-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KwPSLsfPh3cOq+mNt+dij5hJRVgIzRB2AJwu8r12JCJdigNJh9x9tCkPGl54yY2p WAtHmmTtKedblSbx9bdezQ== 0000045370-98-000010.txt : 19981116 0000045370-98-000010.hdr.sgml : 19981116 ACCESSION NUMBER: 0000045370-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANNA M A CO/DE CENTRAL INDEX KEY: 0000045370 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PLASTIC PRODUCTS [3080] IRS NUMBER: 340232435 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05222 FILM NUMBER: 98747589 BUSINESS ADDRESS: STREET 1: STE 36 5000 STREET 2: 200 PUBLIC SQUARE CITY: CLEVELAND STATE: OH ZIP: 44114-2304 BUSINESS PHONE: 2165894000 FORMER COMPANY: FORMER CONFORMED NAME: HANNA MINING CO DATE OF NAME CHANGE: 19850523 10-Q 1 3RD QUARTER FORM 10-Q 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 EX-27 2
5 1,000 3-MOS DEC-31-1998 SEP-30-1998 48,800 0 372,993 9,513 236,776 690,043 559,194 256,097 1,593,944 397,279 447,453 0 0 65,985 472,365 1,593,944 564,539 564,539 471,678 474,678 0 1,120 8,595 (16,210) (16,065) (145) 0 0 0 (145) 0 0
-----END PRIVACY-ENHANCED MESSAGE-----