1
Item 14(c) Exhibit (i) (13)
CONSOLIDATED STATEMENTS OF INCOME
M.A. Hanna Company and Consolidated Subsidiaries
Year Ended December 31
-----------------------------------------
Dollars in thousands except per share data 1999 1998 1997
========================================================================================
NET SALES $ 2,304,578 $ 2,285,882 $ 2,200,345
COSTS AND EXPENSES
Cost of goods sold 1,886,007 1,883,344 1,781,736
Selling, general and administrative 305,374 295,267 271,894
Interest on debt 31,730 33,915 23,751
Amortization of intangibles 15,259 16,167 14,204
Other - net (2,378) 22,161 (1,669)
----------- ----------- -----------
2,235,992 2,250,854 2,089,916
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 68,586 35,028 110,429
Income taxes 33,161 4,686 45,828
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 35,425 30,342 64,601
Cumulative effect of a change in
accounting principle -- (2,059) --
----------- ----------- -----------
NET INCOME $ 35,425 $ 28,283 $ 64,601
=========== =========== ===========
NET INCOME PER SHARE
Basic
Income before cumulative effect of a
change in accounting principle $ .79 $ .68 $ 1.43
Cumulative effect of a change
in accounting principle -- (.04) --
----------- ----------- -----------
Net income $ .79 $ .64 $ 1.43
=========== =========== ===========
Diluted
Income before cumulative effect of a
change in accounting principle $ .79 $ .67 $ 1.40
Cumulative effect of a change
in accounting principle -- (.04) --
----------- ----------- -----------
Net income $ .79 $ .63 $ 1.40
=========== =========== ===========
See Summary of significant accounting policies and notes to consolidated
financial statements.
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2
CONSOLIDATED STATEMENTS OF CASH FLOWS
M.A. Hanna Company and Consolidated Subsidiaries
Year Ended December 31
-----------------------------------
Dollars in thousands 1999 1998 1997
- ---------------------------------------------------------------------------------------------
CASH PROVIDED FROM (USED FOR) OPERATING ACTIVITIES
Net income $ 35,425 $ 28,283 $ 64,601
Depreciation and amortization 64,221 59,735 52,639
Companies carried at equity:
Income (5,098) (4,558) (4,546)
Dividends received 5,527 3,459 5,420
Changes in operating assets and liabilities:
Receivables (20,250) 2,795 (37,153)
Inventories (23,642) (4,161) (30,746)
Prepaid expenses (2,418) (701) (3,193)
Trade payables and accrued expenses 51,668 (33,841) 43,380
Gain from sales of assets (13,232) (1,009) (6,340)
Provisional loss from sale of assets 10,865 -- --
Restructuring payments (9,041) (10,576) (8,239)
Restructuring charges -- 29,800 6,140
Cumulative effect of a change in accounting principle -- 3,460 --
Other 12,800 2,939 7,487
--------- --------- ---------
Net operating activities 106,825 75,625 89,450
CASH PROVIDED FROM (USED FOR) INVESTING
ACTIVITIES
Capital expenditures (58,918) (66,424) (52,604)
Acquisitions of businesses, less cash acquired (11,695) (76,045) (96,512)
Acquisition payments (233) (207) (14,965)
Sales of assets 30,324 5,635 13,048
Investments in associated and other companies (2,105) -- (22,071)
Return of cash from associated and other companies 575 -- 851
Other 7,663 (11,810) 2,468
--------- --------- ---------
Net investing activities (34,389) (148,851) (169,785)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
M.A. Hanna Company and Consolidated Subsidiaries
Year Ended December 31
-----------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
CASH PROVIDED FROM (USED FOR) FINANCING
ACTIVITIES
Cash dividends paid (21,564) (20,370) (19,176)
Proceeds from the sale of common stock 1,223 3,036 4,333
Purchase of shares for treasury -- (16,944) (17,972)
Increase in debt 97,763 233,066 227,523
Reduction in debt (140,880) (134,567) (99,161)
--------- --------- ---------
Net financing activities (63,458) 64,221 95,547
Effect of exchange rate changes on cash (363) (103) (3,810)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase(decrease) 8,615 (9,108) 11,402
Beginning of year 32,322 41,430 30,028
--------- --------- ---------
End of year $ 40,937 $ 32,322 $ 41,430
========= ========= =========
CASH PAID DURING YEAR
Interest $ 31,237 $ 34,304 $ 22,836
Income taxes 13,310 25,527 36,992
See summary of significant accounting policies and notes to consolidated
financial statements.
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CONSOLIDATED BALANCE SHEETS
M.A. Hanna Company and Consolidated Subsidiaries
December 31
-----------------------
Dollars in thousands 1999 1998
- -----------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 40,937 $ 32,322
Receivables
Trade (less allowance of $9,502 in 1999
and $9,757 in 1998) 341,635 339,721
Other 14,394 10,381
---------- ----------
356,029 350,102
Inventories
Finished products 182,861 169,830
Raw materials and supplies 69,190 66,703
---------- ----------
252,051 236,533
Other current assets 20,908 9,937
Deferred income taxes 27,593 25,554
---------- ----------
Total current assets 697,518 654,448
Property, Plant and Equipment
Land 23,482 21,549
Buildings 139,343 141,569
Machinery and equipment 455,315 435,455
---------- ----------
618,140 598,573
Less accumulated depreciation 284,232 258,986
---------- ----------
333,908 339,587
Other Assets
Goodwill and other intangibles 432,576 467,577
Investments and other assets 94,694 91,277
Deferred income taxes 31,862 41,008
---------- ----------
559,132 599,862
---------- ----------
Total assets $1,590,558 $1,593,897
========== ==========
See summary of significant accounting policies and notes to consolidated
financial statements.
