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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 September 30, 2004
--------------------
[ ] 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
-------
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
--------------
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 November 1, 2004
---------------------- ---------------------------------
Common Stock, no par value 30,297,727 shares
MACDERMID, INCORPORATED
INDEX
PART I: Financial Information
Item 1: Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets as of September 30, 2004, and
December 31, 2003.
Consolidated Condensed Statements of Earnings for the three- and
nine-month periods ended September 30, 2004.
Consolidated Statements of Cash Flows for the nine-month periods
Ended September 30, 2004, and 2003.
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 BALANCE SHEETS
(Amounts in thousands of dollars)
September 30, December 31,
2004 2003
--------------- -------------
Assets . . . . . . . . . . . . . . . . . . . . . (Unaudited)
- ------------------------------------------------
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 112,053 $ 61,294
Accounts receivable, net of allowance
for doubtful receivables of $13,232
and $11,908, respectively. . . . . . . . . . . . 135,081 137,149
Inventories. . . . . . . . . . . . . . . . . . . 78,318 75,775
Prepaid expenses . . . . . . . . . . . . . . . . 9,431 8,137
Deferred income taxes. . . . . . . . . . . . . . 24,164 22,960
- ------------------------------------------------ --------------- -------------
Total current assets . . . . . . . . . . . . 359,047 305,315
Property, plant and equipment, net
of accumulated depreciation of
177,956 and $172,741, respectively. . . . . . . 104,317 113,642
Goodwill . . . . . . . . . . . . . . . . . . . . 194,287 194,200
Intangibles, net of accumulated amortization of
11,556 and $10,266, respectively. . . . . . . . 28,811 30,061
Deferred income taxes. . . . . . . . . . . . . . 32,944 31,759
Other assets, net. . . . . . . . . . . . . . . . 17,260 22,258
--------------- -------------
Total Assets $ 736,666 $ 697,235
=============== =============
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars except share and per share amounts)
September 30, December 31,
2004 2003
--------------- --------------
Liabilities and shareholders' equity:. . . . (Unaudited)
- --------------------------------------------
Current liabilities:
- --------------------------------------------
Accounts payable . . . . . . . . . . . . . . $ 52,621 $ 54,061
Accrued compensation . . . . . . . . . . . . 11,503 11,860
Accrued interest . . . . . . . . . . . . . . 5,896 12,732
Accrued income taxes payable . . . . . . . . 11,181 3,220
Other current liabilities. . . . . . . . . . 44,144 43,750
--------------- --------------
Total current liabilities. . . . . . . . 125,345 125,623
Long-term debt and capital lease obligations 301,058 301,203
Retirement benefits, less current portion. . 20,279 20,679
Deferred income taxes. . . . . . . . . . . . 7,308 6,232
Other long-term liabilities. . . . . . . . . 4,509 4,486
--------------- --------------
Total liabilities. . . . . . . . . . . . 458,499 458,223
--------------- --------------
Shareholders' equity:
- --------------------------------------------
Common stock, authorized 75,000,000
shares, issued 46,827,701 at September 30,
2004, and 46,813,138 shares at December
31, 2003, at stated value of $1.00 per share 46,828 46,813
Additional paid-in capital . . . . . . . . . 30,538 25,884
Retained earnings. . . . . . . . . . . . . . 313,388 278,705
Accumulated other comprehensive income . . . 2,126 2,355
Less - cost of common shares held in
treasury, 16,547,686 at September 30, 2004,
16,548,604 at December 31, 2003. . . . . . . (114,713) (114,745)
--------------- --------------
Total shareholders' equity . . . . . . . 278,167 239,012
--------------- --------------
$ 736,666 $ 697,235
=============== ==============
