EXHIBIT 13
CONSOLIDATED STATEMENTS OF INCOME
M.A. Hanna Company and Consolidated Subsidiaries
Year Ended December 31
Dollars in thousands except per share data 1994 1993 1992
Net Sales $1,719,356 $1,412,071 $1,188,541
Costs and Expenses
Cost of goods sold 1,393,036 1,146,191 961,925
Selling, general and administrative 213,318 179,228 152,366
Other income (4,066) (5,016) (5,250)
Other expense 9,839 9,750 8,917
Interest on debt 28,549 32,258 32,509
Amortization of intangibles 12,458 12,006 11,069
1,653,134 1,374,417 1,161,536
Income from Continuing Operations
Before Income Taxes, Extraordinary Charge
and Cumulative Effect of Changes in
Accounting Principles 66,222 37,654 27,005
Income taxes 29,218 16,357 8,819
Income from Continuing Operations
Before Extraordinary Charge and Cumulative
Effect of Changes in Accounting Principles 37,004 21,297 18,186
Income(loss) from discontinued operations 9,970 (19,279) 12,304
Extraordinary charge (3,680) - -
Cumulative effect of changes in
accounting principles - - (11,465)
Net Income $ 43,294 $ 2,018 $ 19,025
Net Income Per Share
Primary
Continuing operations $ 1.20 $ 0.69 $ 0.63
Discontinued operations 0.32 (0.62) 0.43
Extraordinary charge (0.12) - -
Cumulative effect of changes in
accounting principles - - (0.40)
Net income $ 1.40 $ 0.07 $ 0.66
Fully diluted
Continuing operations $ 1.18 $ 0.68 $ 0.61
Discontinued operations 0.32 (0.62) 0.42
Extraordinary charge (0.12) - -
Cumulative effect of changes in
accounting principles - - (0.39)
Net income $ 1.38 $ 0.06 $ 0.64
See summary of accounting policies and notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
M. A. Hanna Company and Consolidated Subsidiaries
Year Ended December 31
Dollars in thousands 1994 1993 1992
CASH PROVIDED FROM (USED FOR) OPERATIONS
Net income $ 43,294 $ 2,018 $19,025
Discontinued operations 13,910 41,345 9,117
Depreciation and amortization 41,904 38,182 35,421
Companies carried at equity:
Income (6,112) (4,286) (3,812)
Dividends received 7,033 5,729 1,355
Changes in operating assets and liabilities:
Receivables (40,103) (10,531) (15,605)
Inventories (31,145) (9,239) (2,301)
Prepaid expenses 725 1,774 (1,881)
Trade payables and other accruals 74,895 10,452 21,008
Gain from sales of assets - (1,730) (409)
Restructuring payments (10,540) (16,594) (10,367)
Other 12,664 10,730 1,935
Extraordinary charge 6,034 - -
Cumulative effect of changes
in accounting principles - - 11,465
Net operating activities 112,559 67,850 64,951
CASH PROVIDED FROM (USED FOR) INVESTMENT
ACTIVITIES
Capital expenditures (46,982) (23,379) (19,154)
Acquisitions of companies, less cash acquired (53,331) (28,803) (55,354)
Acquisition payments (4,106) (3,410) (7,268)
Sales of assets 13,874 7,127 77,427
Investments in associated and other companies - - (1,200)
Return of cash from associated and other companies 8,805 - -
Purchase of short-term securities - (5,061) (25,702)
Sale of short-term securities 5,061 25,702 -
Other 445 (2,000) (6,581)
Net investment activities (76,234) (29,824) (37,832)
CASH PROVIDED FROM (USED FOR) FINANCING
ACTIVITIES
Purchase of common stock warrants - (27,500) -
Cash dividends paid (15,688) (14,003) (12,630)
Proceeds from the sale of common stock 14,165 14,582 3,422
Purchase of shares for treasury (1,472) - -
Increase in debt 131,649 12,228 47,367
Reduction in debt (179,879) (39,144) (35,974)
Net financing activities (51,225) (53,837) 2,185
Effect of exchange rate changes on cash 360 (821) 495
CASH AND CASH EQUIVALENTS
Increase(decrease) (14,540) (16,632) 29,799
Beginning of year 37,645 54,277 24,478
End of year $ 23,105 $37,645 $54,277
CASH PAID DURING YEAR
Interest $ 30,114 $33,001 $31,097
Income taxes 19,927 19,165 13,900
See summary of accounting policies and notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
M. A. Hanna Company and Consolidated Subsidiaries
December 31
Dollars in thousands 1994 1993
ASSETS
Current Assets
Cash and cash equivalents $ 23,105 $ 37,645
Short-term securities - 5,061
Receivables:
Trade 236,737 189,125
Other 10,379 8,145
247,116 197,270
Inventories:
Finished products 116,718 97,098
Raw materials and supplies 44,542 27,236
161,260 124,334
Prepaid expenses 3,981 3,851
Deferred income taxes 26,938 21,501
Net assets (1994) and net current assets (1993)
of discontinued operations 103,215 16,120
Total current assets 565,615 405,782
Property, Plant and Equipment
Land 13,288 11,813
Buildings 78,289 69,943
Machinery and equipment 250,966 226,669
342,543 308,425
Less allowances for depreciation 138,408 124,129
204,135 184,296
Other Assets
Goodwill and other intangibles 330,757 305,665
Investments and other assets 79,803 87,772
Deferred income taxes 34,850 45,191
Net long-term assets of
discontinued operations - 94,904
445,410 533,532
$1,215,160 $1,123,610
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 931 $ 2,478
Trade payables and accrued expenses 335,877 256,479
Current portion of long-term debt 683 723
Total current liabilities 337,491 259,680
Other Liabilities 173,888 176,422
Long-term Debt
Senior notes 235,770 300,000
Other 53,099 22,052
288,869 322,052
Stockholders' Equity
Preferred stock, without par value:
authorized 5,000,000 shares;
issued 132 shares in 1994 and 1993 - -
Common stock, par value $1.00 per share:
authorized 50,000,000 shares; issued
43,015,494 shares in 1994 and 28,605,722
shares in 1993 43,015 28,606
Capital surplus 299,725 299,389
Retained earnings 296,632 269,026
Associates ownership trust (111,471) (115,214)
Cost of treasury stock (7,321,400 shares
in 1994 and 4,864,707 shares in 1993) (103,731) (102,794)
Minimum pension liability adjustment (7,262) (8,577)
Accumulated translation adjustment (1,996) (4,980)
Total stockholders' equity 414,912 365,456
$1,215,160 $1,123,610
See summary of accounting policies and notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
M. A. Hanna Company and Consolidated Subsidiaries
Dollars in thousands except per share data
Common Associates
Preferred Common Stock Capital Retained Ownership Treasury
Stock Stock Warrants Surplus Earnings Trust Stock
Balance January 1, 1992 $- $28,039 $14,621 $250,686 $274,025 $(81,095) $(109,410)
Net income 19,025
Cash dividends - $.4417 per share (12,630)
Exercise of stock options 221 2,847
Sale of common stock (14,012 shares) 14 340
Payment of incentive compensation awards 95 4,207 636
Payment of additional
consideration of acquisition 407 6,395
Adjustment to market value 34,333 (34,333)
Translation adjustment
Balance December 31, 1992 - 28,274 14,621 288,708 280,420 (111,221) (102,379)
Net income 2,018
Cash dividends - $.475 per share (14,003)
Exercise of stock options 311 8,813 (1,675)
Sale of common stock (21,273 shares) 21 609
Purchase of common stock warrants (14,621) (12,879)