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December 31
--------------------------
1999 1998
- ---------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 4,011 $ 3,391
Trade payables and accrued expenses 404,293 358,081
Current portion of long-term debt 4,020 2,611
----------- -----------
Total current liabilities 412,324 364,083
Other Liabilities 205,031 210,476
Long-term Debt
Senior notes 87,775 87,775
Medium-term notes 160,000 160,000
Other 175,914 233,111
----------- -----------
423,689 480,886
Stockholders' Equity
Preferred stock, without par value:
authorized 5,000,000 shares;
issued and outstanding 0 shares in 1999 and 1998 -- --
Common stock, par value $1.00 per share:
authorized 100,000,000 shares; issued 66,193,985
shares in 1999 and 66,059,298 shares in 1998 66,194 66,059
Capital surplus 289,292 293,613
Retained earnings 484,427 470,566
Accumulated translation adjustment (17,763) (12,327)
Associates ownership trust (4,182,713
shares in 1999 and 5,249,721 shares in 1998) (48,203) (65,255)
Cost of treasury stock (17,242,100 shares
in 1999 and 16,439,467 shares in 1998) (224,433) (214,204)
----------- -----------
Total stockholders' equity 549,514 538,452
----------- -----------
Total liabilities and stockholders' equity $ 1,590,558 $ 1,593,897
=========== ===========
See summary of significant accounting policies and notes to consolidated
financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
M.A. Hanna Company and Consolidated Subsidiaries
Accumulated Other
Comprehensive Income
----------------------------
Dollars in thousands except per share data Minimum
Pension Accumulated
Preferred Common Capital Retained Liability Translation
Stock Stock Surplus Earnings Adjustment Adjustment
---------- ----------- ------------- ------------ ------------- -------------
BALANCE JANUARY 1, 1997 $ - $ 65,262 $ 329,543 $417,228 $ (5,018) $ 1,647
Comprehensive income:
Net income 64,601
Translation adjustment (13,611)
Minimum pension adjustment 5,018
Total comprehensive income
Cash dividends - $.4275 per share (19,176)
Exercise of stock options 449 7,047
Purchase of shares for treasury
Sale of common stock (49,356 shares) 39 976
Transfer of shares (300,000 shares)
Payment of incentive compensation awards
and associate benefits 1,779
Adjustment to market value 18,800
---------- ----------- ------------- ------------ ------------- -------------
BALANCE DECEMBER 31, 1997 - 65,750 358,145 462,653 - (11,964)
Comprehensive income:
Net income 28,283
Translation adjustment (363)
Total comprehensive income
Cash dividends - $.4575 per share (20,370)
Exercise of stock options 244 3,302
Purchase of shares for treasury
Sale of common stock (65,319 shares) 65 989
Transfer of shares (200,151 shares)
Payment of incentive compensation awards
and associate benefits
Adjustment to market value (68,823)
---------- ----------- ------------- ------------ ------------- -------------
BALANCE DECEMBER 31, 1998 - 66,059 293,613 470,566 - (12,327)
Comprehensive income:
Net income 35,425
Translation adjustment (5,436)
Total comprehensive income
Cash dividends - $.485 per share (21,564)
Exercise of stock options 74 676
Sale of common stock (61,348 shares) 61 687
Transfer of shares (767,000 shares)
Payment of incentive compensation awards
and associate benefits (494)
Adjustment to market value (5,190)
---------- ----------- ------------- ------------ ------------- -------------
BALANCE DECEMBER 31, 1999 $ - $ 66,194 $ 289,292 $484,427 $ - $ (17,763)
==================================================================================
Dollars in thousands except per share data
Associates Total
Ownership Treasury Stockholders'
Trust Stock Equity
------------- ------------ --------------
BALANCE JANUARY 1, 1997 $(134,704) $(165,675) $ 508,283
Comprehensive income:
Net income
Translation adjustment
Minimum pension adjustment
Total comprehensive income 56,008
Cash dividends - $.4275 per share (19,176)
Exercise of stock options (3,069) 4,427
Purchase of shares for treasury (17,972) (17,972)
Sale of common stock (49,356 shares) 220 1,235
Transfer of shares (300,000 shares) 6,166 (6,166) -
Payment of incentive compensation awards
and associate benefits 2,905 1,816 6,500
Adjustment to market value (18,800) -
------------- ------------ --------------
BALANCE DECEMBER 31, 1997 (144,213) (191,066) 539,305
Comprehensive income:
Net income
Translation adjustment
Total comprehensive income 27,920
Cash dividends - $.4575 per share (20,370)
Exercise of stock options (1,397) 2,149
Purchase of shares for treasury (16,944) (16,944)
Sale of common stock (65,319 shares) 1,054
Transfer of shares (200,151 shares) 4,797 (4,797) -
Payment of incentive compensation awards
and associate benefits 5,338 5,338
Adjustment to market value 68,823 -
------------- ------------ --------------
BALANCE DECEMBER 31, 1998 (65,255) (214,204) 538,452
Comprehensive income:
Net income
Translation adjustment
Total comprehensive income 29,989
Cash dividends - $.485 per share (21,564)
Exercise of stock options (656) 94
Sale of common stock (61,348 shares) 748
Transfer of shares (767,000 shares) 9,654 (9,654) -
Payment of incentive compensation awards
and associate benefits 2,208 81 1,795
Adjustment to market value 5,190 -
------------- ------------ --------------
BALANCE DECEMBER 31, 1999 $ (48,203) $(224,433) $ 549,514
================================================
See summary of significant accounting policies and notes to consolidated
financial statements
-6-
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
M.A. Hanna Company and Consolidated Subsidiaries
Dollars in thousands except per share data
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of M.A. Hanna Company
and all majority-owned subsidiaries. Investments in less than majority-owned
companies are carried at cost adjusted for undistributed earnings and losses
since acquisition, or at cost. All significant intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION
Revenues are recognized when a product is shipped or a service is performed.
NET INCOME PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
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. Basic weighted average shares outstanding for the years ended
December 31, 1999, 1998 and 1997 were 44,602,505, 44,573,436, and 45,167,937,
respectively.
For diluted earnings per share, the number of shares used for basic earnings per
share are increased by the common stock equivalents which would arise from the
exercise of stock options. Weighted average shares outstanding (diluted) for the
years ended December 31, 1999, 1998 and 1997, were 44,718,869, 45,036,676 and
46,271,857, respectively.
-7-
8
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with an original purchased
maturity of three months or less. Cash equivalents are stated at cost, which
approximates fair value.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the company to credit risk are
trade accounts receivable and foreign exchange contracts. Concentration of
credit risk with respect to trade accounts receivable is limited due to the
large number of customers comprising the company's customer base and their
distribution among many different industries and geographic locations. The
company is exposed to credit risk with respect to forward foreign exchange
contracts in the event of nonperformance by the counterparties to these
financial instruments, which are major financial institutions. Management
believes the risk of incurring material losses related to this credit risk is
remote.
INVENTORIES
Inventories are stated at the lower of cost or market. Prior to 1998, a majority
of the domestic inventories were valued by the last-in, first-out (LIFO) cost
method. Effective January 1, 1998, the company changed its method of accounting
for all domestic inventories to the LIFO cost method. The change in accounting
was made to better match acquisition costs against sales, conform to the LIFO
election made for income tax purposes and to provide greater consistency in
inventory valuations across domestic business units. The effect of this change
was not significant to 1998 reported results. Inventories of international
subsidiaries are valued by the first-in, first-out (FIFO) method. The excess of
current cost over LIFO cost was $5,276 and $6,867 at December 31, 1999 and 1998,
respectively.
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PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
principally by the straight-line method. Estimated asset lives are:
Building and improvements 20 - 40 years
Machinery and equipment 5 - 10 years
Computer software and hardware 3 - 5 years
Property items retired or otherwise disposed of are removed from the property
and related accumulated depreciation accounts, and any gain or loss is included
in operating results.
GOODWILL AND OTHER INTANGIBLES
Goodwill is amortized over 40 years on a straight-line basis. Net other
intangibles of $15,771 and $22,065 at December 31, 1999 and 1998, respectively,
are amortized on a straight-line basis over 5 to 40 years. Accumulated
amortization at December 31, 1999 and 1998 was $133,583 and $127,588,
respectively.
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 will be reduced by the
estimated shortfall of cash flows on a discounted basis. During 1999, $15,109 of
goodwill and other intangibles were written off in connection with the sale or
pending sale of businesses.
INCOME TAXES
Deferred tax liabilities and assets are determined based on the differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rate and laws that are currently in effect.
