UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549 - 1004
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
---------------
[ ] TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER 1-13889
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MacDermid, Incorporated
-----------------------
(Exact name of registrant as specified in its charter)
Connecticut 06-0435750
-------------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 Blake St. Denver, Colorado 80202
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (720) 479-3060
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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
----- -----
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Act.
Yes X No
----- -----
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 July 31, 2005
---------------------- --------------------------------
Common Stock, no par value 30,485,572
MACDERMID, INCORPORATED
INDEX
PART I: Financial Information
Item 1: . . . . Financial Statements (Unaudited):
Consolidated Statements of Earnings for the three and six-month periods
ended June 30, 2005, and 2004.
Consolidated Balance Sheets as of June 30, 2005 and
December 31, 2004.
Consolidated Statements of Cash Flows for the six-months ended
June 30, 2005 and 2004.
Notes to Consolidated Financial Statements
Item 2: . . . . Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 3: . . . . Quantitative and Qualitative Disclosures About Market Risk
Item 4: . . . . Controls and Procedures
PART II: Other Information
Item 1: . . . . Legal Proceedings
Item 2: . . . . Unregistered Sales of Equity Securities and Use of Proceeds
Item 3: . . . . Defaults Upon Senior Securities
Item 4: . . . . Submission of Matters to a Vote of Security Holders
Item 5: . . . . Other Information
Item 6: . . . . Exhibits and Reports on Form 8-K
Signatures
MACDERMID, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands of dollars except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales . . . . . . . . . . . . . . . $ 178,281 $ 165,053 $ 348,528 $ 327,065
Cost of sales . . . . . . . . . . . . . 98,255 86,979 190,849 171,465
------------ ------------ ------------ ------------
Gross profit. . . . . . . . . . . . 80,026 78,074 157,679 155,600
Operating expenses:
Selling, technical and administrative 49,907 46,227 96,577 91,587
Research and development. . . . . . . 6,509 5,196 13,041 10,553
------------ ------------ ------------ ------------
56,416 51,423 109,618 102,140
------------ ------------ ------------ ------------
Operating profit. . . . . . . . . . 23,610 26,651 48,061 53,460
Other income (expense):
Interest income . . . . . . . . . . . 676 184 1,298 412
Interest expense. . . . . . . . . . . (7,725) (7,848) (15,369) (15,667)
Miscellaneous (expense) income. . . . (622) 697 (592) 439
------------ ------------ ------------ ------------
(7,671) (6,967) (14,663) (14,816)
Earnings before income taxes. . . . . . 15,939 19,684 33,398 38,644
Income taxes. . . . . . . . . . . . . . (4,011) (6,299) (9,685) (12,366)
------------ ------------ ------------ ------------
Net earnings. . . . . . . . . . . . . . $ 11,928 $ 13,385 $ 23,713 $ 26,278
============ ============ ============ ============
Earnings per common share:
Basic. . . . . . . . . . . . . . . . $ 0.39 $ 0.44 $ 0.78 $ 0.87
============ ============ ============ ============
Diluted. . . . . . . . . . . . . . . $ 0.39 $ 0.43 $ 0.77 $ 0.85
============ ============ ============ ============
Weighted average common shares
outstanding:
Basic . . . . . . . . . . . . . . . . 30,348,830 30,279,910 30,321,662 30,273,670
============ ============ ============ ============
Diluted . . . . . . . . . . . . . . . 30,787,829 31,014,374 30,799,337 31,028,527
============ ============ ============ ============
Dividends declared per common share . . $ 0.06 $ 0.04 $ 0.12 $ 0.08
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
JUNE 30, DECEMBER 31,
2005 2004
----------- --------------
(Unaudited)
Assets
------------------------------------------------
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 70,114 $ 137,829
Accounts receivable, net of allowance
for doubtful receivables of $11,813
and $11,822, respectively. . . . . . . . . . . 157,335 142,455
Inventories. . . . . . . . . . . . . . . . . . . 100,079 80,445
Prepaid expenses . . . . . . . . . . . . . . . . 12,019 10,183
Deferred income taxes. . . . . . . . . . . . . . 17,771 18,303
---------- --------------
Total current assets. . . . . . . . . . . . . 357,318 389,215
Property, plant and equipment, net
of accumulated depreciation of
$182,063 and $189,167, respectively . . . . . 123,731 110,463
Goodwill . . . . . . . . . . . . . . . . . . . . 244,348 194,287
Intangibles, net of accumulated amortization
of $12,834 and $11,933, respectively. . . . . 32,971 28,434
Deferred income taxes. . . . . . . . . . . . . . 30,791 34,675
Other assets, net. . . . . . . . . . . . . . . . 14,597 16,645
---------- --------------
Total assets . . . . . . . . . . . . . . . . . . $ 803,756 $ 773,719
========== ==============
Liabilities and shareholders' equity
------------------------------------------------
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . $ 61,212 $ 55,944
Accrued compensation . . . . . . . . . . . . . . 13,960 12,370
Accrued interest . . . . . . . . . . . . . . . . 12,860 12,700
Accrued income taxes payable . . . . . . . . . . 9,653 7,293
Other current liabilities. . . . . . . . . . . . 55,227 40,805
---------- --------------
Total current liabilities . . . . . . . . . . 152,912 129,112
Long-term debt and capital lease obligations . . 301,227 301,077
Retirement benefits, less current portion. . . . 25,248 26,588
Deferred income taxes. . . . . . . . . . . . . . 7,953 9,267
Other long-term liabilities. . . . . . . . . . . 4,334 3,644
---------- --------------
Total liabilities . . . . . . . . . . . . . . 491,674 469,688
---------- --------------
Shareholders' equity
------------------------------------------------
Common stock, authorized 75,000,000
shares, issued 46,978,670 at June 30,
2005, and 46,838,700 shares at December
31, 2004, at stated value of $1.00 per share. 46,979 46,839
Additional paid-in capital . . . . . . . . . . . 37,222 33,053
Retained earnings. . . . . . . . . . . . . . . . 347,147 327,080
Accumulated other comprehensive (loss) income. . (4,586) 11,772
Less - cost of common shares held in
treasury, 16,546,763 at June 30, 2005,
16,547,686 at December 31, 2004 . . . . . . . (114,680) (114,713)
---------- --------------
Total shareholders' equity. . . . . . . . . . 312,082 304,031
---------- --------------
Total liabilities and shareholders' equity . . . $ 803,756 $ 773,719
========== ==============
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(Unaudited)
Six Months Ended June 30,
------------------------
2005 2004
---------- ----------
Net cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . $ 23,713 $26,278
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation. . . . . . . . . . . . . . . . . 7,617 8,114
Amortization. . . . . . . . . . . . . . . . . 1,788 1,451
Provision for bad debts . . . . . . . . . . . 738 1,507
Deferred income taxes . . . . . . . . . . . . 625 128
Stock compensation expense. . . . . . . . . . 4,050 3,032
In-process research and development . . . . . 386 -
Changes in assets and liabilities
Increase in receivables . . . . . . . . . . . (11,414) (6,824)
Increase in inventories . . . . . . . . . . . (7,948) (2,269)
Decrease (increase) in prepaid expenses . . . 71 (1,210)
Increase (decrease) in accounts payable . . . 1,016 (3,117)
Increase (decrease) in accrued expenses . . . 1,542 (1,411)
Increase in income tax liabilities. . . . . . 2,024 3,943
Other . . . . . . . . . . . . . . . . . . . . 2,660 4,508
--------- --------
Net cash flows provided by operating
activities . . . . . . . . . . . . . . . . . . . 26,868 34,130
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . (7,826) (2,981)
Proceeds from disposition of fixed assets . . 778 537
Acquisition of business, net of cash acquired (89,270) -
Disposition of business . . . . . . . . . . . 263 -
--------- --------
Net cash flows used in investing activities . (96,055) (2,444)
Cash flows from financing activities:
Net short-term borrowings (repayments). . . . 10,912 (498)
Proceeds from long-term borrowings. . . . . . - 25
Repayments of long-term borrowings. . . . . . (255) (267)
Issuance from treasury shares . . . . . . . . 33 31
Proceeds from exercise of stock options . . . 260 285
Dividends paid. . . . . . . . . . . . . . . . (3,031) (1,212)
--------- --------
Net cash flows provided by
(used in) financing activities. . . . . . . . 7,919 (1,636)
Effect of exchange rate changes on cash
and cash equivalents. . . . . . . . . . . . . (6,447) (425)
--------- --------
Net (decrease) increase in
cash and cash equivalents . . . . . . . . . . (67,715) 29,625
Cash and cash equivalents at beginning of
period. . . . . . . . . . . . . . . . . . . . 137,829 61,294
--------- --------
Cash and cash equivalents at end of period . . . $ 70,114 $90,919
========= ========
Cash paid for interest . . . . . . . . . . . . . $ 14,731 $15,078
========= ========
Cash paid for income taxes . . . . . . . . . . . $ 7,627 $ 5,355
========= ========
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except share and per share amounts)
NOTE 1. Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements reflect all normal
and recurring adjustments that are, in the opinion of management, necessary to
present fairly the financial position of MacDermid, Incorporated and its
subsidiary companies as of June 30, 2005, and the results of operations for the
three- and six-month periods ended June 30, 2005, and 2004. The results of
operations for these periods are not necessarily indicative of trends, or of the
results to be expected for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in our
Annual Report for the year ended December 31, 2004.
