<PAGE> 1
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, 2000
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 48,970,291.
<PAGE> 2
M. A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------------
INDEX
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Income -
Three Months ended
March 31, 2000 and 1999 2
Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 3
Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 2000 and 1999 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
</TABLE>
-1-
<PAGE> 3
PART I
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------------------------------
2000 1999
---- ----
(Dollars in thousands except per share data)
<S> <C> <C>
Net Sales $ 612,682 $ 580,559
Costs and Expenses
Cost of goods sold 504,265 475,478
Selling, general and administrative 79,065 78,717
Interest on debt 8,053 8,282
Amortization of intangibles 3,820 3,997
Other - net 324 1,075
---------------------- -----------------------
595,527 567,549
---------------------- -----------------------
Income Before Income Taxes 17,155 13,010
Income taxes 6,948 5,269
---------------------- -----------------------
Net Income $ 10,207 $ 7,741
====================== =======================
Net Income Per Share
- --------------------
Basic $ .23 $ .17
====================== =======================
Diluted $ .23 $ .17
====================== =======================
Dividends per common share $ .125 $ .120
====================== =======================
</TABLE>
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<PAGE> 4
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
March December
31, 2000 31, 1999
-------------------- --------------------
(Dollars in thousands)
Assets
------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 34,622 $ 40,937
Receivables 397,427 356,029
Inventories:
Finished products 177,820 182,861
Raw materials and supplies 71,166 69,190
-------------------- --------------------
248,986 252,051
Other current assets 21,282 20,908
Deferred income taxes 23,010 27,593
-------------------- --------------------
Total current assets 725,327 697,518
Property, Plant and Equipment 622,265 618,140
Less allowances for depreciation 290,424 284,232
-------------------- --------------------
331,841 333,908
Other Assets
Goodwill and other intangibles 430,702 432,576
Investments and other assets 97,397 94,694
Deferred income taxes 31,833 31,862
-------------------- --------------------
559,932 559,132
-------------------- --------------------
$1,617,100 $1,590,558
==================== ====================
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Notes payable to banks $ 3,546 $ 4,011
Trade payables and accrued expenses 395,342 404,293
Current portion of long-term debt 3,846 4,020
-------------------- --------------------
Total current liabilities 402,734 412,324
Other Liabilities 207,973 205,031
Long-term Debt
Senior notes 87,775 87,775
Medium-term notes 160,000 160,000
Other 206,318 175,914
-------------------- --------------------
454,093 423,689
Stockholders' Equity
Preferred stock, without par value
Authorized 5,000,000 shares
Issued -0- shares in 2000 and 1999 - -
Common stock, par value $1
Authorized 100,000,000 shares
Issued 66,208,806 shares at March 31, 2000 and
66,193,985 shares at December 31, 1999 66,209 66,194
Capital surplus 290,582 289,292
Retained earnings 489,035 484,427
Accumulated translation adjustment (22,280) (17,763)
Associates ownership trust (46,865) (48,203)
Cost of treasury stock (17,238,515 shares at March 31, 2000
and 17,242,100 shares at December 31, 1999) (224,381) (224,433)
-------------------- --------------------
552,300 549,514
-------------------- --------------------
$1,617,100 $1,590,558
==================== ====================
</TABLE>
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<PAGE> 5
M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------------------------
2000 1999
---- ----
(Dollars in thousands)
Cash Provided from (Used for) Operating Activities
<S> <C> <C>
Net income $ 10,207 $ 7,741
Depreciation and amortization 16,514 16,196
Companies carried at equity:
Income (1,018) (1,035)
Dividends received - 800
Changes in operating assets and liabilities:
Receivables (44,410) (31,848)
Inventories 2,139 (10,532)
Prepaid expenses (693) (2,671)
Trade payables and accrued expenses (3,997) 27,461
Restructuring payments (1,503) (2,699)
Other 7,513 7,299
---------------------- -------------------------
Net operating activities (15,248) 10,712
Cash Provided from (Used for) Investing Activities
Capital expenditures (11,950) (10,141)
Acquisitions of businesses, less cash acquired (10,630) (9,423)
Acquisition payments (100) (233)
Sales of assets - 300
Investments in associated and other companies - (200)
Return of cash from associated and other companies 294 512
Other 2,736 1,852