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USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the reported financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of international affiliates are translated at the
exchange rates as of the balance sheet date. Related translation adjustments are
reported as a component of stockholders' equity. Revenues and expenses are
translated at the average rates in effect during the period.
DERIVATIVE FINANCIAL INSTRUMENTS
The company limits its use of derivative financial instruments to forward
foreign exchange contracts to hedge certain foreign currency receivables,
payables and intercompany lending transactions. Gains and losses on foreign
currency transaction hedges are recognized in other income or expense and offset
the foreign exchange gains and losses on the underlying transactions.
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.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1998, the company adopted the AICPA's Statement of Position
98-5 "Reporting on the Costs of Start-up Activities" which
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requires all pre-operating costs to be expensed as incurred. Adoption of this
Statement resulted in a one-time charge of $2,059 (net of taxes of $1,401) for
previously capitalized costs. This charge was reported as a cumulative effect of
a change in accounting principle in 1998 earnings.
-11-
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M.A. Hanna Company and Consolidated Subsidiaries
Dollars in thousands except per share data
PROFIT IMPROVEMENT PLAN
In 1998, the company completed a review of its business and implemented a plan
that would lower the company's overall cost structures. This plan included
consolidating manufacturing operations and improving customer service
capabilities through more efficient production facilities and more focused
sales, marketing and technical support. As part of the profit improvement plan,
the company has closed four plants and sold a fifth plant. The company will
continue to incur facility costs including lease payments, utilities and taxes
until the various leases expire or properties are sub-leased. The plan included
the elimination of approximately 300 jobs, of which half were eliminated in 1998
and the remaining were eliminated in 1999. These actions resulted in a pre-tax
charge of $29,800 in the third quarter of 1998. The charge included $4,300
related to inventory valuations, which was charged to cost of goods sold, $1,700
related to accounts receivable, which was charged to selling, general and
administrative costs and $23,800 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 $17,731 or $.39 per share on a diluted basis in
1998.
Details of the charge and its utilization as of December 31, 1999, are as
follows:
1998 Utilized Accrual Balance Utilized Accrual Balance
Charge 1998 December 31, 1998 1999 December 31, 1999
------------------ ------------------ ------------------ ------------------ ------------------
Inventory valuations $ 4,300 $ 4,300 $ -- $ -- $ --
Accounts receivable 1,700 1,700 -- -- --
Associate costs 9,206 3,949 5,257 4,352 905
Asset write-downs 12,046 9,267 2,779 1,551 1,228
Plant closures 2,548 385 2,163 1,652 511
------------------ ------------------ ------------------ ------------------ ------------------
$ 29,800 $ 19,601 $ 10,199 $ 7,555 $ 2,644
================== ================== ================== ================== ==================
The remaining accrued costs of $2,644 as of December 31, 1999 will be fully
utilized per contractual obligations with payments extending until
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2002 for associate costs, and 2005 for obligations related to plant closures and
asset write-downs.
ACQUISITIONS
In December 1999, the company acquired a majority interest in Star Color Co.,
Ltd. Star Color is a producer of color and additives for plastics located in
Thailand. The company has the right to acquire the remaining interest in 2003.
In March 1999, the company acquired the remaining interest in Melos Carl Boesch
GmbH. The company originally acquired a majority interest in Melos Carl Boesch
GmbH based in Melle, Germany in January 1998. Melos produces rubber,
thermoplastic elastomer and plastic compounds for the wire and cable, sport
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 compliment the halogen-free
flame-retardant plastic compounds currently marketed by the company's
subsidiary, Enviro Care Compounds, based in Norway. In December 1998, the
company formed a joint venture with Bifan S. A., which controls So.F.teR S.p.A.,
an Italian producer of thermoplastic elastomers.
These acquisitions were accounted for using the purchase method of accounting.
Had the acquisitions and the formation of joint ventures been made at the
beginning of 1999 and 1998 respectively, reported pro forma results of
operations for 1999 and 1998 would not be materially different.
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INCOME TAXES
Income taxes consist of the following:
1999 1998 1997
- ----------------------------------------------------------------------
Current
Federal $11,707 $(1,280) $26,693
State 1,596 1,519 5,663
Foreign 11,535 8,153 8,675
------- ------ ------
24,838 8,392 41,031
Deferred
Federal 5,482 (4,913) 2,297
State 1,410 (893) 8
Foreign 1,431 2,100 2,492
------- ------ ------
8,323 (3,706) 4,797
------- ------- ------
$33,161 $ 4,686 $45,828
======= ======= =======
The provision for income taxes differs from the amount computed by applying the
U.S. statutory federal income tax rate as follows:
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Provision at statutory tax rate $24,005 35.0% $12,260 35.0% $38,650 35.0%
State income taxes 1,954 2.8 407 1.1 3,686 3.3
Goodwill amortization and writedown 7,117 10.4 3,213 9.2 2,869 2.6
Adjustment to reserves - - (9,500) (27.1) - -
Other - net 85 .1 (1,694) (4.8) 623 .6
------ ---- ------ ---- ------ ----
$33,161 48.3% $ 4,686 13.4% $45,828 41.5%
====== ==== ====== ==== ====== ====
During 1998, the company recorded a reduction of income tax reserves of $9,500
relating to the settlement of examinations of previously filed tax returns.
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 taxes
on undistributed earnings of international subsidiaries and joint ventures,
which amount to $93,563, as these earnings are considered indefinitely
reinvested. It is not practicable to calculate the deferred taxes associated
with the remittance of these earnings.
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Significant components of the company's deferred tax assets (liabilities) are as
follows:
1999 1998
- -------------------------------------------------------------------------
Basis differences from purchase accounting $(6,312) $(6,188)
Property, plant and equipment (12,782) (11,245)
Other postretirement benefits 33,862 34,035
Associate benefits 22,418 19,463
Foreign net operating losses and tax
credit carryforwards 4,081 7,336
Restructuring and plant closedown costs 2,684 5,510
Environmental costs 6,404 6,582
Inventory and receivable allowances 4,405 3,062
Other (1,268) 7,594
------ ------
53,492 66,149
Valuation allowance (4,081) (7,336)
------ ------
Net deferred income tax asset $49,411 $58,813
====== ======
At December 31, 1999, the company has foreign net operating loss carryforwards,
the majority of which expire in varying amounts during 2003 to 2006 and foreign
tax credit carryforwards, the majority of which expire in 2001. The company has
recorded a valuation allowance for these carryforwards, as it is not anticipated
that they will be utilized before expiration. During 1999, certain net operating
loss and foreign tax credit carryforwards were utilized and the valuation
reserve was reduced by $3,255.
Income from continuing operations before income taxes includes $30,001, $27,392,
and $35,343 in 1999, 1998, and 1997, respectively, from international
operations.
LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
1999 1998
- -----------------------------------------------------------------------------
9.375% Senior notes due 2003 $ 87,775 $ 87,775
Medium-term notes - interest rates
from 6.52% to 7.16% with a weighted
average rate of 6.85% - due
between 2004 and 2011 160,000 160,000
Bank borrowings 165,378 214,625
Capital lease obligations 3,153 3,839
Other 11,403 17,258
------- -------
427,709 483,497
Less current portion 4,020 2,611
------- -------
$423,689 $480,886
======= =======
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Annual maturities of long-term debt for the next five years are: 2000--$4,020;
2001--$2,480; 2002--$1,973; 2003--$255,403; and 2004--$21,239.