Payment of incentive compensation awards
and associate benefits 2,525 8,260 569
Acquisition of business (640) 591 691
Adjustment to market value 12,253 (12,253)
Minimum pension adjustment
Translation adjustment
Balance December 31, 1993 - 28,606 - 299,389 269,026 (115,214) (102,794)
Net income 43,294
Cash dividends - $.51 per share (15,688)
Exercise of stock options 61 1,335 (38)
Purchase of shares for treasury (1,472)
Sale of common stock (25,383 shares) 25 706
Payment of incentive compensation awards
and associate benefits 3,115 13,246 573
Three-for-two common stock split 14,323 (14,323)
Adjustment to market value 9,503 (9,503)
Minimum pension adjustment
Translation adjustment
Balance December 31, 1994 $- $43,015 $ - $299,725 $296,632 $(111,471) $(103,731)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
M. A. Hanna Company and Consolidated Subsidiaries
Dollars in thousands except per share data Minimum
Pension Accumulated Total
Liability Translation Stockholders'
Adjustment Adjustment Equity
Balance January 1, 1992 $ - $3,592 $380,458
Net income 19,025
Cash dividends - $.4417 per share (12,630)
Exercise of stock options 3,068
Sale of common stock (14,012 shares) 354
Payment of incentive compensation awards 4,938
Payment of additional
consideration of acquisition 6,802
Adjustment to market value -
Translation adjustment (4,072) (4,072)
Balance December 31, 1992 - (480) 397,943
Net income 2,018
Cash dividends - $.475 per share (14,003)
Exercise of stock options 7,449
Sale of common stock (21,273 shares) 630
Purchase of common stock warrants (27,500)
Payment of incentive compensation awards
and associate benefits 11,354
Acquisition of business 642
Adjustment to market value -
Minimum pension adjustment (8,577) (8,577)
Translation adjustment (4,500) (4,500)
Balance December 31, 1993 (8,577) (4,980) 365,456
Net income 43,294
Cash dividends - $.51 per share (15,688)
Exercise of stock options 1,358
Purchase of shares for treasury (1,472)
Sale of common stock (25,383 shares) 731
Payment of incentive compensation awards
and associate benefits 16,934
Three-for-two common stock split -
Adjustment to market value -
Minimum pension adjustment 1,315 1,315
Translation adjustment 2,984 2,984
Balance December 31, 1994 $(7,262) $(1,996) $414,912
See summary of accounting policies and notes to consolidated financial statements.
SUMMARY OF ACCOUNTING POLICIES
M.A. Hanna Company and Consolidated Subsidiaries
RESTATEMENTS
Prior year financial statements have been restated to reflect the
Company's Day International printing and textile business as a
discontinued operation. In addition, all shares and per share amounts
have been restated to give effect to the three-for-two stock split in
May 1994.
PRINCIPLES OF CONSOLIDATION
Majority-owned subsidiaries are consolidated in the financial statements
and all significant intercompany accounts and transactions have been
eliminated.
Investments in less than majority-owned companies are carried at cost
adjusted for undistributed earnings and losses since acquisition, or at
cost.
NET INCOME PER SHARE
Primary net income per share is computed by dividing net income by the
average number of shares of common stock outstanding during the year.
Shares of common stock held by the Associates Ownership Trust (AOT)
enter into the determination of the average number of shares outstanding
when the shares are released from the AOT to fund obligations under
certain associate compensation and benefit plans. The effect of
assuming the exercise of stock options and stock warrants (common stock
equivalents) was not significant in 1994 and 1992.
For fully-diluted net income per share, the number of shares used for
primary net income per share are increased by the common stock
equivalents which would arise from the exercise of stock options and
stock warrants and, in 1992, by the number of shares of common stock
reserved under earnout provisions of certain purchase agreements.
CASH EQUIVALENTS AND SHORT-TERM SECURITIES
Cash equivalents are highly liquid investments with a maturity of three
months or less. Both cash equivalents and short-term securities are
stated at cost.
INVENTORIES
Inventories are stated at the lower of cost or market. Domestic
inventories ($119,644,000) are valued principally by the last-in,
first-out (LIFO) cost method. Inventories of foreign subsidiaries are
valued by the first-in, first-out (FIFO) method. The excess of current
cost over LIFO cost was $9,937,000 at December 31, 1994 and $6,642,000
at December 31, 1993.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
computed principally by the straight-line method at rates sufficient to
depreciate the cost of the assets over their estimated productive lives.
Property items retired or otherwise disposed of are removed from the
property and related allowance for depreciation accounts, and any profit
or loss is included in operations.
GOODWILL AND OTHER INTANGIBLES
Goodwill is being amortized over 40 years by the straight-line method.
Other intangibles ($25,857,000 net at December 31, 1994) are being
amortized on a straight-line basis over 4 to 40 years. Accumulated
amortization at December 31, 1994 and 1993 was $71,398,000 and
$58,933,000, respectively. In 1993, net goodwill of $26,482,000 was
written off in connection with the discontinuance of the elastomeric
membrane roofing business.
The carrying value of goodwill and other intangibles is evaluated if
circumstances indicate a possible impairment in value. If undiscounted
cash flows over the remaining amortization period indicate that goodwill
and other intangibles may not be recoverable, the carrying value of
goodwill and other intangibles will be reduced by the estimated
shortfall of cash flows on a discounted basis.
INCOME TAXES
Effective January 1, 1992, Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" was adopted. This Statement
requires companies to recognize deferred tax liabilities and assets for
the expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns. The cumulative
effect of adopting Statement 109 increased net income for 1992 by
$22,096,000 or $.74 per share.
Under Statement 109, deferred tax liabilities and assets are determined
based on the differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rate and
laws that will be in effect when the differences are expected to
reverse.
NOTES TO FINANCIAL STATMENTS
M.A. Hanna Company and Consolidated Subsidiaries
ACQUISITIONS
In March 1994, the Company acquired certain assets of North Coast
Compounders, a producer of thermoplastic elastomers and other materials
and in July 1994, acquired Th. Bergmann GmbH & Co. Kunststoffwerk, one
of Germany's largest producers of specialty and reinforced compounds.