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands of dollars except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales . . . . . . . . . . . . . . . $161,585 $149,657 $488,650 $457,780
Cost of sales . . . . . . . . . . . . . 85,210 79,741 256,675 241,528
--------- --------- --------- ---------
Gross profit. . . . . . . . . . . . 76,375 69,916 231,975 216,252
Operating expenses:
Selling, technical and administrative 45,254 42,188 136,841 128,973
Research and development. . . . . . . 5,375 4,950 15,928 14,676
--------- --------- --------- ---------
50,629 47,138 152,769 143,649
--------- --------- --------- ---------
Operating profit. . . . . . . . . . 25,746 22,778 79,206 72,603
Other income (expense):
Interest income . . . . . . . . . . . 367 120 779 626
Interest expense. . . . . . . . . . . (7,654) (7,550) (23,321) (23,219)
Miscellaneous income. . . . . . . . . 92 2,833 531 3,172
--------- --------- --------- ---------
(7,195) (4,597) (22,011) (19,421)
Earnings from continuing operations
before income taxes . . . . . . . . . 18,551 18,181 57,195 53,182
Income taxes. . . . . . . . . . . . . . (6,508) (5,820) (18,874) (17,019)
--------- --------- --------- ---------
Earnings from continuing operations . . 12,043 12,361 38,321 36,163
Discontinued operations, net of tax . . - 66 - (40)
Cumulative effect of accounting
change. . . . . . . . . . . . . . . . - 1,014 - 1,014
--------- --------- --------- ---------
Net earnings. . . . . . . . . . . . . . $ 12,043 $ 13,441 $ 38,321 $ 37,137
========= ========= ========= =========
Basic earnings per common share:
Continuing operations before
cumulative effect of accounting
change and discontinued. . . . . . $ 0.40 $ 0.40 $ 1.27 $ 1.15
operations
Discontinued operations. . . . . . . - - - -
Cumulative effect of accounting
change. . . . . . . . . . . . . . - 0.03 - 0.03
--------- --------- --------- ---------
Net earnings per common share . . $ 0.40 $ 0.43 $ 1.27 $ 1.18
========= ========= ========= =========
Diluted earnings per common share:
Continuing operations before
cumulative effect of accounting
change and discontinued. . . . . . $ 0.39 $ 0.40 $ 1.24 $ 1.14
operations
Discontinued operations. . . . . . . - - - -
Cumulative effect of accounting
change. . . . . . . . . . . . . . - 0.03 - 0.03
--------- --------- --------- ---------
Net earnings per common share. . . $ 0.39 $ 0.43 $ 1.24 $ 1.17
========= ========= ========= =========
Weighted average common shares
outstanding:
Basic . . . . . . . . . . . . . . . . 30,280 30,906 30,276 31,570
========= ========= ========= =========
Diluted . . . . . . . . . . . . . . . 30,908 31,059 30,988 31,744
========= ========= ========= =========
Cash dividends per common share . . . $ 0.04 $ 0.02 $ 0.12 $ 0.06
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(Unaudited)
Nine months ended
September 30,
2004 2003
--------- ---------
Net cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . $ 38,321 $ 37,137
Adjustments to reconcile net income to
net income from continuing operations:
Loss from discontinued operations, net of tax - 40
--------- ---------
Income from continuing operations. . . . . . . 38,321 37,177
Adjustments to reconcile earnings from
continuing operations to net cash provided by
operating activities:
Depreciation . . . . . . . . . . . . . . . . . 12,011 11,817
Amortization . . . . . . . . . . . . . . . . . 2,159 2,412
Provision for bad debts. . . . . . . . . . . . 3,024 3,559
Deferred income taxes. . . . . . . . . . . . . (1,431) -
Stock compensation expense . . . . . . . . . . 4,383 3,100
Changes in assets and liabilities:
(Increase) decrease in receivables. . . . . (1,890) 3,057
(Increase) decrease in inventories. . . . . (2,861) 2,411
Decrease in prepaid expenses. . . . . . . . (1,317) (2,819)
Decrease in accounts payable. . . . . . . . (2,355) (3,856)
Decrease in accrued expenses. . . . . . . . (6,127) (1,786)
Increase in income tax liabilities. . . . . 7,952 3,373
Other . . . . . . . . . . . . . . . . . . . 5,239 3,157