The company has a revolving credit agreement that provides for borrowings up to
$200 million through January 2003 with interest rates determined at the time of
the borrowing based on a choice of formulas specified in the agreement. There
were no borrowings under this agreement at December 31, 1999 or 1998.
Bank borrowings include committed and uncommitted borrowings. At December 31,
1999, the company had $69,600 of borrowings from uncommitted bank lines and
$23,754 from committed bank lines at interest rates ranging from 3.20% to 9.00%
and a weighted average interest rate of 5.73%. During 1998, the company entered
into a five-year, 5.1% fixed rate borrowing for 90,000 DM ($46,301 as of
December 31, 1999) and in 1999, a three-month, 4.48% rate borrowing of 50,000 DM
($25,723 as of December 31, 1999). It is the company's policy to classify these
bank borrowings as long-term debt since the company has the ability, under the
revolving credit agreement, and the intent to maintain these obligations longer
than one year.
Other debt at December 31, 1999 and 1998, consists primarily of mortgages,
industrial revenue bonds and notes. These obligations mature in various
installments through 2007 and are at interest rates ranging from 3.46% to
11.75%.
The company had $4,011 and $3,391 of outstanding notes payable to banks at
December 31, 1999 and 1998, at weighted average interest rates of 6.34% and
8.99%, respectively.
The company's long-term debt agreements contain certain restrictions and
conditions among which are limitations on cash dividends and other payments.
Under the most restrictive of these agreements, approximately
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$253,588 of retained earnings was free of such limitations at December 31, 1999.
STOCKHOLDERS' EQUITY
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. The shares
acquired are released from the AOT on an annual basis 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 and to meet annual principal
payments on the promissory note. Shares remaining in the AOT 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 1988 Long-Term Incentive Plan provides for the granting of
options, including options to non-associate directors, up to 6,426,038 shares.
The exercise price of each option equals the market price of the company's stock
on the date of grant; options have a life of ten years. Options vest according
to a graded vesting schedule of one-third one year
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18
from the date of grant, one-third two years from the date of grant and one-third
three years from the date of grant.
The company applies the intrinsic value-based method of accounting prescribed by
APB Opinion No. 25 for this plan. Accordingly, no compensation expense has been
recognized for its fixed stock option plan as options are granted at fair market
value. Had compensation expense for the company's stock-based compensation plan
been determined based on the fair value at the grant dates for awards under that
plan consistent with the method of SFAS No. 123, the company's net income, basic
earnings per share and diluted earnings per share amounts would have been
restated as follows:
Proforma 1999 1998 1997
- -------------------------------------------------------------------------
Net income $33,366 $26,499 $62,392
Basic earnings per share .74 .59 1.38
Diluted earnings per share .74 .59 1.35
The imputed fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions.
1999 1998 1997
- --------------------------------------------------------------------------
Dividend yield 4.71% 3.20% 2.00%
Expected price volatility 47.00% 27.00% 25.00%
Risk free interest rate 6.20% 4.75% 5.75%
Expected option life 8 years 8 years 8 years
The following table summarizes the changes in the outstanding options for the
three years ended December 31:
-18-
19
1999 1998 1997
-------------------------- -------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at
beginning of year 3,382,505 $16.26 2,905,524 $16.21 2,951,234 $14.14
Granted 873,034 11.53 737,760 15.03 470,026 23.92
Exercised (73,339) 8.73 (244,409) 11.46 (446,958) 10.31
Canceled or expired (183,205) 14.76 (16,370) 22.70 (68,778) 18.01
---------- -------- --------
Outstanding at
end of year 3,998,995 $15.30 3,382,505 $16.26 2,905,524 $16.21
========= ========= =========
Options exercisable
at end of year 2,547,982 2,298,819 2,177,233
Weighted-average fair
value of options
granted during the year $4.14 $3.98 $7.96
The following table summarizes information about options outstanding at December
31, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------------
Weighted Average Weighted Weighted
Range of Options Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 9.78 to 12.99 1,314,174 6.8 years $10.89 490,295 $10.99
13.00 to 16.99 1,417,110 5.8 years 14.65 970,850 14.39
17.00 to 26.94 1,267,711 6.6 years 21.01 1,086,837 20.71
--------- ---------
3,998,995 2,547,982
========= =========
At December 31, 1999, 128,830 shares were available for future grants.
BUSINESS SEGMENTS
In 1998, the company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," which changes the way the company reports
information about its operating segments. Segment information for 1997 has been
restated to conform with the new presentation.
The company has three reportable segments - rubber processing, plastic
processing and distribution. The reportable segments are business units that
offer different products and services. Additionally, the manufacturing processes
for rubber processing and plastic processing are different. Rubber processing
includes the manufacture of custom rubber compounds and additives. Plastic
processing includes the production of custom plastic compounds and custom
formulated colorants and additives. Distribution includes distribution of
engineered plastic shapes and thermoplastic and thermoset resins and
Fiberglas(TM) materials. Other operations include the company's Diversified
Polymer Products business, its dock operations and management fees. During the
third quarter of
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20
1999, the company sold its thermoset resins and glass fiber materials
distribution business, and the company's management contract for dock operations
expired. In addition, the company has entered into an agreement for the sale of
the Diversified Polymer Products business, which the company anticipates will be
consummated in the first half of 2000.
