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, 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 from 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 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 49,583,845.
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, 1998 and 1997 2
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Consolidated Statements of
Cash Flows - Nine Months Ended
September 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. 7-10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
PART I
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(Dollars in thousands except per share data)
Net Sales $ 564,539 $ 561,418 $1,751,653 $1,644,429
Costs and Expenses
Cost of goods sold 471,678 457,511 1,434,990 1,333,025
Selling, general and
administrative 74,090 66,109 223,026 200,294
Interest on debt 8,595 5,976 25,636 16,507
Amortization of intangibles 4,341 3,348 12,627 10,500
Other - net 22,045 (200) 23,893 (316)
580,749 532,744 1,720,172 1,560,010
Income (Loss) Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle (16,210) 28,674 31,481 84,419
Income taxes (credit) (16,065) 12,043 3,250 35,456
Income (Loss) Before Cumulative
Effect of Change in Accounting
Principle (145) 16,631 28,231 48,963
Cumulative effect of change in
accounting principle - - (2,059) -
Net Income (Loss) $ (145)$ 16,631 $ 26,172 $ 48,963
Net Income (Loss) per Share
Basic
Income (loss) before
cumulative effect of change
in accounting principle $ - $ .37 $ .63 $ 1.08
Cumulative effect of change
in accounting principle - - (.05) -
Net income (loss) $ - $ .37 $ .58 $ 1.08
Diluted
Income (loss) before
cumulative effect of change
in accounting principle $ - $ .36 $ .62 $ 1.05
Cumulative effect of change
in accounting principle - - (.05) -
Net income (loss) $ - $ .36 $ .57 $ 1.05
Dividends per common share $ .1125 $ .1050 $ .3375 $ .3150
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September December
30, 1998 31, 1997
(Dollars in thousands)
Assets
Current Assets
Cash and cash equivalents $ 48,800 $ 41,430
Receivables 363,480 332,347
Inventories:
Finished products 172,988 161,731
Raw materials and supplies 63,788 65,430
236,776 227,161
Prepaid expenses 11,788 10,976
Deferred income taxes 29,199 31,005
Total current assets 690,043 642,919
Property, Plant and Equipment 559,194 523,269
Less allowances for depreciation 256,097 234,956
303,097 288,313
Other Assets
Goodwill and other intangibles 470,764 420,696
Investments and other assets 88,546 87,608
Deferred income taxes 41,494 29,469
600,804 537,773
$1,593,944 $1,469,005
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks $ 3,272 $ 2,919
Trade payables and accrued expenses 393,550 393,925
Current portion of long-term debt 457 2,149
Total current liabilities 397,279 398,993
Other Liabilities 210,862 205,480
Long-term Debt
Senior notes 87,775 124,960
Medium-term notes 160,000 120,000
Other 199,678 80,267
447,453 325,227
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 65,985,303 shares at September 30, 1998
and 65,749,570 shares at December 31, 1997 65,985 65,750
Capital surplus 286,372 358,145
Retained earnings 473,773 462,653
Associates ownership trust (62,557) (144,213)
Cost of treasury stock (16,401,458 shares at
September 30, 1998 and 15,272,602 shares
at December 31, 1997) (213,603) (191,066)
Accumulated translation adjustment (11,620) (11,964)
538,350 539,305
$1,593,944 $1,469,005
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
1998 1997
(Dollars in thousands)
Cash Provided from (Used for) Operating Activities
Net income $ 26,172 $ 48,963
Depreciation and amortization 44,359 39,352
Companies carried at equity:
Income (3,437) (3,397)
Dividends received 2,744 4,367
Changes in operating assets and liabilities:
Receivables (29,177) (67,823)
Inventories (9,933) (21,330)
Prepaid expenses (1,776) (3,313)
Trade payables and accrued expenses (5,245) 27,438
Restructuring payments (6,733) (4,996)
Gain on sale of assets (1,009) (3,250)
Restructuring charges 29,800 3,050
Other (595) 5,587
Net operating activities 45,170 24,648
Cash Provided from (Used for) Investing Activities
Capital expenditures (47,541) (29,827)
Acquisitions of businesses, less cash acquired (59,164) (95,929)
Acquisition payments (207) (14,959)
Sales of assets 4,887 6,361
Other (7,318) 8,222
Net investing activities (109,343) (126,132)
Cash Provided from (Used for) Financing Activities
Cash dividends paid (15,053) (14,146)
Proceeds from the sale of common stock 2,634 3,608
Purchase of shares for treasury (16,962) (11,081)
Increase in debt 203,183 206,199
Reduction in debt (102,355) (77,192)
Net financing activities 71,447 107,388
Effect of exchange rate changes on cash 96 (2,236)
Cash and Cash Equivalents
Increase 7,370 3,668
Beginning of period 41,430 30,028
End of period $ 48,800 $ 33,696
Cash paid during period
Interest $ 25,545 $ 17,557
Income taxes 22,149 27,266
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 third quarter and the first
nine 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 44,428,180 and 45,323,323 for the quarters ended
September 30, 1998 and 1997, respectively. Outstanding shares
for the nine months ended September 30, 1998 and 1997 were
44,653,187 and 45,220,381, 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 44,589,156 and 46,520,872 for the
quarters ended September 30, 1998 and 1997, respectively, and
45,228,411 and 46,321,988 for the nine months ended September 30,
1998 and 1997, respectively.