--------- ---------
Cash provided by continuing operations . . . . 57,108 61,602
Cash provided by discontinued operations . . . - 657
--------- ---------
Net cash flows provided by operating
activities. . . . . . . . . . . . . . . . 57,108 62,259
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . (5,933) (7,179)
Proceeds from disposition of fixed assets. . 2,721 1,688
--------- ---------
Net cash flows used in investing activities. (3,212) (5,491)
Cash flows from financing activities:
Net repayments of short-term borrowings. . . (533) (4,735)
Proceeds from long-term borrowings . . . . . 25 3,570
Repayments of long-term borrowings . . . . . (493) (5,367)
Issuance from (purchase of) treasury shares. 31 (51,753)
Proceeds from exercise of stock options. . . 285 812
Dividends paid . . . . . . . . . . . . . . . (2,423) (2,846)
--------- ---------
Net cash flows used in financing activities. (3,108) (60,319)
Effect of exchange rate changes on cash
and cash equivalents . . . . . . . . . . . . . (29) 1,637
--------- ---------
Net increase (decrease) in cash and cash
- ----------------------------------------------
equivalents. . . . . . . . . . . . . . . . . . 50,759 (1,914)
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . . . 61,294 32,019
--------- ---------
Cash and cash equivalents at end of period . . $112,053 $ 30,105
========= =========
Cash paid for interest . . . . . . . . . . . . $ 29,047 $ 30,639
========= =========
Cash paid for income taxes . . . . . . . . . . $ 12,353 $ 13,664
========= =========
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 September 30, 2004, and the results of operations
for the three- and nine-month periods ended September 30, 2004, and 2003. 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, 2003.
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 2003 results have been reclassified to conform to the
current year presentation.
NOTE 2. 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 2,067,650 and 1,279,260 shares of common stock were outstanding during
the periods ended September 30, 2004, and 2003, but were not included in the
computation of diluted EPS because those options would be antidilutive based on
market prices as of September 30, 2004, and 2003, respectively.
The following table reconciles basic weighted-average common shares outstanding
to diluted weighted-average common shares outstanding:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
-------------------------------- ------------------------------- ---------- ----------
Basic common shares. . . . . . . 30,280,014 30,906,254 30,275,800 31,570,451
Dilutive effect of stock options 627,663 153,177 712,459 173,120
-------------------------------- ------------------------------- ---------- ----------
Diluted common shares. . . . . . 30,907,677 31,059,431 30,988,259 31,743,571
================================ =============================== ========== ==========
On May 7, 2003, we executed a purchase and sale agreement with a third party to
acquire 2,201,720 outstanding shares of MacDermid, Incorporated common shares on
or before November 3, 2003. We purchased 1,350,000 on that date at $22.60 per
share and 851,720 shares on September 22, 2003, for $25.00 per share. Share
purchases are reflected in our treasury shares balance on our Consolidated
Balance Sheets. Refer to our Annual Report to Shareholders for the year ended
December 31, 2003, for more information. No share purchases of this nature were
made in the three- or nine-month periods ending September 30, 2004.
NOTE 3. Stock-Based Plans
We grant stock options to our Board of Directors and to our employees. We also
grant stock awards to our Board of Directors. The stock awards are granted at
fair market value and the related expense is recognized at the date of grant.
The amount of expense recognized during the three- and nine-month periods ended
September 30, 2004, and 2003, related to the stock awards was immaterial.
