UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549 - 1004
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2002
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COMMISSION FILE NUMBER 0-2413
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MacDermid, Incorporated
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(Exact name of registrant as specified in its charter)
Connecticut 06-0435750
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
245 Freight Street, Waterbury, Connecticut 06702
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 575-5700
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Former name, former address or former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 1, 2002
---------------------- ------------------------------
Common Stock, no par value 32,251,303 shares
MACDERMID, INCORPORATED
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 2002 and December 31, 2001 2-3
Consolidated Condensed Statements of Earnings
and Retained Earnings - Three Months Ended
March 31, 2002 and 2001 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001 5
Notes to Consolidated Condensed Financial Statements 6-20
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21-26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Part II. Other Information 27
Signatures 28
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in Thousands of Dollars Except Share Amounts)
March 31, December 31,
2002 2001
------------ --------------
Assets (Unaudited) (Audited)
Current assets:
Cash and equivalents $ 14,414 $ 17,067
Accounts and notes receivable, (net
of allowance for doubtful receivables
of $13,665 and $14,642) 159,532 164,230
Inventories
Finished goods 53,752 57,882
Raw materials 50,925 53,152
------------ --------------
104,677 111,034
Prepaid expenses 8,696 8,068
Deferred income tax asset 13,736 13,831
------------ --------------
Total current assets 301,055 314,230
Property, plant and equipment (net
of accumulated depreciation of
$127,908 and $140,234) 142,779 152,482
Goodwill (Note 2) 222,138 222,571
Intangibles, (net of accumulated
amortization of $37,242
and $36,585) (Note 2) 36,782 37,425
Other assets 65,502 64,177
------------ --------------
$ 768,256 $ 790,885
============ ==============
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in Thousands of Dollars Except Share Amounts)
March 31, December 31,
2002 2001
------------ --------------
Liabilities and shareholders' equity (Unaudited) (Audited)
Current liabilities:
Notes payable $ 12,798 $ 12,961
Current installments of long-term obligations 5,750 5,614
Accounts and dividends payable 59,399 62,031
Accrued expenses (Note 7) 66,768 82,886
Income taxes 10,807 10,468
------------ --------------
Total current liabilities 155,522 173,960
Long-term obligations 379,859 393,788
Accrued post-retirement and
postemployment benefits 12,287 12,308
Deferred income taxes 3,552 4,364
Other long-term liabilities 1,136 281
Minority interest 2,920 2,753
Shareholders' equity:
Common stock stated value
$1.00 per share (Note 3) 46,540 46,410
Additional paid-in capital 19,815 16,923
Retained earnings 225,306 218,619
Cumulative comprehensive
income equity adjustments (Note 5) (19,739) (19,579)
Less: cost of treasury shares (Note 3) (58,942) (58,942)
------------ --------------
Total shareholders' equity 212,980 203,431
------------ --------------
$ 768,256 $ 790,885
============ ==============
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
AND RETAINED EARNINGS
(Amounts in Thousands of Dollars Except Share and Per Share Amounts)
(Unaudited)
Three Months
Ended March 31,
2002 2001
------------ ------------
Net sales $ 166,956 $ 211,793
Cost and expenses:
Cost of sales 92,812 124,892
Selling, technical, administrative expenses 51,786 65,403
Amortization 1,568 4,867
Interest income (140) (593)
Interest expense 9,200 9,664
Other expense (net) 193 396
------------ ------------
155,419 204,629
------------ ------------
Earnings before taxes and
minority interest 11,537 7,164
Income taxes (4,039) (2,552)
Minority interest (166) -
------------ ------------
Net earnings 7,332 4,612
Retained earnings, beginning of period 218,619 245,471
Cash dividends declared (645) (623)
------------ ------------
Retained earnings, end of period $ 225,306 $ 249,460
============ ============
Net earnings per common share - (Note 4):
Basic $ 0.23 $ 0.15
============ ============
Diluted $ 0.23 $ 0.14
============ ============
Cash dividends per common share $ 0.02 $ 0.02
============ ============
Weighted average common shares outstanding
Basic 32,221,436 31,130,854
============ ============
Diluted 32,492,880 32,394,869
============ ============
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Amounts In Thousands of Dollars)
(Unaudited)
Three Months
Ended March 31,
2002 2001
--------- -----------
Net cash flows from operating activities $ 12,877 $ 19,405
Cash flows from investing activities:
Capital expenditures (1,170) (11,904)
Proceeds from disposition of fixed assets 14 2,193
Acquisitions of businesses - (17,756)
Dispositions of businesses - 9,415
--------- -----------
Net cash flows used in
investing activities (1,156) (18,052)
Cash flows from financing activities:
Net proceeds from (repayments of)
short-term borrowings (3,281) (4,800)
Long-term borrowings 11,276 21,100
Long-term repayments (21,610) (20,281)
Dividends paid (645) (623)
--------- -----------
Net cash flows used in
financing activities (14,260) (4,604)
Effect of exchange rate changes
on cash and cash equivalents (114) (1,935)
--------- -----------
Increase (decrease) in cash and
cash equivalents (2,653) (5,186)
Cash and cash equivalents at
beginning of period 17,067 17,732
--------- -----------
Cash and cash equivalents
at end of period $ 14,414 $ 12,546
========= ===========
Cash paid for interest $ 17,973 $ 8,398
========= ===========
Cash paid for income taxes $ 2,178 $ 5,388
========= ===========
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of Dollars, Except Share and Per Share Amounts)
Note 1. Summary of Significant Accounting Policies
The December 31, 2001 condensed consolidated balance sheet amounts have been
derived from the previously audited consolidated balance sheets of MacDermid,
Incorporated (the Corporation). The balance of the condensed financial
information reflects all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented and are of a normal
recurring nature unless otherwise disclosed in this report. The results of
operations for the three month periods ended March 31, 2002 and 2001 are not
necessarily indicative of trends or of the results to be expected for the full
year. The statements should be read in conjunction with the notes to the
consolidated financial statements included in the Corporation's transition year
2001 Annual Report.
Note 2. Goodwill and Other Intangible Assets
Goodwill carrying amounts, identified for the following segments; Advanced
Surface Finishes ("ASF"), Graphic Arts ("GA") and Electronics Manufacturing
("EM"), are as follows:
ASF GA EM Total
--------- -------- ------- ---------
Balance as of December 31, 2001 $123,052 $72,130 $27,389 $222,571
Effects of currency translation (354) (79) - (433)
--------- -------- ------- ---------
Balance as of March 31, 2002 $122,698 $72,051 $27,389 $222,138
========= ======== ======= =========
Acquired intangible assets March 31, 2002 December 31, 2001
--------------- ------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------- -------------- ------------------ --------------
Patents $ 23,024 $ (8,572) $ 20,865 $ (8,357)
Trademarks 27,478 (8,446) 28,281 (8,093)
Manufacturing process 5,252 (5,252) 5,252 (5,252)
Others 18,270 (14,972) 19,612 (14,883)
--------------- -------------- ------------------ --------------
Total $ 74,024 $ (37,242) $ 74,010 $ (36,585)
=============== ============== ================== ==============
Aggregate estimated amortization expense is expected to approximate $2,700 for
each of the fiscal years ended December 31, 2002 - 2006.
