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 March 31, 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 50,885,153.
<PAGE>
M. A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income -
Three Months ended March 31, 1997 and 1996 2
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Interim Financial Condition and Results
of Operations. 6-7
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 6. Exhibits and Reports on Form 8-K 8
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<PAGE>
PART I
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FIRST QUARTER
1997 1996
(Dollars in thousands
except per share data)
Net Sales $527,629 $497,451
Costs and Expenses
Cost of goods sold 426,152 405,995
Selling, general and administrative 66,331 58,312
Interest on debt 5,132 6,036
Amortization of intangibles 3,588 3,499
Other - net 171 183
501,374 474,025
Income Before Income Taxes
and Extraordinary Charge 26,255 23,426
Income taxes 11,027 10,073
Income Before Extraordinary Charge 15,228 13,353
Extraordinary charge - (1,575)
Net Income $ 15,228 $ 11,778
Net Income per Share
Primary
Income before extraordinary charge $ .34 $ .29
Extraordinary charge - (.03)
Net income $ .34 $ .26
Fully diluted
Income before extraordinary charge $ .33 $ .28
Extraordinary charge - (.03)
Net income $ .33 $ .25
Dividends per common share $ .105 $ .097
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<PAGE>
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION> March December
31, 1997 31, 1996
(Dollars in thousands)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 39,476 $ 30,028
Receivables 320,320 293,625
Inventories:
Finished products 137,600 134,655
Raw materials and supplies 47,090 44,509
184,690 179,164
Prepaid expenses 8,739 7,679
Deferred income taxes 17,938 23,043
Total current assets 571,163 533,539
Property, Plant and Equipment 455,243 452,668
Less allowances for depreciation 205,666 198,261
249,577 254,407
Other Assets
Goodwill and other intangibles 353,021 355,538
Investments and other assets 72,022 70,678
Deferred income taxes 40,300 36,617
465,343 462,833
$1,286,083 $1,250,779
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks $ 1,281 $ 2,304
Trade payables and accrued expenses 354,348 348,608
Current portion of long-term debt 956 1,027
Total current liabilities 356,585 351,939
Other Liabilities 179,589 182,852
Long-term Debt
Senior notes 124,960 124,960
Other 114,850 82,745
239,810 207,705
Stockholders' Equity
Preferred stock, without par value
Authorized 5,000,000 shares
Issued -0- shares - -
Common stock, par value $1
Authorized 50,000,000 shares
Issued 65,366,495 shares at March 31, 1997 and
65,261,907 shares at December 31, 1996 65,366 65,262
Capital surplus 328,640 329,543
Retained earnings 427,757 417,228
Associates ownership trust (131,040) (134,704)
Cost of treasury stock (14,481,342 shares at March 31, 1997
and 14,272,092 shares at December 31, 1996) (171,653) (165,675)
Minimum pension liability adjustment (5,018) (5,018)
Accumulated translation adjustment (3,953) 1,647
510,099 508,283
$1,286,083 $1,250,779
</TABLE>
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<PAGE>
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1997 1996
(Dollars in thousands)
<S> <C> <C>
Cash Provided from (Used for) Operating Activities
Net income $15,228 $11,778
Depreciation and amortization 13,273 12,370
Companies carried at equity:
Income (967) (995)
Dividends received 1,401 1,415
Changes in operating assets and liabilities:
Receivables (30,051) (24,201)
Inventories (6,361) 1,129
Prepaid expenses (1,146) 907
Trade payables and accrued expenses 4,030 3,953
Restructuring payments (1,654) (1,294)
Gain on sale of assets (3,250) -
Restructuring charges 3,050 -
Other 2,086 2,711
Extraordinary charge - 2,582
Net operating activities (4,361) 10,355
Cash Provided from (Used for) Investing Activities
Capital expenditures (8,449) (7,637)
Acquisitions of businesses, less cash acquired (6,280) (45,812)
Acquisition payments (12,896) (625)
Sales of assets 6,361 -
Other 5,130 1,174
Net investing activities (16,134) (52,900)
Cash Provided from (Used for) Financing Activities
Cash dividends paid (4,699) (4,403)
Proceeds from the sale of common stock 1,379 941
Purchase of shares for treasury (7,928) (538)
Increase in debt 43,500 11,787
Reduction in debt (1,215) (36,351)
Net financing activities 31,037 (28,564)
Effect of exchange rate changes on cash (1,094) 242
Cash and Cash Equivalents
Increase (decrease) 9,448 (70,867)
Beginning of period 30,028 111,235
End of period $39,476 $40,368
Cash paid during period
Interest $ 7,605 $11,296
Income taxes 1,929 1,352
</TABLE>
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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.
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.
Acquisitions
In February 1997, the Company purchased Enviro Care Compounds, a
producer of halogen-free flame retardant plastic compounds based
in Norway. The acquisition was accounted for using the purchase
method of accounting. Had the acquisition been made at the
beginning of 1996, reported pro forma results of operations for
the first quarter of 1997 and 1996 would not be materially
different.