Comprehensive Income
Comprehensive income for the third quarter of 1998 and 1997 was
$2,258 and $14,386, respectively. Comprehensive income for the
nine months ended September 30, 1998 and 1997 was $26,516 and
$38,970, respectively. Comprehensive income includes net income
and foreign currency translation adjustments for the three and
nine months ended September 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.
Change in Accounting Principle
During the quarter the Company adopted, 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
resulted in a one-time charge of $2.1 million (net of taxes of
$1.4 million) for previously capitalized costs. This charge was
reported as a cumulative effect from a change in accounting
principle in 1998 earnings. Adoption of this statement did not
impact previously reported amounts for the first or second
quarter of 1998.
Profit Improvement Plan
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 resulted in a pre-tax charge of $29.8 million in the
third quarter. The charge includes $4.3 million related to
inventory valuations, which was charged to cost of goods sold.
The charge also includes $1.7 million related to accounts
receivable, which was charged to selling, general and
administrative costs. The remainder of the charge ($23.8
million) related to involuntary severances, fixed asset write-
downs and plant closings which was charged to other-net. The one-
time charge on an after-tax basis was $17.7 million or $.40 per
share on a diluted basis.
Income Taxes
During the third quarter, the Company recorded a one-time
reduction of income tax reserves of $9.5 million 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 September 30, 1998 as
compared to 1997 increased by $3.1 million from $561.4
million and sales from the first nine months of 1998
increased to $ 1,751.7 million as compared with $1,644.4
million in 1997. Sales within the processing segment
increased by $23.2 million in the quarter and by $146.7
million for the first nine months. The increase is
primarily attributable to acquisitions, which added $40.7
million in the quarter and $138.4 million for the first
nine months. Third quarter sales were impacted by lower
volumes in all product lines partially offset by better
pricing and mix within the product lines. The labor
stoppage at General Motors also had a negative impact
during the quarter. The nine month period benefited from
higher volumes in domestic rubber and international plastic
processing businesses offset by weak sales in the domestic
colorant and plastic compounding businesses. Sales in the
distribution businesses decreased by $17.5 million in the
quarter and $29.4 million for the first nine months. The
decline is due to lower material pricing and volumes and
the impact of foreign exchange on those businesses.
Gross margins for the third quarter and first nine months
of 1998 were 16.4% and 18.1%, respectively compared with
18.5% and 18.9% for the 1997 periods, respectively.
Acquisitions had a positive impact on the gross margins in
the quarter and first nine months of 1998 of nine-tenths of
a percentage point and seven-tenths of a percentage point,
respectively. These improvements from acquisitions were
completely offset by decreased margins from existing
businesses due in part to the volume declines without a
corresponding reduction in cost structures as well as the
impact from the charge associated with the profit
improvement plan.
Selling, general and administrative costs increased by $8.0
million for the third quarter and by $22.7 million for the
first nine months of 1998. As a percentage of sales,
selling, general and administrative costs were 13.1% and
11.8% in the third quarter of 1997 and 1998, respectively,
and 12.7% and 12.2% in the first nine months of 1997 and
1998, respectively. The increase in selling, general and
administrative costs was primarily due to acquisitions made
since September 1997 and increases in selling and marketing
expenses in the domestic plastic compounding business.
Also impacting year over year costs were special charges
associated with the previously announced profit improvement
plan and provisions associated with the retirement of the
Company's former chairman and chief executive officer.
Interest on debt increased to $8.6 million from $6.0
million for the third quarter of 1998 and to $25.6 million
from $16.5 million for the first nine 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 third quarter and first nine months
includes the minority interest's share of profit for the
joint venture of Techmer PM LLC formed in November 1997.
Also included in other - net in 1998 is a special charge of
$23.8 million related to involuntary severances, fixed
asset write-downs and plant closings. The charge is a
result of a comprehensive review of the Company's business
and the resultant plan that will result in the
consolidation of manufacturing operations and improvement
of customer service capabilities through more efficient
production facilities and more focused sales, marketing and
technical support. An additional $4.3 million was charged
to the cost of sales and $1.7 million was charged to
selling, general and administrative expenses as a result of
this review. The Company expects to derive $12 million to
$14 million in benefits from this profit improvement plan
in 1999.