Additional transitional disclosures: Three Months Ended March 31,
2002 2001
------------- ----------------
Reported net income $ 7,332 $ 4,612
Add back: goodwill amortization - 1,913
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Adjusted net income $ 7,332 $ 6,525
============= ================
Basic earnings per share:
Reported net income $ 0.23 $ 0.15
Goodwill amortization - $ 0.06
------------- ----------------
Adjusted net income $ 0.23 $ 0.21
============= ================
Diluted earnings per share:
Reported net income $ 0.23 $ 0.14
Goodwill amortization - $ 0.06
------------- ----------------
Adjusted net income $ 0.23 $ 0.20
============= ================
Note 3. Common Share Data
The following table summarizes common shares issued as of March 31, 2002 and
2001.
2002 2001
---------- ----------
Balance beginning of period 46,409,757 45,408,464
Shares issued - stock awards 130,000 -
---------- ----------
Balance end of period 46,539,757 45,408,464
========== ==========
The Board of Directors has from time-to-time authorized the purchase of issued
and outstanding shares of the Corporation's common stock. There were 14,277,610
common shares held in treasury at March 31, 2002 and December 31, 2001. There
remained authorization to purchase approximately 142,000 common shares at March
31, 2002. Such additional shares may be acquired through privately negotiated
transactions or on the open market from time to time. Any future repurchases by
MacDermid will depend on various factors, including the market price of the
shares, the Corporation's business and financial position and general economic
and market conditions. Additional shares acquired pursuant to such
authorization will be held in the Corporation's treasury and will be available
for the Corporation to issue for various corporate purposes without further
shareholder action (except as required by applicable law or the rules of any
securities exchange on which the shares are then listed).
Note 4. Earnings Per Common Share
The computation of basic earnings per share is based upon the weighted average
number of outstanding common shares. The computation of diluted earnings per
share is based upon the weighted average number of outstanding common shares
plus the effect of all dilutive contingently issuable common shares from stock
options, stock awards and share warrants outstanding during the period.
Earnings per share is calculated based upon net earnings available for common
shareholders.
The following table reconciles basic weighted-average common shares outstanding
to diluted weighted-average common shares outstanding.
Three Months Ended March 31,
2002 2001
------------ ---------------
Basic common shares 32,221,436 31,130,854
Dilutive effect of stock options 271,444 262,663
Dilutive effect of share warrants - 1,001,352
------------ ---------------
Diluted common shares 32,492,880 32,394,869
============ ===============
Note 5. Comprehensive Income and Cumulative Comprehensive Equity Adjustment
The components of comprehensive income for the three month periods ended March
31, 2002 and 2001 are as follows:
Three Months Ended
March 31,
2002 2001
-------------- --------
Net earnings $ 7,332 $ 4,612
Other comprehensive income:
Foreign currency translation adjustment (410) (3,163)
Minimum pension liability - (9,670)
Hedging activities 250 -
-------------- --------
Comprehensive Income $ 7,172 $(8,221)
============== ========
The components of cumulative equity adjustments for comprehensive income as of
March 31, 2002 and December 31, 2001 are as follows:
March 31, 2002 December 31, 2001
---------------- -------------------
Cumulative equity adjustments for:
Foreign currency translation $ (16,759) $ (16,349)
Additional minimum pension liability (2,954) (2,954)
Hedging activities (26) (276)
---------------- -------------------
Cumulative comprehensive income $ (19,739) $ (19,579)
================ ===================
Note 6. Segment Reporting
The Corporation provides development, manufacture and technical service for a
large variety of specialty chemical processes and related equipment in two
reportable operating segments: Advanced Surface Finishes and Graphic Arts. In
addition, the Corporation operates a third reportable segment, Electronics
Manufacturing, for the design and manufacture of printed circuit boards. These
three segments under which the Corporation operates on a worldwide basis are
managed separately as each segment has differences in technology and marketing
strategies. The chemicals supplied by Advanced Surface Finishes are used for a
broad range of purposes including finishing metals and non metallic surfaces,
electro-plating metal surfaces, etching, imaging, metalization, high pressure
fluids and cleaning. The chemicals supplied by Graphic Arts are used for
diverse purposes including offset blankets, printing plates, textile blankets
and rubber-based covers for industrial rollers used in the printing industry.
The Electronics Manufacturing segment produces a wide variety of both single and
double sided printed circuit boards.
The business segments reported below are the segments of the Corporation for
which separate financial information is available and for which operating
results are reviewed by executive management to assess performance of the
Corporation. The accounting policies of the business segments are the same as
those described in the summary of significant accounting policies, Note 1.
Net sales for all of the Corporation's products fall into one of the three
business segments. The business segment results of operations include certain
operating costs, which are allocated based on the relative burden each segment
bears on those costs. Operating income amounts are evaluated before
amortization of intangible assets and non-recurring charges. The business
segment identifiable assets which follow are reconciled to total consolidated
assets including unallocated corporate assets which consist primarily of
deferred tax assets and certain other long term assets not directly associated
with the support of the individual operations.
Segment results of operations: Three Months Ended March 31,
2002 2001
-------------- -----------------
Net sales
Advanced surface finishes $ 78,431 $ 108,124
Graphic arts 68,353 77,066
Electronics manufacturing 20,172 26,603
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Consolidated net sales $ 166,956 $ 211,793
-------------- -----------------
Operating income (loss)
Advanced surface finishes $ 10,092 $ 16,375
Graphic arts 11,269 12,887
Electronics manufacturing 997 (1,890)
Restructuring and impairment expense - (5,874)
Amortization expense (1,568) (4,867)
-------------- -----------------
Consolidated operating income $ 20,790 $ 16,631
Interest income 140 593
Interest expense (9,200) (9,664)
Other (expense) income, net (193) (396)
Earnings before income taxes
-------------- -----------------
and minority interest $ 11,537 $ 7,164
============== =================
Segment identifiable assets: March 31, 2002 December 31, 2001
--------------- ------------------
Advanced surface finishing $ 156,437 $ 177,253
Graphic arts 431,071 431,353
Electronics manufacturing 131,027 132,296
Corporate-wide 49,721 49,983
--------------- ------------------
Consolidated assets $ 768,256 $ 790,885
=============== ==================
Note 7. Restructuring Charges and Acquisition Liabilities
The Corporation initiated restructuring programs (included in accrued expenses)
each of the two previous fiscal years in order to reduce its manufacturing and
operating cost structures.