Both acquisitions were accounted for using the purchase method of
accounting and operations from the respective dates of acquisition are
included in the Consolidated Statements of Income. Had the acquisitions
been made at the beginning of 1993, reported pro forma results of
operations for 1993 and 1994 would not be materially different.
DISCONTINUED OPERATIONS
In December 1994, the Company adopted a plan to sell its Day
International printing and textile business. The business consists of
the manufacturing of printing blankets and other consumable supplies for
the printing industry and the manufacturing of engineered consumable
supplies for the textile industry. The Company believes the business
will be sold in 1995.
In November 1993, the Company reached an agreement to sell its
elastomeric membrane roofing business to Firestone Building Products
Company, a division of Bridgestone/Firestone, Inc. The sale was
consummated in the third quarter of 1994, resulting in an additional
charge to earnings of $1,828,000 ($1,115,000 after tax) for costs
incurred while obtaining government antitrust clearance for the sale.
The Company recognized an after-tax charge of $30,000,000 in 1993 for
the writeoff of goodwill and restructuring charges associated with the
sale.
The Company received $2,320,000 and $9,180,000 during 1993 and 1992,
respectively, representing the recovery of a prepetition bankruptcy
claim Colowyo Coal Company had against a customer. The Company sold its
interest in Colowyo in 1991.
Summary operating results of these discontinued businesses are as
follows:
Dollars in thousands 1994 1993 1992
Net sales $120,083 $148,699 $145,400
Income from operations
before income taxes $ 18,891 $ 17,051 $ 14,617
Income taxes 7,806 7,812 6,581
11,085 9,239 8,036
Loss(gain) net of income taxes
on disposal 1,115 28,518 (4,268)
$ 9,970 $(19,279) $ 12,304
At December 31, 1994, net assets of discontinued operations consisted of
current assets of $31,724,000, current liabilities of $18,015,000, net
fixed assets of $26,942,000, other noncurrent assets of $72,155,000 and
other noncurrent liabilities of $9,591,000.
INCOME TAXES
Income taxes from continuing operations consist of the following:
Dollars in thousands 1994 1993 1992
Current:
Federal $20,740 $ 9,205 $4,794
State 4,664 2,660 1,888
Foreign 4,809 2,907 1,697
30,213 14,772 8,379
Deferred:
Federal 110 2,730 529
State (1,023) (319) 18
Foreign (82) (826) (107)
(995) 1,585 440
$29,218 $16,357 $8,819
A graph depicting the following information appears at this point:
BOOK VALUE
Dollars per share
1990 1991 1992 1993 1994
14.21 11.11 11.34 10.26 11.62
The provision for income taxes from continuing operations differs from
the amount computed by applying the U.S. statutory federal income tax
rate as follows:
Dollars in thousands 1994 1993 1992
Provision at statutory tax rate $23,178 $13,179 $ 9,195
State income taxes 2,367 1,528 1,258
Goodwill amortization 2,784 3,169 2,488
Change in income tax rate - (578) -
Utilization of capital loss
and tax credit carryforwards (1,820) (1,062) -
Favorable adjustment of income
tax liabilities - - (4,800)
Other - net 2,709 121 678
$29,218 $16,357 $ 8,819
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company has not provided deferred taxes on undistributed earnings of
foreign subsidiaries and joint ventures because it is not practical to
estimate the amount of tax payable upon any future remittance of these
earnings. Significant components of the Company's deferred tax assets
(liabilities) for continuing operations are as follows:
Dollars in thousands 1994 1993
Basis differences from purchase accounting $(13,705) $(15,694)
Tax over book depreciation (13,665) (15,754)
Other post-retirement benefits 32,467 31,637
Associate benefits 22,064 18,699
Restructuring and plant closedown costs 7,699 11,917
Environmental costs 7,353 8,012
Inventory and receivable reserves 6,734 8,026
Other 11,983 8,171
Tax credit carryforwards 858 13,751
Capital loss carryforwards 23,317 22,689
Valuation allowance (23,317) (24,762)
$ 61,788 $ 66,692
A graph depicting the following information appears at this point:
COMMON STOCK
1990 1991 1992 1993 1994
High 18.17 17.25 20.00 22.67 28.88
Low 9.83 11.83 13.17 17.17 21.42
Close 12.83 13.33 19.25 21.75 23.75
For financial reporting purposes, a valuation allowance has been
recognized to offset the deferred tax asset related to capital loss
carryforwards which expire in 1995 and 1998. During 1994, the valuation
allowance was increased by $375,000 due to increases in capital loss
carryforwards and reduced $1,820,000 due to the utilization of tax
credit carryforwards. During 1993, the valuation allowance was
increased $370,000 due to the tax law change and was reduced by
$1,062,000 due to the utilization of capital loss carryforwards.
Income before income taxes includes $12,624,000, $3,799,000 and
$2,693,000 in 1994, 1993 and 1992, respectively, from foreign
operations.
LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
Dollars in thousands 1994 1993
9% Senior Notes due 1998 $117,745 $150,000
9.375% Senior Notes due 2003 118,025 150,000
Credit agreements 12,650 17,787
Other 41,132 4,988
289,552 322,775
Less current portion 683 723
$288,869 $322,052
Annual maturities of long-term debt for the next five years are: 1995--
$683,000; 1996--$18,552,000; 1997--$18,452,000; 1998--$131,048,000 and
1999--$614,000.
On June 30, 1994, the Company entered into a new revolving credit
agreement with a group of financial institutions. The agreement
provides for borrowings up to $200 million through June 1998 with
interest rates determined at the time of the borrowing based on a choice
of formulas specified in the agreement. At December 31, 1994,
borrowings supported by this agreement were $12,650,000 at a rate of
6.70%.
In 1993, the Company entered into a credit agreement which provided for
borrowings up to 150 million French francs through November 1996. In
1994, borrowings under this agreement were repaid and the credit
agreement was terminated. At December 31, 1993, borrowings outstanding
under this agreement were $17,787,000.
Other debt at December 31, 1994 and 1993 consists primarily of
mortgages, industrial revenue bonds, and notes including $35.5 million
of foreign borrowings related to an acquisition which will be refinanced
in the first quarter of 1995. These obligations mature in various
installments through December 2003 and are at interest rates ranging
from 3.50% to 10.50%. The weighted average interest rate on short-term
borrowings was 7.28% and 7.08% at December 31, 1994 and 1993,
respectively.
In 1994, the Company repurchased $64,230,000 principal amount of Senior
Notes in the open market, resulting in an extraordinary charge of
$6,034,000 ($3,680,000 after tax).
