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, 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 (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Sercurities Exchange Act of
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 49,788,263.
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, 1998 and 1997 2
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 3
Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 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. 7-9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
PART I
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
(Dollars in thousands except per share data)
Net Sales $ 595,613 $ 555,382 $1,187,114 $1,083,011
Costs and Expenses
Cost of goods sold 486,040 449,362 963,312 875,514
Selling, general and administrative 74,072 67,854 148,936 134,185
Interest on debt 8,769 5,399 17,041 10,531
Amortization of intangibles 4,229 3,564 8,286 7,152
Other - net 707 (287) 1,848 (116)
573,817 525,892 1,139,423 1,027,266
Income Before Income Taxes 21,796 29,490 47,691 55,745
Income taxes 8,827 12,386 19,315 23,413
Net Income $ 12,969 $ 17,104 $ 28,376 $ 32,332
Net Income per Share
Basic $ .29 $ .38 $ .63 $ .72
Diluted $ .29 $ .37 $ .62 $ .69
Dividends per common share $ .1125 $ .1050 $ .2250 $ .2100
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June December
30, 1998 31, 1997
(Dollars in thousands)
Assets
Current Assets
Cash and cash equivalents $ 47,736 $ 41,430
Receivables 364,271 332,347
Inventories:
Finished products 172,527 161,731
Raw materials and supplies 63,348 65,430
235,875 227,161
Prepaid expenses 10,481 10,976
Deferred income taxes 20,810 31,005
Total current assets 679,173 642,919
Property, Plant and Equipment 550,451 523,269
Less allowances for depreciation 250,313 234,956
300,138 288,313
Other Assets
Goodwill and other intangibles 466,863 420,696
Investments and other assets 92,884 87,608
Deferred income taxes 37,188 29,469
596,935 537,773
$1,576,246 $1,469,005
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks $ 4,871 $ 2,919
Trade payables and accrued expenses 383,865 393,925
Current portion of long-term debt 542 2,149
Total current liabilities 389,278 398,993
Other Liabilities 206,410 205,480
Long-term Debt
Senior notes 124,960 124,960
Medium-term notes 160,000 120,000
Other 149,566 80,267
434,526 325,227
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 65,940,776 shares at June 30, 1998 and
65,749,570 shares at December 31, 1997 65,941 65,750
Capital surplus 323,091 358,145
Retained earnings 480,971 462,653
Associates ownership trust (99,845) (144,213)
Cost of treasury stock (16,152,513 shares at
June 30, 1998 and 15,272,602 shares at
December 31, 1997) (210,103) (191,066)
Accumulated translation adjustment (14,023) (11,964)
546,032 539,305
$1,576,246 $1,469,005
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30
1998 1997
(Dollars in thousands)
Cash Provided from (Used for) Operating Activities
Net income $ 28,376 $ 32,332
Depreciation and amortization 29,220 26,617
Companies carried at equity:
Income (2,333) (2,248)
Dividends received 1,550 3,322
Changes in operating assets and liabilities:
Receivables (30,530) (44,496)
Inventories (8,383) (16,977)
Prepaid expenses (3,231) (2,390)
Trade payables and accrued expenses 4,550 27,798
Restructuring payments (2,284) (3,648)
Gain on sale of assets - (3,250)
Restructuring charges - 3,050
Other 7,068 3,561
Net operating activities 24,003 23,671
Cash Provided from (Used for) Investing Activities
Capital expenditures (31,725) (18,029)
Acquisitions of businesses, less cash acquired (59,121) (11,019)
Acquisition payments (207) (12,900)
Sales of assets - 6,361
Other (3,220) 4,855
Net investing activities (94,273) (30,732)
Cash Provided from (Used for) Financing Activities
Cash dividends paid (10,054) (9,409)
Proceeds from the sale of common stock 2,119 2,509
Purchase of shares for treasury (13,463) (8,179)
Increase in debt 118,502 101,968
Reduction in debt (19,884) (65,614)
Net financing activities 77,220 21,275
Effect of exchange rate changes on cash (644) (1,523)
Cash and Cash Equivalents
Increase (decrease) 6,306 12,691
Beginning of period 41,430 30,028
End of period $ 47,736 $ 42,719
Cash paid during period
Interest $ 16,606 $ 10,213
Income taxes 12,214 11,970
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 January 1998, the Company acquired 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 complement 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 second quarter and the first
six months 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 of 44,654,530 and 45,334,290 for the quarters ended
June 30, 1998 and 1997, respectively. Outstanding shares for the
six months ended June 30, 1998 and 1997 were 44,767,542 and
45,166,081, 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 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 45,346,271 and 46,371,564 for the
quarters ended June 30, 1998 and 1997, respectively, and
45,538,224 and 46,183,587 for the six months ended June 30, 1998
and 1997, respectively.
Comprehensive Income
Comprehensive income for the second quarter of 1998 and 1997 was
$11,878 and $14,956, respectively. Comprehensive income for the
six months ended June 30, 1998 and 1997 was $26,317 and $24,584,
respectively. Comprehensive income includes net income and
foreign currency translation adjustments for the three and six
months ended June 30, 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.
Pending Accounting Changes
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131 "Disclosures about Segments of an Enterprise
and Related Information"; in February 1998, Statement No. 132
"Employers' Disclosures about Pensions and Other Postretirement
Benefits" was issued and in June 1998 Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities"
was issued. The Company is analyzing the impact of Statements No.