Transition year ended December 31, 2001 included a $21,264 restructuring charge,
representing management and office support redundancies. The resulting cash
payments and other charges, including cash payments of $1,132 for the three
months ended March 31, 2002, are summarized, cumulative, since inception, on the
following table:
Cash Non-cash
Inception Payments Charges Balance
---------- --------- --------- --------
Severance $ 2,918 $ 1,188 - $ 1,730
Lease/asset write-offs 18,346 - 15,644 2,702
---------- --------- --------- --------
Total $ 21,264 $ 1,188 $ 15,644 $ 4,432
========== ========= ========= ========
Fiscal year ended March 31, 2001 included a $6,663 restructuring charge,
primarily representing management and office support redundancies. The
resulting cash payments and other charges, including cash payments of $11 for
the three months ended March 31, 2002, are summarized, cumulative, since
inception, on the following table:
Cash Non-cash
Inception Payments Charges Balance
---------- --------- --------- --------
Severance $ 6,133 $ 5,787 - $ 346
Lease/asset write-offs 530 106 424 -
---------- --------- --------- --------
Total $ 6,663 $ 5,893 $ 424 $ 346
========== ========= ========= ========
The Corporation established liabilities (included in accrued expenses) in fiscal
year 1999 when recording the acquisition of W.Canning, plc. The reorganization
of employees has been completed. The reorganization of facilities is proceeding
as planned. Five facilities have been closed with those activities assimilated
elsewhere. Negotiations are ongoing regarding the elimination of leased
facilities and sale of owned facilities.
The following table summarizes the cumulative activity to this account, since
inception, including cash payments of $23 for the three months ended March 31,
2002:
Inception Adjustments Payments Balance
---------- ----------- -------- --------
Facilities $ 4,200 885 3,328 $ 1,757
Redundancies 2,050 3,100 5,150 -
Environmental 2,000 - 120 1,880
---------- ----------- -------- --------
Total $ 8,250 3,985 8,598 $ 3,637
========== =========== ======== ========
Note 8. Market Risk and Contingencies
Market Risk
The Corporation is exposed to market risk in the normal course of its business
operations due to its operations in different foreign currencies and its ongoing
investing and financing activities. The risk of loss can be assessed from the
perspective of adverse changes in fair values, cash flows and future earnings.
The Corporation has established policies and procedures governing its management
of market risks and the use of financial instruments to manage exposure to such
risks.
The Corporation is exposed to interest rate risk primarily from its credit
facility, which is based upon various floating rates. The Corporation has
entered into interest rate swaps, a portion of which have been designated as
hedging instruments under the provisions of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.
At March 31, 2002, the aggregate notional amount covers 65% of its borrowings on
this credit facility. The resulting weighted-average fixed interest rate is
5.9% under this facility. The Corporation further reduced its exposure to
interest rate risk with a fixed rate bond offering during transition year 2001.
For additional information, see the financial information for guarantors of the
Corporation's bond offering, Note 9. Based upon expected levels of borrowing in
2002 and providing for swap protection, an increase in interest rates of 100
basis points would result in an incremental interest expense of less than $700.
The Corporation operates manufacturing facilities in ten countries and sells
products in over twenty-five countries. Approximately 55% of the Corporation's
sales are denominated in currencies other than the US Dollar, predominantly the
Pound Sterling, currencies pegged to the Euro, the Yen, Hong Kong and New Taiwan
Dollars. For the three month period ending March 31, 2002, there was a negative
impact on earnings of approximately $0.01 per share, or approximately 6%.
Earnings are generally reinvested locally and the impact on operating cash flows
has been less than $2,600 annually. Management continually reviews the balance
between foreign currency denominated assets and liabilities in order to minimize
the exposure to foreign exchange fluctuations. Approximately 60% of the
Corporation's identifiable assets are denominated in currencies other than the
US Dollar, predominantly the Pound Sterling, currencies pegged to the Euro, the
Yen, Hong Kong and New Taiwan Dollars.
MacDermid does not enter into any derivative financial instruments for trading
purposes. The Corporation has certain other supply agreements for raw material
inventories but has chosen not to enter into any price hedging with its
suppliers for commodities.
Contingencies
Environmental: As manufacturers and distributors of specialty chemicals and
systems, the Corporation is subject to extensive U.S. and foreign laws and
regulations relating to environmental protection and worker health and safety,
including those governing: discharges of pollutants into the air and water; the
management and disposal of hazardous substances and wastes; and the cleanup of
contaminated properties.
The Corporation has incurred, and will continue to incur, significant costs and
capital expenditures in complying with these laws and regulations. The
Corporation could incur significant additional costs, including cleanup costs,
fines and sanctions and third-party claims, as a result of violations of or
liabilities under environmental laws. In order to ensure compliance with
applicable environmental, health and safety laws and regulations, the
Corporation maintains a disciplined environmental and occupational safety and
health compliance program, which includes conducting regular internal and
external audits at its plants to identify and categorize potential environmental
exposure.
The Corporation's nature of operations and products (including raw materials)
expose it to the risk of liabilities or claims with respect to environmental
cleanup or other matters, including those in connection with the disposal of
hazardous materials. The Corporation has been named as a potentially
responsible party ("PRP") at three Superfund sites. There are many other PRPs
involved at each of these sites. The Corporation has recorded its best estimate
of liabilities in connection with site clean-up based upon the extent of its
involvement, the number of PRPs and estimates of the total costs of the site
clean-up that reflect the results of environmental investigations and
remediation estimates produced by remediation contractors. While the ultimate
costs of such liabilities are difficult to predict, the Corporation does not
expect that its costs associated with these sites will be material.
In addition, some of the Corporation's facilities have an extended history of
chemical processes or other industrial activities. Contaminants have been
detected at some of these sites, with respect to which the Corporation is
conducting environmental investigations and/or cleanup activities. These sites
include some of the Canning sites acquired in December 1998, such as the Kearny,
New Jersey and Waukegan, Illinois sites. The Corporation has established an
environmental remediation reserve, predominantly attributable to those Canning
sites that it believes will require environmental remediation. With respect to
those sites, it also believes that its Canning subsidiary is entitled under the
acquisition agreement to withhold a deferred purchase price payment of
approximately $2,000. The Corporation estimates the range of cleanup costs at
its Canning sites between $2,000 and $11,500. Investigations into the extent of
contamination, however, are ongoing with respect to some of these sites. To the
extent the Corporation's liabilities exceed $2,000, it may be entitled to
additional indemnification payments. Such recovery may be uncertain, however,
and would likely involve significant litigation expense. See restructuring
charges and acquisition liabilities, Note 7.
The Corporation does not anticipate that it will be materially affected by
environmental remediation costs, or any related claims, at any contaminated
sites, including the Canning sites. It is difficult, however, to predict the
final costs and timing of costs of site remediation. Ultimate costs may vary
from current estimates and reserves, and the discovery of additional
contaminants at these or other sites or the imposition of additional cleanup
obligations, or third-party claims relating thereto, could result in significant
additional costs.
Legal Proceedings: On January 30, 1997, the Corporation was served with a
subpoena from a federal grand jury in Connecticut requesting certain documents
relating to an accidental spill from its Huntingdon Avenue, Waterbury,
Connecticut facility that occurred in November of 1994, together with other
information relating to operations and compliance at the Huntingdon Avenue
facility. The Corporation was subsequently informed that it is a subject of the
grand jury's investigation in connection with alleged criminal violations of the
federal Clean Water Act pertaining to its wastewater handling practices. In
addition, two of the Corporation's former employees, who worked at the
Huntington Avenue facility, pled guilty in early 2001 to misdemeanor violations
under the Clean Water Act in connection with the above matter. These
individuals were sentenced to fines of $25 and $10 and 2 years probation, as
well as community service.