---------------------- -------------------------
Net investing activities (19,650) (17,333)
Cash Provided from (Used for) Financing Activities
Cash dividends paid (5,599) (5,326)
Proceeds from the sale of common stock 157 221
Increase in debt 64,108 51,405
Reduction in debt (29,396) (35,718)
---------------------- -------------------------
Net financing activities 29,270 10,582
Effect of exchange rate changes on cash (687) (1,304)
---------------------- -------------------------
Cash and Cash Equivalents
Increase (decrease) (6,315) 2,657
Beginning of period 40,937 32,322
---------------------- -------------------------
End of period $ 34,622 $ 34,979
====================== =========================
Cash paid (received) during period
Interest $ 7,383 $ 6,306
Income taxes paid (refunded), net 4,834 (3,604)
</TABLE>
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<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
March 31, 2000
--------------
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 1999 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 44,949,864 and
44,483,690 for the quarters ended March 31, 2000 and 1999, 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 44,991,378 and 44,551,555
for the three months ended March 31, 2000 and 1999, respectively.
Comprehensive Income
- --------------------
Comprehensive income for the first quarter of 2000 and 1999 was $5,690 and
$4,643, respectively. Comprehensive income includes net income and foreign
currency translation adjustments for the three months ended March 31, 2000 and
1999.
Pending Accounting Changes
- --------------------------
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137 which delays the effective date of
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", to
fiscal years beginning after June 15, 2000. The company is analyzing the impact
of SFAS 133 and will adopt it in 2001.
Profit Improvement Plan
- -----------------------
During the first quarter of 2000, 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 2000 are as follows:
<TABLE>
<CAPTION>
Accrual Balance Utilized First Accrual Balance
December 31, 1999 Quarter 2000 March 31, 2000
----------------- -------------- ---------------
<S> <C> <C> <C>
Associate Costs $ 905 $ 161 $ 744
Asset Write-downs 1,228 613 615
Plant Closures 511 14 497
-------- ---------- --------
$ 2,644 $ 788 $ 1,856
======== ========== ========
</TABLE>
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<PAGE> 7
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 resins. Other operations include the
Company's Diversified Polymer Products business and its marine operations.
During the third quarter of 1999, the Company sold its thermoset resins and
glass fiber materials business and the Company's management contract for dock
operations expired. In April 2000, the Company completed the previously
announced divestiture of its Diversified Polymer Products business.
<TABLE>
<CAPTION>
Rubber Plastic Other
Processing Processing Distribution Operations Corporate Total
---------- ---------- ------------ ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDING MARCH 31, 2000
Net sales from external customers $ 137,565 $ 241,518 $ 229,209 $ 4,390 $ - $ 612,682
Intersegment sales 1,531 5,866 1,703 - - 9,100
Operating income 12,592 14,453 3,822 (118) (5,541) 25,208
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
</TABLE>
SUBSEQUENT EVENTS
On May 8, 2000, the Company announced that it and The Geon Company will
consolidate into a new Ohio Corporation. The Geon Company is a leading
Ohio-based polymer services and technology company with operations in vinyl
compounds, specialty vinyl resins and formulations, engineered films and other
value-added products and services. The consolidation will take place in the form
of a cashless stock swap, and following the consolidation the shareholders of
each company will hold approximately 50 percent of the new corporation.
Consummation of the transaction is subject to approval by the shareholders of
both companies and regulatory approvals and is expected to be consummated in the
third quarter of 2000.
On May 11, 2000, the Company announced it had signed a definitive agreement to
sell a substantial component of its Cadillac Plastic shapes distribution and
fabrication business to GE Plastics. The agreement includes substantially all
the assets and leased facilities of Cadillac operations in North America, Asia,
the United Kingdom, and the Netherlands. The sale is subject to government
approvals and is targeted to close in the summer of 2000. Certain portions of
Cadillac Plastic are not part of the sale agreement. These include the Richmond
Aircraft unit, headquartered in the United States and three joint ventures
located in Germany, France and Spain. Strategic alternatives for these
businesses are being considered.