Unless otherwise noted in this report, any description of us includes MacDermid,
Inc. (MacDermid) as a consolidated entity, the Advanced Surface Finishing
segment (ASF), the MacDermid Printing Solutions segment (MPS), and our other
corporate entities.
Certain amounts in our 2004 results have been reclassified to conform to the
current year presentation.
NOTE 2. Acquisitions
On June 14, 2005, we acquired Autotype International Ltd. and associated
entities ("Autotype") from Norcros Industry (International) Limited of the UK.
The Autotype business acquired is a high technology producer of specialty coated
film products for the electronics and printing industries. In electronics,
Autotype is a producer of hard coated films for the membrane switch and touch
screen markets. In printing, Autotype provides high quality stencil materials
and digital pre-press products for screen printing. We recorded total payments
and acquisition costs of $96,692 for this acquisition (net payments of $91,803
adjusted for cash acquired). $3,283 was accrued for outstanding purchase and
acquisition costs as of June 30, 2005.
This acquisition was accounted for under the purchase method of accounting, and
accordingly, the purchase was allocated to the acquired assets and liabilities
based on preliminary estimates of the fair values of the assets purchased and
liabilities assumed as of the date of acquisition. The estimated purchase price
allocations are subject to adjustment, generally within one year of the
acquisition date. Preliminary allocation of the purchase price is as follows:
At June 14,
2005
-------------
Current assets, net of cash
acquired. . . . . . . . . . $ 31,316
Fixed assets and other . . . . 19,535
Intangible assets. . . . . . . 4,449
Acquired in-process
research and development. . 386
Goodwill . . . . . . . . . . . 50,061
-------------
Total assets acquired . . 105,747
Current liabilities. . . . . . (12,232)
Long-term debt . . . . . . . . (377)
Deferred tax liability . . . . (1,335)
-------------
Total liabilities assumed (13,944)
-------------
Net assets acquired. . . . . . 91,803
=============
The results of operations from the Autotype acquisition were included in the
accompanying Consolidated Financial Statements since the acquisition date and
were not material.
In June of 2005, we also acquired a marketing distribution channel for our North
American printing blankets business for $995. Of this amount, $245 was accrued
for outstanding acquisition costs as of June 30, 2005.
NOTE 3. Earnings Per Common Share and Other Common Share Information
Earnings per share ("EPS") is calculated based upon net earnings available for
common shareholders. 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 warrants that were
outstanding during the period, under the treasury stock method. Options to
purchase 2,418,015 and 1,287,100 shares of common stock were outstanding as of
June 30, 2005, and 2004, respectively, but were not included in the computation
of diluted EPS because those options would be antidilutive based on market
prices as of June 30, 2005, and 2004, respectively.
The following table reconciles basic weighted-average common shares outstanding
to diluted weighted-average common shares outstanding:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Basic common shares. . . . . . . 30,348,830 30,279,910 30,321,662 30,273,670
Dilutive effect of stock options 438,999 734,464 477,675 754, 857
---------- ---------- ---------- ----------
Diluted common shares. . . . . . 30,787,829 31,014,374 30,799,337 31,028,527
NOTE 4. Stock-Based Plans
We grant stock options and stock awards to our Board of Directors and to our
employees. The stock awards are granted at fair market value and the related
expense is recognized at the date of grant. The amount of expense related to
stock awards recognized during the three- and six-month periods ended June 30,
2005 was $135. During the three- and six-month periods ended June 30, 2004, the
amount of expense related to stock awards recognized was $70. Effective April
1, 2001, we adopted the fair value expense recognition provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("FAS 123"), prospectively, to all stock options granted, modified
or settled after April 1, 2001. Accordingly, compensation expense is measured
using the fair value at the date of grant for options granted after April 1,
2001. The resulting expense is amortized over the period in which the options
are earned. During the three- and six-month periods ended June 30, 2005, we
charged $1,873 and $3,915, respectively, to expense related to stock options.
For the same periods in the prior year, we charged $1,473 and $2,962,
respectively, to expense related to stock options. Previously, and since April
1, 1996, we had adopted the disclosure requirements of FAS 123 and continued to
account for our stock options by applying the expense recognition provisions of
APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25").
Had we used the fair value expense recognition method of accounting for all
stock options granted under our plans between April 1, 1996, and April 1, 2001,
net earnings and net earnings per common share for the three- and six-month
periods ended June 30, 2005, and 2004, would have been reduced to the following
pro forma amounts:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net earnings available for common
shareholders as reported. . . . . . . . . . $11,928 $13,385 $23,713 $26,278
-------- -------- -------- --------
Add: stock based employee compensation
expense included in reported net income,
net of related tax effects. . . . . . . . . 1,330 1,001 2,876 2,062
Deduct: total stock based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects. . . . . . . . . . . (1,330) (1,001) (2,876) (2,140)
-------- -------- -------- --------
Pro forma net earnings. . . . . . . . . . . $11,928 $13,385 $23,713 $26,200
======== ======== ======== ========
Net earnings per common share:
Basic
As reported . . . . . . . . . . . . . . $ 0.39 $ 0.44 $ 0.78 $ 0.87
Pro forma . . . . . . . . . . . . . . . $ 0.39 $ 0.44 $ 0.78 $ 0.87
Diluted
As reported . . . . . . . . . . . . . . $ 0.39 $ 0.43 $ 0.77 $ 0.85
Pro forma . . . . . . . . . . . . . . . $ 0.39 $ 0.43 $ 0.77 $ 0.84
NOTE 5. Goodwill and Other Intangible Assets
Acquired intangible assets as of June 30, 2005, and December 31, 2004, are as
follows:
AS OF
JUNE 30, 2005 DECEMBER 31, 2004
--------------------------------------------- ----------------------------------------
Gross Carrying Accumulated Net Gross Carrying Accumulated Net
Amount Amortization Amount Amount Amortization Amount
--------------- ------------------- ------- --------------- -------------- -------
Patents. . $ 17,566 $ (8,674) $ 8,892 $ 17,566 $ (8,087) $ 9,479
Trademarks 20,138 (2,243) 17,895 20,135 (2,115) 18,020
Others . . 8,101 (1,917) 6,184 2,666 (1,731) 935
--------------- ------------------- ------- --------------- -------------- -------
Total . $ 45,805 $ (12,834) $32,971 $ 40,367 $ (11,933) $28,434
=============== =================== ======= =============== ============== =======
Included in the table above is the net carrying amount of $16,233 at June 30,
2005, and December 31, 2004, for trademarks which are not being amortized due to
the indefinite life associated with these assets. Amortization expense related
to amortization of intangible assets for the three- and six-month periods ended
June 30, 2005 was $427 and $836, respectively. Amortization for the three- and
six-months periods ended June 30, 2004 was $441 and $878, respectively.
Useful lives for amortizable patents are approximately 15 years. Other
intangible assets have useful lives of 5 to 30 years.
Amortization expense for intangible assets is expected to range from $2,600 down
to $1,600 over the next five years.
The goodwill carrying amount for the Advanced Surface Finishing segment was
$122,157 as of June 30, 2005, and December 31, 2004. The goodwill carrying
amount for the Printing Solutions segment was $72,130 as of June 30, 2005, and
December 31, 2004. As a result of the June 2005 acquisition of Autotype, we
recorded $50,060 in goodwill. The allocation of the goodwill between the
Advanced Surface Finishing and Printing Solutions segments has not yet been
determined. The total carrying value of goodwill at June 30, 2005 and December
31, 2004 was $244,348 and $194,287, respectively.
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), stipulates that we are required to perform
goodwill and other intangible asset impairment tests on at least an annual basis
and more frequently in certain circumstances. We will perform our annual
impairment testing for 2005 during our fourth fiscal quarter. Currently, we are
not aware of any event that occurred since our last impairment testing date that
would have caused our goodwill or intangible assets to become impaired.
NOTE 6. Comprehensive Income
The components of comprehensive income for the three- and six-month periods
ended June 30, 2005, and 2004, are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2005 2004 2005 2004
--------- -------- --------- --------
Net earnings. . . . . . . . . . . . . . . $ 11,928 $13,385 $ 23,713 $26,278
Other comprehensive income:
Other. . . . . . . . . . . . . . . . . 545 - 709 -
Foreign currency translation adjustment (10,288) (2,997) (17,067) (2,397)
--------- -------- --------- --------
Comprehensive income. . . . . . . . . . . $ 2,185 $10,388 $ 7,355 $23,881
========= ======== ========= ========
NOTE 7. Segment Reporting
We operate on a worldwide basis, supplying proprietary chemicals for two
distinct segments, Advanced Surface Finishing and Printing Solutions. These
segments are managed separately as each segment has differences in technology
and marketing strategies. Chemicals supplied by the Advanced Surface Finishing
segment are used for cleaning, activating, polishing, mechanical plating and
galvanizing, electro-plating, phosphatising, stripping and coating, filtering,
anti-tarnishing and rust retarding for metal and plastic surfaces associated
with automotive and industrial applications. The Advanced Surface Finishing
segment also supplies chemicals for etching copper and imprinting electrical
patterns for various electronics applications and lubricants and cleaning agents
associated with offshore oil and gas operations. The June 2005 acquisition of
Autotype further augments this segment by adding production of hard coated films
for the membrane switch and touch screen markets. The products supplied by the
Printing Solutions segment include offset printing blankets and photo-polymer
plates used in packaging and newspaper printing, offset printing applications,
and digital printers and related supplies. The June 2005 acquisition of
Autotype added high quality stencil materials and digital pre-press products for
screen printing. Net sales for all of our products fall into one of these two
business segments.
