10-Q 1 e10-q.txt M.A. HANNA COMPANY FORM 10-Q 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 June 30, 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 (I) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the proceeding 12 months, and (2) has been subjected 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 48,480,744. 2 M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES INDEX
PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Income - Three Months and Six Months Ended June 30, 2000 and 1999 2 Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3 Consolidated Statements of Cash Flows -Six Months Ended June 30, 2000 and 1999 4 Notes to Consolidated Financial Statements 5 - 7 Item 2. Management's Discussion and Analysis of Interim Financial Condition and Results of Operations. 8 - 10 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11
1 3 M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 --------------------------------------------- ---------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in thousands except per share data) Net Sales $ 606,788 $ 594,263 $1,219,470 $1,174,822 Costs and Expenses Cost of goods sold 503,764 486,987 1,008,029 962,465 Selling, general and administrative 76,527 76,079 155,592 154,796 Interest on debt 8,278 8,251 16,331 16,533 Amortization of intangibles 3,669 3,973 7,489 7,970 Other - net 45,571 1,518 45,895 2,593 ----------------- --------------------- ----------------- ------------------ 637,809 576,808 1,233,336 1,144,357 ----------------- --------------------- ----------------- ------------------ Income(Loss) Before Income Taxes (31,021) 17,455 (13,866) 30,465 Income taxes 2,302 7,069 9,250 12,338 ----------------- --------------------- ----------------- ------------------ Net Income(Loss) $ (33,323) $ 10,386 $ (23,116) $ 18,127 ================= ===================== ================= ================== Net Income(Loss) per Share Basic $ (.74) $ .23 $ (.51) $ .41 ================= ===================== ================= ================== Diluted $ (.74) $ .23 $ (.51) $ .41 ================= ===================== ================= ================== Dividends per common share $ .125 $ .12 $ .25 $ .24 ================= ===================== ================= ==================
The accompanying footnotes are an integral part of these financial statements. 2 4 M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
June December 30, 2000 31, 1999 -------------------------- ------------------------ (Dollars in thousands) ASSETS Current Assets Cash and cash equivalents $ 39,659 $ 40,937 Receivables 326,340 356,029 Inventories: Finished products 125,103 182,861 Raw materials and supplies 80,746 69,190 -------------------------- ------------------------- 205,849 252,051 Other Current Assets 121,580 20,908 Deferred income taxes 26,373 27,593 -------------------------- ------------------------ Total current assets 719,801 697,518 Property, Plant and Equipment 617,733 618,140 Less allowances for depreciation 301,287 284,232 -------------------------- ------------------------ 316,446 333,908 Other Assets Goodwill and other intangibles 377,974 432,576 Investments and other assets 100,458 94,694 Deferred income taxes 28,321 31,862 -------------------------- ------------------------ 506,753 559,132 -------------------------- ------------------------ $ 1,543,000 $ 1,590,558 ========================== ======================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable to banks $ 6,146 $ 4,011 Trade payables and accrued expenses 349,684 404,293 Current portion of long-term debt 2,361 4,020 -------------------------- ------------------------ Total current liabilities 358,191 412,324 Other Liabilities 206,087 205,031 Long-term Debt Senior notes 87,775 87,775 Medium-term notes 160,000 160,000 Other 213,014 175,914 -------------------------- ------------------------ 460,789 423,689 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 Issued 66,225,914 shares at June 30, 2000 and 66,193,985 shares at December 31, 1999 66,226 66,194 Capital surplus 282,571 289,292 Retained earnings 450,101 484,427 Accumulated translation adjustment (18,156) (17,763) Associates ownership trust (32,441) (48,203) Cost of treasury stock 17,745,170 shares at June 30, 2000 and 17,242,100 shares at December 31, 1999 (230,368) (224,433 -------------------------- ------------------------ 517,933 549,514 -------------------------- ------------------------ $ 1,543,000 $ 1,590,558 ========================== ========================
The accompanying footnotes are an integral part of these financial statements. 3 5 M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30 -------------------------------------------- 2000 1999 ---- ---- (Dollars in thousands) Cash Provided from (Used for) Operating Activities Net income(loss) $ (23,116) $ 18,127 Depreciation and amortization 33,377 32,594 Companies carried at equity Income (2,134) (2,385) Dividends received 728 1,400 Changes in operating assets and liabilities Receivables (42,199) (35,291) Inventories (16,215) 2,751 Prepaid expenses (703) (889) Trade payables and accrued expenses (9,565) 18,357 Restructuring payments (3,225) (4,643) Provisional loss from pending sale of assets 45,350 - Other 12,531 13,553 ----------------- ----------------- Net operating activities (5,171) 43,574 Cash Provided from (Used for) Investing Activities Capital expenditures (24,261) (23,440) Acquisitions of businesses, less cash acquired (10,743) (9,423) Acquisition payments (185) (233) Sales of assets 6,985 2,197 Investments in associated and other companies - (391) Return of cash from associated and other companies 1,008 512 Other (120) 6,303 ----------------- ----------------- Net investing activities (27,316) (24,475) Cash Provided from (Used for) Financing Activities Cash dividends paid (11,210) (10,657) Proceeds from the sale of common stock 340 674 Increase in debt 91,031 54,699 Reduction in debt (47,937) (56,798) ----------------- ----------------- Net financing activities 32,224 (12,082) Effect of exchange rate changes on cash (1,015) 284 ----------------- ----------------- Cash and Cash Equivalents Increase (decrease) (1,278) 7,301 Beginning of period 40,937 32,3220 ----------------- ----------------- End of period $ 39,659 $ 39,623 ================= ================= Cash paid during period Interest $ 16,471 $ 15,691 Income taxes 8,681 302 The accompanying footnotes are an integral part of these financial statements.