-6-
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------------
Results of Operations
- ---------------------
Consolidated net sales for the quarter ending March 31, 2000 increased to $612.7
million from $580.6 million for the quarter ending March 31, 1999, representing
an increase of 5.5 percent. Net sales in the plastic processing segment for the
quarter increased 7.2 percent to $247.4 million in 2000 compared with $230.8
million in 1999. Increases in volume accounted for 5.3 percentage points,
price/mix resulted in a favorable 3.6 percentage point effect and foreign
exchange had a negative impact of 4.0 percentage points. Acquisitions
contributed 2.3 percentage points to the plastic processing segment's net sales.
The rubber processing segment's net sales increased 6.2 percent for the quarter
to $139.1 million in 2000 compared with $130.9 million in 1999. Volume increased
14.3 percentage points, price/mix was a negative 7.6 percentage points, and
foreign exchange resulted in a negative 0.5 percentage point impact. The
distribution segment's net sales for the quarter were $230.9 million in 2000
compared with $223.0 million in 1999, an increase of 3.6 percent. Volume had a
favorable 7.5 percentage point impact, price/mix accounted for an increase of
2.7 percentage points, and foreign exchange had a favorable impact of 0.1
percentage points. The divestiture of the thermoset resin distribution business
in the third quarter of 1999 resulted in a 6.7 percentage point reduction in net
sales of the distribution segment quarter over quarter.
Gross margins declined 0.4 percentage points to 17.7 percent for the quarter
ending March 31, 2000 compared with 18.1 percent for the comparable period in
1999. The rubber processing segment's margins increased slightly due to
increased volume and benefits realized from lean manufacturing and supply chain
management initiatives begun in 1999 and were partially offset by the start-up
costs of a new facility in Mexico. Manufacturing inefficiencies in the
plastic-processing segment negatively impacted gross margins. Gross margins in
the distribution segment also declined from prior period levels as shapes
distribution continues to rebuild its customer base.
Selling, general and administrative expenses increased $0.4 million to $79.1 for
the period ending March 31, 2000 compared with $78.7 million in the comparable
period in 1999. As a percentage of net sales, selling, general and
administrative expenses declined 0.7 percentage points to 12.9 percent in 2000
from 13.6 percent in 1999. The percentage decline is attributable to the
divestiture of the thermoset resin distribution business in 1999 and better
control of spending in the quarter.
Other-net decreased $0.8 million for the period ending March 31, 2000 compared
to the same period in 1999 due to reduced minority interest eliminations, and
increased foreign currency exchange gains.
-7-
<PAGE> 9
During the quarter, the Company acquired Tekno Polimer, a leading Turkish
compounder in the Middle East. In addition, the Company divested of its
Diversified Polymer Products business. The Company recorded a $0.5 million
pre-tax charge associated with the Diversified Polymer Products business sale in
addition to the $10.9 million pre-tax charge taken in the fourth quarter of 1999
related to the write-down of goodwill and other intangibles related to this
business.
Liquidity and Sources of Capital
- --------------------------------
Operating activities used $15.2 million. Working capital used $47.0 million
reflecting the increase in activity in the first quarter of 2000 as compared
with the fourth quarter of 1999. Investing activities used $19.7 million and
included $12.0 million for capital expenditures and $10.7 million related to
acquisitions. Financing activities provided $29.3 million from increased
borrowings of $34.7 million offset by $5.6 million to pay dividends.
The current ratio was 1.8:1 at March 31, 2000 and 1.7:1 at December 31, 1999.
Debt to total capital was 45.1 percent at March 31, 2000 and 43.5 percent at
December 31, 1999.
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
- ---------------------
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.