In a separate matter, on July 26, 1999, the Corporation was named in a civil
lawsuit commenced in the Superior Court of the State of Connecticut brought by
the Connecticut Department of Environmental Protection alleging various
compliance violations at its Huntingdon Avenue and Freight Street locations
between the years 1992 through 1998 relating to wastewater discharges and the
management of waste materials. The complaint alleges violations of its permits
issued under the Federal Clean Water Act and the Resource Conservation and
Recovery Act, as well as procedural, notification and other requirements of
Connecticut's environmental regulations over the foregoing period of time.
The Corporation voluntarily resolved both of these matters on November 28, 2001.
As a result, MacDermid will be required to pay fines and penalties totaling
$2,500, without interest, over six quarterly installments. In addition, $1,550
will be paid to various local charitable and environmental organizations and
causes. The Corporation will be placed on probation for two years and will
perform certain environmental audits, as well as other environmentally related
actions. The Corporation had recorded liabilities during the negotiation period
and therefore future results of operations and financial position will not be
affected by these arrangements.
Other Concentrations: The Corporation's business operations, consist
principally of manufacture and sale of specialty chemicals, supplies and related
equipment to customers throughout much of the world. Approximately 40% of the
business is concentrated in the printing industry used for a wide variety of
applications, including offset blankets, printing plates, textile blankets and
rubber based covers for industrial rollers, while 20% of the business is
concentrated with manufacturers of printed circuit boards which are used in a
wide variety of end-use applications, including computers, communications and
control equipment, appliances, automobiles and entertainment products. As is
usual for this business, the Corporation generally does not require collateral
or other security as a condition of sale rather relying on credit approval,
balance limitation and monitoring procedures to control credit risk of trade
account financial instruments. Management believes that reserves for losses,
which are established based upon review of account balances and historical
experience, are adequate.
Note 9. Financial Information for Guarantors of the Corporation's Bond
Offering
The Corporation issued 9 1/8% Senior Subordinated Notes ("bond offering")
effective June 20, 2001, for the face amount of $301,500, which pay interest
semiannually on January 15th and July 15th and mature in 2011. The proceeds
were used to pay down existing long-term debt. This bond offering is guaranteed
by substantially all existing and future directly or indirectly wholly-owned
domestic restricted subsidiaries of the Corporation ("guarantors"). The
guarantors, fully, jointly and severally, irrevocably and unconditionally
guarantee the performance and payment when due of all the obligations under the
bond offering. The Corporation's unrestricted subsidiaries that result from the
January 2001 Eurocir acquisition and its foreign subsidiaries are not guarantors
of the indebtedness under the bond offering. The following financial
information is presented to give additional disclosures to the Corporation's
consolidated condensed financial statements, with respect to: a) the parent
(MacDermid, Incorporated as the issuer), b) the guarantors, c) the non-guarantor
subsidiaries, d) the unrestricted non-guarantor subsidiaries, e) elimination
entries and f) the Corporation on a consolidated basis for and as of the the
fiscal periods ended March 31, 2002 and 2001 and December 31, 2001. The equity
method has been used by the Corporation with respect to investments in
subsidiaries. The equity method also has been used by subsidiary guarantors
with respect to investments in non-guarantor subsidiaries and by subsidiary
non-guarantors with respect to investments in unrestricted non-guarantor
subsidiaries. Financial statements for subsidiary guarantors are presented as a
combined entity. The financial information includes certain allocations of
revenues and expenses based on management's best estimates which is not
necessarily indicative of financial position, results of operations and cash
flows that these entities would have achieved on a stand-alone basis and should
be read in conjunction with the consolidated financial statements and notes to
consolidated financial statements included in the Corporation's transition year
2001 annual report of the Corporation.
CONSOLIDATED CONDENSED BALANCE SHEET
MARCH 31, 2002
(unaudited)
MacDermid
Unrestricted Incorporated
MacDermid Guarantor Nonguarantor Nonguarantor and
Incorporated Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
------------- -------------- -------------- -------------- -------------- -------------
ASSETS
Current assets:
Cash and equivalents $ 1,527 $ 1,206 $ 11,507 $ 174 $ - $ 14,414
Accounts receivables, net 13,728 27,137 101,266 17,401 - 159,532
Due (to) from affiliates 229,986 (149,583) (57,163) (23,240) - -
Inventories 16,573 33,151 47,634 7,319 - 104,677
Prepaid expenses 2,680 2,567 3,449 - - 8,696
Deferred income taxes 9,781 - 3,370 585 - 13,736
------------- -------------- -------------- -------------- -------------- -------------
Total current assets 274,275 (85,522) 110,063 2,239 - 301,055
Property, plant and
equipment, net 15,687 56,023 52,109 18,960 - 142,779
Goodwill 13,240 67,766 114,025 27,107 - 222,138
Intangibles, net - 10,904 25,785 93 - 36,782
Investments in subsidiaries 249,157 225,236 9,454 - (483,847) -
Other assets 42,322 9,735 11,435 2,010 - 65,502
------------- -------------- -------------- -------------- -------------- -------------
$ 594,681 $ 284,142 $ 322,871 $ 50,409 $ (483,847) $ 768,256
============= ============== ============== ============== ============== =============
CONSOLIDATED CONDENSED BALANCE SHEET (continued)
MARCH 31, 2002
(unaudited)
MacDermid
Unrestricted Incorporated
MacDermid Guarantor Nonguarantor Nonguarantor and
Incorporated Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
--------------- -------------- -------------- -------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ - $ 4,247 $ 8,551 $ - $ 12,798
Current installments of
Long-term obligations - 146 403 5,201 - 5,750
Accounts, dividend
payable 9,633 8,985 28,091 12,690 - 59,399
Accrued expenses 26,027 14,438 23,774 2,529 - 66,768
Income taxes (6,335) 11,307 5,615 220 - 10,807
--------------- -------------- -------------- -------------- -------------- --------------
Total current liabilities 29,325 34,876 62,130 29,191 - 155,522
Long-term obligations 343,280 802 27,818 7,959 - 379,859
Accrued postretirement 9,096 - 3,191 - - 12,287
Deferred income taxes - (760) 3,602 710 - 3,552
Other long-term liabilities - 67 894 175 - 1,136
Minority interest - - - 2,920 - 2,920
Shareholders' equity:
Common stock 46,540 (99) 3,809 3 (3,713) 46,540
Additional paid-in capital 19,815 129,708 96,476 10,260 (236,444) 19,815
Retained earnings 225,306 135,578 134,922 (1,943) (268,557) 225,306
Cumulative
comprehensive
income equity
adjustment, net (19,739) (16,030) (9,971) 1,134 24,867 (19,739)
Less cost common shares
in treasury (58,942) - - - - (58,942)
--------------- -------------- -------------- -------------- -------------- --------------
Total shareholders' equity 212,980 249,157 225,236 9,454 (483,847) 212,980
--------------- -------------- -------------- -------------- -------------- --------------
$ 594,681 $ 284,142 $ 322,871 $ 50,409 $ (483,847) $ 768,256