The company evaluates performance and allocates resources on operating income
before interest and income taxes. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Net sales, which are attributed to countries based on the location of the
business unit recognizing the sale, and long-lived assets by geographic area are
as follows:
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Net sales
United States $1,728,720 $1,775,373 $1,722,373
Europe 338,965 291,007 251,720
Asia/Pacific 160,430 144,011 154,897
Other 76,463 75,491 71,355
--------- --------- ---------
$2,304,578 $2,285,882 $2,200,345
========= ========= =========
Long-lived assets
United States $ 606,639 $ 636,553 $ 642,077
Europe 192,493 211,063 102,699
Asia/Pacific 44,186 45,748 46,858
Other 17,860 5,077 4,983
--------- --------- ---------
$ 861,178 $ 898,441 $ 796,617
========= ========= =========
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21
NOTES TO FINANCIAL STATEMENTS --CONTINUED
M.A. Hanna Company and Consolidated Subsidiaries
Rubber Plastic Other
Processing Processing Distribution Operations
---------------- ---------------- ---------------- ----------------
1999
Net sales from external customers $514,663 $892,460 $883,006 $ 14,449
Intersegment sales 4,740 21,639 6,008 -
Depreciation and amortization 18,669 36,304 7,422 711
Operating income 45,736 58,179 (1) 25,056 (2) (8,365) (3)
Assets 400,232 663,819 380,610 6,927
Capital expenditures 25,575 28,963 4,063 202
1998
Net sales from external customers $528,513 $833,091 $910,057 $ 14,221
Intersegment sales 2,483 25,032 7,834 -
Depreciation and amortization 17,855 33,499 6,586 785
Operating income 47,816 (5) 28,286 (6) 13,457 (7) 1,358
Assets 390,197 670,324 372,798 18,678
Capital expenditures 23,955 35,444 5,573 699
1997
Net sales from external customers $448,488 $768,683 $961,222 $ 21,952
Intersegment sales 3,347 22,637 7,118 -
Depreciation and amortization 13,556 31,175 6,167 825
Operating income 44,381 63,460 (9) 42,767 (10) 10,552 (11)
Assets 326,107 616,097 376,681 16,471
Capital expenditures 11,672 34,283 6,022 420
Corporate Total
---------------- -------------------
1999
Net sales from external customers $ - $2,304,578
Intersegment sales - 32,387
Depreciation and amortization 1,115 64,221
Operating income (20,290) (4) 100,316
Assets 138,970 1,590,558
Capital expenditures 115 58,918
1998
Net sales from external customers $ - $2,285,882
Intersegment sales - 35,349
Depreciation and amortization 1,010 59,735
Operating income (21,974) (8) 68,943
Assets 141,900 1,593,897
Capital expenditures 753 66,424
1997
Net sales from external customers $ - $2,200,345
Intersegment sales - 33,102
Depreciation and amortization 916 52,639
Operating income (26,980) 134,180
Assets 133,649 1,469,005
Capital expenditures 207 52,604
(1) Includes $600 reversal of profit improvement plan reserve
(2) Includes $11,991 gain from sale of assets
(3) Includes $10,865 charge for pending sale of assets and $1,219 reversal of
reserve for dock operation
(4) Includes $1,241 gain from sale of asset
(5) Includes $4,251 of charges from the profit improvement plan
(6) Includes $16,372 of charges from the profit improvement plan
(7) Includes $5,640 of charges from the profit improvement plan
(8) Includes $3,537 of charges from the profit improvement plan
(9) Includes $5,140 of restructuring charges
(10) Includes $1,000 of restructuring charges
(11) Includes $6,340 gain from the sale of assets
-21-
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PENSION AND OTHER POSTRETIREMENT BENEFITS
The company has noncontributory defined benefit plans covering certain
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
(including stock of the company), 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 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:
1999 1998 1997
- ------------------------------------------------------------------------------
Defined benefit plans
Service cost $ 79 $ 480 $ 411
Interest cost on projected
benefit obligation 5,794 5,477 5,979
Return on plan assets (8,687) (7,760) (8,941)
Net amortization and deferral (115) (58) 2,673
------ ------ ------
Net pension cost (2,929) (1,861) 122
Defined contribution plans 7,524 6,822 5,464
------ ------ ------
$ 4,595 $4,961 $5,586
====== ====== ======
The following table sets forth the funded status of the company's defined
benefit plans:
-22-
23
1999 1998
- -------------------------------------------------------------------
Change in projected benefit obligation
Benefit obligation at beginning of year $ 82,236 $ 81,009
Service and interest cost 5,872 5,957
Plan amendments -- (1,178)
Actuarial losses 1,363 3,430
Benefits paid (7,424) (6,982)
--------- ---------
Benefit obligation at year end 82,047 82,236
Change in plan assets
Fair value of plan
assets at beginning of year 105,987 100,711
Actual return on plan assets 11,459 11,774
Employer contributions 3 484
Benefits paid (7,424) (6,982)
--------- ---------
Fair value of plan assets at end of year 110,025 105,987
--------- ---------
Funded status 27,978 23,751
Unrecognized actuarial gains (10,582) (9,257)
Unrecognized net transition obligation 174 159
--------- ---------
Net amount recognized $ 17,570 $ 14,653
========= =========
The projected benefit obligation was determined using an assumed discount rate
of 7.50% and 6.75% in 1999 and 1998, respectively, an assumed long-term rate of
increase in compensation of 4.5% and 5.0% in 1999 and 1998, respectively, and an
assumed long-term rate of return on plan assets of 8.5% for both years.
Effective December 31, 1998, the company amended the Salaried Employees
Retirement Income Plan, freezing the benefits earned under the Plan. In
accordance with SFAS No. 88 "Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits", the company
recorded a $1,457 net curtailment loss. Additionally, this plan amendment
resulted in a $1,178 decrease in the projected benefit obligation.
In addition to providing pension benefits, the company currently provides
certain contributory and noncontributory health care and life insurance benefits
for certain retired associates. Certain associates of the company may become
eligible for these postretirement benefits if they reach retirement age while
working for the company.
-23-
24
The status of the company's plans, which are unfunded, at December 31, 1999 and
1998, is as follows:
1999 1998
- ------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at the beginning of the year $70,294 $65,773
Service and interest cost 4,915 5,605
Benefits paid (5,097) (4,233)
Actuarial (gain) loss (12,526) 3,149
------- -------
Benefit obligation at the end of the year $57,586 $70,294
======= =======
Funded status
Unfunded obligation $57,586 $70,294
Unrecognized actuarial gain 26,164 14,447
------- -------
Accrued liability recognized at year end $83,750 $84,741
======= =======
Net periodic postretirement benefit cost includes the following components:
1999 1998 1997
- ------------------------------------------------------------------------------------
Service cost $ 930 $ 972 $ 834
Interest cost 3,986 4,633 4,807
Amortization of unrecognized actuarial gain (809) (1,081) (781)
------ ------ ------
Net periodic postretirement benefit cost $4,107 $4,524 $4,860
====== ====== ======
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 8.5% at December
31, 1999 and 1998, respectively, and decreasing gradually to 5.25% in 2005 and
remaining at that level thereafter. A one percentage point change in the assumed
health care cost trend rates would have the following effects:
One percentage point One percentage point
increase decrease
- ---------------------------------------- ----------------------------------------------------
Change in service and interest
cost components of annual expense $716 $(599)
Change in postretirement
benefit obligation $6,409 $(5,625)
-24-
25
A discount rate of 7.50% and 6.75% in 1999 and 1998, respectively, was used in
determining the accumulated benefit obligation.
FINANCIAL INSTRUMENTS
The company transacts business in various foreign currencies and is subject to
financial exposure from foreign exchange rate movement between the date a
foreign currency transaction is recorded and the date it is consummated. To
mitigate this risk, the company enters into foreign exchange contracts. Gains
and losses on these contracts generally offset gains or losses on the assets and
liabilities being hedged and are recorded as other income or expense.
Additionally, the company enters into intercompany lending transactions. The
company also enters into foreign exchange contracts related to this foreign
exchange exposure. Realized and unrealized gains and losses on these contracts
are recorded as other income or expense. 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, 1999. Foreign currency amounts are
translated at exchange rates as of December 31, 1999. 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.
Buy Sell
--- ----
Currency
U.S. dollar $81,173 $42,111
Euro 39,277 88,501
British pound sterling 7,834 8,532
Canadian dollar 4,204 -
Australian dollar 20 2,508
Other 6,064 704
The following methods and assumptions were used by the company in estimating
fair value disclosures for financial instruments:
-25-
26
CASH AND CASH EQUIVALENTS: 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 and
Medium-term Notes is based on quoted market prices. The carrying amount of the
company's borrowings under its variable interest rate long-term revolving credit
agreements and other long-term borrowings approximates fair value.