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 (SFAS 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 month periods ended September
30, 2004, and 2003, we charged $1,352 and $915, respectively, to expense related
to stock options. During the nine month periods ended September 30, 2004, and
2003 we charged $4,314 and $2,986, respectively, to expense related to stock
options. Previously, and since April 1, 1996, we had adopted the disclosure
requirements of SFAS 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 nine-month
periods ended September 30, 2004, and 2003, would have been reduced to the
following pro forma amounts:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2004 2003 2004 2003
------------------------------------ ---------------------------------- -------- --------
Net earnings available for common
shareholders as reported. . . . . . . $ 12,043 $ 13,441 $38,321 $37,137
------------------------------------ ---------------------------------- -------- --------
Add: stock based employee
compensation expense included in
reported net income, net of related
tax effects . . . . . . . . . . . . . 875 622 2,937 2,108
Deduct: total stock based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects. . (875) (701) (3,014) (2,425)
------------------------------------ ---------------------------------- -------- --------
Pro forma net earnings. . . . . . . . $ 12,043 $ 13,362 $38,244 $36,820
----------------------------------- --------------------------------- -------- --------
Net earnings per common share:
Basic
As reported . . . . . . . . . . . $ 0.40 $ 0.43 $ 1.27 $ 1.18
Pro forma . . . . . . . . . . . . $ 0.40 $ 0.43 $ 1.26 $ 1.17
Diluted
As reported . . . . . . . . . . . $ 0.39 $ 0.43 $ 1.24 $ 1.17
Pro forma . . . . . . . . . . . . $ 0.39 $ 0.43 $ 1.23 $ 1.16
NOTE 4. Goodwill and Other Intangible Assets
Acquired intangible assets as of September 30, 2004, and December 31, 2003, are
as follows:
AS OF
SEPTEMBER 30, 2004 DECEMBER 31, 2003
Gross Carrying Accumulated Net Gross Carrying Accumulated Net
Amount Amortization Amount Amount Amortization Amount
------------------- ------------------- ------- --------------- -------------- -------
Patents. . $ 17,566 $ (7,764) $ 9,802 $ 17,566 $ (6,851) $10,715
Trademarks 20,135 (2,098) 18,037 20,133 (1,951) 18,182
Others . . 2,666 (1,694) 972 2,628 (1,464) 1,164
------------------- ------------------- ------- --------------- -------------- -------
Total . $ 40,367 $ (11,556) $28,811 $ 40,327 $ (10,266) $30,061
=================== =================== ======= =============== ============== =======
Included in the table above is the net carrying amount of $16,233 at September
30, 2004, and December 31, 2003, 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 month periods ended
September 30, 2004, and 2003, was $426 and $444, respectively. Amortization
expense related to amortization of intangible assets for the nine month periods
ended September 30, 2004, and 2003, was $1,304 and $1,506, 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 approximate $1,739 for
each of the next five years.
Goodwill carrying amounts for the periods ended September 30, 2004, and December
31, 2003, were $194,287 and $194,200, respectively. Goodwill carrying amounts by
segment as of September 30, 2004, were: Advanced Surface Finishing, $122,156,
and Printing Solutions, $72,131. We acquired a small company in our ASF Segment
in Europe that resulted in an increase of goodwill of approximately $87. The
purchase of this company resulted in an immaterial effect to our financial
statements as the total purchase price was less than $165.
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 2004 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 5. Comprehensive Income
The components of comprehensive income for the three- and nine-month periods
ended September 30, 2004, and 2003, are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---------------------------------- -------------------------------- -------- -------
Net earnings. . . . . . . . . $ 12,043 $ 13,441 $38,321 $37,137
Other comprehensive income:
Unrealized gain on available-
for-sale securities . . . . . 50 - 50 -
Foreign currency translation
adjustment . . . . . . . . 2,118 1,903 (279) 11,218
---------------------------------- -------------------------------- -------- -------
Comprehensive income. . . . . $ 14,211 $ 15,344 $38,092 $48,355
================================== ================================ ======== =======
NOTE 6. 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 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. 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. Intersegment loans and accounts
receivable are included in the calculation of identifiable assets and are
eliminated separately.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Results of operations by segment:
Net sales:
Advanced Surface Finishing
Total segment net sales . . . . . . $ 98,321 $ 87,075 $292,253 $261,337
Intersegment sales. . . . . . . . . (2,185) (1,633) (6,253) (5,297)
--------- --------- --------- ---------
Net external sales for the segment 96,136 85,442 286,000 256,040
Printing Solutions. . . . . . . . . 65,449 64,215 202,650 201,740
--------- --------- --------- ---------
Consolidated net sales . . . . . $161,585 $149,657 $488,650 $457,780
========= ========= ========= =========
Operating profit (loss):
Advanced Surface Finishing . . . $ 16,276 $ 12,577 $ 46,742 $ 37,339
Printing Solutions . . . . . . . 9,470 10,201 32,464 35,264
--------- --------- --------- ---------
Consolidated operating profit. $ 25,746 $ 22,778 $ 79,206 $ 72,603
========= ========= ========= =========
AS OF
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- --------------
Identifiable assets by segment:
Advanced Surface Finishing. . . $ 516,212 $ 513,729
Printing Solutions. . . . . . . 240,014 268,204
Unallocated corporate assets. . 110,012 88,039
Intercompany eliminations . . . (129,572) (172,737)
--------------- --------------
Consolidated assets. . . . . $ 736,666 $ 697,235
=============== ==============
NOTE 7. Acquisition Reserves
We established acquisition reserves (included in accrued expenses) in fiscal
year 1999 when recording the acquisition of W.Canning, plc. The reorganization
of employees was completed in 2001. 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
certain leased facilities and sale of owned facilities. See Note 11,
Contingencies and Legal Matters, regarding environmental activity at these
sites.