=============== ============== ============== ============== ============== ==============
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 2002
(unaudited)
MacDermid
Unrestricted Incorporated
MacDermid Guarantor Nonguarantor Nonguarantor and
Incorporated Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
-------------- -------------- -------------- -------------- -------------- --------------
Net sales $ 24,796 $ 46,291 $ 79,920 $ 20,172 $ (4,223) $ 166,956
Costs and expenses:
Cost of sales 14,553 23,220 41,975 17,287 (4,223) 92,812
Selling, technical,
administrative 14,323 11,036 24,540 1,887 - 51,786
Amortization 866 410 285 7 - 1,568
Equity in earnings of
subsidiaries (13,096) (7,570) 51 - 20,615 -
Interest income (22) (33) (79) (6) - (140)
Interest expense 4,016 3,006 1,529 649 - 9,200
Other expense
(income), net 457 (180) (98) 14 - 193
-------------- -------------- -------------- -------------- -------------- --------------
21,097 29,889 68,203 19,838 16,392 155,419
-------------- -------------- -------------- -------------- -------------- --------------
Earnings before taxes
And minority interest 3,699 16,402 11,717 334 (20,615) 11,537
Income taxes benefit
(expense) 3,633 (3,306) (4,147) (219) - (4,039)
Minority interest - - - (166) - (166)
-------------- -------------- -------------- -------------- -------------- --------------
Net earnings (loss) $ 7,332 $ 13,096 $ 7,570 $ (51) $ (20,615) $ 7,332
============== ============== ============== ============== ============== ==============
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
(unaudited)
MacDermid
Unrestricted Incorporated
MacDermid Guarantor Nonguarantor Nonguarantor and
Incorporated Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
-------------- -------------- -------------- -------------- ------------- --------------
Net cash flows (used in)
provided by
operating activities: $ (12,819) $ 14,220 $ 12,587 $ (1,111) $ - $ 12,877
Investing activities:
Capital expenditures (98) (220) (264) (588) - (1,170)
Proceeds from disposition
of fixed assets - - 14 - - 14
-------------- -------------- -------------- -------------- ------------- --------------
Net cash flows used in
investing activities (98) (220) (250) (588) - (1,156)
-------------- -------------- -------------- -------------- ------------- --------------
Financing activities:
Net proceeds from
(repayments of)
short-term borrowings 5,734 (8,760) (1,905) 1,650 - (3,281)
Long-term borrowings 11,000 - - 276 - 11,276
Long-term repayments (15,000) - (6,061) (549) - (21,610)
Dividends paid 8,291 (5,915) (3,021) - - (645)
-------------- -------------- -------------- -------------- ------------- --------------
Net cash flows provided
by / (used in)
financing activities 10,025 (14,675) (10,987) 1,377 - (14,260)
-------------- -------------- -------------- -------------- ------------- --------------
Effect of exchange rate
changes on
cash and equivalents - - (104) (10) - (114)
-------------- -------------- -------------- -------------- ------------- --------------
Net (decrease) increase in
cash and equivalents (2,892) (675) 1,246 (332) - (2,653)
Cash and cash equivalents
at beginning of period 4,419 1,881 10,261 506 - 17,067
-------------- -------------- -------------- -------------- ------------- --------------
Cash and cash equivalents
at end of period $ 1,527 $ 1,206 $ 11,507 $ 174 $ - $ 14,414
============== ============== ============== ============== ============= ==============
CONSOLIDATED CONDENSED BALANCE SHEET
DECEMBER 31, 2001
(audited)
MacDermid
Unrestricted Incorporated
MacDermid Guarantor Nonguarantor Nonguarantor and
Incorporated Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
------------- -------------- -------------- -------------- -------------- -------------
ASSETS
Current assets:
Cash and equivalents $ 4,419 $ 1,881 $ 10,261 $ 506 $ - $ 17,067
Accounts receivables, net 14,361 28,107 106,645 15,117 - 164,230
Due (to) from affiliates 246,066 (184,474) (39,295) (22,297) - -
Inventories 17,442 35,849 49,314 8,429 - 111,034
Prepaid expenses 779 2,707 4,582 - - 8,068
Deferred income taxes 9,781 - 3,451 599 - 13,831
------------- -------------- -------------- -------------- -------------- -------------
Total current assets 292,848 (115,930) 134,958 2,354 - 314,230
Property, plant and
equipment, net 20,231 57,730 54,702 19,819 - 152,482
Goodwill 16,056 80,221 99,187 27,107 - 222,571
Intangibles, net - 11,219 26,106 100 - 37,425
Investments in subsidiaries 231,820 224,640 9,192 - (465,652) -
Other assets 40,529 9,325 12,273 2,050 - 64,177
------------- -------------- -------------- -------------- -------------- -------------
$ 601,484 $ 267,205 $ 336,418 $ 51,430 $ (465,652) $ 790,885
============= ============== ============== ============== ============== =============
CONSOLIDATED CONDENSED BALANCE SHEET (continued)
DECEMBER 31, 2001
(audited)
MacDermid
Unrestricted Incorporated
MacDermid Guarantor Nonguarantor Nonguarantor and
Incorporated Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
--------------- -------------- -------------- -------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ - $ 5,898 $ 7,063 $ - $ 12,961
Current installments of
Long-term obligations - 148 482 4,984 - 5,614
Accounts, dividend payable 9,273 9,091 28,649 15,018 - 62,031
Accrued expenses 37,955 18,250 24,138 2,543 - 82,886
Income taxes (2,533) 7,785 5,214 2 - 10,468
--------------- -------------- -------------- -------------- -------------- --------------
Total current liabilities 44,695 35,274 64,381 29,610 - 173,960
Long-term obligations 349,140 802 34,733 9,113 - 393,788
Accrued postretirement 4,218 - 8,055 35 - 12,308
Deferred income taxes - (762) 4,399 727 - 4,364
Other long-term liabilities - 71 210 - - 281
Minority interest - - - 2,753 - 2,753
Shareholders' equity:
Common stock 46,410 (99) 3,809 3 (3,713) 46,410
Additional paid-in capital 16,923 125,936 100,248 10,260 (236,444) 16,923
Retained earnings 218,619 126,625 135,166 (1,891) (259,900) 218,619
Cumulative comprehensive
income equity
adjustment, net (19,579) (20,642) (14,583) 820 34,405 (19,579)
Less cost common shares
in treasury (58,942) - - - - (58,942)
--------------- -------------- -------------- -------------- -------------- --------------
Total shareholders' equity 203,431 231,820 224,640 9,192 (465,652) 203,431
--------------- -------------- -------------- -------------- -------------- --------------
$ 601,484 $ 267,205 $ 336,418 $ 51,430 $ (465,652) $ 790,885
=============== ============== ============== ============== ============== ==============
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 2001
(unaudited)
MacDermid
Unrestricted Incorporated
MacDermid Guarantor Nonguarantor Nonguarantor and
Incorporated Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
-------------- -------------- -------------- -------------- -------------- --------------
Net sales $ 39,456 $ 60,673 $ 103,436 $ 21,978 $ (13,750) $ 211,793
Costs and expenses:
Cost of sales 26,840 38,353 53,156 20,293 (13,750) 124,892
Selling, technical,
Administrative 18,798 15,833 28,803 1,969 - 65,403
Amortization 955 2,592 951 369 - 4,867
Equity in earnings of
Subsidiaries (10,212) (13,781) 1,010 - 22,983 -
Interest income (53) (334) (199) (7) - (593)
Interest expense 3,943 4,028 967 726 - 9,664
Other expense
(income), net (87) 364 407 (288) - 396
-------------- -------------- -------------- -------------- -------------- --------------
40,184 47,055 85,095 23,062 9,233 204,629
-------------- -------------- -------------- -------------- -------------- --------------
Earnings before taxes (728) 13,618 18,341 (1,084) (22,983) 7,164
Income taxes benefit
(expense) 5,340 (3,406) (4,560) 74 - (2,552)