The results of operations for each business segment include certain corporate
operating costs which are allocated based on the relative burden each segment
bears on those costs. Identifiable assets for each business segment are
reconciled to total consolidated assets including unallocated corporate assets.
Unallocated corporate assets consist primarily of deferred tax assets, deferred
bond financing fees and certain other long term assets not directly associated
with the support of the individual segments. At June 30, 2005 the unallocated
corporate assets also includes the goodwill from the Autotype acquisition, as
the allocation between segments has not yet been determined. Intersegment loans
and accounts receivable are included in the calculation of identifiable assets
and are eliminated separately.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Results of operations by segment:
Net sales:
Advanced Surface Finishing
Total segment net sales. . . . . $105,744 $ 98,377 $207,052 $193,932
Intersegment sales . . . . . . . (2,411) (2,001) (4,578) (4,068)
--------- --------- --------- ---------
Net external sales for the segment 103,333 96,376 202,474 189,864
Printing Solutions. . . . . . . . 74,948 68,677 146,054 137,201
--------- --------- --------- ---------
Consolidated net sales . . . . . . $178,281 $165,053 $348,528 $327,065
========= ========= ========= =========
Operating profit (loss):
Advanced Surface Finishing . . . $ 16,705 $ 15,729 $ 30,840 $ 30,466
Printing Solutions . . . . . . . 6,905 10,922 17,221 22,994
--------- --------- --------- ---------
Consolidated operating profit. $ 23,610 $ 26,651 $ 48,061 $ 53,460
========= ========= ========= =========
AS OF
JUNE 30, DECEMBER 31,
2005 2004
---------- --------------
Identifiable assets by segment:
Advanced Surface Finishing. . . $ 531,029 $ 499,119
Printing Solutions. . . . . . . 261,374 277,488
Unallocated corporate assets. . 151,472 132,035
Intercompany eliminations . . . (140,119) (134,923)
---------- --------------
Consolidated assets. . . . . $ 803,756 $ 773,719
========== ==============
NOTE 8. Inventories
The major components of inventory as of June 30, 2005 and December 31, 2004,
were as follow:
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
Finished goods . . . . . . $ 57,101 $ 43,802
Raw materials and supplies 37,183 29,563
Equipment. . . . . . . . . 5,795 7,080
-------- -------------
Inventories. . . . . . . . $100,079 $ 80,445
======== =============
NOTE 9. Pension and Postretirement Benefits Plans
The following tables show the components of the net periodic pension benefit
costs we incurred in the three- and six-month periods ended June 30, 2005, and
2004:
Three Months Ended June 30,
-------------------------------------------
2005 2004
--------------------- -------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
--------- ---------- --------- ---------
Net periodic benefit cost:
Service Costs . . . . . . . . . . . $ 939 $ 144 $ 936 $ 130
Interest Costs. . . . . . . . . . . 895 815 898 694
Expected return on plan assets. . . (798) (807) (876) (805)
Amortization of prior service costs 6 - 6 -
Recognized actuarial (gain)/loss. . 83 55 83 194
--------- ---------- --------- ---------
Net periodic benefit cost . . . . . $ 1,125 $ 207 $ 1,047 $ 213
========= ========== ========= =========
Six Months Ended June 30,
-------------------------------------------
2005 2004
--------------------- -------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
--------- ---------- --------- ---------
Net periodic benefit cost:
Service Costs . . . . . . . . . . . $ 1,875 $ 288 $ 1,872 $ 260
Interest Costs. . . . . . . . . . . 1,793 1,630 1,796 1,388
Expected return on plan assets. . . (1,596) (1,614) (1,752) (1,610)
Amortization of prior service costs 12 - 12 -
Recognized actuarial (gain)/loss. . 166 341 166 388
--------- ---------- --------- ---------
Net periodic benefit cost . . . . . $ 2,250 $ 645 $ 2,094 $ 426
========= ========== ========= =========
The estimated net periodic benefit cost for our other postretirement benefits
was $160 for the three- and six-months ended June 30, 2005. For the three- and
six-months ended June 30, 2004, the estimated net periodic benefit cost for our
other postretirement benefits was $320.
We previously disclosed in our financial statements for the year ended December
31, 2004, that we expected to contribute $5,500 to our pension plans in 2005.
As of June 30, 2005, $1,015 of contributions has been made. We currently expect
to contribute $4,380 to our pension plans during the remainder of 2005.
In May 2004, the FASB issued Staff Position No. FAS 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003, ("FAS 106-2"). We adopted FAS 106-2 in the third
quarter of 2004, and, at that time, we were unable to assess the impact to our
financial statements from the adoption because the legislation related to the
exact calculation of a Federal subsidy for qualifying plans had not been
finalized. We have since determined that the effect of this adoption will not
be material in fiscal year 2005.
NOTE 10. Contingencies, Environmental and Legal Matters
Environmental Issues:
The nature of our operations, as manufacturers and distributors of specialty
chemical products and systems, expose us to the risk of liability or claims with
respect to environmental cleanup or other matters, including those in connection
with the disposal of hazardous materials. As such, we are 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. We have incurred, and will
continue to incur, significant costs and capital expenditures in complying with
these laws and regulations. We could incur significant additional costs,
including cleanup costs, fines, 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, we maintain a disciplined environmental and occupational safety and
health compliance program, which includes conducting regular internal and
external audits at our plants to identify and categorize potential environmental
exposure.
We are named as a potentially responsible party ("PRP") at two Superfund sites,
Fike-Artel in Nitro, West Virginia and Solvent Recovery Service in Southington,
Connecticut. There are many other PRPs involved at these sites. With respect
to both of these sites, we have entered into cost sharing agreements with the
applicable PRP groups and our allocated cost share with regard to each of these
sites is deminimus at 0.2%. Our ongoing costs with respect to each site
generally range from about $2-$4 thousand dollars per quarter. As a result of
the deminimus nature of the costs, no specific reserve has been established. We
have also been contacted with requests for information with regard to two
additional sites, Whitney Barrel in Massachusetts and the Lake Calumet Cluster
site in Illinois. We have found no information connecting the Company or its
subsidiaries to these sites and the Company has not received a PRP notice
regarding these two additional sites. As a result, no reserve is deemed
appropriate in this regard at this time. While the ultimate costs of such
liabilities are difficult to predict, we do not expect that our costs associated
with these sites will be material.
In addition, some of our 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 we are conducting environmental
investigations and/or cleanup activities. These sites include certain sites
acquired in the December 1998, acquisition of W. Canning plc, such as the
Kearny, New Jersey and Waukegan, Illinois sites. We have established an
environmental remediation reserve of $1,700, predominantly attributable to those
Canning sites that we believe will require environmental remediation. With
respect to those sites, we also believe that our Canning subsidiary is entitled
under the Acquisition Agreement ("the acquisition agreement") to withhold a
deferred purchase price payment of approximately $1,600. We estimate the range
of cleanup costs at the Canning sites between $2,000 and $5,000 and have
recorded a $3,300 accrual (comprised of the foregoing $1,700 reserve and the
$1,600 deferred purchase price) related to these costs, representing
management's best estimate of total costs within this range. Investigations
into the extent of contamination, however, are ongoing with respect to these
sites. To the extent our liabilities exceed the $1,600 deferred purchase price,
we may be entitled to additional indemnification payments. Such recovery may be
uncertain, however, and would likely involve significant litigation expense. We
have instituted an arbitration to enforce the obligations of other parties to
the acquisition agreement concerning the remediation of the Kearney, New Jersey
and Waukegan, Illinois sites. The arbitration was concluded with a
confirmation, in our favor, that the former primary shareholders of the entity
that operated the Kearney, New Jersey site are responsible for its remediation
to applicable state standards and an order to establish a time line for
completion of the remediation. We expect that the remediation will take several
years. We are continuing to monitor the environmental condition at the Waukegan
site. Significant remediation activities have already been concluded on the
Waukegan site; however, it has not yet been determined whether additional
remediation activities will be required. We are also in the process of
characterizing contamination at our Huntingdon Avenue, Waterbury, Connecticut
site, which was closed in the quarter ended September 30, 2003. The extent of
required remediation activities at the Huntingdon Avenue site has not yet been
determined. We have recorded a reserve of $645 with regard to this remediation.
We do not anticipate that we will be materially affected by environmental
remediation costs, or any related claims, at any contaminated sites, including
the Canning sites and the Huntingdon Avenue, Waterbury, Connecticut site. 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:
From time to time there are various legal proceedings pending against us. We
consider all such proceedings to be ordinary litigation incident to the nature
of our business. Certain claims are covered by liability insurance. We believe
that the resolution of these claims, to the extent not covered by insurance,
will not individually or in the aggregate, have a material adverse effect on its
financial position or results of operations. To the extent reasonably
estimable, reserves have been established regarding pending legal proceedings.
On July 25, 2005, the Company settled a litigation which had been brought
against the Company by a supplier in exchange for a payment of $5,000. The
litigation had arisen as a result of a contractual dispute. The underlying
contract and the dispute had been inherited by a Company subsidiary as a result
of the acquisition of PTI, Inc. in December 1999. The Company had previously
reserved $2,500 as a contingency in this litigation. As a result, the Company
has taken an additional charge of $2,500 against its second quarter results.
