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 June 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 50,972,654.
<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 Six Months ended
June 30, 1997 and 1996 2
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 3
Consolidated Statements of
Cash Flows - Six Months Ended
June 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)
Three Months Ended
June 30
1997 1996
Net Sales $555,382 $537,348
Costs and Expenses
Cost of goods sold 449,362 438,753
Selling, general and administrative 67,854 61,467
Interest on debt 5,399 5,195
Amortization of intangibles 3,564 3,576
Other - net (287) 887
525,892 509,878
Income Before Income Taxes
and Extraordinary Charge 29,490 27,470
Income taxes 12,386 11,812
Income Before Extraordinary Charge 17,104 15,658
Extraordinary Charge - (3,777)
Net Income $ 17,104 $ 11,881
Net Income per Share of Common Stock
Primary
Income before extraordinary charge $ .38 $ .34
Extraordinary charge - (.08)
Net income $ .38 $ .26
Fully diluted
Income before extraordinary charge $ .37 $ .33
Extraordinary charge - (.08)
Net income $ .37 $ .25
Dividends per common share $ .105 $ .10
Six Months Ended
June 30
1997 1996
(Dollars in thousands except per share data)
Net Sales $1,083,011 $1,034,799
Costs and Expenses
Cost of goods sold 875,514 844,748
Selling, general and administrative 134,185 119,779
Interest on debt 10,531 11,231
Amortization of intangibles 7,152 7,075
Other - net (116) 1,070
1,027,266 983,903
Income Before Income Taxes
and Extraordinary Charge 55,745 50,896
Income taxes 23,413 21,885
Income Before Extraordinary Charge 32,332 29,011
Extraordinary Charge - (5,352)
Net Income $ 32,332 $ 23,659
Net Income per Share of Common Stock
Primary
Income before extraordinary charge $ .72 $ .63
Extraordinary charge - (.11)
Net income $ .72 $ .52
Fully diluted
Income before extraordinary charge $ .69 $ .61
Extraordinary charge - (.11)
Net income $ .69 $ .50
Dividends per common share $ .21 $ .197
-2-
<PAGE>
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION> June December
30, 1997 31, 1996
(Dollars in thousands)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 42,719 $ 30,028
Receivables 332,276 293,625
Inventories:
Finished products 145,426 134,655
Raw materials and supplies 48,733 44,509
194,159 179,164
Prepaid expenses 9,880 7,679
Deferred income taxes 20,588 23,043
Total current assets 599,622 533,539
Property, Plant and Equipment 465,411 452,668
Less allowances for depreciation 213,826 198,261
251,585 254,407
Other Assets
Goodwill and other intangibles 348,341 355,538
Investments and other assets 72,749 70,678
Deferred income taxes 37,100 36,617
458,190 462,833
$1,309,397 $1,250,779
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks $ 1,971 $ 2,304
Trade payables and accrued expenses 368,281 348,608
Current portion of long-term debt 531 1,027
Total current liabilities 370,783 351,939
Other Liabilities 181,867 182,852
Long-term Debt
Senior notes 124,960 124,960
Other 108,693 82,745
233,653 207,705
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 65,462,696 shares at June 30, 1997 and
65,261,907 shares at December 31, 1996 65,463 65,262
Capital surplus 370,865 329,543
Retained earnings 440,150 417,228
Associates ownership trust (170,360) (134,704)
Cost of treasury stock (14,498,335 shares at June 30, 1997
and 14,272,092 shares at December 31, 1996) (171,905) (165,675)
Minimum pension liability adjustment (5,018) (5,018)
Accumulated translation adjustment (6,101) 1,647
523,094 508,283
$1,309,397 $1,250,779
</TABLE>
-3-
<PAGE>
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30
1997 1996
(Dollars in thousands)
Cash Provided from (Used for) Operating Activities
Net income $ 32,332 $ 23,659
Depreciation and amortization 26,617 25,298
Companies carried at equity:
Income (2,248) (2,017)
Dividends received 3,322 3,191
Changes in operating assets and liabilities:
Receivables (44,496) (37,592)
Inventories (16,977) 7,861
Prepaid expenses (2,390) (840)
Trade payables and accrued expenses 27,798 15,461
Restructuring payments (3,648) (5,618)
Gain on sale of assets (3,250) -
Restructuring charges 3,050 -
Other 3,561 5,333
Extraordinary charge - 8,774
Net operating activities 23,671 43,510
Cash Provided from (Used for) Investing Activities
Capital expenditures (18,029) (14,560)
Acquisitions of businesses, less cash acquired (11,019) (48,803)
Acquisition payments (12,900) (669)
Sales of assets 6,361 11,820
Other 4,855 5,980
Net investing activities (30,732) (46,232)
Cash Provided from (Used for) Financing Activities
Cash dividends paid (9,409) (8,989)
Proceeds from the sale of common stock 2,509 6,503
Purchase of shares for treasury (8,179) (2,759)
Increase in debt 101,968 43,403
Reduction in debt (65,614) (110,735)
Net financing activities 21,275 (72,577)
Effect of exchange rate changes on cash (1,523) 315
Cash and Cash Equivalents
Increase (decrease) 12,691 (74,984)
Beginning of period 30,028 111,235
End of period $ 42,719 $ 36,251
Cash paid during period
Interest $ 10,213 $ 14,234
Income taxes 11,970 12,279
-4-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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.
