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, 1999
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 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 49,639,214.
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, 1999 and 1998 2
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 1999 and 1998 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 4. Submission of Matter to a Vote of
Security Holders 10
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
March 31
1999 1998
(Dollars in thousands except per share data)
Net Sales $ 580,559 $ 591,501
Costs and Expenses
Cost of goods sold 475,478 477,272
Selling, general and administrative 78,717 74,864
Interest on debt 8,282 8,272
Amortization of intangibles 3,997 4,057
Other - net 1,075 1,141
567,549 565,606
Income Before Income Taxes and
Cumulative Effect of a Change in
Accounting Principle 13,010 25,895
Income taxes 5,269 10,488
Income Before Cumulative Effect
of a Change in Accounting Principle 7,741 15,407
Cumulative effect of a change in
accounting principle - (2,059)
Net Income $ 7,741 $ 13,348
Net Income per Share
Basic
Income before cumulative effect
of a change in accounting principle $ .17 $ .34
Cumulative effect of a change in
accounting principle - (.05)
Net income $ .17 $ .29
Diluted
Income before cumulative effect
of a change in accounting principle $ .17 $ .34
Cumulative effect of a change in
accounting principle - (.05)
Net income $ .17 $ .29
Dividends per common share $ .1200 $ .1125
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March December
31, 1999 31, 1998
(Dollars in thousands)
Assets
Current Assets
Cash and cash equivalents $ 34,979 $ 32,322
Receivables 377,779 350,102
Inventories:
Finished products 175,603 169,830
Raw materials and supplies 68,030 66,703
243,633 236,533
Prepaid expenses 14,064 9,937
Deferred income taxes 23,008 25,554
Total current assets 693,463 654,448
Property, Plant and Equipment 599,056 598,573
Less allowances for depreciation 266,713 258,986
332,343 339,587
Other Assets
Goodwill and other intangibles 464,695 467,577
Investments and other assets 91,163 91,277
Deferred income taxes 39,469 41,008
595,327 599,862
$ 1,621,133 $ 1,593,897
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks $ 3,938 $ 3,391
Trade payables and accrued expenses 382,192 358,081
Current portion of long-term debt 1,751 2,611
Total current liabilities 387,881 364,083
Other Liabilities 207,293 210,476
Long-term Debt
Senior notes 87,775 87,775
Medium-term notes 160,000 160,000
Other 239,852 233,111
487,627 480,886
Stockholders' Equity
Preferred stock, without par value
Authorized 5,000,000 shares
Issued -0- shares in 1999 and 1998 - -
Common stock, par value $1
Authorized 100,000,000 shares
Issued 66,078,071 shares at March 31,
1999 and 66,059,298 shares
at December 31, 1998 66,078 66,059
Capital surplus 295,880 293,613
Retained earnings 472,981 470,566
Accumulated translation adjustment (15,425) (12,327)
Associates ownership trust (66,950) (65,255)
Cost of treasury stock (16,438,857 shares
at March 31, 1999 and 16,439,467 shares
at December 31, 1998) (214,232) (214,204)
538,332 538,452
$ 1,621,133 $ 1,593,897
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31
1999 1998
(Dollars in thousands)
Cash Provided from (Used for) Operating Activities
Net income $ 7,741 $ 13,348
Depreciation and amortization 16,196 14,393
Companies carried at equity:
Income (1,035) (891)
Dividends received 800 500
Changes in operating assets and liabilities:
Receivables (31,848) (32,190)
Inventories (10,532) (10,730)
Prepaid expenses (2,671) 242
Trade payables and accrued expenses 27,461 7,666
Restructuring payments (2,699) (656)
Cumulative effect of a change in accounting principle - 3,460
Other 7,299 4,104
Net operating activities 10,712 (754)
Cash Provided from (Used for) Investing Activities
Capital expenditures (10,141) (15,937)
Acquisitions of businesses, less cash acquired (9,423) (59,114)
Acquisition payments (233) (207)
Sales of assets 300 -
Investments in associated and other companies (200) -
Return of cash from associated and other companies 512 -
Other 1,852 1,306
Net investing activities (17,333) (73,952)
Cash Provided from (Used for) Financing Activities
Cash dividends paid (5,326) (5,032)
Proceeds from the sale of common stock 221 1,498
Purchase of shares for treasury - (6,113)
Increase in debt 51,405 94,397
Reduction in debt (35,718) (6,185)
Net financing activities 10,582 78,565
Effect of exchange rate changes on cash (1,304) (517)
Cash and Cash Equivalents
Increase 2,657 3,342
Beginning of period 32,322 41,430
End of period $ 34,979 $ 44,772
Cash paid (received) during period
Interest $ 6,306 $ 8,688
Income taxes paid (refunded), net (3,604) 2,385
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
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 1998
Annual Report.
The results of operations for the interim periods are not
necessarily indicative of the results expected for the full year.
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 44,483,690 and 44,871,546 for the quarters ended
March 31, 1999 and 1998, 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 44,551,555 and 45,720,484 for the
quarters ended March 31, 1999 and 1998, respectively.
Comprehensive Income
Comprehensive income for the first quarter of 1999 and 1998 was
$4,643 and $12,399, respectively. Comprehensive income includes
net income and foreign currency translation adjustments for the
quarters ended March 31, 1999 and 1998.
Pending Accounting Changes
In June 1998 the Financial Accounting Standards Board issued
Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities". The Company is analyzing the impact of
Statement 133.