Payment of the full settlement amount will be made in the third quarter of this
year.
NOTE 11. Guarantor Financial Statements
MacDermid, Inc. ("Issuer") 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 100%
owned domestic restricted subsidiaries of MacDermid, Inc. ("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. Our foreign subsidiaries ("Non-Guarantors") are not guarantors
of the indebtedness under the Bond Offering.
The equity method was used by MacDermid, Inc. with respect to investments in
subsidiaries for these financial statements. The equity method also has been
used by subsidiary guarantors with respect to investments in 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 are not
necessarily indicative of the financial position, results of operations and cash
flows that these entities would have achieved on a stand-alone basis.
Therefore, these statements should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report for the
year ended December 31, 2004.
The following financial information sets forth our Consolidating Balance Sheets
as of June 30, 2005, and December 31, 2004; the Condensed Consolidating
Statements of Earnings for the three- and six-month periods ending June 30,
2005, and 2004; and the Condensed Consolidating Statements of Cash Flows for the
six months ending June 30, 2005, and 2004.
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED JUNE 30, 2005
(Unaudited)
MACDERMID
GUARANTOR NON-GUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------- ------------- ------------- ------------- -------------
Net sales . . . . . . . . . . $22,301 48,456 114,068 (6,544) 178,281
Cost of sales . . . . . . . . 15,024 24,165 65,610 (6,544) 98,255
-------- ------------- ------------- ------------- -------------
Gross profit. . . . . . . . . 7,277 24,291 48,458 - 80,026
Operating expenses:
Selling, technical and
administrative. . . . . . . 10,198 11,370 28,339 - 49,907
Research and development. . . 1,562 2,378 2,569 - 6,509
-------- ------------- ------------- ------------- -------------
11,760 13,748 30,908 - 56,416
-------- ------------- ------------- ------------- -------------
Operating (loss) profit . . . (4,483) 10,543 17,550 - 23,610
Equity in earnings of
subsidiaries. . . . . . . . 16,660 11,273 - (27,933) -
Interest income . . . . . . . 360 8 308 - 676
Interest expense. . . . . . . (7,574) (24) (127) - (7,725)
Miscellaneous income. . . . . -
(expense), net. . . . . . . . 74 36 (732) - (622)
-------- ------------- ------------- ------------- -------------
9,520 11,293 (551) (27,933) (7,671)
-------- ------------- ------------- ------------- -------------
Earnings (loss) before taxes. 5,037 21,836 16,999 (27,933) 15,939
Income tax benefit
(expense) . . . . . . . . . . 6,891 (5,176) (5,726) - (4,011)
-------- ------------- ------------- ------------- -------------
Net earnings (loss) . . . . . $11,928 16,660 11,273 (27,933) 11,928
======== ============= ============= ============= =============
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED JUNE 30, 2004
(Unaudited)
MACDERMID
GUARANTOR NON-GUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
-------- -------------- -------------- -------------- ------------------
Net sales . . . . . . . . . . $23,819 $ 42,114 $ 103,525 $ (4,405) $ 165,053
Cost of sales . . . . . . . . 15,374 17,832 58,178 (4,405) 86,979
-------- -------------- -------------- -------------- ------------------
Gross profit. . . . . . . . . 8,445 24,282 45,347 - 78,074
Operating expenses:
Selling, technical and
administrative. . . . . . . 11,625 7,793 26,809 - 46,227
Research and development. . . 1,622 1,831 1,743 - 5,196
-------- -------------- -------------- -------------- ------------------
13,247 9,624 28,552 - 51,423
-------- -------------- -------------- -------------- ------------------
Operating (loss) profit . . . (4,802) 14,658 16,795 - 26,651
Equity in earnings of
subsidiaries. . . . . . . . 22,077 11,916 - (33,993) -
Interest income . . . . . . . 94 3 87 - 184
Interest expense. . . . . . . (7,783) 1,226 (1,291) - (7,848)
Miscellaneous income
(expense), net. . . . . . . . 632 (152) 217 - 697
-------- -------------- -------------- -------------- ------------------
15,020 12,993 (987) (33,993) (6,967)
-------- -------------- -------------- -------------- ------------------
Earnings (loss) before taxes. 10,218 27,651 15,808 (33,993) 19,684
Income tax benefit
(expense) . . . . . . . . . . 3,166 (5,574) (3,891) - (6,299)
-------- -------------- -------------- -------------- ------------------
Net earnings (loss) . . . . . $13,384 $ 22,077 $ 11,917 $ (33,993) $ 13,385
======== ============== ============== ============== ==================
CONSOLIDATED STATEMENTS OF EARNINGS
SIX MONTHS ENDED JUNE 30, 2005
(Unaudited)
MACDERMID
GUARANTOR NON-GUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
--------- ------------- ------------- ------------- -----------------
Net sales . . . . . . . . . . $ 44,820 93,460 224,611 (14,363) 348,528
Cost of sales . . . . . . . . 30,194 46,192 128,826 (14,363) 190,849
--------- ------------- ------------- ------------- -----------------
Gross profit. . . . . . . . . 14,626 47,268 95,785 - 157,679
Operating expenses:
Selling, technical and
administrative. . . . . . . 21,087 19,626 55,864 - 96,577
Research and development. . . 3,241 4,649 5,151 - 13,041
--------- ------------- ------------- ------------- -----------------
24,328 24,275 61,015 - 109,618
--------- ------------- ------------- ------------- -----------------
Operating (loss) profit . . . (9,702) 22,993 34,770 - 48,061
Equity in earnings of
subsidiaries. . . . . . . . 36,540 22,926 - (59,466) -
Interest income . . . . . . . 700 9 589 - 1,298
Interest expense. . . . . . . (15,144) (24) (201) - (15,369)
Miscellaneous income. . . . . -
(expense), net. . . . . . . . 228 297 (1,117) - (592)
--------- ------------- ------------- ------------- -----------------
22,324 23,208 (729) (59,466) (14,663)
--------- ------------- ------------- ------------- -----------------
Earnings (loss) before taxes. 12,622 46,201 34,041 (59,466) 33,398
Income tax benefit
(expense) . . . . . . . . . . 11,091 (9,661) (11,115) - (9,685)
--------- ------------- ------------- ------------- -----------------
Net earnings (loss) . . . . . $ 23,713 36,540 22,926 (59,466) 23,713
========= ============= ============= ============= =================
CONSOLIDATED STATEMENTS OF EARNINGS
SIX MONTHS ENDED JUNE 30, 2004
(Unaudited)
MACDERMID
GUARANTOR NON-GUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
--------- -------------- -------------- -------------- ------------------
Net sales . . . . . . . . . . $ 47,300 $ 81,929 $ 206,728 $ (8,892) $ 327,065
Cost of sales . . . . . . . . 31,124 34,655 114,578 (8,892) 171,465
--------- -------------- -------------- -------------- ------------------
Gross profit. . . . . . . . . 16,176 47,274 92,150 - 155,600
Operating expenses:
Selling, technical and
administrative. . . . . . . 21,816 15,096 54,675 - 91,587
Research and development. . . 3,520 3,526 3,507 - 10,553
--------- -------------- -------------- -------------- ------------------
25,336 18,622 58,182 - 102,140
--------- -------------- -------------- -------------- ------------------
Operating (loss) profit . . . (9,160) 28,652 33,968 - 53,460
Equity in earnings of
subsidiaries. . . . . . . . 42,621 22,550 - (65,171) -
Interest income . . . . . . . 123 10 279 - 412
Interest expense. . . . . . . (15,799) 2,436 (2,304) - (15,667)
Miscellaneous income
(expense), net. . . . . . . . 667 174 (402) - 439
--------- -------------- -------------- -------------- ------------------
27,612 25,170 (2,427) (65,171) (14,816)
--------- -------------- -------------- -------------- ------------------
Earnings (loss) before taxes. 18,452 53,822 31,541 (65,171) 38,644
Income tax benefit
(expense) . . . . . . . . . . 7,825 (11,201) (8,990) - (12,366)
--------- -------------- -------------- -------------- ------------------
Net earnings (loss) . . . . . $ 26,277 $ 42,621 $ 22,551 $ (65,171) $ 26,278
========= ============== ============== ============== ==================
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005
(Unaudited)
MACDERMID
GUARANTOR NON-GUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
--------- ------------- -------------- -------------- -----------------
Assets
-----------------------------
Current assets:
Cash and cash equivalents . . $ 40,474 $ 5,356 $ 24,284 $ - $ 70,114
Accounts receivables, net . . 11,711 21,760 123,864 - 157,335
Due (to) from affiliates. . . 25,635 95,704 (121,339) - -
Inventories, net. . . . . . . 7,000 30,932 62,147 - 100,079
Prepaid expenses. . . . . . . 965 3,299 7,755 - 12,019
Deferred income taxes . . . . 12,908 - 4,863 - 17,771
--------- ------------- -------------- -------------- -----------------
Total current assets. . . . . 98,693 157,051 101,574 - 357,318
Property, plant and
equipment, net. . . . . . . 16,457 30,858 76,416 - 123,731
Goodwill. . . . . . . . . . . 21,680 89,225 133,443 - 244,348
Intangibles, net. . . . . . . - 5,670 27,301 - 32,971
Investments in subsidiaries . 488,012 237,567 - (725,579) -
Deferred income taxes . . . . 16,959 - 13,832 - 30,791
Other assets, net . . . . . . 6,122 2,813 5,662 - 14,597
--------- ------------- -------------- -------------- -----------------
Total assets. . . . . . . . . $647,923 $ 523,184 $ 358,228 $ (725,579) $ 803,756
========= ============= ============== ============== =================
Liabilities and shareholders' equity
------------------------------------
Current liabilities:
Accounts and dividends
payable . . . . . . . . . . $ 7,492 $ 10,526 $ 43,194 $ - $ 61,212
Accrued compensation. . . . . 1,604 1,981 10,375 - 13,960
Accrued interest. . . . . . . 12,616 24 220 - 12,860
Accrued income taxes
payable . . . . . . . . . . (12,587) 13,255 8,985 - 9,653
Other current liabilities . . 17,738 8,872 28,617 - 55,227
--------- ------------- -------------- -------------- -----------------
Total current liabilities . . 26,863 34,658 91,391 - 152,912
Long-term obligations . . . . 300,448 167 612 - 301,227
Retirement benefits, less . .