The Senior Note agreements contain certain restrictions and conditions
among which are limitations on cash dividends and other payments. Under
the most restrictive of these agreements, approximately $114.4 million
of retained earnings was free of such limitations at December 31, 1994.
STOCKHOLDERS' EQUITY
In May 1994, the Company issued 14,322,624 shares of common stock to
effect a three-for-two stock split. The par value ($1 per share) of the
additional shares issued was charged to capital surplus.
The Associates Ownership Trust (AOT) acquired shares of common stock
from the Company in 1991 for a promissory note in the amount of
$100,049,000. The shares acquired are to fund a portion of the
Company's obligations under certain of its associate compensation and
associate benefit plans for the 15-year term of the AOT. At December
31, 1994 the AOT holds 4,693,518 shares of the Company's common stock.
Such shares are adjusted at each balance sheet date to their respective
market value with an offsetting adjustment to capital surplus.
Under the Company's Stock Purchase Rights Plan each Right entitles the
holder of common stock to buy from the Company one one-hundredth of a
share of Cumulative Series A Preferred Stock, without par value for $95,
subject to adjustment. The Rights become exercisable if certain
triggering events occur, including the acquisition of 15% or more of the
Company's common stock. The Company is entitled to redeem the Rights at
$.01 per Right at any time until ten days after any person or group has
acquired 20% of the Company's common stock and in certain circumstances
thereafter. If a party owning 20% or more of the Company's common stock
merges with the Company or engages in certain other transactions with
the Company, each Right, other than the Rights held by the acquiring
party, entitles the holder to purchase that number of additional common
shares having a market value of two times the exercise price of the
Right. The Rights expire on December 16, 2001.
The Company's stock option plans provide for granting options, including
options to non-associate directors, at the market value at date of grant.
Options are exercisable for ten years from the date of grant.
The following table summarizes the changes in the outstanding options for the
three years ended December 31, 1994.
SHARES PRICE RANGE
Outstanding January 1, 1992 1,859,401 $ 8.167 - $16.833
Granted 172,200 18.833
Exercised (330,920) 8.167 - 16.833
Canceled or expired (6,430) 8.887 - 16.833
Outstanding December 31, 1992 1,694,251 8.167 - 18.833
Granted 375,465 19.833 - 20.50
Exercised (464,794) 8.167 - 16.833
Canceled or expired (25,275) 11.167 - 18.833
Outstanding December 31, 1993 1,579,647 8.167 - 20.50
Granted 342,913 22.125 - 27.125
Exercised (77,320) 8.889 - 20.50
Canceled or expired (3,667) 14.833 - 20.50
Outstanding December 31, 1994 1,841,573 8.167 - 27.125
At December 31, 1994, options were exercisable for 1,099,126 shares (905,796
shares at December 31, 1993) at prices from $8.167 to $20.50 and 1,126,055
shares were reserved for future grants.
A graph depicting the following information appears at this point:
INTERNATIONAL SALES
In percent
1990 1991 1992 1993 1994
9.8 11.3 12.7 13.6 14.2
BUSINESS SEGMENTS
The Company operates principally in the formulated polymers industry
which consists of two major segments - processing and distribution.
Processing includes production of custom plastic and rubber compounds
and custom formulated colorants for the plastics industry. Distribution
includes distributors of thermoplastic and thermoset resins and
fiberglass materials and distributors of engineered plastic shapes.
Sales are made through the Company's organization, distributors and
representatives.
Other operations include the Company's diversified polymer products
business, its marine and insurance operations and management fees. The
Company is Managing Agent for Iron Ore Company of Canada (IOC) and owns
approximately 8% of IOC's common stock. IOC incurred commission and
management expense of $3,064,000 in 1994 ($2,648,000 in 1993 and
$2,628,000 in 1992) payable to the Company and $4,302,000 in 1994
($3,317,000 in 1993 and $3,294,000 in 1992) payable to 50% owned
companies carried at equity. In December 1992 the Company sold Midland
SouthWest, an oil and gas business for $5,290,000. No gain or loss was
recognized as a result of this transaction.
A graph depicting the following information appears at this point:
INTERNATIONAL OPERATING PROFITS
In percent
1990 1991 1992 1993 1994
7.4 10.9 10.8 10.0 14.2
Net sales, operating profit and identifiable assets by geographic area
are as follows:
Dollars in thousands 1994 1993 1992
Net sales
Domestic $1,475,277 $1,220,555 $1,037,995
International
Europe 130,461 93,595 68,296
Other 113,618 97,921 82,250
$1,719,356 $1,412,071 $1,188,541
Operating profit
Domestic $ 104,484 $ 83,104 $ 69,315
International
Europe 10,565 4,172 4,526
Other 6,764 5,070 3,829
$ 121,813 $ 92,346 $ 77,670
Identifiable assets
Domestic $ 868,201 $ 859,193 $ 845,406
International
Europe 180,842 89,556 101,768
Other 62,902 49,087 42,007
Discontinued operations 103,215 125,774 163,384
$1,215,160 $1,123,610 $1,152,565
Depreciation
Operating and Capital Identifiable
(Dollars in thousands) Net Sales Profit Amortization Expenditures Assets
1994
Processing $ 942,999 $88,175 $34,254 $36,193 $ 615,715
Distribution 766,711 24,086 6,368 3,363 345,929
Other 32,129 9,552 823 - 16,751
Intersegment activity (22,483) - - - -
Corporate - (27,042) 459 3,862 133,550
Discontinued operations - - - 3,564 103,215
$1,719,356 $94,771 $41,904 $46,982 $1,215,160
1993
Processing $ 784,951 $65,427 (1) $29,842 $15,494 $ 522,122
Distribution 628,887 19,409 6,930 3,185 296,449
Other 33,479 7,510 936 727 16,281
Intersegment activity (35,246) - - - -
Corporate - (22,434)(2) 474 38 162,984
Discontinued operations - - - 3,935 125,774
$1,412,071 $69,912 $38,182 $23,379 $1,123,610
1992
Processing $ 655,584 $54,110 $25,987 $13,088 $ 489,900
Distribution 533,392 15,990 6,709 2,627 286,296
Other 36,201 7,570 2,182 363 24,101
Intersegment activity (36,636) - - - -
Corporate - (18,156) 543 - 188,884
Discontinued operations - - - 3,076 163,384
$1,188,541 $59,514 $35,421 $19,154 $1,152,565
(1) Includes $1,300,000 of restructuring costs.
(2) Includes $1,730,000 gain from sale of assets.
PENSION AND OTHER POST-RETIREMENT BENEFITS
The Company has non-contributory defined benefit plans covering certain
of its associates which comply with federal funding requirements.
Benefits for these plans are based primarily on years of service and
qualifying compensation during the final years of employment. Plan
assets include marketable equity securities, money market funds and
fixed income securities.