131, 132 and 133. Statements No. 131 and 132 will be adopted in
1998. Statement No. 133 will be adopted in 2000.
The Company will adopt, retroactive to January 1, 1998, the AICPA
Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" which requires all pre-operating costs to be expensed
as incurred. Adoption of this Statement will result in a one-
time charge of $2.1 million (net of taxes of $1.4 million) for
previously capitalized costs. This charge will be reported as a
cumulative effect from a change in accounting principles in 1998
earnings. The Company will adopt the statement in the third
quarter 1998 and will not impact previously reported amounts.
Subsequent Events
The Company completed a comprehensive review of its business and
announced a plan in August 1998 which will lower the Company's
overall cost structures as a result of consolidating
manufacturing operations and will improve customer service
capabilities through more efficient production facilities and
more focused sales, marketing and technical support. These
actions will result in a pre-tax charge of $29.8 million in the
third quarter. Included in the charge are asset and equipment
write-downs, costs associated with future lease obligations and
severance benefits.
In addition, the Company will also record a one-time reduction of
income tax reserves of $9.5 million in the third quarter in
connection with reaching an agreement with the Internal Revenue
Service relative to an examination of previously filed tax
returns.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the quarter ended June 30, 1998 increased to
$595.6 million as compared to $555.4 million for the
comparable quarter in 1997 and sales for the first six
months of 1998 as compared to 1997 increased by $104.1
million from $1,083.0 million to $1,187.1 million. Sales
within the processing segment increased by $58.0 million
for the quarter and by $123.5 million for the first six
months. This increase is primarily attributable to
acquisitions, which added $49.1 million for the quarter and
$97.7 million for the first six months. The remaining
increase in sales of $8.9 million for the quarter and $25.8
for the first six months is attributable to volume
increases in domestic rubber and international plastic
processing offset by weak sales in the domestic colorant
and plastic compounding businesses. Sales in the
distribution businesses have decreased by $13.6 million for
the quarter and by $12.0 million for the first six months.
Volume, price/mix and the impact of the Asian currency
devaluation have adversely affected sales in the shapes
distribution business.
Gross margins for the second quarter of 1998 were 18.4%
compared to 19.1% in 1997 and were 18.9% for the first six
months of 1998 compared to 19.2% for the first six months
of 1997. Acquisitions since the second quarter of 1997
increased margins by six-tenths of a percentage point for
the quarter and for the six months period. Margin
improvements from acquisitions were completely offset by
decreased margins in the domestic colorant and shapes
distribution businesses.
Selling, general and administrative costs increased by $6.2
million for the second quarter and by $14.8 millions for
the first six months of 1998. Selling, general and
administrative costs represented 12.4% and 12.5% of sales
for the quarter and six months ended June 30, 1998 as
compared to 12.2% and 12.4% in 1997. The increase in
selling, general and administrative costs was primarily due
to acquisitions made since September 1997 and due to
increased selling and marketing expenses in the domestic
plastic compounding business.
Interest on debt increased to $8.8 million from $5.4
million for the second quarter of 1998 and to $17.0 million
from $10.5 million for the first six months of 1998.
Interest has increased as a result of additional borrowings
used primarily for acquisitions and working capital
requirements. The acquisitions have been funded primarily
with the issuance of Medium-Term Notes under the 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 are due
between 2004 and 2011.
Other - net for the second quarter and first six months
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% for
1998 compared to 42.0% in 1997 due to continued
implementation of tax planning strategies.
Liquidity and Sources of Capital
Operating activities generated $24.0 million of cash for
the first six months of 1998 after providing for working
capital requirements of $37.6 million. Investing
activities utilized $94.3 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 $77.2 million of cash from increased
borrowings of $98.6 million offset by $13.5 million used to
repurchase 629,000 shares of the Company's common stock and
$10.1 million used to pay dividends.
During the first quarter of 1998, 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 June 30, 1998 compared with
1.6:1 at December 31, 1997. Debt to total capital was
44.3% at June 30, 1998 and 37.6% at December 31, 1997.
Subsequent Event
In August 1998, the Company disclosed it had completed a
comprehensive review of its business and announced a plan
which will lower the Company's overall cost structures as a
result of consolidating manufacturing operations and will
improve customer service capabilities. These actions will
result in a pre-tax charge of $29.8 million in the third
quarter.
Included in the charge are asset and equipment write-downs,
costs associated with future lease obligations and
severance benefits. The Company estimates savings of $12.0
million to $14.0 million in 1999 from these actions.
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.
Year 2000 Computer Problem
The Company has identified and assessed the activities to
become Year 2000 complaint. Correction processes are in
place and will be completed by early 1999.
The Company is in the process of implementing enterprise-
wide information technology systems and applications across
all businesses which will be Year 2000 compliant and is
converting its other computer systems to be Year 2000
compliant. The Company has also implemented a program to
identify and test embedded date chips to ensure Year 2000
functioning and is monitoring supplier and other third
party interfaces. The majority of these costs have already
been incurred and are being amortized or charged to expense
in current operating results. The Company does not believe
that the future costs of implementation will materially
affect its financial condition, results of operations or
cash flows.
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, general economy,
foreign political and economic developments (including the
Asian economic situation), availability and pricing of raw
materials, changes in product mix, shifts in market demand,
and changes in prevailing interest rates.
PART II
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: August 13, 1998
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