current portion . . . . . . 5,216 - 20,032 - 25,248
Deferred income taxes . . . . - - 7,953 - 7,953
Other long-term liabilities . 3,313 347 674 - 4,334
--------- ------------- -------------- -------------- -----------------
Total liabilities . . . . . . 335,840 35,172 120,662 - 491,674
--------- ------------- -------------- -------------- -----------------
Shareholders' equity
-----------------------------
Total shareholders' equity. . 312,083 488,012 237,566 (725,579) 312,082
--------- ------------- -------------- -------------- -----------------
Total liabilities and
shareholders' equity. . . . . $647,923 $ 523,184 $ 358,228 $ (725,579) $ 803,756
========= ============= ============== ============== =================
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004
MACDERMID
GUARANTOR NON-GUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
--------- ------------- -------------- -------------- -----------------
Assets
-----------------------------
Current assets:
Cash and cash equivalents . . $ 69,512 $ 688 $ 67,629 $ - $ 137,829
Accounts receivables, net . . 9,127 18,103 115,225 - 142,455
Due (to) from affiliates. . . 47,106 78,199 (125,305) - -
Inventories, net. . . . . . . 5,002 22,996 52,447 - 80,445
Prepaid expenses. . . . . . . 1,125 2,240 6,818 - 10,183
Deferred income taxes . . . . 12,908 - 5,395 - 18,303
--------- ------------- -------------- -------------- -----------------
Total current assets. . . . . 144,780 122,226 122,209 - 389,215
Property, plant and
equipment, net. . . . . . . 16,886 33,224 60,353 - 110,463
Goodwill. . . . . . . . . . . 21,680 68,574 104,033 - 194,287
Intangibles, net. . . . . . . - 5,004 23,430 - 28,434
Investments in subsidiaries . 449,641 238,254 - (687,895) -
Deferred income taxes . . . . 21,579 - 13,096 - 34,675
Other assets, net . . . . . . 8,006 3,385 5,254 - 16,645
--------- ------------- -------------- -------------- -----------------
Total assets. . . . . . . . . $662,572 $ 470,667 $ 328,375 $ (687,895) $ 773,719
========= ============= ============== ============== =================
Liabilities and shareholders' equity
------------------------------------
Current liabilities:
Accounts and dividends
payable . . . . . . . . . . $ 7,538 $ 7,363 $ 41,043 $ - $ 55,944
Accrued compensation. . . . . 3,645 1,884 6,841 - 12,370
Accrued interest. . . . . . . 12,692 - 8 - 12,700
Accrued income taxes
payable . . . . . . . . . . (3,467) 5,556 5,204 - 7,293
Other current liabilities . . 14,621 5,911 20,273 - 40,805
--------- ------------- -------------- -------------- -----------------
Total current liabilities . . 35,029 20,714 73,369 - 129,112
Long-term obligations . . . . 300,385 274 418 - 301,077
Retirement benefits, less
current portion . . . . . . 20,395 - 6,193 - 26,588
Deferred income taxes . . . . - - 9,267 - 9,267
Other long-term liabilities . 2,732 38 874 - 3,644
--------- ------------- -------------- -------------- -----------------
Total liabilities . . . . . . 358,541 21,026 90,121 - 469,688
--------- ------------- -------------- -------------- -----------------
Shareholders' equity
-----------------------------
Total shareholders' equity. . 304,031 449,641 238,254 (687,895) 304,031
--------- ------------- -------------- -------------- -----------------
Total liabilities and
shareholders' equity. . . . . $662,572 $ 470,667 $ 328,375 $ (687,895) $ 773,719
========= ============= ============== ============== =================
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005
(Unaudited)
MACDERMID
GUARANTOR NON-GUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES AND SUBSIDIARIES
--------- ------------- --------------- -----------------
Net cash flows (used in)
provided by operating
activities. . . . . . . . . . $(25,334) $ 32,484 $ 19,718 $ 26,868
Investing activities:
Capital expenditures. . . . . . (1,601) (1,100) (5,125) (7,826)
Acquisition of business . . . . - (26,610) (62,660) (89,270)
Proceeds from disposition of
fixed assets and business . . 635 - 406 1,041
--------- ------------- --------------- ------------------
Net cash flows (used in)
provided by investing
activities. . . . . . . . . . (966) (27,710) (67,379) (96,055)
Financing activities:
Net proceeds from
(repayments of) short-term
borrowings. . . . . . . . . . - - 10,912 10,912
Repayments of long-term
borrowings. . . . . . . . . . - (107) (148) (255)
Issuance of treasury shares . . 33 - - 33
Proceeds from exercise of
stock options . . . . . . . . 260 - - 260
Dividends paid. . . . . . . . . (3,031) - - (3,031)
--------- ------------- --------------- ------------------
Net cash flows provided by
(used in) financing activities. (2,738) (107) 10,764 7,919
Effect of exchange rate
changes on cash and cash
equivalents . . . . . . . . . . - - (6,447) (6,447)
--------- ------------- --------------- ------------------
Net increase (decrease) in
cash and cash equivalents . . . (29,038) 4,667 (43,344) (67,715)
Cash and cash equivalents at
beginning of period . . . . . . 69,512 688 67,629 137,829
--------- ------------- --------------- ------------------
Cash and cash equivalents at
end of period . . . . . . . . . $ 40,474 $ 5,355 $ 24,285 $ 70,114
========= ============= =============== ==================
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004
(Unaudited)
MACDERMID
GUARANTOR NON-GUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES AND SUBSIDIARIES
--------- ------------- --------------- ------------------
Net cash flows (used in)
provided by operating
activities. . . . . . . . . . $(9,144) $ 20,493 $ 22,781 $ 34,130
Investing activities:
Capital expenditures. . . . . . (1,260) (623) (1,098) (2,981)
Proceeds from disposition of
fixed assets. . . . . . . . . 1 512 24 537
--------- ------------- --------------- ------------------
Net cash flows (used in)
provided by investing
activities. . . . . . . . . . (1,259) (111) (1,074) (2,444)
Financing activities:
Net proceeds from
(repayments of) short-term
borrowings. . . . . . . . . . 34,584 (18,400) (16,682) (498)
Proceeds from long-term
borrowings. . . . . . . . . . - - 25 25
Repayments of long-term
borrowings. . . . . . . . . . - (102) (165) (267)
Purchase of treasury shares . . 31 - - 31
Proceeds from exercise of
stock options . . . . . . . . 285 - - 285
Dividends paid. . . . . . . . . 15,336 (2,198) (14,350) (1,212)
--------- ------------- --------------- ------------------
Net cash flows provided by
(used in) financing activities. 50,236 (20,700) (31,172) (1,636)
Effect of exchange rate
changes on cash and cash
equivalents . . . . . . . . . . - - (425) (425)
--------- ------------- --------------- ------------------
Net increase (decrease) in
cash and cash equivalents . . . 39,833 (318) (9,890) 29,625
Cash and cash equivalents at
beginning of period . . . . . . 18,295 1,286 41,713 61,294
--------- ------------- --------------- ------------------
Cash and cash equivalents at
end of period . . . . . . . . . $58,128 $ 968 $ 31,823 $ 90,919
========= ============= =============== ==================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSAND OF DOLLARS, EXCEPT SHARES AND PER SHARE AMOUNTS)
CONSOLIDATED OVERVIEW
EXECUTIVE OVERVIEW
On June 14, 2005, we acquired Autotype International Ltd. and associated
entities from Norcros (Holdings) Limited of the UK ("Autotype"). We recorded
total proceeds and acquisition costs of $96,692 for this acquisition (net
proceeds of $91,803 adjusted for cash acquired). Net assets acquired totaled
$46,631, and total goodwill recorded was $50,061. The net assets and results of
operations are included in our financial statements since the acquisition date.
Our consolidated business consists of two business segments, Advanced Surface
Finishing and Printing Solutions. The Advanced Surface Finishing (ASF) segment
supplies chemicals used for finishing metals and non-metallic surfaces for
automotive and other industrial applications, electro-plating metal surfaces,
etching, and imaging to create electrical patterns on circuit boards for the
electronics industry, and offshore lubricants and cleaners for the offshore oil
and gas markets. The acquisition of Autotype further augments this segment by
adding production of hard coated films for the membrane switch and touch screen
markets. The Printing Solutions (MPS) segment supplies an extensive line of
offset printing blankets, photo-polymer plates and digital printers for use in
the commercial printing and packaging industries for image transfer. The
acquisition of Autotype added high quality stencil materials and digital
pre-press products for screen printing to the MPS segmentIn both of our
business segments, we continue to invest significant resources in research and
development and intellectual properties such as patents, trademarks, copyrights
and trade secrets as our business depends on these activities for our financial
stability and future growth.
