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, 1998
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 50,079,559.
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, 1998 and 1997 2
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 1998 and 1997 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 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
-1-
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FIRST QUARTER
1998 1997
(Dollars in thousands
except per share data)
Net Sales $591,501 $527,629
Costs and Expenses
Cost of goods sold 477,272 426,152
Selling, general and administrative 74,864 66,331
Interest on debt 8,272 5,132
Amortization of intangibles 4,057 3,588
Other - net 1,141 171
565,606 501,374
Income Before Income Taxes 25,895 26,255
Income taxes 10,488 11,027
Net Income $ 15,407 $ 15,228
Net Income per Share
Basic $ .34 $ .34
Diluted $ .34 $ .33
Dividends per common share $ .1125 $ .1050
-2-
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION> March December
31, 1998 31, 1997
(Dollars in thousands)
Assets
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 44,772 $ 41,430
Receivables 367,584 332,347
Inventories:
Finished products 173,656 161,731
Raw materials and supplies 66,605 65,430
240,261 227,161
Prepaid expenses 10,697 10,976
Deferred income taxes 28,610 31,005
Total current assets 691,924 642,919
Property, Plant and Equipment 538,163 523,269
Less allowances for depreciation 243,504 234,956
294,659 288,313
Other Assets
Goodwill and other intangibles 469,643 420,696
Investments and other assets 90,721 87,608
Deferred income taxes 30,697 29,469
591,061 537,773
$1,577,644 $1,469,005
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks $ 4,688 $ 2,919
Trade payables and accrued expenses 399,299 393,925
Current portion of long-term debt 714 2,149
Total current liabilities 404,701 398,993
Other Liabilities 209,686 205,480
Long-term Debt
Senior notes 124,960 124,960
Medium-term notes 160,000 120,000
Other 133,695 80,267
418,655 325,227
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 65,875,056 shares at March 31, 1998 and
65,749,570 shares at December 31, 1997 65,875 65,750
Capital surplus 354,924 358,145
Retained earnings 473,027 462,653
Associates ownership trust (134,061) (144,213)
Cost of treasury stock (15,795,497 shares at March 31, 1998
and 15,272,602 shares at December 31, 1997) (202,231) (191,066)
Accumulated translation adjustment (12,932) (11,964)
544,602 539,305
$1,577,644 $1,469,005
</END TABLE>
-3-
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31
1998 1997
(Dollars in thousands)
Cash Provided from (Used for) Operating Activities
Net income $ 15,407 $ 15,228
Depreciation and amortization 14,393 13,273
Companies carried at equity:
Income (891) (967)
Dividends received 500 1,401
Changes in operating assets and liabilities:
Receivables (32,190) (30,051)
Inventories (10,730) (6,361)
Prepaid expenses 242 (1,146)
Trade payables and accrued expenses 9,067 4,030
Restructuring payments (656) (1,654)
Gain on sale of assets - (3,250)
Restructuring charges - 3,050
Other 4,104 2,086
Net operating activities (754) (4,361)
Cash Provided from (Used for) Investing Activities
Capital expenditures (15,937) (8,449)
Acquisitions of businesses, less cash acquired (59,114) (6,280)
Acquisition payments (207) (12,896)
Sales of assets - 6,361
Other 1,306 5,130
Net investing activities (73,952) (16,134)
Cash Provided from (Used for) Financing Activities
Cash dividends paid (5,032) (4,699)
Proceeds from the sale of common stock 1,498 1,379
Purchase of shares for treasury (6,113) (7,928)
Increase in debt 94,397 43,500
Reduction in debt (6,185) (1,215)
Net financing activities 78,565 31,037
Effect of exchange rate changes on cash (517) (1,094)
Cash and Cash Equivalents
Increase (decrease) 3,342 9,448
Beginning of period 41,430 30,028
End of period $ 44,772 $ 39,476
Cash paid during period
Interest $ 8,688 $ 7,605
Income taxes 2,385 1,929
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
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 1997
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 1998, the Company announced the acquisition of Melos
Carl Bosch GmbH & Co. based in Melle, Germany. Melos produces
rubber, thermoplastic elastomer and plastic compounds for the
wire and cable, sport and recreation and automotive markets. In
March 1998, the Company acquired a line of halogen free, low-
smoke flame retardant compounds from Exxon. These products will
compliment the compounds currently marketed by the Company's
subsidiary, Enviro Care Compounds, based in Norway. These
acquisitions were accounted for using the purchase method of
accounting. Had the acquisitions been made at the beginning of
1997, reported pro forma results of operations for the first
quarter of 1998 and 1997 would not be materially different.
Net Income Per Share of Common Stock
Basic net income per share is computed by dividing net income
applicable to common stock by the average number of shares
outstanding during the period (44,871,546 in 1998 and 44,996,787
in 1997). 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 number of shares used to compute diluted net income per share
is based on the number of shares used for basic 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 was 45,720,484 in 1998 and 46,014,396 in
1997.
Comprehensive Income
Comprehensive income for the first quarter of 1998 and 1997 was
$14,439 and $9,628, respectively. Comprehensive income includes
net income and foreign currency translation adjustments for the
quarters ending March 31, 1998 and 1997.
Long-term Debt
During the first quarter of 1998, the Company issued $40 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 6.52% to 6.58%, are due in 2010 and
2011 and pay interest semi-annually.