-------------- -------------- -------------- -------------- -------------- --------------
Net earnings (loss) $ 4,612 $ 10,212 $ 13,781 $ (1,010) $ (22,983) $ 4,612
============== ============== ============== ============== ============== ==============
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001
(unaudited)
MacDermid
Unrestricted Incorporated
MacDermid Guarantor Nonguarantor Nonguarantor and
Incorporated Subsidiaries Subsidiaries Subsidiaries Eliminations Subsidiaries
-------------- -------------- -------------- -------------- -------------- --------------
Net cash flows provided
by (used in)
operating activities: $ (48,493) $ 50,702 $ (774) $ 17,970 $ - $ 19,405
Investing activities:
Capital expenditures (4,227) (2,057) (2,838) (2,782) - (11,904)
Proceeds from disposition
of fixed assets - - 2,120 73 - 2,193
Acquisitions of businesses - 15,333 (13,432) (19,657) - (17,756)
Dispositions of businesses - - 9,415 - - 9,415
-------------- -------------- -------------- -------------- -------------- --------------
Net cash flows (used in)
provided by
investing activities (4,227) 13,276 (4,735) (22,366) - (18,052)
-------------- -------------- -------------- -------------- -------------- --------------
Financing activities:
Net proceeds from
(repayments of)
short-term borrowings 46,269 (60,592) 3,502 6,021 - (4,800)
Long-term borrowings 7,000 3,000 11,100 - - 21,100
Long-term repayments (7,284) (10,833) (2,164) - - (20,281)
Dividends paid 6,057 2,266 (8,946) - - (623)
-------------- -------------- -------------- -------------- -------------- --------------
Net cash flows provided
by (used in)
financing activities 52,042 (66,159) 3,492 6,021 - (4,604)
-------------- -------------- -------------- -------------- -------------- --------------
Effect of exchange rate
changes on
Changes on
cash and equivalents - (412) (1,325) (198) - (1,935)
-------------- -------------- -------------- -------------- -------------- --------------
Net (decrease) increase in
cash and equivalents (678) (2,593) (3,342) 1,427 - (5,186)
Cash and cash equivalents
at beginning of period 4,979 4,826 7,927 - - 17,732
-------------- -------------- -------------- -------------- -------------- --------------
Cash and cash equivalents
at end of period $ 4,301 $ 2,233 $ 4,585 $ 1,427 $ - $ 12,546
============== ============== ============== ============== ============== ==============
ITEM 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion compares the results of operations for the three month
period which ended March 31, 2002 to the same period in 2001.
SALES, COSTS AND EXPENSES
Advanced Surface Finishes: Total sales for the current quarter were $78.4
million, a decrease of $29.7 million, or 27% from $108.1 million in the same
period last year. The disposition of certain business at the end of February
2001 resulted in $2.1 million less sales as compared to the same period last
year. A negative effect of foreign currency translation of $2.4 million also
contributed to the decline in sales. Proprietary sales, excluding the effects
of foreign currency translation, were 20% below the same period last year. The
proprietary sales decline resulted from lower consumer volume, as virtually all
worldwide markets remain soft.
Costs as a percentage of sales were below the same period last year. Less
headcount, lower depreciation and other cost reductions all contributed. Gross
profit percentage was 53.4% as compared to 50.3% for the same period last year,
primarily a result of the previously mentioned cost reductions. ST&A expenses
were $31.8 million this quarter, a 16% decrease as compared to $38.0 million for
the same period last year, primarily from lower costs of selling associated with
the lower sales volume. ST&A as a percentage of sales for the current quarter
was 40.6% as compared to 35.1% in the same period last year.
Total amortization charged to earnings was $1.4 million for the three month
period ended March 31, 2002. This was $1.7 million less than the same period
last year, due to the adoption of SFAS142 which requires that goodwill not be
amortized.
As a result of the above, operating profit (after amortization) decreased 35%.
Graphic Arts: Total sales for the current quarter were $68.4 million, a decrease
of $8.7 million, or 11% from $77.1 million in the same period last year. The
underlying sales in all areas of the graphic arts business were below the same
period last year as worldwide economies remain soft. A negative effect of
foreign currency translation of $1.0 million also contributed to the decline in
sales.
Costs as a percentage of sales were below the same period last year as
production overheads in the Americas were reduced. As a result, gross profit
percentage was 43.0% as compared to 41.4% for the same period last year.
Selling, technical and administrative expenses (ST&A) were $18.1 million this
quarter, a 5% decrease as compared to $19.0 million for the same period last
year, as a result of the elimination of certain management and office support
redundancies. ST&A as a percentage of sales for the current quarter was 26.5%
as compared to 24.6% in the same period last year.
Total amortization charged to earnings was $0.2 million for the three month
period ended March 31, 2002. This was $1.2 million less than the same period
last year, due to the adoption of SFAS142 which requires that goodwill not be
amortized.
As a result of the above, operating profit (after amortization) decreased 3%.
Electronics Manufacturing: Total sales for the current quarter were $20.2
million, a decrease of $6.4 million, or 24% from $26.6 million in the same
period last year. The decrease is primarily due to the closure of Dynacircuits,
for which sales of $4.6 million were included in the same period last year. A
negative effect of foreign currency translation of $1.1 million further reduced
reported sales.
Costs as a percentage of sales decreased with the removal of Dynacircuits
operations. Gross profit percentage was 14.3% as compared to 2.3% for the same
period last year, as a result. ST&A expenses were $1.9 million this quarter, a
24% decrease as compared to $2.5 million for the same period last year,
primarily due to the closure of Dynacircuits.
As a result of the above, there was operating income (after amortization) of
$1.0 million for the three month period ended March 31, 2002 as compared to an
operating loss (after amortization) of $2.3 million for the same period last
year.
Consolidated: Total sales for the current quarter, $167.0 million decreased
$44.8 million or 21% from $211.8 million in the same period last year.
Disposition of business resulted in $2.1 million less sales as compared to the
same period last year. There was a $4.5 million negative effect from foreign
currency translation which resulted in lower reported sales. These effects
reduced sales by approximately 3% as compared to the same period last year.
Without these effects, reported sales would have decreased 18% and proprietary
sales, which were roughly 82% of total sales as compared to 78% in the same
period last year, would have decreased 15%.
Gross profits decreased 15% for the three month period ended March 31, 2002 as
compared to the same period last year, as a result of less proprietary sales.
Gross profit as a percentage of sales was 44.4% for the three month period as
compared to 41.0% for the same period last year, in large part due to
manufacturing cost reductions. In addition, ST&A expenses for the three month
period were 13% less than the same period last year, excluding restructuring and
impairment costs. The resulting ST&A as a percentage of sales for the three
month period was 31.0% as compared to 28.1% for the same period last year.