Profit Improvement Plan
During the first quarter of 1999, the Company continued to take
actions under its Profit Improvement Plan announced during the
third quarter of 1998. Details of the utilization of the profit
improvement accruals during the first quarter of 1999 are as
follows:
Accrual Utilized Accrual
balance first balance
December 31,1998 quarter 1999 March 31, 1999
Associate costs $ 5,257 $ 1,005 $ 4,252
Asset write-downs 2,779 568 2,211
Plant closures 2,163 703 1,460
$ 10,199 $ 2,276 $ 7,923
Business Segments
The Company has three reportable segments - rubber processing,
plastic processing and distribution. The reportable segments are
business units that offer different products and services.
Additionally, the manufacturing processes for rubber processing
and plastic processing are different. Rubber processing includes
the manufacture of custom rubber compounds and additives.
Plastic processing includes the production of custom plastic
compounds and custom formulated colorants and additives.
Distribution includes distribution of engineered plastic shapes
and thermoplastic and thermoset resins and Fiberglas TM materials.
Other operations include the Company's Diversified Polymer
Products business and its marine operations.
Rubber Plastic Distribu- Other
Processing Processing ion Operating Corporate Total
Quarter Ending March 31, 1999
Net sales
from external
customers $130,199 $225,449 $221,288 $3,623 $ - $580,559
Intersegment
sales 717 5,358 1,662 - - 7,737
Operating income 11,366 13,926 2,517 236 (6,753) 21,292
Quarter Ending March 31, 1998
Net sales
from external
customers $138,789 $217,169 $231,719 $3,824 $ - $591,501
Intersegment
sales 733 5,941 1,825 - - 8,499
Operating income 15,398 15,580 9,170 171 (6,152) 34,167
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales decreased from $591.5 million in 1998 to $580.6
million in 1999, representing a decrease of 1.8 percent.
Sales in the plastic processing businesses increased 3.4
percent to $230.8 million in 1999 compared with $223.1
million in 1998. Volume was down .6 percentage points,
price/mix was a negative 2.7 percentage points and foreign
exchange accounted for .7 percentage point increase. The
acquisition of So.F.teR added 6 percentage points. Rubber
processing sales decreased 6.2 percent to $130.9 million
compared with $139.5 million in 1998. Volume decreased 3.9
percentage points while price/mix was a negative 2.2
percentage points. Foreign exchange accounted for .1
percentage point of the decline. Distribution sales were
$223 million in 1999 compared with $233.5 million in 1999,
a decrease of 4.5 percent. Foreign exchange had a negative
impact of 1.3 percentage points while price/mix accounted
for 2.7 percentage points of the decline. Volume had a
negative .5 percentage point impact.
Gross margins were 18.1 percent in 1999 compared with 19.3
percent in 1998. The decrease in gross margins is due to
the year over year performance issues in our domestic
plastic compounding business as well as our shapes
distribution business. In addition, margins in our rubber
processing business declined on a year over year basis due
to lower volumes domestically, a shift in price/mix
internationally and plant expansion costs. Our resin
distribution business also continues to be impacted by
pricing pressures.
Selling, general and administrative costs increased $3.8
million to $78.7 million or 13.6 percent of sales in 1999
as compared with 12.7 percent of sales in 1998.
Acquisitions accounted for $2.2 million of the increase
with the balance of the increase attributable to costs
associated with international plastics and the Techmer
joint venture, both growing businesses in terms of sales
and the search for a new chief executive officer.
Liquidity and Sources of Capital
Operating activities provided $10.7 million. Working
capital used $17.6 million reflecting the increase in
activity in the first quarter of 1999 as compared with the
fourth quarter of 1998. Investing activities used $17.3
million and included $10.1 million for capital expenditures
and $9.4 million for acquisitions. Financing activities
provided $10.6 million from increased borrowings of $15.7
million offset by $5.3 million to pay dividends.
The current ratio was 1.8:1 at March 31, 1999 and December
31, 1998. Debt to total capital was 47.5 percent at March
31, 1999 and 47.2 percent at December 31, 1998.
Market Risk
The Company is exposed to foreign currency exchange risk in
the ordinary course of business. Management has examined
the Company's exposure to this risk and has concluded that
the Company's exposure in this area is not material to fair
values, cash flows or earnings.
The Company is exposed to foreign currency exchange risks
in the ordinary course of its business operations due to
the fact that the Company's products are provided in
numerous countries around the world and collection of
revenues and payment of certain expenses may give rise to
currency exposure. The Company also enters into
intercompany lending transactions and foreign exchange
contracts related to this foreign currency exposure.
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 subsidiaries of the Company
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. While it is not possible to predict with
certainty, management believes that 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 Readiness Disclosure
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 substantially 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
in 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
functionality, 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 respect to their state of year 2000 readiness.
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 uncertainty 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 4. Submission of Matters to a Vote of Security Holders
a.) Annual meeting of stockholders held May 5, 1999.
b.) Proxies for the meeting were solicited 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 eleven directors were
elected: Carol A. Cartwright, Wayne R. Embry, J. Trevor Eyton,
Robert A. Garda, Gordon D. Harnett, David H. Hoag, George D.
Kirkham, David Baker Lewis, Marvin L. Mann, Richard W. Pogue and
Martin D. Walker.
c.) The appointment of PricewaterhouseCoopers LLP as the
Company's independent public accountants for the year 1999 was
ratified and approved. There were 44,692,685 shares voted in the
affirmative, 524,523 shares voted in the negative and 259,696
shares abstained.
Item 6. Exhibits and Reports of Form 8-K
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 10, 1999
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