As of September 30, 2004, reserves of $411 remained in other accrued liabilities
on the consolidated balance sheet, which relates to the facilities. During the
three- and nine-months ended September 30, 2004, we made cash payments of $48
and $143, respectively, relating to these reserves. Netting against our cash
payments for the three and nine months ended September 30, 2004, was $23 and
$70 in rental income related to a sublease on one of our properties.
NOTE 8. Discontinued Operations
On December 9, 2003, we sold our 60% interest in Eurocir S.A. (Eurocir) to the
40% stakeholders of Eurocir. The Eurocir operations represented substantially
all of the remaining electronics manufacturing segment and as such the sale was
accounted for as discontinued operations in accordance with Statement of
Financial Accounting Standards No.144, Accounting for the Disposal or Impairment
of Long-Lived Assets ("SFAS 144"). The operating results and cash flows from
operations of the electronics manufacturing segment have therefore been
segregated from continuing operations on our consolidated statements of earnings
and consolidated statements of cash flows for all prior periods presented.
The following table presents the amounts segregated from the consolidated
statements of earnings and reflected as discontinued operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
Net Sales. . . . . . . . . . . . . . $ 19,110 $ 61,683
Income (loss) before income taxes. . 96 (58)
Income tax (expense) benefit . . . . (30) 18
-------------------- --------------------
Discountinued operations, net of tax $ 66 $ (40)
==================== ====================
NOTE 9.
The major components of inventory at September 30, 2004 and December 31, 2003
were as follows:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------- ------------------
Finished goods . . . . . . $ 41,767 $ 37,396
Raw materials and supplies 29,077 30,062
Equipment. . . . . . . . . 7,474 8,317
------------------- ------------------
Inventories. . . . . . . . $ 78,318 $ 75,775
=================== ==================
NOTE 10. Pension and postretirement Benefits Plans
The following table shows the components of the net periodic pension benefit
costs we incurred in the three-and nine-month periods ended September 30 2004,
and 2003:
PENSION BENEFITS
-----------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------- -------- --------
2004 2003 2004 2003
------------------ ------- -------- --------
Net periodic benefit cost:
Service Costs . . . . . . . . . . . $ 936 $ 894 $ 2,808 $ 2,682
Interest Costs. . . . . . . . . . . 898 820 2,694 2,460
Expected return on plan assets. . . (876) (716) (2,628) (2,148)
Amortization of prior service costs 6 6 18 18
Recognized actuarial (gain)/loss. . 83 60 249 180
------------------ ------- -------- --------
Net periodic benefit cost . . . . . $ 1,047 $1,064 $ 3,141 $ 3,192
================== ======= ======== ========
The estimated net periodic benefit cost for our other postretirement benefits
was $160 and $480 for the three- and nine-months ended September 30, 2004, and
2003, respectively.
We previously disclosed in our financial statements for the year ended December
31, 2003, that we expected to contribute $3,136 to our pension plans in 2004.
As of September 30, 2004, $2,000 of contributions have been made. We currently
expect to contribute $1,136 to our pension plans during the remainder of 2004.
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 as of
September 30, 2004, however due to the fact that the regulations surrounding the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 are not
yet final, our adoption of this FAS had no effect on our financial statements
for the three or nine-month periods ended September 30, 2004. See further
discussion in Item 2: Management's Discussion and Analysis, "Critical Accounting
Estimates."
NOTE 11. Contingencies, Environmental and Legal Matters
Environmental Issues:
The nature of the 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 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, 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 the Company's 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. The
Company has 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. The Company has found no information connecting it or its
subsidiaries to these sites and 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 has been 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 $650 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.