In the three month period ending March 31, 2001, there was $1.1 million for
restructuring and $4.8 million for impairment charged to earnings. Total
amortization charged to earnings was $1.6 million for the three month period
ended March 31, 2002. This was $3.3 million less than the same period last year
due to the adoption of SFAS142 as identified above.
Operating profit (after amortization) for the three month period was $20.8
million, an increase of $4.2 million, or approximately 25% more than $16.6
million for the same period last year.
PROVISION FOR INCOME TAXES
The Corporation's effective income tax rate approximates 35% for the three month
period ended March 31, 2002 and 36% for the same period in 2001. The rate
difference is mainly a result of non-deductible goodwill charges in the March
31, 2001 period, as well as change in earnings mix from higher to lower taxed
jurisdictions.
NET EARNINGS
Net earnings available to common shareholders for the three month period ended
March 31, 2002 increased 59% as compared to the same period last year. Foreign
currency translation had the effect of reducing the reported earnings by
approximately 6% for the three month period.
The following discussion provides information with respect to changes in
financial condition during the three months ended March 31, 2002.
Financial Condition
Operating activities during the three months ending March 31, 2002 resulted in a
net cash inflow of $12.9 million, as the Corporation was able to continue its
proactive reduction of trade accounts receivable and inventory balances. This
cash generation was used for capital improvements, dividends to shareholders
($0.02 per common share) and debt repayments. In addition, the Corporation made
the first semi-annual interest payment, of $15.7 million, on its senior
subordinated bonds Working Capital at March 31, 2002 was $145.5 million as
compared to $140.3 million at December 31, 2001. The change in working capital
is principally due to movements in other accrued items during the quarter.
Capital expenditures were $1.2 million for the three months ended March 31, 2002
as compared with total planned expenditures of approximately $14.0 million for
the full year.
The Corporation's financial position remains strong and, other than the debt
obligations in the following table, there are no long-range commitments which
would have a significant impact upon results of operation, financial condition
or liquidity.
($millions) This Year 2-4 Years 5 or More Years Total
---------- ---------- ---------------- ------
Long-term debt $ 4.6 $ 76.6 $ 301.4 $382.6
Capital leases 1.2 1.2 0.6 3.0
Operating leases 9.8 10.8 4.2 24.8
---------- ---------- ---------------- ------
Total contractual cash commitments $ 15.6 $ 102.1 $ 292.7 $410.4
The Corporation issued 9 1/8% senior subordinated notes effective June 20, 2001,
for the face amount of $301.5 million, which pay interest semiannually on
January 15th and July 15th and mature in 2011. The Corporation also has a
long-term credit arrangement, which consists of a combined revolving loan
facility that permits borrowings, denominated in US dollars and foreign
currencies, of up to $175 million. The outstanding balance on the revolving
loan facility decreased $12.3 million during the three months ended March 31,
2002. The amounts outstanding on the revolving loan at March 31, 2002, consists
of $5.0 million, $36.6 million ( 25.7 million) and $27.0 million (Euro 31.0
million). The Corporation's other uncommitted credit facilities presently total
approximately $64 million. These, together with the Corporation's cash flows
from operations are adequate to fund working capital and expected capital
expenditures.
The following table contains other data for the three month periods ended March
31, 2002 and 2001. EBITDA is earnings before interest, taxes, depreciation and
amortization. Owner earnings is cash flow from operations less net capital
spending. Neither EBITDA nor Owner earnings are intended to represent cash flow
from operations as defined by generally accepted accounting principles. These
measures should not be used as an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity.
($millions) Three Months Ended March 31,
2002 2001
-------------- -----------------
Cash provided by operations $ 12.9 $ 19.4
Cash used in investing activities ($1.2) ($18.1)
Cash used in financing activities ($14.3) ($4.6)
EBITDA (before one-time costs) $ 27.5 $ 33.3
Cash provided by operations $ 12.9 $ 19.4
Less: net capital spending (1.2) (9.7)
-------------- -----------------
Owner earnings $ 11.7 $ 9.7
CRITICAL ACCOUNTING POLICIES and NEW ACCOUNTING STANDARDS
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management must
undertake decisions that impact the reported amounts and related disclosures.
Such decisions include the selection of the appropriate accounting principles to
be applied and also assumptions upon which accounting estimates are based.
Management applies judgement based on its understanding and analysis of the
relevant circumstances to reach these decisions. However, actual results could
differ significantly from the estimates applied.
The Corporation's critical accounting policies include the following:
The Corporation records sales, including freight charged to customers, when its
products are shipped. In addition, commissions and royalties are recorded when
earned.
The Corporation values inventory at lower of average cost or replacement market.
Management regularly reviews obsolescence to determine that inventories are
appropriately reserved. In making any determination historical write-offs,
product evolution, usage rates and quantities of stock on hand are considered.
The Corporation records property, plant and equipment at cost. Depreciation and
amortization of property, plant and equipment are provided over the estimated
useful lives of the respective assets, principally on the straight-line basis.
Expenditures for maintenance and repairs are charged directly to expense;
renewals and betterments which significantly extend the useful lives are
capitalized. Costs and accumulated depreciation and amortization on assets
retired or disposed of are removed from the accounts and any resulting gains or
losses are credited or charged to earnings.
The Corporation performs periodic review of the carrying value of long-lived
assets for impairment in accordance with SFAS121 and SFAS142. In many
instances, projected future cash flows are used to assess the recoverability of
long-lived assets of the Corporation. Estimation factors, including but not
limited to, the timing of new product introductions, market conditions and
competitive environment could affect previous projections.
The Corporation is subject to environmental remediation and also has been
identified as a potentially responsible party by the Environmental Protection
Agency. In addition, the Corporation has been a party to a number of claims and
lawsuits that arise out of the ordinary conduct of business. It is the
Corporation's policy to review these environmental issues in light of historical
experience and to reserve for those that both a liability has become probable
and the cost is reasonably estimable, in accordance with Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies.
The Corporation adopted the fair value expense recognition provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS123) for its stock options effective April 1, 2001.
Previously, and since April 1, 1996, the Corporation had adopted the disclosure
requirements of SFAS123 and accounted for its stock options by applying the
expense recognition provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees ("APB25"). As a result of this change, compensation expense
is measured using the fair value for options granted after April 1, 2001. The
resulting expense is amortized over the period in which it is earned. In the
three months ended March 31, 2002 there was $729 charged to expense.
The Financial Accounting Standards Board (FASB) recently issued Statement of
Financial Accounting Standard No. 143, "Accounting for Asset Retirement
Obligations" (SFAS143). The Corporation is currently evaluating the impact of
SFAS143 and does not expect that adoption of this standard will have a material
impact on its results of operation or financial position. The FASB also issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS144). The Corporation has
adopted SFAS144 effective January 1, 2002 and adoption of this standard did not
materially impact its results of operation or financial position.
ENVIRONMENTAL MATTERS
As manufacturers and distributors of specialty chemicals and systems, the
Corporation is subject to extensive U.S. and foreign laws and regulations
relating to environmental protection and worker health and safety, including
those governing: discharges of pollutants into the air and water; the
management and disposal of hazardous substances and wastes; and the cleanup of
contaminated properties.