4 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 44,943,169 and 44,577,005 for the quarters ended June 30, 2000 and 1999, respectively. Outstanding shares for the six months ended June 30, 2000 and 1999 were 44,946,516 and 44,530,611. Shares of common stock held by the Associates Ownership Trust ("AOT") enter into the determination of the average number of shares outstanding as the shares are released from the AOT to fund a portion of the Company's obligations under certain of its employee compensation and benefit plans. The number of shares used to compute diluted net income per share is based on the number of shares used for basic net income per share increased by the common stock equivalents which would arise from the exercise of stock options. The average number of shares used in the computation was 45,033,946 and 44,886,750 for the quarters ended June 30, 2000 and 1999, respectively, and 45,013,024 and 44,680,533 for the six months ended June 30, 2000 and 1999, respectively. Comprehensive Income Comprehensive income (loss) for the second quarter of 2000 and 1999 was ($29,199) and $8,795, respectively. Comprehensive income (loss) for the six months ended June 30, 2000 and 1999 was, ($23,512) and $13,438, respectively. Comprehensive income includes net income and foreign currency translation adjustments for the quarters and six months ending June 30, 2000 and 1999, respectively. 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 six months 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 six months of 2000 are as follows:
Accrual Balance Utilized first six Accrual Balance December 31, 1999 months of 2000 June 30, 2000 ------------------ --------------- ------------- Associate Costs $ 907 $ 359 $ 548 Plant Closures $ 511 $ 42 $ 469 ----------- ---------- --------- $ 1,418 $ 401 $ 1,017 ============ ========== =========
5 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. 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. At June 30, 2000, the Company recorded a pre-tax charge of $45.3 million related to the writedown of goodwill and closing costs associated with the sale. On July 31, 2000, the Company completed the divestiture of this business with GE Plastic. 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.
Rubber Plastic Other Processing Processing Distribution Operations Corporate Total ---------- ---------- ------------ ---------- --------- ----- QUARTER ENDING JUNE 30, 2000 Net sales from external customers $129,817 $242,053 $234,630 $288 $ - $606,788 Intersegment sales 884 5,962 1,879 - - 8,725 Operating income (loss) 9,863 13,621 (41,340) (70) (4,818) (22,744) QUARTER ENDING JUNE 30, 1999 Net sales from external customers $130,721 $227,725 $232,132 $3,685 $ - $594,263 Intersegment sales 856 5,462 1,571 - - 7,889 Operating income 11,532 16,028 3,592 344 (5,790) 25,706 SIX MONTHS ENDING JUNE 30, 2000 Net sales from external customers $267,381 $483,572 $463,839 $4,678 $ - $1,219,470 Intersegment sales 2,415 11,828 3,582 - - 17,825 Operating income (loss) 22,455 28,074 (37,518) (188) (10,359) 2,464 SIX MONTHS ENDING JUNE 30, 1999 Net sales from external customers $260,919 $453,175 $453,420 $7,308 $ - $1,174,822 Intersegment sales 1,573 10,820 3,232 - - 15,625 Operating income 22,898 29,954 6,110 579 (12,543) 46,998
Merger On May 8, 2000, the Company announced that it and The Geon Company will consolidate into a new Ohio Corporation, PolyOne(TM) 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 is expected to be consummated in the third quarter of 2000. Subsequent Event On July 19, 2000, the Company announced it had signed a definitive agreement to sell its Richmond Aircraft Products unit to UMECO, plc. Richmond Aircraft is part of the Company's Cadillac Plastic subsidiary. The agreement includes substantially all of the assets of Richmond Aircraft. The sale is subject to regulatory approval and is targeted to close in August 2000. 6 8 On July 31, 2000, the Company announced it had signed a definitive agreement to sell its 50 percent interest in three shapes distribution joint ventures to Thyssen Krupp Materials & Services AG. The three joint ventures are a part of the Company's Cadillac Plastic subsidiary. The sale is subject to regulatory approval and is expected to close in the fourth quarter of 2000. 