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 (44,996,787 in
1997 and 45,723,759 in 1996). 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.
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
was 46,014,396 in 1997 and 47,014,867 in 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings Per Share". This statement
simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15 "Earnings Per Share". The
Company does not believe the new standard will have a material
impact on previously reported earnings per share when adopted in
the fourth quarter of 1997.
Long-term Debt
In 1996, the Company repurchased $34,650,000 principal amount of
Senior Notes in the open market resulting in an extraordinary
charge of $2,582,000 ($1,575,000 after tax).
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales increased from $497.5 million in 1996 to $527.6
million in 1997. Sales from processing businesses were
$297.2 million in 1997 compared with $270.7 million in
1996. Acquisitions accounted for $25.1 million of the
increase in sales with increased volume accounting for the
balance of the increase. Distribution sales increased $8.8
million to $231.9 million in 1997 due to higher volume.
Sales from other operations decreased by $1.9 million from
1996 due to the expiration of the Company's management
contract with Iron Ore Company of Canada as of December 31,
1996 and the sale of the Company's ownership interest in
the sales agency in February 1997.
Gross margins increased by $10.0 million from 18.4% in 1996
to 19.2% in 1997. Increased focus on operating
efficiencies within the processing businesses resulted in
margin improvements while volume increases in both segments
resulted in improved absorption of fixed costs.
Selling, general and administrative expenses increased $8.0
million as the result of acquisitions made in 1996, costs
associated with the implementation and development of
HannaLink TM and general economic cost increases. As a
percentage of sales, selling, general and administrative
expenses were 12.6% in 1997 and 11.7% in 1996.
Interest on debt decreased from $6.0 million in 1996 to
$5.1 million in 1997 due to the repurchase of $102.3
million of its Senior Notes in the first and second
quarters of 1996. This debt was replaced with lower rate
borrowings.
Other 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 the resin distribution business.
The Company's effective tax rate decreased from 43% in the
first quarter of 1996 to 42% in the first quarter of 1997,
reflecting the Company's ongoing efforts to reduce its
overall effective tax.
Liquidity and Sources of Capital
Operating activities utilized $4.4 million of cash during
the first quarter of 1997, the result of $33.5 million of
working capital requirements. Investing activities
utilized $16.1 million of cash including $12.9 for
acquisition payments and $8.4 for capital expenditures,
-6-
<PAGE>
offset by the proceeds from the sale of the ownership
interest in the Iron Ore Company of Canada sales agency.
Financing activities provided $31.0 million of cash as a
result of $43.5 million of borrowings offset by $7.9
million used to repurchase common stock and $4.7 million
used to pay dividends.
The Company entered into a new credit agreement during the
quarter 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 March 31, 1997, there were no borrowings
outstanding under this agreement.
The current ratio was 1.6:1 at March 31, 1997 compared with
1.5:1 at December 31, 1996. Debt to total capital was 32.0%
at March 31, 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 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, availability
and pricing of raw materials, changes in product mix,
shifts in market demand, and changes in prevailing interest
rates.
-7-
<PAGE>
PART II
Item 4. Submission of Matters to a Vote of Security Holders
a.) Annual meeting of stockholders held May 7, 1997.
b.) Proxies for the meeting were solicited pursurant to
Regulation 14 under the Securities Exchange Act of 1934; there
was no solicitation in opposition to management nominees as
listed in the Proxy Statement; and ten directors were elected.
c.) The appointment of Price Waterhouse LLP as the Company's
independent public accountants for the year 1997 was ratified and
approved. There were 45,424,500 shares voted in the affirmative,
132,395 shares voted in the negative and 960,223 shares
abstained.
d) The amendment to the 1988 Long-Term Incentive Plan to
increase the number of shares of common stock that may be sold or
delivered under the Plan by 1,500,000 shares was ratified and
approved. There were 38,772,520 shares voted in the affirmative,
6,837,501 shares voted in the negative and 839,040 shares
abstained.
Item 6. Exhibits and Reports of Form 8-K
a) 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: May 9, 1997
-8-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 39,476
<SECURITIES> 0
<RECEIVABLES> 327,089
<ALLOWANCES> 6,769
<INVENTORY> 184,690
<CURRENT-ASSETS> 571,163
<PP&E> 455,243
<DEPRECIATION> 205,666
<TOTAL-ASSETS> 1,286,083
<CURRENT-LIABILITIES> 356,585
<BONDS> 239,810
0
0
<COMMON> 65,366
<OTHER-SE> 444,733
<TOTAL-LIABILITY-AND-EQUITY> 1,286,083
<SALES> 527,629
<TOTAL-REVENUES> 527,629
<CGS> 426,152
<TOTAL-COSTS> 426,152
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 708
<INTEREST-EXPENSE> 5,132
<INCOME-PRETAX> 26,255
<INCOME-TAX> 11,027
<INCOME-CONTINUING> 15,228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,228
<EPS-PRIMARY> .34
<EPS-DILUTED> .33
</TABLE>