-5-
Pending Accounting Changes
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131 "Disclosures about Segments of an Enterprise
and Related Information"; and in February 1998, Statement No. 132
"Employers' Disclosures about Pensions and Other Postretirement
Benefits" was issued. The Company is analyzing the impact of
Statements No. 131 and 132 and will adopt these standards in
1998.
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales increased to $591.5 million in 1998 from $527.6
million in 1997 representing a 12.1% increase. Processing
sales were $362.6 million for the first quarter of 1998
compared to $297.2 million for the first quarter of 1997.
Acquisitions accounted for $48.6 million of the year over
year growth. The remaining increase in the processing
segment of $16.8 million is attributable to volume
increases in the international color and rubber processing
businesses which were partially offset by the strengthening
dollar and a negative impact from pricing and mix.
Distribution sales increased by $1.6 million or 1% to
$233.5 million for the first quarter of 1998. Volume
increases in the distribution segment were offset by
falling resin prices in the resin distribution business and
the Asian currency devaluation in the shapes distribution
business.
Gross margins were 19.3% in 1998 compared to 19.2% in 1997.
Acquisitions since the first quarter of 1997 increased
gross margins seven-tenths of a percent point. This
increase in gross margins from acquisitions was offset by
decreased margins in the existing businesses caused by
weakness in the domestic color and additive concentrates
business and lower vendor rebates in the shapes
distribution business. Management has undertaken a study
of its domestic color and additive concentrates business to
determine if a rationalization of its facilities is
required. The study is in an early stage and no decisions
have been reached with respect to this business.
Selling, general and administrative costs increased by $8.5
million to $74.9 million for the first quarter of 1998 or
12.7% of sales as compared to 12.6% of sales during the
first quarter of 1997. Acquisitions accounted for $6.5
million of the increase with the balance of the increase
associated with business information systems
implementations and the realignment of the sales and
marketing organizations of several business units.
Interest on debt increased to $8.3 million in the first
quarter of 1998 from $5.1 million in the first quarter of
1997 as the result of interest on additional borrowings
used primarily for acquisitions. These acquisitions have
been funded primarily with the issuance of Medium-Term
Notes under the Shelf Registration Statement filed with the
Securities and Exchange Commission in 1996. The Medium-
Term Notes bear interest at rates ranging from 6.52% to
7.16% and due between 2004 and 2011.
Other - net for the first quarter of 1998 includes the
minority interest's share of profit for the joint venture
of Techmer PM LLC formed in November 1997.
The Company's effective tax rate decreased to 40.5% in the
first quarter of 1998 compared to 42.0% in the first
quarter of 1997 due to continued implementation of tax
planning strategies.
-7-
Liquidity and Sources of Capital
Operating activities utilized $.8 million of cash during
the quarter as the result of working capital requirements.
Investing activities used $74.0 million of cash primarily
for the acquisition of Melos and the halogen free compounds
product line from Exxon and for capital expenditures.
Financing activities provided $78.6 million of cash from
increased borrowings of $88.2 million offset by $6.1
million used to repurchase 288,300 shares of the Company's
common stock and $5.0 million used to pay dividends.
During the quarter, the Company issued $40.0 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 6.52% to 6.58%, are
due in 2010 and 2011 and pay interest semi-annually.
The current ratio was 1.7:1 at March 31, 1998 compared with
1.6:1 at December 31, 1997. Debt to total capital was
43.5% at March 31, 1998 and 37.6% at December 31, 1997.
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, results of operations or cash flows
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.
-8-
PART II
Item 4. Submission of Matters to a Vote of Security Holders
a.) Annual meeting of stockholders held May 6, 1998.
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. The following nine directors were
elected: Carol A. Cartwright, Wayne R. Embry, J. Trevor Eyton,
Gordon D. Harnett, George D. Kirkham, David Baker Lewis, Marvin
L. Mann, Douglas J. McGregor and Richard W. Pogue.
c.) The appointment of Price Waterhouse LLP as the Company's
independent public accountants for the year 1998 was ratified and
approved. There were 44,273,267 shares voted in the affirmative,
221,840 shares voted in the negative and 357,846 shares
abstained.
Item 6. Exhibits and Reports of Form 8-K
a.) During the quarter ended March 31, 1998, the Registrant filed Current
Report on Form 8-K dated February 19, 1998, 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: May 11, 1998
-9-
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 44,772
<SECURITIES> 0
<RECEIVABLES> 376,728
<ALLOWANCES> 9,144
<INVENTORY> 240,261
<CURRENT-ASSETS> 691,924
<PP&E> 538,163
<DEPRECIATION> 243,504
<TOTAL-ASSETS> 1,577,644
<CURRENT-LIABILITIES> 404,701
<BONDS> 418,655
0
0
<COMMON> 65,875
<OTHER-SE> 478,727
<TOTAL-LIABILITY-AND-EQUITY> 1,577,644
<SALES> 591,501
<TOTAL-REVENUES> 591,501
<CGS> 477,272
<TOTAL-COSTS> 477,272
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 586
<INTEREST-EXPENSE> 8,272
<INCOME-PRETAX> 25,895
<INCOME-TAX> 10,488
<INCOME-CONTINUING> 15,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,407
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
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