7 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Consolidated net sales for the quarter ending June 30, 2000 increased 2.1 percent to $606.8 million from $594.3 million for the quarter ending June 30, 1999. The quarterly sales increases are attributable to a 3.8 percent increase in sales volume, a favorable 2.6 percent price/mix variance, and an unfavorable 2.4 percent foreign exchange impact. The six months ending June 30 experienced a 3.8 percent increase in consolidated net sales to $1,219.5 million in 2000 from $1,174.8 million in 1999. The sales increases are attributable to a 6.0 percent increase in sales volume, a favorable 1.7 percent price/mix variance, and an unfavorable 2.1 percent foreign exchange impact. The combined impact from acquisitions net of divestitures was an unfavorable 1.9 percent for the quarter ending June 30, 2000 and an unfavorable 1.8 percent for the six months ending June 30, 2000. Net sales for the quarter in the plastic processing segment increased 6.4 percent to $248.0 million in 2000 compared with $233.2 million in 1999. Quarterly volume increased 3.0 percent and price/mix increased 4.2 percent while the foreign exchange impact was an unfavorable 4.0 percent. Net sales for the six months ending June 30 increased 6.8 percent to $495.4 million in 2000 from $464.0 million in 1999. Volume increased 4.1 percent, price/mix variance was a favorable 3.9 percent while foreign exchange had an unfavorable 4.0 percent impact for the six months ending June 30, 2000. Acquisitions in the plastic processing segment increased net sales 3.2 percent for the quarter and 2.8 percent for the six months ending June 30, 2000. Operating margins were 5.5 percent in the second quarter of 2000 compared with 6.9 percent for the comparable period in 1999. Operating margins for the six month periods were 5.7 percent and 6.5 percent in 2000 and 1999, respectively. The decline in operating margins was partly the result of raw material cost increases that the Company was unable to fully offset with price increases. In response to this, the Company is implementing customer equity analysis, which evaluates customers according to profitability and focuses on growing business with profitable customers, as well as examining pricing stewardship across all customers. The rubber processing segment's quarterly net sales declined 0.7 percentage points to $130.7 million in 2000 compared with $131.6 million in 1999. Quarterly net sales volume increased 0.7 percentage points, the price/mix variance was an unfavorable 0.6 percentage points, and foreign exchange had a negative 0.8 percentage point impact. Net sales increased 2.8 percent to $269.8 million for the six months ending June 30, 2000 from $262.5 million for six months ending June 30, 1999. During the six months ending June 30, 2000 net sales volume increased 7.5 percent, the price/mix variance was an unfavorable 4.0 percent, and foreign exchange had an unfavorable 0.7 percentage point impact. Operating margins were 7.5 percent in the second quarter of 2000 compared with 8.8 percent in the comparable 1999 period. Operating margins for the six month periods were 8.3 percent and 8.7 percent in 2000 and 1999, respectively. The decline in operating margins was due in part to the start-up of a new rubber compounding plant in Mexico. The plant's revenue base has not yet matched the level of operating expenses but expectations are for the facility to break even in the third quarter. Also impacting operating margins was margin pressure from raw material cost increases. The Company has implemented price increases for its automotive customers effective July 1, which the company expects to see the effects of in the third quarter. The distribution segment's quarterly net sales increased 1.2 percent to $236.5 million in 2000 from $233.7 million for the comparable period in 1999. Quarterly sales volume increased 6.6 percent, the price/mix variance was a favorable 2.8 percent, foreign exchange had an unfavorable 1.6 percent impact, and a 1999 divestiture resulted in an unfavorable 6.6 percent impact. Net distribution sales increased 2.4 percent to $467.4 million from $456.7 million for the six-month periods ending June 30, 2000 and 1999, respectively. Sales volume increased 7.2 percent, the price/mix variance was a favorable 2.8 percent, foreign exchange had an unfavorable 0.8 percentage point impact, and a 1999 divestiture resulted in an unfavorable 6.8 8 10 percent impact for the six months ending June 30, 2000. Operating margins, excluding the one-time charge related to the writedown of goodwill and closing costs associated with the sale of a substantial portion of the Company's shapes distribution business, increased from 1.5 percent in the second quarter of 1999 to 1.7 percent in the comparable period in 2000. Operating margins also increased in the six months ended June 30, 2000 to 1.7 percent, compared with 1.3 percent in the comparable period in 1999. The Company's resin distribution business showed solid growth benefiting from the strong market demand for its products and improved operational efficiencies. The Company's shapes distribution business performed below expectations, in part because an action plan intended to modify the overall operating structure was put on hold as the Company sought to divest this business. The sale of the largest portion of this business was consummated on July 31, 2000. Agreements are in place for the sales of the remainder of the business. Gross margins declined 1.1 percent for the second quarter to 17.0 percent in 2000 compared with 