NOTE 13. 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. 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, 2003.
The following financial information sets forth our Condensed Consolidating
Balance Sheets as of September 30, 2004, and December 31, 2003; the Condensed
Consolidating Statements of Earnings for the three- and nine-month periods
ending September 30, 2004, and 2003; and the Condensed Consolidating Statements
of Cash Flows for the nine months ending September 30, 2004, and 2003.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004
(Unaudited)
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------- ------------- -------------- -------------- -----------------
Assets
- ----------------------------------
Current assets:
Cash and cash equivalents. . . . . $ 63,210 $ 1,361 $ 47,482 $ - $ 112,053
Accounts receivables, net. . . . . 11,181 15,626 108,274 - 135,081
Due (to) from affiliates . . . . . 13,561 74,862 (88,423) - -
Inventories, net . . . . . . . . . 5,694 22,368 50,256 - 78,318
Prepaid expenses . . . . . . . . . 1,165 2,468 5,798 - 9,431
Deferred income taxes. . . . . . . 17,883 - 6,281 - 24,164
---------- ------------- -------------- -------------- -----------------
Total current assets . . . . . . . 112,694 116,685 129,668 - 359,047
Property, plant and equipment, net 14,494 34,023 55,800 - 104,317
Goodwill . . . . . . . . . . . . . 21,680 68,574 104,033 - 194,287
Intangibles, net . . . . . . . . . - 5,171 23,640 - 28,811
Investments in subsidiaries. . . . 458,124 228,734 - (686,858) -
Deferred income taxes. . . . . . . 19,745 - 13,199 - 32,944
Other assets, net. . . . . . . . . 6,269 4,047 6,944 - 17,260
---------- ------------- -------------- -------------- -----------------
$ 633,006 $ 457,234 $ 333,284 $ (686,858) $ 736,666
========= ============== ============= ============== ==================
CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 2004
(Unaudited)
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------- ------------- ------------- -------------- -----------------
Liabilities and Shareholders' equity
- ------------------------------------
Current liabilities:
Accounts payable . . . . . . . . . . $ 9,508 $ 6,878 $ 36,235 $ - $ 52,621
Accrued compensation . . . . . . . . 3,395 1,983 6,125 - 11,503
Accrued interest . . . . . . . . . . 5,891 - 5 - 5,896
Accrued income taxes payable . . . . 4,201 1,082 5,898 - 11,181
Other current liabilities. . . . . . 13,301 5,792 25,051 - 44,144
---------- ------------- ------------- -------------- -----------------
Total current liabilities. . . . . . 36,296 15,735 73,314 - 125,345
Long-term obligations. . . . . . . . 300,354 324 380 - 301,058
Retirement benefits, less
current portion. . . . . . . . . . . 14,775 - 5,504 - 20,279
Deferred income taxes. . . . . . . . - - 7,308 - 7,308
Other long-term liabilities. . . . . 3,414 260 835 - 4,509
---------- ------------- ------------- -------------- -----------------
Total liabilities. . . . . . . . . . 354,839 16,319 87,341 - 458,499
---------- ------------- ------------- -------------- -----------------
Total shareholders' equity . . . . . 278,167 440,915 245,943 (686,858) 278,167
---------- ------------- ------------- -------------- -----------------
Total Liabilities and
Shareholders' Equity . . . . . . . . $ 633,006 $ 457,234 $ 333,284 $ (686,858) $ 736,666
========== ============= ============= ============== =================
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------- ------------- -------------- -------------- -----------------
Assets
- ----------------------------------
Current assets:
Cash and cash equivalents. . . . . $ 18,295 $ 1,286 $ 41,713 $ - $ 61,294
Accounts receivables, net. . . . . 10,598 16,523 110,028 - 137,149
Due (to) from affiliates . . . . . 89,236 12,554 (101,790) - -
Inventories, net . . . . . . . . . 6,417 23,343 46,015 - 75,775
Prepaid expenses . . . . . . . . . 1,188 1,925 5,024 - 8,137
Deferred income taxes. . . . . . . 17,890 - 5,070 - 22,960