The Company also sponsors defined contribution plans for certain of its
associates, which provide for Company contributions of a specified
percentage of each associate's total compensation.
A summary of the components of net periodic pension cost for the defined
benefit plans and the total contributions charged to expense for the
defined contribution plans follows:
Dollars in thousands 1994 1993 1992
Defined benefit plans:
Service costs $ 743 $ 617 $ 650
Interest cost on projected
benefit obligation 5,838 6,300 8,050
Return on plan assets (5,073) (6,258) (8,364)
Net amortization and deferral 930 815 656
Net pension costs 2,438 1,474 992
Defined contribution plans 3,785 3,236 3,745
$6,223 $4,710 $4,737
The Company has recorded a minimum pension liability representing the
excess of the accumulated benefit obligation over the fair value of plan
assets and accrued pension liabilities. The liability has been offset
by intangible assets to the extent possible. Because the asset
recognized may not exceed the amount of unrecognized past service cost,
the balance of the liability at the end of 1994 and 1993 is reported as
a separate reduction of stockholders' equity, net of applicable deferred
income taxes.
The following table sets forth the funded status of the Company's
defined benefit plans:
Accumulated Benefits Assets Exceed
Exceed Assets Accumulated Benefits
Dollars in thousands 1994 1993 1994 1993
Actuarial present value of benefit obligations:
Accumulated benefit obligations
including vested benefits of
$73,428 in 1994 and $79,793 in 1993 $43,467 $66,528 $31,521 $16,000
Projected benefit obligation $44,414 $68,088 $31,981 $16,386
Plan assets at fair value 30,182 46,953 36,909 21,199
Projected benefits in excess of
(less than) plan assets 14,232 21,135 (4,928) (4,813)
Consisting of:
Unrecognized net obligations (asset) 1,190 1,969 135 (441)
Unrecognized net actuarial (gains) or losses 14,022 17,842 (1,389) (2,180)
Adjustment to recognize minimum liability 14,265 18,251 - -
Accrued(prepaid) pension cost
recognized in balance sheet $13,285 $19,575 $(3,674) $(2,192)
The projected benefit obligation was determined using an assumed
discount rate of 8.25% (7.25% in 1993) and an assumed long-term rate of
increase in compensation of 5%. The assumed long-term rate of return on
plan assets is 8.5% (10% in 1993). The change in the discount rate
caused the accumulated benefit obligation to decrease approximately
$6,500,000.
In addition to providing pension benefits, the Company provides certain
contributory and non-contributory health care and life insurance
benefits for certain retired associates. Certain associates of the
Company may become eligible for these post-retirement benefits if they
reach retirement age while working for the Company.
A graph depicitng the following information appears at this point:
LONG-TERM DEBT/TOTAL CAPITAL
In percent
1990 1991 1992 1993 1994
19.5 46.5 46.8 46.8 41.0
Effective January 1, 1992, Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions" was adopted using the immediate recognition transition option.
The standard requires recognition of the estimated future costs of
providing health and other post-retirement benefits on an accrual basis.
These benefits had previously been recognized as incurred. The
cumulative effect of this accounting change reduced 1992 net income by
$33,561,000 ($54,131,000 less related deferred income taxes of
$20,570,000) or $1.13 per share.
The status of the Company's plans at December 31, 1994 and 1993 is as
follows:
Dollars in thousands 1994 1993
Accumulated post-retirement benefit obligation
Retirees $57,134 $65,905
Fully eligible active plan participants 3,747 5,167
Other active plan participants 9,732 13,193
70,613 84,265
Unrecognized actuarial gain(loss) 12,634 (3,146)
Accrued post-retirement benefit obligation $83,247 $81,119
Net periodic post-retirement benefit cost includes the following
components:
Dollars in thousands 1994 1993 1992
Service cost $1,069 $1,201 $1,127
Interest cost 5,605 6,512 6,354
Net periodic post-retirement benefit cost $6,674 $7,713 $7,481
The weighted-average assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is assumed to be
12.0% (14.0% in 1993) and decreasing gradually to 6.25% in 2007 (5.25%
in 2009 in 1993) and remaining at that level thereafter. A one
percentage point increase in the assumed health care cost trend rate
would have increased the accumulated benefit obligation by $8,209,000 at
December 31, 1994 and the aggregate service and interest costs
components of net periodic post-retirement benefit costs for 1994 by
$1,011,000.
A discount rate of 8.25% (7.25% in 1993) was used in determining the
accumulated benefit obligation. The change in the discount rate caused
the accumulated benefit obligation to decrease approximately $9,600,000.
A graph depicting the following information appears at this point:
RETURN ON EQUITY
In percent
1990 1991 1992 1993 1994
5.6 2.8 3.4 5.3 9.5
FINANCIAL INSTRUMENTS
The Company conducts business in various foreign currencies. As a
result, it is subject to transaction exposures that arise from
foreign exchange movements between the date that the foreign currency
transaction is recorded and the date it is consummated. The Company
has a policy of entering into intercompany lending transactions and
hedging the foreign exchange through foreign exchange forward
contracts. Gains and losses on intercompany debt are recognized
currently as a component of accumulative translation adjustment. The
Company has entered into such cross-currency foreign exchange
contracts with maturities of up to five years to protect the Company
from the risk that the future intercompany cash flows will be
adversely affected by changes in exchange rates. The Company does
not hold or issue financial instruments for trading purposes.
The table below summarizes by currency the contractual amounts of the
Company's foreign exchange contracts at December 31, 1994. Foreign
currency amounts are translated at exchange rates as of December 31,
1994. The "Buy" amounts represent the U.S. dollar equivalent of
commitments to purchase foreign currencies, and the "Sell" amounts
represent the U.S. dollar equivalent of commitments to sell foreign
currencies.
Dollars in thousands
Buy Sell
Currency:
British pound sterling $10,650 $ -
Canadian dollar 6,502 -
French franc - 18,695
German deutschmark - 13,174
Other 1,543 -
Total $18,695 $31,869
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments. No
counterparties are expected to fail to meet their obligations given
their high credit ratings, so the Company usually does not obtain
collateral for these instruments. There is no credit exposure from
the foreign exchange contracts at December 31, 1994.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash, Cash Equivalents and Short-Term Securities: The carrying
amounts reported in the balance sheet approximate fair value.
Long and Short-Term Debt: The carrying amount of the Company's
short-term borrowings approximates fair value. The fair value of the
Company's Senior Notes is based on quoted market prices. The
carrying amount of the Company's borrowings under its long-term
revolving credit agreements and other long-term borrowings
approximates fair value.
Foreign Exchange Contracts and Interest Rate Swaps: The fair value
of short-term foreign exchange contracts is based on exchange rates
at December 31, 1994. The fair value of long-term foreign exchange
contracts and interest rate swaps is based on quoted market prices.