Our products are sold in a competitive, global economy, which exposes us to
certain currency, economic and regulatory risks and opportunities. Approximately
60% of our net sales and identifiable assets for the six-month period ended and
as of June 30, 2005, are denominated in currencies other than the U.S. dollar,
predominantly the Euro, British Pound Sterling, Hong Kong dollar and the
Japanese Yen. We do not manage our foreign currency exposure in a manner that
would eliminate the effects of changes in foreign exchange rates on our
earnings, cash flows and fair values of assets and liabilities, and as such our
financial performance could be positively or negatively impacted by changes in
foreign exchange rates in any given reporting period. For the second quarter and
first six months of 2005, net sales and net earnings were positively impacted by
the effect of foreign currency translation resulting primarily from the Euro and
the British Pound Sterling strengthening against the U.S. dollar, compared to
exchange rates that were in effect for the second quarter and first six months
of 2004. These currencies weakened against the U.S. dollar from the rates that
were in effect at the end of 2004, which had a negative impact on net assets and
liabilities.
We focus on growing revenues and the generation of cash from operations in order
to build shareholder value. Specifically, we plan to improve top line sales
growth over the longer term by focusing on:
- utilizing our technical service and outstanding products to penetrate
global markets for all products,
- supporting working capital initiatives focused on maximizing cash flows
during a period of continued economic uncertainty in our primary markets,
- emphasizing efficiency improvements throughout the organization,
- adding new products through internal research and development, relying
heavily on our internal knowledge base,
- strengthening the common identity of our products through a new branding
initiative called "Yes We Can!", and
- acquiring strategically sound companies or products.
Our competitors include many large multi-national chemical firms based in
Europe, Asia, and the U.S. New competitive products or pricing policies of our
competitors can materially affect demand for and pricing of our products, which
could have a significant impact on our financial results.
Our performance for the second quarter and first six months of 2005 reflects the
results of our key opportunities, philosophies and risks, as outlined above.
Specifically, we acquired Autotype to broaden our product offerings in both of
our segments. We improved top line sales growth with this acquisition and due to
favorable market conditions in some of our ASF segment markets and the
introduction of new products by one of our MPS units. A change in the product
mix along with higher manufacturing costs and lower volumes due to soft market
conditions in some of our units resulted in a decreased gross profit percentage.
Increases in research and development activities and the expenses from our new
Autotype units increased our operating expense. Taken together these activities
resulted in a decrease in net income when compared to the same periods in 2004.
From a cash flow standpoint, we continue to maintain a high level of liquidity,
with working capital of $204,406. Cash decreased $67,715 during the six months
ended June 30, 2005, due primarily to the acquisition of Autotype on June 14,
2005. The cash used by investing activities was partially offset by cash
generated from our operating activities.
The following summary of results further explains the results of our operations
during the three- and six-month periods ended June 30, 2005, and 2004, in
addition to an analysis of our liquidity as of the end of the period.
SUMMARY OF THE CONSOLIDATED RESULTS FOR THE QUARTER AND SIX-MONTHS ENDED JUNE 30, 2005:
THREE MONTHS ENDED CURRENCY SIX MONTHS ENDED CURRENCY
June 30, ADJUSTED June 30, ADJUSTED
2005 2004 %CHANGE %CHANGE* 2005 2004 %CHANGE %CHANGE*
---------- ---------- -------- --------- --------- --------- -------- ---------
Favorable(Unfavorable) Favorable(Unfavorable)
Net sales . . . . . . . $ 178,281 $ 165,053 8.0% 5.6% $348,528 $327,065 6.6% 4.5%
Cost of sales . . . . . 98,255 86,979 (13.0%) (10.2%) 190,849 171,465 (11.3%) (9.0%)
---------- ---------- --------- ---------
Gross profit. . . . 80,026 78,074 2.5% 0.5% 157,679 155,600 1.3% (0.6%)
Gross profit percentage 44.9% 47.3% ** ** 45.2% 47.6% ** **
Operating expenses. . . 56,416 51,423 (9.7%) (6.8%) 109,618 102,140 (7.3%) (4.9%)
---------- ---------- --------- ---------
Operating profit. . 23,610 26,651 (11.4%) (13.1%) 48,061 53,460 (10.1%) (11.7%)
Interest income
(expense), net. . . . (7,049) (7,664) 8.0% 7.8% (14,071) (15,255) 7.8% 7.8%
Other income
(expense), net. . . . (622) 697 ** ** (592) 439 ** **
---------- ---------- --------- ---------
(7,671) (6,967) (14,663) (14,816)
---------- ---------- -------- ---------
Earnings before
income taxes. . . . . 15,939 19,684 (19.0%) (20.9%) 33,398 38,644 (13.6%) (15.5%)
Income taxes. . . . . . (4,011) (6,299) 36.3% 37.5% (9,685) (12,366) 21.7% 23.1%
---------- ---------- --------- ---------
Net earnings. . . . . . $ 11,928 $ 13,385 (10.9%) (13.2%) $ 23,713 $ 26,278 (9.8%) (11.9%)
========== ========== ========= =========
Diluted earnings
per share . . . . . . . $ .39 $ 0.43 (9.3%) (2.3%) $ .77 $ 0.85 (9.4%) (2.3%)
========== ========== ========= =========
* Currency adjusted percent change is calculated based on a constant foreign exchange rate period-over-period.
Management believes this more accurately reflects true fluctuation in the business without the effect of
changing exchange rates.
** Not a meaningful statistic.
SUMMARY OF KEY SEGMENTED RESULTS FOR THE QUARTER AND SIX-MONTHS ENDED JUNE 30, 2005:
THREE MONTHS ENDED CURRENCY SIX MONTHS ENDED CURRENCY
June 30, ADJUSTED June 30, ADJUSTED
2005 2004 %CHANGE %CHANGE* 2005 2004 %CHANGE %CHANGE*
---------- ---------- -------- --------- --------- --------- -------- ---------
Favorable(Unfavorable) Favorable(Unfavorable)
ADVANCED SURFACE
FINISHING
Total net sales. . . . . $ 103,333 $ 96,376 7.2% 4.5% $202,472 $189,864 6.6% 4.2%
Operating profit . . . . $ 16,705 $ 15,729 6.2% 3.7% $ 30,840 $ 30,466 1.2% (1.1%)
Operating profit
percentage . . . . . . 16.2% 16.3% ** ** 15.2% 16.0% ** **
PRINTING SOLUTIONS
Total net sales. . . . . $ 74,948 $ 68,677 9.1% 7.2% $146,054 $137,201 6.5% 4.9%
Operating profit . . . . $ 6,905 $ 10,922 (36.8%) (37.6%) $ 17,221 $ 22,994 (25.1%) (25.9%)
Operating profit
percentage . . . . . . 9.2% 15.9% ** ** 11.8% 16.8% ** **
CONSOLIDATED TOTAL
Total net sales. . . . . $ 178,281 $ 165,053 8.0% 5.6% $348,528 $327,065 6.6% 4.5%
Operating profit . . . . $ 23,610 $ 26,651 (11.4%) (13.1%) $ 48,061 $ 53,460 (10.1%) (11.7%)
Operating profit
percentage . . . . . . 13.2% 16.1% ** ** 13.8% 16.3% ** **
* Currency adjusted percent change is calculated based on a constant foreign exchange rate
period-over-period. Management believes this more accurately reflects true fluctuation in the business
without the effect of changing exchange rates.
** Not a meaningful statistic.
NET SALES
During the three- and six-month periods ended June 30, 2005, our net sales grew
by 8% and 6.6%, respectively, compared to the same periods in 2004. For the
same periods on a currency-adjusted basis, net sales grew by 5.6% and 4.5%,
respectively, increasing both in the ASF and MPS segments. Our ASF segment
benefited from volume growth in both our electronics and offshore fluids groups.
Our electronics group continued to see growth all through Asia due to favorable
market conditions, this increase was partially offset by market weakness in
Europe and the Americas. Our offshore fluids group has benefited this year from
increased oil field development activities throughout the world. Our MPS
segment benefited from growth in our digital printer group due to market
acceptance of new product offerings. Partially offsetting this increase in our
MPS business was a reduction in overall sales volume in groups that supply the
commercial, packaging and publication printing industries due to a continued
soft markets, the timing of bulk sales, and the effects of changes in our
distribution system wherein we beginning to sell directly to our customer in the
U.S. Revenues from the Autotype acquisition added $2,195 and $2,747 to our ASF
and MPS segments, respectively, in the second half of the month of June 2005.
