialty colorants and other specialty products for
the rubber industry, and specialty color pigment dispersions and
dry colorants for plastics. These acquisitions were accounted
for using the purchase method of accounting. Had the
acquisitions been made at the beginning of 1996, reported pro
forma results of operations for the third quarter or first nine
months of 1997 and 1996 would not be materially different.
On November 3, 1997, the Company announced that it had formed a
joint venture alliance with Techmer PM to produce color and
additive concentrates for the film and fiber markets. The
Company owns a 51% interest in the joint venture.
Net Income Per Share of Common Stock
Primary net income per share of common stock was computed by
dividing net income applicable to common stock by the average
number of shares outstanding. The average number of shares
outstanding for the quarters ended September 30, 1997 and 1996 was
45,323,323 and 45,885,704, respectively. The average number of
shares outstanding for the nine months ended September 30, 1997 and 1996
was 45,220,381 and 45,913,379, 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 from the AOT to fund a portion of the
Company's obligations under certain of its employee compensation
and benefit plans. The effect of assuming the exercise of stock
options was not significant in 1997 and 1996.
-5-
<PAGE>
The number of shares used to compute fully diluted 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 and stock
warrants. The average number of shares used in the computation
for the quarters ended September 30, 1997 and 1996 was 46,528,118
and 47,020,190, respectively. The average number of shares for
the nine months ended September 30, 1997 and 1996 was
46,501,803 and 47,092,914, respectively.
In February 1997, the FASB issued Statement No. 128 "Earnings Per
Share". The Company expects that the new standard will not have
an impact on previously reported earnings per share when adopted
in the fourth quarter of 1997.
Long-term Debt
During the third quarter and first nine months of 1997, the
Company issued $30 million and $80 million, respectively, of
Medium Term Notes under its Shelf Registration Statement filed
with the Securities and Exchange Commission in 1996. The notes
bear interest at rates from 6.74% to 7.16%, are due between 2005
and 2008 and pay interest semi-annually.
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 $29.5 million in the third quarter of 1997
and $77.7 million in the first nine months of 1997 as compared
with the 1996 periods. Sales in the processing segment increased
by $26.2 million or 9% and $61.6 million or 7.2% for the third
quarter and for the first nine months of 1997 as compared to
1996. Acquisitions since 1996 contributed $13.9 million and
$47.6 million to sales for the third quarter and first nine
months of 1997. Volume increased by 11% and 6% within the
processing businesses for the three and nine month periods ended
September 30, 1997 as compared to the same periods in 1996.
However, these increases were partially offset due to the
strengthening of the U.S. dollar and unfavorable pricing and mix
changes. Distribution sales increased by $9.7 million or 4.1%
for the third quarter and by $34.4 or 4.9% for the nine months
ended September 30, 1997 as compared to the same periods in 1996.
International volume increases drove revenue increases within
this segment which was also offset by adverse impacts of the
strengthening dollar and pricing and mix changes. Overall,
currency translation and pricing/mix changes have each adversely
impacted sales by 2% in the third quarter and by 1% for the nine
months ended September 30, 1997 as compared to the corresponding
periods in 1996.
Gross margins were 18.5% in the third quarter of 1997 and 18.9%
for the first nine months of 1997 compared with 18.0% and 18.2%,
respectively, for the comparable 1996 periods. Margins have been
positively impacted by a decrease in average raw material costs
for the quarter and the nine months ended September 30, 1997
versus the same periods in 1996. Operating efficiencies
implemented in the processing businesses have driven higher
margins and increased volumes have led to improved absorption of
fixed costs.
Selling, general and administrative expenses increased $5.2
million in the third quarter of 1997 and $19.6 million in the
first nine months of 1997. As a percentage of sales, selling,
general and administrative costs were 11.8% in the third quarter
of 1997 and 12.2% for the first nine months of 1997 compared with
11.4% and 11.5% respectively, for the comparable 1996 periods.
The increase in selling, general and administrative costs is
attributable to acquisitions, general economic cost increases and
the implementation of common business information systems.