The carrying amounts and fair values of the Company's financial
instruments at December 31, 1994 and 1993 are as follows:
1994 1993
Carrying Fair Carrying Fair
Dollars in thousands Amount Value Amount Value
Cash and cash equivalents $ 23,105 $ 23,105 $ 37,645 $ 37,645
Short-term securities - - 5,061 5,061
Notes payable to banks 931 931 2,478 2,478
Long-term debt
9% Senior Notes 117,745 119,252 150,000 172,500
9.375% Senior Notes 118,025 122,002 150,000 180,000
Credit agreements 12,650 12,650 17,787 17,787
Other 41,132 41,132 4,988 4,988
Foreign exchange contracts - (1,681) - -
Interest rate swaps - - - 365
LEASE COMMITMENTS
Rental expense under operating leases for certain manufacturing
facilities, warehouses, transportation equipment and data processing and
office equipment was $16,890,000 in 1994, $15,859,000 in 1993 and
$14,202,000 in 1992. Certain of the Company's leases have options to
renew, and there are no significant contingent rentals.
At December 31, 1994, future minimum lease commitments for noncancelable
operating leases are:
Dollars in thousands
1995 $10,585
1996 9,644
1997 8,825
1998 6,944
1999 5,325
Thereafter 17,903
$59,226
CONTINGENCIES
The Company is involved in certain legal actions and claims arising in
the ordinary course of business including lawsuits brought by the State
of Idaho in 1983 and the United States government in 1993 seeking
reimbursement from the Company and other defendants for alleged damages
to the environment and clean-up costs for the area around the Blackbird
Mine in Idaho.
Claims have also been made against a subsidiary of the Company for the
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. In April 1994, the New Jersey
Department of Environmental Protection and Energy finalized a Record of
Decision, which incorporates the agreed upon remediation to be performed
by the Company's subsidiary at its Wharton, New Jersey site.
Reserves for such liabilities have been established and no insurance
recoveries have been anticipated in the determination of the reserves.
In management's opinion, the aforementioned litigation and claims will
be resolved without material adverse effect on the financial position of
the Company.
A graph depicting the following information appears at this point:
DIVIDENDS
1990 1991 1992 1993 1994
0.37 0.42 0.44 0.48 0.51
OTHER INCOME
Other income includes the following:
Dollars in thousands 1994 1993 1992
Interest and dividends $3,025 $1,680 $3,006
Gain on sales of assets - 1,730 409
Other 1,041 1,606 1,835
$4,066 $5,016 $5,250
OTHER EXPENSE
Other expense includes the following:
Dollars in thousands 1994 1993 1992
Expenses of closed facilities $5,930 $7,031 $7,091
Restructuring costs 865 1,300 -
Other 3,044 1,419 1,826
$9,839 $9,750 $8,917
DETAIL OF CURRENT AND OTHER LIABILITIES
Included in trade payables and accrued expenses and other liabilities at
December 31 are:
Dollars in thousands 1994 1993
Trade payables and accrued expenses:
Trade payables $178,166 $132,151
Salaries and wages 14,744 10,992
Associate benefits 37,933 27,841
Restructuring and acquisition costs 19,808 16,018
Other liabilities:
Plant closedown costs 13,460 14,318
Environmental costs 12,808 18,449
Associate benefits 17,605 11,816
Other post-retirement benefits 77,898 75,186
A graph depicting the following information appears at this point:
CAPITAL EXPENDITURES
As a percent of depreciation
1990 1991 1992 1993 1994
131.6 117.3 65.8 79.8 147.5
SUPPLEMENTAL CASH FLOW DATA
The following is a summary of noncash investing and financing activities:
Dollars in thousands 1994 1993 1992
Acquisition of businesses
Assets acquired $70,456 $33,130 $106,447
Liabilities assumed 13,752 4,327 45,030
Cash paid 56,704 28,803 61,417
Less cash acquired 3,373 - 6,063
$53,331 $28,803 $ 55,354
Debt of companies acquired $ 4,692 $ 11,084
Payment of additional purchase
price of acquired business
with treasury stock $ 6,802
Payment of incentive compensation
awards with treasury stock $ 990 $ 780 $ 731
Release of common stock held by
Associates Ownership Trust $13,246 $ 8,260 $ 4,207
Payment of stock option exercised
with shares of common stock $ 38 $ 1,675
Quarterly Financial and Stock Price Data
M.A. Hanna Company and Consolidated Subsidiaries
Summarized unaudited quarterly financial and stock price data for 1994 and 1993 are as follows:
First Second Third Fourth
Dollars in thousands except per share data Quarter Quarter Quarter Quarter
1994
Net sales $388,520 $422,516 $448,650 $459,670
Gross margin 72,214 80,575 84,130 89,401
Income(loss)
Continuing operations 6,210 9,370 11,269 10,155
Discontinued operations 2,047 2,573 1,625 3,725
Extraordinary charge - (3,680) - -
Net income 8,257 8,263 12,894 13,880
Income(loss) per common share (fully diluted)
Continuing operations 0.19 0.30 0.36 0.32
Discontinued operations 0.07 0.08 0.05 0.12
Extraordinary charge - (0.12) - -
Net income 0.26 0.26 0.41 0.44
Price range
High 25.58 26.50 28.88 26.00
Low 21.42 23.17 23.50 21.62
Cash dividends paid 0.125 0.125 0.125 0.135
1993
Net sales $337,324 $357,972 $361,993 $354,782
Gross margin 61,821 67,924 67,510 68,625
Income(loss)
Continuing operations 2,743 6,057 6,569 5,928
Discontinued operations 3,097 2,287 2,295 (26,958)
Net income(loss) 5,840 8,344 8,864 (21,030)
Income(loss) per common share (fully diluted)
Continuing operations 0.09 0.20 0.21 0.19
Discontinued operations 0.10 0.07 0.08 (0.87)
Net income(loss) 0.19 0.27 0.29 (0.68)
Price range
High 20.50 22.17 21.42 22.67
Low 17.17 18.67 17.33 19.25
Cash dividends paid 0.117 0.117 0.117 0.125
During the fourth quarter of 1994, the Company adopted a plan to sell its Day International
printing and textile business. The operating results of this business have been reclassified
as discontinued operations which has decreased previously reported income from continuing
operations in 1994 by $2,047,000 in the first quarter ($.07 per share), $2,573,000 in the second
quarter ($.08 per share) and $2,740,000 in the third quarter ($.08 per share) and decreased
previously reported income from continuing operations in 1993 by $1,753,000 in the first quarter
($.06 per share), $2,067,000 in the second quarter ($.06 per share), $2,009,000 in the third quarter
($.07 per share) and $2,922,000 in the fourth quarter ($.09 per share).