The Corporation has incurred, and will continue to incur, significant costs and
capital expenditures in complying with these laws and regulations. The
Corporation could incur significant additional costs, including cleanup costs,
fines and sanctions and third-party claims, as a result of violations of or
liabilities under environmental laws. In order to ensure compliance with
applicable environmental, health and safety laws and regulations, the
Corporation maintains a disciplined environmental and occupational safety and
health compliance program, which includes conducting regular internal and
external audits at its plants to identify and categorize potential environmental
exposure.
The Corporation's nature of operations and products (including raw materials)
exposes it to the risk of liabilities or claims with respect to environmental
cleanup or other matters, including those in connection with the disposal of
hazardous materials. The Corporation has been named as a potentially
responsible party ("PRP") at three Superfund sites. There are many other PRPs
involved at each of these sites. The Corporation has recorded its best estimate
of liabilities in connection with site cleanup based upon the extent of its
involvement, the number of PRPs and estimates of the total costs of the site
cleanup that reflect the results of environmental investigations and remediation
estimates produced by remediation contractors. While the ultimate costs of such
liabilities are difficult to predict, the Corporation does not expect that its
costs associated with these sites will be material.
In addition, some of the Corporation's facilities have an extended history of
chemical processes or other industrial activities. Contaminants have been
detected at some of these sites, with respect to which the Corporations is
conducting environmental investigations and/or cleanup activities. These sites
include some of the Canning sites acquired in December 1998, such as the Kearny,
New Jersey and Waukegan, Illinois sites. The Corporation has established an
environmental remediation reserve of $2 million, predominantly attributable to
those Canning sites that it believes will require environmental remediation.
With respect to those sites, it also believes that its Canning subsidiary is
entitled under the acquisition agreement to withhold a deferred purchase price
payment of approximately $2 million. The Corporation estimates the range of
cleanup costs at its Canning sites between $2 and $11.5 million. Investigations
into the extent of contamination, however, are ongoing with respect to some of
these sites. To the extent the Corporation's liabilities exceed $2 million, it
may be entitled to additional indemnification payments. Such recovery may be
uncertain, however, and would likely involve significant litigation expense.
The Corporation does not anticipate that it will be materially affected by
environmental remediation costs, or any related claims, at any contaminated
sites, including the Canning sites. It is difficult, however, to predict the
final costs and timing of costs of site remediation. Ultimate costs may vary
from current estimates and reserves, and the discovery of additional
contaminants at these or other sites or the imposition of additional cleanup
obligations, or third-party claims relating thereto, could result in significant
additional costs.
Legal Proceedings
On January 30, 1997, the Corporation was served with a subpoena from a federal
grand jury in Connecticut requesting certain documents relating to an accidental
spill from its Huntingdon Avenue, Waterbury, Connecticut facility that occurred
in November of 1994, together with other information relating to operations and
compliance at the Huntingdon Avenue facility. The Corporation was subsequently
informed that it is a subject of the grand jury's investigation in connection
with alleged criminal violations of the federal Clean Water Act pertaining to
its wastewater handling practices. In addition, two of the Corporation's former
employees, who worked at the Huntington Avenue facility, pled guilty in early
2001 to misdemeanor violations under the Clean Water Act in connection with the
above matter. These individuals were sentenced to fines of $25 thousand and $10
thousand and 2 years probation, as well as community service.
In a separate matter, on July 26, 1999, the Corporation was named in a civil
lawsuit commenced in the Superior Court of the State of Connecticut brought by
the Connecticut Department of Environmental Protection alleging various
compliance violations at its Huntingdon Avenue and Freight Street locations
between the years 1992 through 1998 relating to wastewater discharges and the
management of waste materials. The complaint alleges violations of its permits
issued under the Federal Clean Water Act and the Resource Conservation and
Recovery Act, as well as procedural, notification and other requirements of
Connecticut's environmental regulations over the foregoing period of time.
The Corporation voluntarily resolved both of these matters on November 28, 2001.
As a result, MacDermid will be required to pay fines and penalties totaling $2.5
million, without interest, over six quarterly installments. In addition, $1.5
million will be paid to various local charitable and environmental organizations
and causes. The Corporation will be placed on probation for two years and will
perform certain environmental audits, as well as other environmentally related
actions. The Corporation had recorded liabilities during the negotiation period
and therefore future results of operations and financial position will not be
affected by these arrangements.As manufacturers and distributors of specialty
chemicals and systems, the Corporation is subject to extensive U.S. and foreign
laws and regulations relating to environmental protection and worker health and
safety, including those governing: discharges of pollutants into the air and
water; the management and disposal of hazardous substances and wastes; and the
cleanup of contaminated properties.
FORWARD-LOOKING STATEMENTS
This report and other Corporation reports include forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to analyses and other information that is based on
forecasts of future results and estimates of amounts not yet determinable. These
statements also relate to future prospects, developments and business
strategies. The statements contained in this report that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties.
The words "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "plan," "predict," "project," "will" and similar terms and phrases,
including references to assumptions, have been used to identify forward-looking
statements. These forward-looking statements are made based on management's
expectations and beliefs concerning future events affecting the Corporation and
are subject to uncertainties and factors relating to its operations and business
environment, all of which are difficult to predict and many of which are beyond
its control, that could cause actual results to differ materially from those
matters expressed in or implied by these forward-looking statements. The
following factors are among those that may cause actual results to differ
materially from the forward-looking statements: acquisitions and dispositions,
environmental liabilities, changes in general economic, business and industry
conditions, changes in current advertising, promotional and pricing levels,
changes in political and social conditions and local regulations, foreign
currency fluctuations, inflation, significant litigation; changes in sales mix,
competition, disruptions of established supply channels, degree of acceptance of
new products, difficulty of forecasting sales at various times in various
markets, the availability, terms and deployment of capital, and the other
factors discussed elsewhere in this report.
All forward-looking statements should be considered in light of these factors.
The Corporation undertakes no obligation to update forward-looking statements or
risk factors to reflect new information, future events or otherwise.
ITEM 3:
Quantitative and Qualitative Disclosures
About Market Risk
Refer to the Notes to Consolidated Condensed Financial Statements, Note 8
"Market Risk and Contingencies".
PART II. OTHER INFORMATION
ITEM 1 : Legal Proceedings
None.
ITEM 2 : Changes in the Rights of Security Holders
None.
ITEM 3 : Defaults by the Corporation on its Senior Securities
None.
ITEM 4 : Results of Votes of Security Holders
None.
ITEM 5 : Other Information
None.
ITEM 6(a) : Exhibits
None.
ITEM 6(b) : Reports on Form 8-K
On January 8, 2002, the Corporation filed its Form 8-K to report the hiring of
John P. Malfettone as Executive Vice President and Chief Financial Officer of
the Corporation. The Form 8-K is incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MacDermid, Incorporated
------------------------
(Registrant)
Date: May 14, 2002 /s/ Daniel H. Leever
-------------- -----------------------
Daniel H. Leever
Chairman, President and
Chief Executive Officer
Date: May 14, 2002 / s / John P. Malfettone
-------------- -----------------------------
John P. Malfettone
Executive Vice President and
Chief Financial Officer