Interest on debt increased by $1.6 million in the third quarter
of 1997 and increased by $.9 million in the first nine months of
1997. 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. Interest incurred on
increased borrowings associated with acquisitions and working
capital requirements have offset savings generated from lower
rates on the borrowings which replaced the Senior Notes in 1996.
Other net income includes a gain of $3.3 million from the sale in
February 1997 of the Company's remaining interest in the Iron Ore
Company of Canada sales agency. Additionally, the Company
recorded a $2.1 million provision for two plant closings and
start-up cost for a new plant within its processing operations
and a $1.0 million charge for the reengineering of its resin
distribution business in the first quarter of 1997.
-7-
<PAGE>
Liquidity and Sources of Capital
Operating activities provided $24.6 million of cash during the
first nine months of 1997 after providing for working capital
requirements of $65.0 million. The Company used $126.1 million
of cash for investing activities including $29.8 million for
capital expenditures and $95.9 million for the purchase of new
businesses. Financing activities provided $107.4 million
primarily as a result of increases in debt offset by dividend
payments of $14.1 million and cash used to repurchase shares of
$11.1 million.
The Company has a credit agreement which provides commitments for
borrowings up to $200 million through January 2002. 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, 1997, there were no borrowings
supported by this agreement.
During the third quarter and first nine months of 1997, the
Company issued $30 million and $80 million, respectively, of
Medium-Term Notes under its Shelf Registration Statement filed
with the Securities and Exchange Commission in 1996. The notes
bear interest at rates from 6.74% to 7.16%, are due between 2005
and 2008 and pay interest semi-annually.
The current ratio was 1.7:1 at September 30, 1997 compared with
1.5:1 at December 31, 1996. Debt to total capital was 37.9% at
September 30, 1997 and 29.0% at December 31, 1996.
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 the Company and certain
subsidiaries for costs of environmental remediation measures
taken or to be taken principally 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.
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,
fluctuations in exchange rates, availability and pricing of raw
materials, changes in product mix, shifts in market demand, and
changes in prevailing interest rates.
-8-
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 12.1 - Computation of Ratio of Earnings to Fixed
Charges (revised to reflect the Company results as of September
30, 1997).
b) During the quarter ended September 30, 1997, the Registrant
filed Current Report on Form 8-K dated September 19, 1997
updating the exhibit to its Registration Statement on Form S-3
(File No. 333-5763), which was declared effective November 8,
1996.
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
Controller
(Principal Accounting Officer)
Date: November 4, 1997
-9-
Exhibit 12.1
M.A. Hanna Company
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION> Nine Months
Ended
September 30 Year Ended December 31
1997 1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated pretax income
from continuing operations $ 84,419 $77,309 $102,891 $ 98,821 $ 66,222 $37,654 $27,005
Adjustments
Fixed charges - excluding
capitalized interest:
Consolidated interest expense 16,507 15,582 20,033 26,278 28,549 32,258 32,509
Interest portion of rental expense 4,521 4,856 6,215 5,942 5,624 5,281 4,729
Total fixed charges 21,028 20,438 26,248 32,220 34,173 37,539 37,238
Adjusted earnings $105,447 $97,747 $129,139 $131,041 $100,395 $75,193 $64,243
Ratio of earnings to fixed charges 5.01 4.78 4.92 4.07 2.94 2.00 1.73
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 33,696
<SECURITIES> 0
<RECEIVABLES> 360,269
<ALLOWANCES> 5,674
<INVENTORY> 204,302
<CURRENT-ASSETS> 625,527
<PP&E> 484,609
<DEPRECIATION> 219,846
<TOTAL-ASSETS> 1,412,828
<CURRENT-LIABILITIES> 376,453
<BONDS> 325,550
0
0
<COMMON> 65,620
<OTHER-SE> 468,199
<TOTAL-LIABILITY-AND-EQUITY> 1,412,828
<SALES> 1,644,429
<TOTAL-REVENUES> 1,644,429
<CGS> 1,333,025
<TOTAL-COSTS> 1,333,025
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,106
<INTEREST-EXPENSE> 16,507
<INCOME-PRETAX> 84,419
<INCOME-TAX> 35,456
<INCOME-CONTINUING> 48,963
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,963
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.05
</TABLE>