Income per share calculations for each of the quarters are based on the weighted average number of
shares outstanding for each period, and the sum of the quarters may not necessarily be equal to the
full year income per share amount.
SELECTED FINANCIAL DATA
M. A. Hanna Company and Consolidated Subsidiaries
Dollars in thousands except per share data 1994 1993 1992 1991 1990 1989
SUMMARY OF OPERATIONS
Net sales $1,719,356 $1,412,071 $1,188,541 $1,006,638 $960,228 $918,276
Cost of goods sold 1,393,036 1,146,191 961,925 797,892 749,071 718,636
Selling, general and administrative 213,318 179,228 152,366 147,998 137,674 135,741
Amortization of intangibles 12,458 12,006 11,069 10,146 9,704 8,886
Interest on debt 28,549 32,258 32,509 23,221 18,301 21,128
Income(loss) from continuing operations before
income taxes, extraordinary charge and cumulative
effect of changes in accounting principles 66,222 37,654 27,005 (16,195) 44,023 44,797
Income taxes 29,218 16,357 8,819 8,225 12,830 7,608
Income(loss) from continuing operations before
extraordinary charge and cumulative effect
of changes in accounting principles 37,004 21,297 18,186 (24,420) 31,193 37,189
Net income 43,294 2,018 19,025 1,875 55,871 86,920
Per share of common stock
Income(loss) from continuing operations 1.20 0.69 0.63 (0.72) 0.75 0.92
Net income 1.40 0.07 0.66 0.02 1.35 2.23
Dividends paid 0.51 0.48 0.44 0.42 0.37 0.30
Cash dividends paid on
Common stock 15,688 14,003 12,630 15,267 15,175 11,812
Preferred stock - - - 1,031 - 2,125
BALANCE SHEET
Current assets $565,615 $405,782 $416,739 $275,060 $276,711 $264,772
Current liabilities 337,491 259,680 229,327 195,610 181,471 167,272
Working capital 228,124 146,102 187,412 79,450 95,240 97,500
Property, plant and equipment - net 204,135 184,296 195,117 184,877 183,536 173,477
Other assets 445,410 438,628 440,873 443,702 458,394 444,479
Net long-term assets of discontinued operations - 94,904 99,836 121,374 129,869 137,304
Other liabilities (173,888) (176,422) (174,558) (118,082) (161,674) (175,310)
Long-term debt (288,869) (322,052) (350,737) (330,863) (137,691) (134,834)
Total stockholders' equity $414,912 $365,456 $397,943 $380,458 $567,674 $542,616
Shares of common stock outstanding 35,694,094 35,611,522 35,100,108 34,245,075 39,937,572 41,682,807
Book value per share of common stock $11.62 $10.26 $11.34 $11.11 $14.21 $13.02
SELECTED FINANCIAL DATA
M. A. Hanna Company and Consolidated Subsidiaries
Dollars in thousands except per share data 1988 (1)
SUMMARY OF OPERATIONS
Net sales $797,563
Cost of goods sold 614,465
Selling, general and administrative 128,573
Amortization of intangibles 6,456
Interest on debt 23,622
Income(loss) from continuing operations before
income taxes, extraordinary charge and cumulative
effect of changes in accounting principles 28,554
Income taxes 4,107
Income(loss) from continuing operations before
extraordinary charge and cumulative effect
of changes in accounting principles 24,447
Net income 83,223
Per share of common stock
Income(loss) from continuing operations 0.49
Net income 2.32
Dividends paid 0.22
Cash dividends paid on
Common stock 7,169
Preferred stock 8,501
BALANCE SHEET
Current assets $240,029
Current liabilities 166,185
Working capital 73,844
Property, plant and equipment - net 154,477
Other assets 406,426
Net long-term assets of discontinued operations 141,552
Other liabilities (169,470)
Long-term debt (137,725)
Total stockholders' equity $469,104
Shares of common stock outstanding 32,331,271
Book value per share of common stock $11.41
(1) Prior to 1988, the Company was a natural resources company and not in the specialty chemicals business.
Results for 1984 -1987 are excluded because they are not comparable to results for 1988 -1994.
STOCK INFORMATION
M. A. Hanna Company common stock is listed on the New York and Chicago
stock exchanges under the symbol MAH. At December 31, 1994, the number
of stockholders of record of the Company's common stock was 3,886.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
M.A. Hanna Company and Consolidated Subsidiaries
RESULTS OF OPERATIONS
1994 Compared with 1993
Significant strategic and financial progress was made in 1994. The
Company developed a capability in thermoplastic elastomers with the
acquisition of North Coast Compounders and enhanced its capability in
polymer processing with the acquisition of Th. Bergmann GmbH & Co.
Kunststoffwerk, one of Germany's largest producers of specialty and
reinforced compounds. Net sales were a record $1,719.4 million, an
increase of 21.8% over net sales in 1993 of $1,412.1 million. Sales
from processing businesses increased from $784.9 million in 1993 to
$943.0 million in 1994 due to acquisitions in 1994 and 1993, higher unit
volumes and pricing. Distribution sales increased $137.8 million to
$766.7 million in 1994 due to higher unit volumes and pricing. Sales
from other operations were comparable with 1993 levels.
Cost of goods sold increased from $1,146.2 million in 1993 to $1,393.0
million in 1994 and corresponds with the increase in net sales. Gross
margins were 19.0% in 1994 and 18.8% in 1993. Gross margin dollars in
1994 were $326.3 million compared with $265.9 million in 1993 or an
increase of 22.7%, which exceeds the growth in sales of 21.8%. Gross
margins were favorably impacted by higher volumes and productivity
improvements, partially offset by the mix of sales between processing
and distribution businesses. Distribution businesses, which had a
higher growth rate in net sales than processing businesses, carry a
lower gross margin. Also impacting gross margins in 1994 was a $3.3
million provision for inventories valued by the last-in first-out cost
method.
Selling, general and administrative expenses increased $34.1 million in
1994 to $213.3 million and is attributable to the higher level of sales,
acquisitions made in 1994 and increased costs associated with the
Company's incentive compensation programs due to the higher level of
earnings. As a percentage of sales, selling, general and administrative
expenses were 12.4% in 1994 compared with 12.7% in 1993.
Interest on debt decreased from $32.3 million in 1993 to $28.5 million
in 1994 due to lower average borrowings outstanding and lower effective
interest rates. During 1994, the Company repurchased $64.2 million of
its Senior Notes in the open market, resulting in an extraordinary
charge of $6.0 million ($3.7 million after-tax). Funds to repurchase
the Senior Notes were obtained from existing cash flows as well as
borrowings under the Company's credit agreement, which carry a lower
rate of interest.