-8-
<PAGE> 10
YEAR 2000 ISSUE UPDATE
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the "Year 2000 issue". However, it
is possible that the full impact of the date change, which was of concern due to
computer programs that use two digits instead of four digits to define years,
has not been fully recognized. For example, it is possible that Year 2000 issues
may occur with billing, payroll, or financial closings at month, quarterly, or
year-end. The Company believes that any such problems are likely to be minor and
correctable. In addition, the Company could still be negatively affected if its
customers or suppliers are adversely affected by the Year 2000 or similar
issues. The Company currently is not aware of any significant Year 2000 or
similar problems that have arisen for its customers and suppliers.
SUBSEQUENT EVENTS
On May 8, 2000, the Company announced that it and The Geon Company will
consolidate into a new Ohio Corporation. The Geon Company is a leading
Ohio-based polymer services and technology company with operations in vinyl
compounds, specialty vinyl resins and formulations, engineered films and other
value-added products and services. The consolidation will take place in the form
of a cashless stock swap, and following the consolidation the shareholders of
each company will hold approximately 50 percent of the new corporation.
Consummation of the transaction is subject to approval by the shareholders of
both companies and regulatory approvals and is expected to be consummated in the
third quarter of 2000.
On May 11, 2000, the Company announced it had signed a definitive agreement to
sell a substantial component of its Cadillac Plastic shapes distribution and
fabrication business to GE Plastics. The agreement includes substantially all
the assets and leased facilities of Cadillac operations in North America, Asia,
the United Kingdom, and the Netherlands. The sale is subject to government
approvals and is targeted to close in the summer of 2000. Certain portions of
Cadillac Plastic are not part of the sale agreement. These include the Richmond
Aircraft unit, headquartered in the United States and three joint ventures
located in Germany, France and Spain. Strategic alternatives for these
businesses are being considered.
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.
-9-
<PAGE> 11
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a.) Annual meeting of stockholders held May 3, 2000.
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:
Phillip D. Ashkettle, 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,
and Martin D. Walker.
c.) The appointment of PricewaterhouseCoopers LLP as the Company's
independent public accountants for the year 2000 was ratified
and approved. There were 44,249,605 shares voted in the
affirmative, 404,023 shares voted in the negative and 206,807
shares abstained.
d.) The approval of the M.A. Hanna Company Long-Term Incentive
Plan, as amended and restated as of March 1, 2000 was ratified
and approved. There were 42,124,715 shares voted in the
affirmative, 2,202,378 voted in the negative and 533,342
shares abstained.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
a.) On May 8, 2000, the Registrant filed a Current Report on Form
8-K, reporting its execution of an Agreement and Plan of
Consolidation with The Geon Company (a Delaware Corporation)
to form a new Ohio Corporation.
b.) On May 11, 2000, the Registrant filed a Current Report on Form
8-K, reporting its execution of a definitive agreement to sell
a substantial component of the Registrant's Cadillac Plastics
shapes distribution and fabrication businesses to GE Plastics.
The agreement includes substantially all the assets and leased
facilities in North America, Asia, the United Kingdom, and the
Netherlands.
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 12, 2000
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 34,622
<SECURITIES> 0
<RECEIVABLES> 405,776
<ALLOWANCES> 8,349
<INVENTORY> 248,986
<CURRENT-ASSETS> 725,327
<PP&E> 622,265
<DEPRECIATION> 290,424
<TOTAL-ASSETS> 1,617,100
<CURRENT-LIABILITIES> 402,734
<BONDS> 454,093
0
0
<COMMON> 66,209
<OTHER-SE> 486,091
<TOTAL-LIABILITY-AND-EQUITY> 1,617,100
<SALES> 612,682
<TOTAL-REVENUES> 612,682
<CGS> 504,265
<TOTAL-COSTS> 504,265
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,215
<INTEREST-EXPENSE> 8,053
<INCOME-PRETAX> 17,155
<INCOME-TAX> 6,948
<INCOME-CONTINUING> 10,207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,207
<EPS-BASIC> .23
<EPS-DILUTED> .23
</TABLE>