18.1 percent in 1999 and declined 0.8 percentage points for the six month periods ending June 30 to 17.3 percent in 2000, compared with 18.1 percent in 1999. The decrease in gross margins is attributable to the aforementioned raw material price increases, plant start up costs and the delayed action plan to improve the profitability of the shapes distribution business. Selling, general and administrative expenses for the quarter ending June 30, 2000 were $76.5 million or 12.6 percent of sales compared with $76.1 million or 12.8 percent of sales for the same period in 1999. Selling, general and administrative expenses for the six months ending June 30, 2000 were $155.6 million or 12.8 percent of sales and $154.8 million or 13.2 percent of sales for the six months ending June 30, 1999. Other-net increased to $45.6 million for the quarter and $45.9 million for the six months ended June 30 due to the one-time nonrecurring charge of $45.3 million related to the writedown of goodwill and closing costs associated with the sale of a substantial portion of the Company's shapes distribution business to GE Plastics. The effective tax rate for the quarter and six months ended June 30, 2000 was impacted by two nonrecurring items. During the second quarter of 2000, the Company reached a settlement with the Internal Revenue Service on examinations of previously filed tax returns, which resulted in a one-time reduction of income tax reserves of $10.5 million. Also recognized in the period was a tax provision of $7.0 million related to the disposition of the shapes distribution business. Liquidity and Sources of Capital Operating activities used $5.2 million for the first six months of 2000, which included the use of $68.7 million for working capital requirements. Investing activities used $27.3 million and included $24.3 million for capital expenditures and $10.7 million for acquisitions. Financing activities provided $32.2 million, which included increasing debt by $43.1 million and paying dividends of $11.2 million. The current ratio was 2.0:1 at June 30, 2000 and 1.7:1 at December 31, 1999. Debt to total capital was 47.1 percent at June 30, 2000 and 43.5 percent at December 31, 1999. Market Risk 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. 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. 9 11 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. There are seventeen sites that are in the process of being remediated. Reserves for such liabilities have been established on an undiscounted basis and no insurance recoveries have been anticipated in the determination of reserves. Due to evolving remediation technology, changing regulations, inherent shortcomings of the estimation process and other factors, amounts accrued could vary significantly from amounts paid or to be paid. Accordingly, it is not possible to estimate a meaningful range of possible exposure. 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. Subsequent Events On July 19, 2000, the Company announced it had signed a definitive agreement to sell its Richmond Aircraft Products unit to UMECO, plc. Richmond Aircraft is part of the Company's Cadillac Plastic subsidiary. The agreement includes substantially all of the assets of Richmond Aircraft. The sale is subject to regulatory approval and is targeted to close in August 2000. On July 31, 2000, the Company announced it had signed a definitive agreement to sell its 50 percent interest in three shapes distribution joint ventures to Thyssen Krupp Materials & Services AG. The three joint ventures are a part of the Company's Cadillac Plastic subsidiary. The sale is subject to regulatory approval and is expected to close in the fourth quarter of 2000. 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, availability and pricing of supplies and raw materials, changes in product mix, shifts in market demand, the success of the Company's lean manufacturing and Supply Chain initiatives, the continuing improvement in the domestic plastic processing businesses, and changes in prevailing interest rates, inability to pass raw material cost increases through to customers, and unanticipated delays in effecting divestitures. 10 12 PART II Item 6 Exhibits and Reports on Form 8-K (a) On May 9, 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. (c) On July 26, 2000, the Registrant filed a Current Report on Form 8-K, reporting its financial results for the quarter ended June 30, 2000. (d) On August 14, 2000, the Registrant filed a Current Report on Form 8-K, reporting the completion of the previously announced disposition of substantially all of the assets of the Registrant's Cadillac Plastics shapes distribution and fabrication business to GE Plastics. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. M. A. HANNA COMPANY (Registrant) /s/ Thomas E. Lindsey ------------------------------ Thomas E. Lindsey Controller (Principal Accounting Officer) Date: August 14, 2000 11