The Company's effective tax rate in 1994 was 44.1% compared with 43.4%
in 1993. The tax rate in 1993 was favorably impacted by 1.6 percentage
points from the enactment of a change in tax laws.
Income from continuing operations increased from $21.3 million in 1993
to $37.0 million in 1994, an increase of 73.8% on an increase in net
sales of 21.8%.
In December 1994, the Company adopted a plan to sell its Day
International printing and textile business. Accordingly, the operating
results of the business have been reclassified as discontinued
operations. Also included in 1994 amounts is a charge of $1.1 million
related to the Company's elastomeric membrane roofing business for
additional costs incurred while obtaining government antitrust clearance
for the sale, which closed in the third quarter of 1994. The Company
recognized an after-tax charge of $30.0 million in 1993 for the write-off
of goodwill and restructuring charges associated with the sale. Also
included in discontinued operations in 1993 is $1.5 million from the
sale of a former natural resources affiliate.
1993 Compared with 1992
Net sales increased from $1,188.5 million in 1992 to $1,412.1 million in
1993. Sales from processing businesses increased $129.4 million from
1992 levels due to acquisitions made in both 1993 and 1992 and higher
unit volumes. Distribution sales increased $95.5 million to $628.9
million in 1993 due to higher unit volumes and an acquisition made at
the end of the third quarter in 1992. Sales from other operations
decreased from $36.2 million in 1992 to $33.5 million in 1993 due to
the sale of businesses in both years.
Cost of goods sold increased $184.3 million to $1,146.2 million in 1993
and corresponds with the sales increase. As a percentage of sales, cost
of goods sold was 81.2% in 1993 compared with 80.9% in 1992. The
resultant decrease in gross margin is due to a higher percentage of
sales from distribution businesses, which carry a lower gross margin.
Selling, general and administrative expenses increased $26.9 million in
1993 over 1992 levels due to acquisitions in processing and distribution
businesses. However, as a percentage of sales, selling, general and
administrative expenses fell from 12.8% in 1992 to 12.7% in 1993,
reflecting the Company's ongoing efforts to manage these costs.
Amortization expense increased from $11.1 million in 1992 to $12.0
million in 1993 due to acquisitions made in both 1993 and 1992.
The Company's effective tax rate in 1993 was 43.4% compared with 32.7%
in 1992. The tax rate in both years was impacted by favorable tax
adjustments. Tax expense in 1993 was reduced $.6 million from the
enactment of a change in tax laws and tax expense in 1992 was reduced
$4.8 million due to a favorable adjustment of income tax liabilities.
During the fourth quarter of 1993, the Company announced it had reached
an agreement to sell its elastomeric membrane roofing business.
Accordingly, the operating results of this business were reclassified as
discontinued operations. In addition, the Company recognized an after-
tax charge of $30.0 million for the writeoff of goodwill and
restructuring charges associated with the sale. Also included in
discontinued operations is $1.5 million from the sale of a former
natural resources affiliate.
A graph depicting the following information appears at this point:
WORKING CAPITAL EXCLUDING CASH
Percent of sales
1990 1991 1992 1993 1994
6.2 4.7 8.4 6.2 5.9
Liquidity and Sources of Capital
The Company generated significant cash flows in 1994 from operations
with $112.6 million provided from operating activities. Included in
this amount was $4.4 million from reductions in operating working
capital on an increase in net sales of $307.3 million. Payments of
obligations from prior restructurings used $10.5 million. Investment
activities used $76.2 million and include $47.0 million for capital
expenditures and $57.4 million for acquisitions and payment of
acquisition-related obligations. The sale of assets and cash from
associated companies provided cash of $13.9 million and $8.8 million,
respectively. Sales of short-term securities also provided $5.1
million. Financing activities used $51.2 million and include $15.7
million for the payment of dividends, $48.2 million in net reductions of
outstanding debt and $1.5 million for shares repurchased, partially
offset by $14.2 million in proceeds from the sale of common stock. The
Company repurchased $64.2 million of its Senior Notes in the open
market, resulting in an extraordinary after-tax charge of $3.7 million.
Funds to repurchase the Senior Notes were obtained from existing cash
flows as well as borrowings under the Company's credit agreements, which
carry a lower rate of interest than the Senior Notes.
The Company entered into a new revolving credit agreement during 1994,
replacing an existing credit agreement which provided for a reducing
amount of credit availability. The new agreement provides commitments
for borrowings up to $200 million through June 1998. The arrangement
provides for interest rates to be determined at the time of borrowing
based on a choice of formulas specified in the agreement. At December
31, 1994, there were $12.7 million of outstanding borrowings supported
by this agreement.
The Company also had a credit agreement which provided commitments for
borrowings of up to 150 million French francs through November 1996.
The agreement provided for interest rates to be determined at the time
of borrowing. During the third quarter of 1994, borrowings under this
agreement were repaid and the credit agreement was terminated.
In July 1994, the Company acquired Th. Bergmann GmbH & Co.
Kunststoffwerk. The Company entered into an acquisition financing
agreement which provided for borrowings in German marks. It is the
intent of the Company to refinance the acquisition financing in the
first quarter of 1995.
A graph depicting the following information appears at this point:
RETURN ON WORKING ASSETS
In percent
1990 1991 1992 1993 1994
18.8 14.9 19.6 23.5 30.7
The current ratio at December 31, 1994 was 1.7:1 compared with 1.6:1 at
December 31, 1993. Excluding the net assets of discontinued operations
reported as a current asset in 1994, the current ratio at December 31,
1994 was 1.4:1. Long-term debt to total capital was 41.0% at December
31, 1994 and 46.8% at December 31, 1993.
The Company believes that its ability to generate cash flows from
operations and the availability of funds under existing credit
facilities will be sufficient to meet anticipated capital expenditure
programs, payment of obligations from prior restructurings, dividends
and other planned financial commitments in 1995 and throughout the term
of the existing credit facilities.
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.
The Company is involved in certain legal actions and claims arising in
the ordinary course of business including lawsuits brought by the State
of Idaho in 1983 and the United States government in 1993 seeking
reimbursement from the Company and other defendants for alleged damages
to the environment and clean-up costs for the area around the Blackbird
Mine in Idaho.
Claims have also been made against a subsidiary 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. In April 1994, the New Jersey Department
of Environmental Protection and Energy finalized a Record of Decision,
which incorporates the agreed upon remediation to be performed by the
Company's subsidiary at its Wharton, New Jersey site.
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 litigation and claims will be
resolved without material adverse effect on the financial position of
the Company.
On behalf of M.A. Hanna Management,
/s/ Douglas R. Schrank
Douglas R. Schrank
Vice President and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
M. A. Hanna Company
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of
M. A. Hanna Company and subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December
31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
M. A. Hanna Company and subsidiaries at December 31, 1994 and 1993, and
the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 31, 1995