FOREIGN EXCHANGE CONTRACTS: The fair value of short-term foreign exchange
contracts is based on exchange rates at December 31, 1999. The fair value of
long-term foreign exchange contracts is based on quoted market prices for
contracts with similar maturities.
The carrying amounts and fair values of the company's financial instruments at
December 31, 1999 and 1998, are as follows:
1999 1998
- ---------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and cash equivalents $ 40,937 $ 40,937 $32,322 $32,322
Notes payable to banks 4,011 4,011 3,391 3,391
Long-term debt
9.375% Senior notes 87,775 92,620 87,775 99,291
Medium-term notes 160,000 149,032 160,000 163,637
Bank borrowings 165,378 165,378 214,625 214,625
Other 14,556 14,556 21,097 21,097
Foreign exchange contracts 784 784 166 166
LEASE COMMITMENTS
The company leases certain manufacturing facilities, warehouses, transportation
equipment and data processing and office equipment under capital and operating
leases. Rent expense for operating leases was $21,889, $21,530 and $21,009 for
the years ending December 31, 1999, 1998
-26-
27
and 1997, respectively. Certain of the company's leases have options to renew,
and there are no significant contingent rentals.
At December 31, 1999, future minimum lease commitments for non-cancelable leases
are as follows:
Operating Capital
Leases Leases
- --------------------------------------------------------------------------
2000 $ 14,969 $ 1,167
2001 11,931 807
2002 9,826 698
2003 6,508 996
2004 5,451 6
Thereafter 10,838 -
-------- -------
Total $ 59,523 3,674
========
Less: Interest 521
-------
Present value of minimum lease payments $ 3,153
=======
CONTINGENCIES
Claims have been made against subsidiaries 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. 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 claims will be resolved without
material adverse effect on the consolidated financial position, results of
operations or cash flows of the company.
LITIGATION
The company is engaged in legal proceedings arising in the ordinary course of
business. The company believes that the ultimate outcome of these proceedings
will not have material adverse impact on the company's consolidated financial
position, results of operations or cash flows.
-27-
28
OTHER - NET
Other - net includes the following:
1999 1998 1997
- ------------------------------------------------------------------------------
Interest and dividends $ (755) $ (1,010) $ (589)
Gain on sale of assets (13,232) (1,009) (6,340)
Provision for loss on sale of assets 10,865 - -
Expenses of closed facilities 816 1,291 3,166
Profit improvement plan charges - 23,800 6,140
Foreign exchange gain (2,689) (3,249) (2,800)
Minority interest 5,245 4,706 -
Other (2,628) (2,368) (1,246)
------- ------ ------
$ (2,378) $22,161 $(1,669)
======= ====== ======
DETAIL OF CURRENT AND OTHER LIABILITIES
Trade payables and accrued expenses and other liabilities at December 31 are
principally comprised of the following items:
1999 1998
- --------------------------------------------------------------------------------
Trade payables and accrued expenses
Trade payables $255,130 $222,993
Salaries and wages 12,182 10,732
Associate benefits 50,009 39,657
Restructuring and acquisition costs 10,262 18,350
Other post-retirement benefits 4,854 4,912
Other liabilities
Plant closedown costs 8,065 8,718
Environmental costs 13,218 13,687
Associate benefits 26,447 31,924
Other post-retirement benefits 78,896 79,829
Minority interest 36,837 33,091
Associate benefit accruals include employee health, life and disability
insurance, profit sharing and incentive compensation, pension expense, workers'
compensation costs and vacation pay.
SUPPLEMENTAL CASH FLOW DATA
The following is a summary of non-cash investing and financing activities.
1999 1998 1997
- ----------------------------------------------------------------------------
Acquisition of businesses
Assets acquired $ 18,310 $129,674 $103,369
Liabilities assumed 6,615 52,096 6,520
-------- -------- --------
Cash paid 11,695 77,578 96,849
Less cash acquired - 1,533 337
-------- -------- --------
$ 11,695 $ 76,045 $ 96,512
======== ======== ========
-28-
29
Debt of companies acquired $ 2,537 $ 27,338 -
Payment of incentive compensation
awards with treasury and AOT stock $ 157 $ 1,042 $ 3,293
Payment of stock options exercised
with shares of common stock $ 656 $ 1,396 $ 3,069
Release of common stock held by
Associates Ownership Trust $ 6,633 $ 5,033 $ 8,134
Transfer of common stock released
from Associates Ownership Trust
to treasury stock $ (9,654) $ (4,797) $ (6,166)
-29-
30
Quarterly Financial and Stock Price Data
M.A. Hanna Company and Consolidated Subsidiaries
Dollars in thousands except per share data
Summarized unaudited quarterly financial and stock price data for 1999 and 1998
are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
1999
Net sales $580,559 $594,263 $564,415 $565,342
Gross margin 105,081 107,276 102,824 103,390
Net income 7,741 10,386 16,293 1,005
Net income per common share (diluted) 0.17 0.23 0.36 0.02
Price range
High 13.13 17.31 16.81 11.75
Low 10.31 12.38 10.50 9.13
Cash dividends paid .1200 .1200 .1200 .1250
1998
Net sales $591,501 $595,613 $564,539 $534,229
Gross margin 114,229 109,573 92,861 85,875
Income before cumulative effect of a
change in accounting principle 15,407 12,969 (145) 2,111
Cumulative effect of a change in
accounting principle (2,059) - - -
---------------- ---------------- ---------------- ---------------
Net income 13,348 12,969 (145) 2,111
Net income per common share (diluted)
Income before cumulative effect of
a change in accounting principle 0.34 0.29 - 0.05
Cumulative effect of a change in
accounting principle (0.05) - - -
---------------- ---------------- ---------------- ---------------
Net Income 0.29 0.29 - 0.05
Price range
High 25.56 24.69 18.25 15.94
Low 19.75 17.88 9.75 10.56
Cash dividends paid .1125 .1125 .1125 .1200
Income per share calculations for each of the quarters are based on the weighted
average number of shares outstanding for each quarter, and the sum of the
quarters may not necessarily be equal to the full year income per share amount.