The Company's effective tax rate is 40.5% for 1998 compared
to 42.0% in 1997 due to continued implementation of tax
planning strategies. Tax expense in the third quarter and
first nine months of 1998 include a one-time benefit of
$9.5 million as a result of an agreement with the IRS
regarding an examination of previously filed tax returns.
Liquidity and Sources of Capital
Operating activities generated $45.2 million of cash for
the first nine months of 1998 after providing for working
capital requirements of $46.1 million. Investing
activities utilized $109.3 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 $71.4 million of cash from
increased borrowings of $100.8 million offset by $17.0
million used to repurchase 876,000 shares of the Company's
common stock and $15.1 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 September 30, 1998 compared
with 1.6:1 at December 31, 1997. Debt to total capital was
45.4% at September 30, 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.
Year 2000 Compliance
The Company is addressing the issue of computer programs
and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000. It has undertaken
various initiatives intended to ensure that its computer
programs and embedded computer chips will perform as
intended regardless of date and that all data including
dates can be accessed and processed with expected results.
The Company expects to be year 2000 compliant by June 30,
1999.
Beginning in 1995 the Company began a multi-year project to
(i) replace 22 legacy systems which resulted from
acquisitions made since 1986, (ii) introduce enterprise-
wide information technology systems from SAP America, Inc.,
Oracle Corporation and J.D. Edwards in order to consolidate
and standardize its information technology systems and
(iii) install other enterprise-wide software in order to
serve customers better and operate more efficiently. An
important benefit of this project is that new systems and
software will be year 2000 compliant.
It is expected that the new systems and software will be
installed, tested and operating no later than June 30,
1999. When installed the new systems and software will
comprise at least 95% of the systems and software being
operated by the Company worldwide. In connection with the
introduction of the new systems and software, the Company
has identified the legacy systems being retained which are
not currently year 2000 compliant, and has put in place
programs to bring them to a state of year 2000 compliance
by the middle of 1999 through upgrading or replacement, as
appropriate. In addition, the Company has implemented
a program to identify and test date chips to ensure year
2000 functioning, with a formal monthly reporting
procedure.
The Company has also been engaged in the process of
identifying and prioritizing critical suppliers and
customers at the direct interface level, and communicating
with them about their plans and progress in addressing the
year 2000 problem. Evaluations of the most critical third
parties has commenced and will be followed by the
development of contingency plans.
A significant portion of the costs to implement the new
systems and software have already been incurred and are
being amortized or charged to expense in current
operations. The historical cost of remediating the non-
complaint systems has been included in the Company's
information technology cost reporting and are not material
to its financial position, results of operations or cash
flows. The company does not believe that future costs
associated with the new systems and software and the
required modifications of the legacy systems to become year
2000 compliant will be material to its financial position,
results of operations or cash flows.
The Company has formulated a general contingency plan for
dealing with the most serious year 2000 compliance failures
as they may occur and expects to fund the contingency plan
efforts from operating funds. During 1999 the Company will
develop more detailed contingency plans.
The failure to correct a material year 2000 problem could
result in an interruption in, or a failure of, certain
normal business activities or operations. Such failure
could materially and adversely affect the Company's results
of operations, liquidity and financial condition or
adversely affect the Company's relationships with its
suppliers, customers or other third parties. Due to the
general uncertainty inherent in the year 2000 problem,
resulting in part from the uncertainly of the year 2000
readiness of suppliers and customers, the Company is unable
to determine at this time whether the consequences of year
2000 failures will have a material impact on its financial
position, results of operations or cash flows. The
Company believes that the scheduled completion of the
implementation of the new systems and software prior to
June 30, 1999 should reduce the possibility of significant
interruptions of normal operations.
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: November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 48,800
<SECURITIES> 0
<RECEIVABLES> 372,993
<ALLOWANCES> 9,513
<INVENTORY> 236,776
<CURRENT-ASSETS> 690,043
<PP&E> 559,194
<DEPRECIATION> 256,097
<TOTAL-ASSETS> 1,593,944
<CURRENT-LIABILITIES> 397,279
<BONDS> 447,453
0
0
<COMMON> 65,985
<OTHER-SE> 472,365
<TOTAL-LIABILITY-AND-EQUITY> 1,593,944
<SALES> 564,539
<TOTAL-REVENUES> 564,539
<CGS> 471,678
<TOTAL-COSTS> 474,678
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,120
<INTEREST-EXPENSE> 8,595
<INCOME-PRETAX> (16,210)
<INCOME-TAX> (16,065)
<INCOME-CONTINUING> (145)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (145)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