COST OF SALES AND GROSS PROFIT
Cost of sales during the three- and six-months ended June 30, 2005, increased
$11,276 and $19,384, respectively, compared to the same periods in the prior
year. Strengthening foreign currencies contributed approximately $2,176 and
$3,938 to this increase for the three and six months respectively. Excluding
the effects of foreign currency, our cost of sales during the three- and
six-months ended June 30, 2005, increased 10.2% and 9%, respectively, when
compared to the same periods in the prior year. This increase was larger than
our currency-adjusted sales increase of 5.6% and 4.5%, respectively, for the
three- and six-months ended June 30, 2005. This resulted in a decrease in our
gross profit percentage from 47.3% to 44.9% for the three months ended June 30,
2005 compared to the same period in 2004, and a decrease from 47.6% to 45.2% for
the six months ended June 30, 2005 compared to the same period in 2004. Our ASF
segment margin has decreased slightly in 2005 due to lower margins from product
introductions to new customers, higher raw material costs and higher sales of
lower margin non-proprietary equipment to the electronics industry. In our MPS
segment, margins were lower in most groups and regions with the exception of our
digital printer group. The decrease in these MPS segment margins was a result
of higher raw material costs a less favorable product mix and the de-leveraging
of fixed overhead costs caused by lower volume. The newly acquired Autotype
group contributed approximately $2,900 to cost of sales in the second half of
the month of June 2005.
OPERATING EXPENSES
Operating expenses for the three- and six-months ended June 30, 2005, increased
9.7% and 7.3%, respectively, when compared to the same periods in the prior
year, or 6.8% and 4.9%, respectively, on a currency adjusted basis. Most of this
increase was the result of increased spending on research and development in
both our ASF and MPS segments. Operating expenses were also higher in the
current quarter as a result of higher stock option expenses, other employee
costs, and a one-time charge of $2,500 taken to settle certain litigation, as
described in Note 10 to our financial statements. In the second quarter of
2005, we wrote off $386 of in-process research and development costs related to
our Autotype acquisition. Operating expenses from the units acquired from
Autotype also added $3,057 in operating expenses in the second half of the month
of June 2005.
OPERATING PROFIT
During the three- and six-months ended June 30, 2005, operating profit decreased
approximately 11.4% and 10.1% respectively, when compared to the same periods in
the prior year, or 13.1% and 11.7%, respectively, on a currency adjusted basis.
As a percent of sales, operating profit for the three- and six-months ended June
30, 2005, was 13.2% to 13.8%, respectively, compared to 16.1% to 16.3% for the
same periods in the prior year. Our operating profit decrease was the result of
the decrease gross profit percentages and higher operating expenses noted above.
The overall impact from the Autotype acquisition was negligible.
INTEREST INCOME (EXPENSE)
Interest (expense), net, decreased for the three- and six-months ended June 30,
2005, when compared to the same periods in the prior year. The decrease was due
to higher interest income as a result of a higher average cash and cash
equivalents balance in the current year. This balance consists primarily of
interest expense on our outstanding bonds and interest income on our cash and
cash equivalents balance.
OTHER INCOME (EXPENSE)
Other income (expense), net, was negatively impacted for the three- and
six-months ended June 30, 2005, when compared to the same periods in the prior
year primarily as a result of higher foreign exchange loss and less income from
the mark-to-market of our interest rate hedge.
INCOME TAX EXPENSE
In the second quarter of 2005, our tax rate was reduced from the 32.5% rate used
in the first quarter of 2005 and from the 32% rate used in 2004, to a 29% rate
for the six-months ended June 30, 2005. The reduction in the tax rate from the
first quarter of 2005 to the second quarter of 2005 was a result of the
expectation that less cash will be repatriated to the United States from foreign
tax jurisdictions that have a lower tax rate. Overseas funds, which are
normally repatriated to the United States from lower foreign tax jurisdictions,
were instead used to fund the acquisition of the overseas operations of
Autotype. The reduction in the tax rate from 32% in 2004 to 29% for the
six-months ended June 30, 2005, was comprised of a 1.2% reduction due to the
expectation that less cash will be repatriated to the United States from foreign
tax jurisdictions that have a lower tax rate in 2005 than was repatriated in
2004, and various other items which increased the 2004 tax rate that are
individually insignificant and are not expected to affect the 2005 tax rate.
In 2004, a significant amount of low-tax foreign earnings were repatriated to
the United States in order to utilize foreign tax credits.
NET EARNINGS
Net earnings during the three- and six-months ended June 30, 2005, decreased by
approximately $1,457 (or 10.9%) and $2,565 (or 9.8%), respectively, compared to
the same periods in 2004. As discussed above, the fluctuations were due
primarily to a lower gross profit percentage, higher operating expenses and the
negative impact from other income (expense) which were partially offset by
higher revenues, interest income, higher other income and a lower effective tax
rate.
DILUTED EARNINGS PER SHARE
Diluted earnings per share during the three- and six-months ended June 30, 2005,
decreased 9.3% and 9.4%, respectively, compared to the same periods in 2004, for
the same reasons described above for net income.
OTHER COMPREHENSIVE INCOME
Other comprehensive income decreased by $8,203 and $16,526, respectively, for
the three- and six-months ended June 30, 2005, compared to the same periods in
the previous year. This decrease is a result of the changes in net earnings
described above and a negative impact on the foreign currency translation
adjustment recognized during the current periods. We hold assets that are
denominated in currencies that have weakened against the U.S. dollar in the
first six months of 2005. These currencies were primarily the Euro, Great
British Pound and Japanese Yen. In the second quarter of 2004, these currencies
were mixed against the U.S. dollar which resulted in a small negative impact
from currency translation.
LIQUIDITY AND CAPITAL RESOURCES
The table below summarizes our cash flows for the six months ended June 30,
2005, and 2004:
2005 2004 VARIANCE
--------- -------- ----------
Cash provided by (used in):
Operating activities. . . . . . . . . . $ 26,868 $34,130 $ (7,262)
Investing activities. . . . . . . . . . (96,055) (2,444) (93,611)
Financing activities. . . . . . . . . . 7,919 (1,636) 9,555
Effect of exchange rate changes on cash (6,447) (425) (6,022)
--------- -------- ----------
Net change in cash. . . . . . . . . . . $(67,715) $29,625 $ (97,340)
========= ======== ==========
Cash flow from operating activities declined during the six months ended June
30, 2005, compared to the same period in 2004 primarily as a result of lower
income, and changes in our inventory, and accounts receivable. Increases in
accounts receivable and inventories are a result of our current focus on driving
growth in sales.
Net cash used in investing activities increased significantly during the six
months ended June 30, 2005, compared to the same period in 2004. We expended
$89,270 in cash for the acquisition described in Note 2 to our financial
statements. Capital spending also increased in 2005, due primarily to a new
plant in China for our ASF segment that is expected to be completed this year.
Net cash provided by financing activities increased by $9,555 in the six months
ended June 30, 2005, when compared to the same six months last year. The change
was due principally to increased net short-term borrowings, which were used to
fund working capital requirements in Europe as a result of the cash used for the
Autotype acquisition in that region. The increase in cash provided by financing
activities was offset partially by the timing of our quarterly dividend
payments. Dividends paid as of the six-months ended June 30, 2004 does not
include the fourth quarter 2003 dividend payment, because it was funded in
December 2003. Dividends paid as of the six-months ended June 30, 2005 includes
the fourth quarter 2004 dividend payment, which was funded in January 2005. In
the first two quarters of 2005 we declared dividends of $0.06 per share which
was an increase from the $0.04 per share that was declared in each quarter of
2004.
The Board of Directors from time-to-time authorizes the purchase of issued and
outstanding shares of MacDermid, Inc.'s common stock. Such additional shares may
be acquired through privately negotiated transactions or on the open market.
Any future repurchases by us will depend on various factors, including the
market price of the shares, our business and financial position and general
economic and market conditions. Additional shares acquired pursuant to such
authorizations will be held in our treasury and will be available for us 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). At June 30, 2005, the outstanding authorization to
purchase approximately 6 million shares would cost approximately $186,960.
We believe that we have the financial flexibility to deliver shareholder value
described above while meeting our contractual obligations. We currently have
$70,114 in cash and cash equivalents and working capital of $204,406. Excluding
our non-monetary items, which are prepaid expenses, inventory, and deferred
taxes, our working capital is $74,537. We also have 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 $50,000.
There has been no balance outstanding, or activity on this revolving loan
facility for any of the periods presented. We have other uncommitted credit
facilities which presently total approximately $46,500.
Future estimated contractual cash commitments for the years subsequent to June
30, 2005, are summarized in the following table:
LESS THAN 2-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
-------- -------- -------- -------- --------
Long-term debt . . . . . . . . $301,890 $ 390 $ - $ - $301,500
Semi-annual bond interest. . . 178,828 27,512 55,024 55,024 41,268
Capital leases . . . . . . . . 635 107 394 50 84
Operating leases . . . . . . . 25,381 4,615 8,803 3,473 8,490
Pension funding requirements . 29,300 5,860 11,720 11,720 -
Purchase obligations and other 295 95 100 100 -
-------- -------- -------- -------- --------
Total contractual cash
commitments. . . . . . . . . $536,329 38,579 76,041 70,367 351,342
======== ======== ======== ======== ========
The following table reflects our ability to fund both our required obligations
and our shareholder growth initiatives for fiscal 2005:
Cash and cash equivalents as of June 30, 2005 . . . . . . . . . . . . $ 70,114
Other net current monetary assets and liabilities as of June 30, 2005 4,423
--------
74,537
Available borrowings under revolving loan facility. . . . . . . . . . 50,000
Availability under other uncommitted credit facilities. . . . . . . . 46,500
--------
Total cash available and potentially available. . . . . . . . . . 171,037
Contractual cash commitments due in next year . . . . . . . . . . . . 38,579
Expected capital expenditures for the year. . . . . . . . . . . . . . 7,173
Expected dividend payments in the next year . . . . . . . . . . . . . 7,264
--------
Excess of cash available and potentially available over
requirements. . . . . . . . . . . . . . . . . . . . . . . . . . $118,021
========
CRITICAL ACCOUNTING ESTIMATES:
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 judgment based on its understanding and analysis of the
relevant circumstances to reach these decisions. By their nature, these
judgments are subject to an inherent degree of uncertainty. Accordingly actual
results could differ significantly from the estimates applied.