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 currently
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. Both 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 second quarter or first six months 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 (45,334,290 in
1997 and 46,118,428 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 46,769,041 in 1997 and 47,280,171 in 1996.
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.
-5-
<PAGE>
Long-term Debt
During the second quarter of 1997, the Company issued $50 million
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 7.07% to 7.16%, are due between 2006
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 $18.0 million in the second quarter of 1997
and $48.2 million in the first six months of 1997 as compared
with the 1996 periods. Sales in the processing segment increased
by $9.0 million or 3.0% and $35.5 million or 6.3% for the second
quarter and for the first six months of 1997 as compared to 1996.
Acquisitions since 1996 contributed $8.6 million and $33.7
million to sales for the second quarter and first six months of
1997. Volume increases within the processing segment were offset
by decreases in sales due to changes in pricing and product mix.
Distribution sales increased by $15.8 million or 6.7% for the
second quarter and by $24.6 or 5.4% for the six months ended June
30, 1997 as compared to the same periods in 1996. International
volume increases drove revenue increases within this segment.
Sales in both segments have been adversely impacted by the
strengthening of the U.S. dollar. Overall, currency translation
has reduced sales by 1%.
Gross margins were 19.1% in the second quarter of 1997 and 19.2%
for the first six months of 1997 compared with 18.3% and 18.4%,
respectively, for the comparable 1996 periods. Margins have been
positively impacted by a 1% decrease in average raw material
costs for the quarter versus the second quarter of 1996.
Operating efficiencies implemented in the processing businesses
have driven higher margins as well as increased volumes have led
to improved absorption of fixed costs.
Selling, general and administrative expenses increased $6.4
million in the second quarter of 1997 and $14.4 million in the
first six months of 1997 due in part to acquisitions made in 1996
and 1997. As a percentage of sales, selling, general and
administrative costs were 12.2% in the second quarter of 1997 and
12.4% for the first six months of 1997 compared with 11.4% and
11.6% respectively, for the comparable 1996 periods. The
increase in selling, general and administrative costs is
attributable to acquisitions, general economic costs and the
implementation of common business information systems.
Interest on debt increased by $.2 million in the second quarter
of 1997 and decreased by $.7 million in the first six months of
1997. The Company repurchased $102.3 million of its Senior Notes
in the first six months of 1996, resulting in an after-tax
extraordinary charge of $5.4 million. Interest expense decreased
for the six months due to the replacement of the Senior Notes
with lower rate borrowings; however, increased debt levels
associated with acquisitions have begun to offset the savings
from lower rates during the second quarter.
Other net 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.
-7-
<PAGE>
Liquidity and Sources of Capital
Operating activities provided $23.7 million of cash during the
first six months of 1997 after providing for working capital
requirements of $36.1 million. The Company used $30.8 million of
cash for investing activities including $18.0 million for capital
expenditures and $11.0 million for the purchase of new
businesses. Financing activities provided $21.3 million
primarily as a result of increases in debt offset by dividend
payments of $9.4 million and cash used to repurchase shares of
$8.2 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 June 30, 1997, there were no borrowings supported
by this agreement.
During the second quarter, the Company issued $50.0 million 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 7.07% to 7.16%, are due between 2006
and 2008 and pay interest semi-annually.
The current ratio was 1.6:1 at June 30, 1997 compared with 1.5:1
at December 31, 1996. Debt to total capital was 30.9% at June
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 of Form 8-K
a) During the quarter ended June 30, 1997, the Registrant filed
Current Report on Form 8-K dated June 24, 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
Thomas E. Lindsey
Controller
(Principal Accounting Officer)
Date: August 1, 1997
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 42,719
<SECURITIES> 0
<RECEIVABLES> 339,301
<ALLOWANCES> 7,025
<INVENTORY> 194,159
<CURRENT-ASSETS> 599,622
<PP&E> 465,411
<DEPRECIATION> 213,826
<TOTAL-ASSETS> 1,309,397
<CURRENT-LIABILITIES> 370,783
<BONDS> 233,653
0
0
<COMMON> 65,463
<OTHER-SE> 457,631
<TOTAL-LIABILITY-AND-EQUITY> 1,309,397
<SALES> 555,382
<TOTAL-REVENUES> 555,382
<CGS> 449,362
<TOTAL-COSTS> 449,362
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 698
<INTEREST-EXPENSE> 5,399
<INCOME-PRETAX> 29,490
<INCOME-TAX> 12,386
<INCOME-CONTINUING> 17,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,104
<EPS-PRIMARY> .38
<EPS-DILUTED> .37
</TABLE>