-30-
31
SELECTED FINANCIAL DATA
M. A. Hanna Company and Consolidated Subsidiaries
Dollars in thousands except per share data
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales $ 2,304,578 $ 2,285,882 $ 2,200,345 $ 2,066,248 $ 1,901,954
Cost of goods sold 1,886,007 1,883,344 1,781,736 1,685,167 1,552,643
Selling, general and administrative 305,374 295,267 271,894 243,505 218,823
Amortization of intangibles 15,259 16,167 14,204 14,313 13,969
Interest on debt 31,730 33,915 23,751 20,033 26,278
Income(loss) from continuing operations before
income taxes, extraordinary charge and cumulative
effect of changes in accounting principles 68,586 35,028 110,429 102,891 98,821
Income taxes 33,161 4,686 45,828 43,729 42,119
------------ ------------ ------------ ------------ ------------
Income(loss) from continuing operations before
extraordinary charge and cumulative effect
of changes in accounting principles 35,425 30,342 64,601 59,162 56,702
Net income 35,425 28,283 64,601 53,810 102,039
Per share of common stock (basic)
Income(loss) from continuing operations .79 .68 1.43 1.29 1.22
Net income .79 .64 1.43 1.18 2.19
Dividends paid .49 .46 .43 .40 .37
Cash dividends paid on
Common stock 21,564 20,370 19,176 18,291 16,962
Preferred stock -- -- -- -- --
BALANCE SHEET
Current assets $ 697,518 $ 654,448 $ 642,919 $ 533,539 $ 574,612
Current liabilities 412,324 364,083 398,993 351,939 335,251
------------ ------------ ------------ ------------ ------------
Working capital 285,194 290,365 243,926 181,600 239,361
Property, plant and equipment - net 333,908 339,587 288,313 254,407 227,021
Other assets 559,132 599,862 537,773 462,833 429,963
Net long-term assets of discontinued operations -- -- -- -- --
Other liabilities (205,031) (210,476) (205,480) (182,852) (179,580)
Long-term debt (423,689) (480,886) (325,227) (207,705) (231,987)
------------ ------------ ------------ ------------ ------------
Total stockholders' equity $ 549,514 $ 538,452 $ 539,305 $ 508,283 $ 484,778
Shares of common stock outstanding 48,951,885 49,619,831 50,476,968 50,989,815 51,964,377
Average diluted shares outstanding 44,718,869 45,036,676 46,271,857 46,823,501 47,412,297
Book value per share of common stock $ 11.23 $ 10.85 $ 10.68 $ 9.97 $ 9.33
1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales $ 1,719,356 $ 1,412,071 $ 1,188,541 $ 1,006,638 $ 960,228
Cost of goods sold 1,393,036 1,146,191 961,925 797,892 749,071
Selling, general and administrative 213,318 179,228 152,366 147,998 137,674
Amortization of intangibles 12,458 12,006 11,069 10,146 9,704
Interest on debt 28,549 32,258 32,509 23,221 18,301
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
Income taxes 29,218 16,357 8,819 8,225 12,830
------------ ------------ ------------ ------------ ------------
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
Net income 43,294 2,018 19,025 1,875 55,871
Per share of common stock (basic)
Income(loss) from continuing operations .80 .46 .42 (.48) .50
Net income .93 .05 .44 .01 .90
Dividends paid .34 .32 .29 .28 .25
Cash dividends paid on
Common stock 15,688 14,003 12,630 15,267 15,175
Preferred stock -- -- - 1,031 -
BALANCE SHEET
Current assets $ 565,615 $ 405,782 $ 416,739 $ 275,060 $ 276,711
Current liabilities 337,491 259,680 229,327 195,610 181,471
------------ ------------ ------------ ------------ ------------
Working capital 228,124 146,102 187,412 79,450 95,240
Property, plant and equipment - net 204,135 184,296 195,117 184,877 183,536
Other assets 445,410 438,628 440,873 443,702 458,394
Net long-term assets of discontinued operations -- 94,904 99,836 121,374 129,869
Other liabilities (173,888) (176,422) (174,558) (118,082) (161,674)
Long-term debt (288,869) (322,052) (350,737) (330,863) (137,691)
------------ ------------ ------------ ------------ ------------
Total stockholders' equity $ 414,912 $ 365,456 $ 397,943 $ 380,458 $ 567,674
Shares of common stock outstanding 53,541,141 53,417,283 52,650,162 51,367,613 59,906,358
Average diluted shares outstanding 47,203,412 46,283,262 44,332,720 54,472,086 63,136,015
Book value per share of common stock $ 7.75 $ 6.84 $ 7.56 $ 7.41 $ 9.47
SHAREHOLDER INFORMATION
M.A. Hanna Company common stock is listed on the New York and Chicago stock
exchanges under the symbol MAH. At December 31, 1999, the number of shareholders
of record of the Company's common stock was 4,452.
-31-
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
M.A. Hanna Company and Consolidated Subsidiaries
RESULTS OF OPERATIONS
The company made progress on several strategic and operational objectives during
1999. The rubber processing businesses completed the construction of two new
facilities--a rubber colorant and additives plant in Ohio and a rubber
compounding facility in Mexico and the expansion of a plant in Germany. The
rubber processing business also made progress on supply chain and lean
manufacturing initiatives and has started to see the benefits from those
initiatives.
The plastic processing businesses also made progress on strategic and
operational objectives. The European and Asian businesses gained momentum due to
improving economics in the respective regions. Operating results were also
positively impacted by the actions associated with the profit improvement plan
instituted in the third quarter of 1998. Work continues on the expansion of a
plastic additives and compounding plant in Texas. Late in the year, the company
acquired a majority interest in Star Color, a producer of color and additives
for plastics, located in Thailand, which expands the geographic reach of the
company.
Progress was also made in the distribution businesses. Resin distribution
generated higher volumes resulting from an increase in its sales force and a
focus on its core thermoplastic resin business. The company divested its
regional thermoset resin distribution business in the third quarter; this
business was a regional business and was not strategically aligned with the
thermoplastic focus of the resin business. The domestic shapes distribution
business continues a slow recovery as it works to win back customers lost due to
customer service issues resulting
-32-
33
from the implementation of a new distribution and customer service system along
with the installation of a new information system.
The company also entered into an agreement to divest its molded sponge business.
The sale of this business, which is not strategic to the company, is expected to
close in the first half of 2000.
The company strengthened and realigned its management team in 1999. In addition
to appointing a new chief executive officer, the management team includes new
leaders in procurement and supply, corporate development and strategy, domestic
plastic operations, market and customer focused business teams and
manufacturing.
1999 COMPARED WITH 1998
Rubber processing revenues decreased 2.6% from 1998 levels, falling to $514.7
million. While volume was higher, lower pricing and a stronger U.S. dollar
caused revenues to decline. Revenues from plastic processing increased from
$833.1 million in 1998 to $892.5 million in 1999 driven by acquisitions in 1998
and higher volume, partially offset by lower pricing and the impact of foreign
exchange. Distribution revenues were $883.0 million in 1999 compared with $910.1
million in 1998, a decrease of 3.0%. The decline in revenue is due to lower
volume in shapes distribution, lower pricing and the divestiture of the
company's thermoset resin distribution business, partially offset higher volume
from the company's thermoplastic resin distribution business. Revenues from
other operations were flat with 1998 levels.
Gross margins were 18.2% in 1999 compared with 17.6% in 1998. Gross margins in
the rubber processing business declined on a year over year basis due to a shift
in price and mix, plant start up costs in Mexico,
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Germany and the United States and additional expenses associated with lean
manufacturing and supply chain initiatives. Margins in the plastic processing
businesses improved in 1999 compared with 1998 levels due to benefits achieved
from the company's profit improvement pla[An initiated in the third quarter of
1998. Distribution margins were up slightly on a year over year basis. A
reduction in LIFO reserves in 1999 also improved overall gross margins in 1999
by .2 percentage points.
Selling, general and administrative expenses increased from $295.3 million in
1998 to $305.4 million in 1999. The increase in cost is attributable to expenses
associated with acquisitions in 1998, selling and technical investments in the
company's European plastics compounding business and costs associated with the
hiring of a new chief executive officer. As a percentage of sales, selling,
general and administrative expenses were 13.3% in 1999 and 12.9% in 1998.