Our critical accounting policies are consistent with those disclosed in our Form
10-K for the year ended December 31, 2004.
New Accounting Standards
The Financial Accounting Standards Board ("FASB") finalized Staff Position No.
FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes,
to the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004 ("FAS 109-1"), and Staff Position No. FAS 109-2,
Accounting and Disclosure for the Foreign Earnings Provision within the American
Jobs Creation Act of 2004 ("FAS 109-2"), in December 2004. The American Jobs
Creation Act of 2004 ("the Act") provides for a temporary 85% dividends received
deduction on certain foreign earnings repatriated during a one-year period. The
deduction would result in a 5.25% Federal tax rate on qualifying earnings
repatriated under the Act. The Act will not have an impact on our fiscal year
2005 income tax expense.
In November 2004, the FASB issued Statement No. 151, Inventory Costs - an
amendment of ARB No. 43, Chapter 4 ("FAS 151"). FAS 151 clarifies the
accounting treatment of abnormal amounts of idle facility expense, freight,
handling costs and spoilage such that these items be recognized as
current-period charges regardless of whether they meet the criterion established
in Accounting Research Bulletin ("ARB") No. 43, Chapter 4. This statement is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005, with earlier application permitted. We are assessing the impact that
FAS 151 will have on our financial statements.
In December 2004, the FASB issued a revision ("the revision") of FASB Statement
No. 123, Accounting for Stock-Based Compensation, ("FAS 123R") which also
supersedes APB Opinion No 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. The revision establishes standards for the
accounting treatment of transactions in which an entity exchanges its equity
instruments for goods or services, as well as certain transactions in which the
entity may settle based on the fair value or exchange of the entity's equity
instruments. In addition to providing additional guidance on how to measure and
report fair value of these equity instruments, the pronouncement also gives
guidance on option expense, related tax benefits, and cash flow treatment, among
other things. In April 2005, the Securities and Exchange Commission postponed
the effective date of FAS 123R until the fiscal year beginning after June 15,
2005 (our first quarter of 2006). We are assessing the impact that the revision
will have on our financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47"), Accounting
for Conditional Asset Retirement Obligations, which is an interpretation of FASB
Statement No. 143 ("FAS 143"). The interpretation clarifies that the term
conditional asset retirement obligation, as used in SFAS 143, refers to a legal
obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be
within the control of the entity. The interpretation is effective no later than
the end of fiscal years ending after December 15, 2005. We are currently
evaluating the impact that FIN 47 will have on our financial statements.
FORWARD-LOOKING STATEMENTS
This report and other of our 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 us and are subject
to uncertainties and factors relating to our operations and business
environment, all of which are difficult to predict and many of which are beyond
our 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.
We undertake 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
We are exposed to market risk in the normal course of business activity due to
our operations in different foreign currencies and our 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. We have
established policies and procedures governing our management of market risks and
the use of financial instruments to manage exposure to such risks. Management
continually reviews the balance between foreign-currency-denominated assets and
liabilities in order to minimize our exposure to foreign exchange fluctuations.
We have not historically actively hedged any of our foreign currency risk;
however, we acquired the following five fair value hedges as part of the
Autotype acquisition in June 2005. We have no plans to re-new the Autotype
hedging program when these options expire.
- Option to purchase 880 British pounds for $1,500 U.S dollars which expired
in June 2005
- Option to purchase 837 British pounds for $1,500 U.S dollars which expires
in July 2005
- Option to purchase 207 British pounds for 1,267 Denmark krona which
expires in September 2005
- Option to purchase 300 British pounds for 1,660 Denmark krona which
expires in December 2005
- Option to purchase 300 British pounds for 1,669 Denmark krona which
expires in March 2006
The total fair value of the above options is approximately $43 as of June 30,
2005. Gains and losses related to these options for the three and six-months
ended June 30, 2005 were negligible and were included in Other income (expense).
We operate manufacturing facilities in ten countries and sell products in over
twenty-five countries. Approximately 60% of our net sales and total assets are
denominated in currencies other than the US Dollar, predominantly the Euro, the
Pound Sterling, the Yen, and the Hong Kong Dollar. For the six-month period
ending June 30, 2005 foreign currency translation had a slightly positive effect
on diluted earnings per share. The impact of exchange rate changes on operating
cash flows has historically been comparable to the impact on earnings.
Our business operations consist principally of manufacture and sale of specialty
chemicals, supplies and related equipment to customers throughout much of the
world. Approximately 42% of our business is concentrated in the printing
business, used for a wide variety of applications, while 58% of our business is
concentrated on customers supplying a wide variety of chemicals to manufacturers
of automotive, other industrial, electronics and offshore applications. As is
usual for these businesses, we generally do 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.
In the past, we were exposed to interest rate risk, primarily from our floating
interest rate credit facilities. At the time, we entered into interest rate
swap agreements for the purpose of reducing our exposure to possible future
changes in interest rates on these facilities. On September 20, 2001, we
refinanced these facilities with 9 1/8% Senior Subordinated Notes, which reduced
our exposure to changing interest rates and is currently unhedged. However,
there is still one interest rate swap outstanding. This swap formerly hedged
our floating rate debt, but because we refinanced these obligations, the swap is
now considered speculative. For additional information, see Note 10, Guarantor
Financial Statements, in Part I, Item 1. Based upon our current debt structure
and expected levels of borrowing for the remainder of 2005, an increase in
interest rates would not result in an incremental interest expense.
We do not enter into derivative financial instruments for trading purposes but
have certain other supply agreements for raw material inventories and have
chosen not to enter into any price hedging with our suppliers for commodities.
ITEM 4:
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and the
Senior Vice President of Finance, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this report. Based on
that evaluation, these officers have concluded that our disclosure controls and
procedures are effective for the purpose of ensuring that material information
required to be in this quarterly report is made known to them by others on a
timely basis and that information required to be disclosed in the reports that
we file or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
We are continuously seeking to improve the efficiency and effectiveness of its
operations and of its internal controls. This results in refinements to
processes throughout the company. However, there has been no change in our
internal control over financial reporting that occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1 : Legal Proceedings
Refer to the notes to the consolidated condensed financial statements,
Contingencies and Legal Matters, Note 10.
ITEM 2 : Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3 : Defaults Upon Senior Securities
None.
ITEM 4 : Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders at the annual
meeting of stockholders, which was held on May 12, 2005:
The stockholders voted to re-elect Robert L. Ecklin, Daniel H. Leever, Donald G.
Ogilvie, Joseph M. Silvestri, James C. Smith, and T. Quinn Spitzer to continue
as directors of the Company. A total of 29,574,193 votes were represented with
respect to this matter, with voting on each specific nominee as follows:
AGAINST BROKER
FOR OR WITHHELD NON-VOTES
---------- ----------- ---------
Robert L. Ecklin. . 27,119,409 2,454,784 -
Daniel H. Leever. . 29,346,613 227,580 -
Donald G. Ogilvie . 27,085,822 2,488,371 -
Joseph M. Silvestri 20,368,457 9,205,736 -
James C. Smith. . . 27,061,921 2,512,272 -
T. Quinn Spitzer. . 27,102,877 2,471,316 -
A proposal to ratify the selection of KPMG LLP as our Certified Public
Accountants was approved by the stockholders. A total of 29,574,193 votes were
represented, with a total of 29,117,032 (94%) shares voting for the proposal,
447,572 voting against the proposal, and 9,589 shares abstaining from voting.
A proposal to approve an amendment to the MacDermid, Incorporated Special Stock
Purchase Plan was approved by the stockholders. A total of 29,574,193 votes
were represented, with a total of 20,366,669 (66%) shares voting for the
proposal, 4,974,703 voting against the proposal, 1,596,252 shares abstaining
from voting, and 2,636,569 broker non-votes.
ITEM 5 : Other Information
None.
ITEM 6(a) : Exhibits
31.1 Certification of Daniel H. Leever pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Gregory M. Bolingbroke pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
ITEM 6(b) : Reports on Form 8-K
Current Report on Form 8-K dated May 5, 2005, regarding earnings for the first
quarter of fiscal year 2005 ended March 31, 2005.
Current Report on Form 8-K dated May 5, 2005, regarding affirmation of
independence pursuant to New York Stock Exchange regulations.
Current Report on Form 8-K dated May 6, 2005, regarding an amendment to the
MacDermid Incorporated Special Stock Purchase Plan.
Current Report on Form 8-K dated May 12, 2005, regarding authorization to
repurchase the Company common stock.
Current Report on Form 8-K/A dated May 12, 2005, regarding amended authorization
to repurchase the Company common stock.
Current Report on Form 8-K dated June 14, 2005, regarding the acquisition of
Autotype International Ltd and associated entities.
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: August 8, 2005 /s/ Daniel H. Leever
---------------- -----------------------
Daniel H. Leever
Chairman and
Chief Executive Officer
Date: August 8, 2005 /s/ Gregory M. Bolingbroke
---------------- -----------------------------
Gregory M. Bolingbroke
Senior Vice President, Finance