Interest on debt decreased from $33.9 million in 1998 to $31.7 million in 1999.
The decrease in interest expense is driven by improved operating cash flow,
lower capital and acquisition related expenditures and proceeds from the sale of
assets which were utilized to reduce debt.
Other-net in 1999 includes the gain from the sale of the company's thermoset
resin distribution business of $12.0 million and a provision for a loss on the
pending sale of the company's molded sponge business of $10.9 million. Other-net
in 1998 includes a $23.8 million provision related to the profit improvement
plan initiated in the third quarter of 1998.
The company's effective tax rate in 1999 was 48.3% compared with 13.4% in 1998.
Included in tax expense in 1998 is a one-time benefit of $9.5 million related to
a settlement of previously filed tax returns. Without
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the one-time benefit, the effective tax rate in 1998 would have been 40.5%. The
effective tax rate for 1999, excluding 6.5 percentage points related to the
write off of goodwill pertaining to the thermoset resin distribution and molded
sponge businesses and the incremental tax cost of 1.3 percentage points
associated with the remittance of foreign dividends, would have been 40.5%.
1998 COMPARED WITH 1997
Revenues from rubber processing businesses increased from $448.5 million to
$528.5 million in 1998 due to acquisitions and higher volumes, partially offset
by lower pricing. Plastic processing revenues increased 8.4% over 1997 levels to
$833.1 million; acquisitions made in 1998 and 1997 account for all of the growth
with unit volumes, pricing and a stronger U.S. dollar partially offsetting the
growth. Revenues from the distribution businesses decreased $51.2 million to
$910.1 million due to lower unit volumes, lower pricing and the stronger U.S.
dollar. Revenues from other operations were $14.2 million in 1998 compared with
$21.9 million in 1997 due to lower volume and pricing.
Gross margins were 17.6% in 1998 compared with 19.0% in 1997. Gross margins in
the rubber processing business improved over 1997 levels due to acquisitions.
Plastic processing margins deteriorated from 1997 levels due to lower volume and
pricing without a corresponding decrease in cost structures. Gross margins in
the distribution businesses also fell from 1997 levels due in part to lower
volume and pricing and the problems converting to the hub and spoke distribution
system in the shapes distribution business. A reduction in LIFO reserves also
improved gross margins in 1997.
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Selling, general and administrative expenses increased $23.4 million in 1998 to
$295.3 million. Acquisitions accounted for $20.3 million and incremental costs
for the company's information technology systems were $6.0 million. As a
percentage of sales, selling, general and administrative expenses were 12.9% in
1998 and 12.4% in 1997 and reflect lower revenues without a corresponding
reduction in expenses.
Interest on debt increased from $23.8 million in 1997 to $33.9 million in 1998
due to increased borrowings to fund acquisitions made in 1998 and 1997, higher
levels of working capital and capital expenditure programs.
Other-net in 1998 includes a $23.8 million provision related to the profit
improvement plan announced during 1998. The provision included costs for asset
write downs, plant closings and severance. Other-net in 1997 included gains of
$6.3 million from the sale of the company's remaining interest in the Iron Ore
Company of Canada sales agency and its interest in Hollinger Hanna.
Additionally, in 1997 the company recorded a $5.1 million charge related to
plastic processing businesses for plant closings, facilities rationalization and
start-up costs for a new plant and a $1.0 million charge for the reengineering
of its resin distribution business.
The company's effective tax rate in 1998 was 13.4% compared with 41.5% in 1997.
Included in tax expense in 1998 is a one-time benefit of $9.5 million as a
result of a settlement of previously filed tax returns. Without the one time
benefit, the effective tax rate for 1998 would have been 40.5%.
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LIQUIDITY AND SOURCES OF CAPITAL
Cash flows from operating activities provided $106.8 million in 1999. Working
capital provided $5.4 million, reflecting an improvement in both days sales
outstanding and days supply in trade payables. Inventory turns were essentially
flat with prior year performance. Payments related to restructuring activities
used $9.0 million in cash in 1999. Investing activities used $34.4 million in
cash in 1999 and included $58.9 million for capital expenditures and $11.7
million for acquisitions, partially offset with $30.3 million in proceeds from
asset sales. Capital spending in 2000 is expected to approximate 1999 spending
levels. Financing activities in 1999 used $63.5 million in cash and included
$21.6 million for the payment of dividends and $43.1 million in net reduction of
debt.
The company has a revolving credit facility, which provides for borrowings up to
$200 million and expires in 2003. The agreement provides for interest rates to
be determined at the time of borrowing based on a choice of formulas specified
in the agreement.
The current ratio was 1.7:1 at December 31, 1999 compared with 1.8:1 on December
31, 1998. Long-term debt to total capital was 43.5% and 47.2% on December 31,
1999 and 1998, respectively.
MARKET RISK
The company is exposed to foreign currency exchange risk in the ordinary course
of business. Management has reviewed 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.
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The company is exposed to foreign currency exchange risks in the ordinary course
of its business operations due to the fact that the company's products are
provided in numerous countries around the world and collection of revenues and
payment of certain expenses may give rise to currency exposure. The company also
enters into intercompany lending transactions and foreign exchange contracts
related to this foreign currency exposure.
ENVIRONMENTAL MATTERS
The company is subject to various laws and regulations concerning environmental
matters. The company is committed to a long-term environmental protection
program that reduces releases of hazardous materials into the environment as
well as to the remediation of identified existing environmental concerns.
Claims have been made against subsidiaries of the company for costs of
environmental remediation measures taken or to be taken in connection with
operations that have been sold or closed. These include the clean-up of
Superfund sites and participation with other companies in the clean-up of
hazardous waste disposal sites, several of which have been designated as
Superfund sites. Reserves for such liabilities have been established and no
insurance recoveries have been anticipated in the determination of reserves.
While it is not possible to predict with certainty, management believes that the
aforementioned claims will be resolved without material adverse effect on the
financial position, results of operations or cash flows of the company.
YEAR 2000 ISSUE UPDATE
The company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000.
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Based on operations since January 1, 2000, the company does not expect any
significant impact to its ongoing business as a result of the "Year 2000 issue".
However, it is possible that the full impact of the date change, which was of
concern due to computer programs that use two digits instead of four digits to
define years, has not been fully recognized. For example, it is possible that
Year 2000 or similar issues such as leap year-related problems may occur with
billing, payroll, or financial closings at month, quarterly, or year end. The
company believes that any such problems are likely to be minor and correctable.
In addition, the company could still be negatively affected if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. The company
currently is not aware of any significant Year 2000 or similar problems that
have arisen for its customers and suppliers.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Any forward-looking statements included in this annual 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, continuing improvement in the domestic plastic shapes
distribution business and changes in prevailing interest rates.
On behalf of M.A. Hanna management,
/s/ M. S. Duffey
Michael S. Duffey
Senior Vice President, Finance and Administration
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REPORT OF INDEPENDENT ACCOUNTANTS
M.A. Hanna Company and Consolidated Subsidiaries
To the Board of Directors and Stockholders of M.A. Hanna Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of M.A. Hanna Company
and its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in the notes to the consolidated financial statements, the Company
changed its methods of accounting for start-up costs and certain of its
inventories in 1998.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
January 28, 2000
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