---------- ------------- -------------- -------------- -----------------
Total current assets . . . . . . . 143,624 55,631 106,060 - 305,315
Property, plant and equipment, net 13,962 39,386 60,294 - 113,642
Goodwill . . . . . . . . . . . . . 21,680 68,574 103,946 - 194,200
Intangibles, net . . . . . . . . . - 5,672 24,389 - 30,061
Investments in subsidiaries. . . . 391,289 232,851 - (624,140) -
Deferred income taxes. . . . . . . 29,601 - 2,158 - 31,759
Other assets, net. . . . . . . . . 8,196 6,532 7,530 - 22,258
---------- ------------- -------------- -------------- -----------------
$ 608,352 $ 408,646 $ 304,377 $ (624,140) $ 697,235
========== ============= ============== ============== =================
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2003
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------- ------------- -------------- -------------- -----------------
Liabilities and Shareholders' equity
- -----------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . $ 8,281 $ 7,268 $ 38,512 $ - $ 54,061
Accrued compensation. . . . . . . . . . . 3,534 2,025 6,301 - 11,860
Accrued interest. . . . . . . . . . . . . 12,658 - 74 - 12,732
Accrued income taxes payable. . . . . . . 13,095 882 (10,757) - 3,220
Other current liabilities . . . . . . . . 12,965 6,631 24,154 - 43,750
---------- ------------- -------------- -------------- -----------------
Total current liabilities . . . . . . . . 50,533 16,806 58,284 - 125,623
Long-term obligations . . . . . . . . . . 300,265 524 414 - 301,203
Retirement benefits, less current portion 15,123 - 5,556 - 20,679
Deferred income taxes . . . . . . . . . . - - 6,232 - 6,232
Other long-term liabilities . . . . . . . 3,419 27 1,040 - 4,486
---------- ------------- -------------- -------------- -----------------
Total liabilities . . . . . . . . . . . . 369,340 17,357 71,526 - 458,223
---------- ------------- -------------- -------------- -----------------
Total shareholders' equity. . . . . . . . 239,012 391,289 232,851 (624,140) 239,012
---------- ------------- -------------- -------------- -----------------
Total liabilities and
stockholders' equity. . . . . . . . . . . $ 608,352 $ 408,646 $ 304,377 $ (624,140) $ 697,235
========== ============= ============== ============== =================
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
----------- -------------- -------------- -------------- ------------------
Net sales . . . . . . . . . . $ 22,661 $ 39,454 $ 103,880 $ (4,410) $ 161,585
Cost of sales . . . . . . . . 14,225 16,938 58,457 (4,410) 85,210
----------- -------------- -------------- -------------- ------------------
Gross profit. . . . . . . . . 8,436 22,516 45,423 - 76,375
Operating expenses:
Selling, technical and
administrative. . . . . . . . 11,694 7,536 26,024 - 45,254
Research and development. . . 1,583 1,897 1,895 - 5,375
----------- -------------- -------------- -------------- ------------------
13,277 9,433 27,919 - 50,629
----------- -------------- -------------- -------------- ------------------
Operating (loss) profit . . . (4,841) 13,083 17,504 25,746
Equity in earnings of
subsidiaries. . . . . . . . . 20,638 13,098 - (33,736) -
Interest income . . . . . . . 159 6 202 - 367
Interest expense. . . . . . . (7,641) (6) (7) - (7,654)
----------- -------------- -------------- -------------- ------------------
Miscellaneous income
(expense), net. . . . . . . . 102 (45) 35 - 92
----------- -------------- -------------- -------------- ------------------
13,258 13,053 230 (33,736) (7,195)
----------- -------------- -------------- -------------- ------------------
Earnings (loss) before taxes. 8,417 26,136 17,734 (33,736) 18,551
Income tax benefit
(expense) . . . . . . . . . . 3,626 (5,498) (4,636) - (6,508)
----------- -------------- -------------- -------------- ------------------
Net earnings (loss) . . . . . $ 12,043 $ 20,638 $ 13,098 $ (33,736) $ 12,043
=========== ============== ============== ============== ==================
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
UNRESTRICTED MACDERMID
GUARANTOR NONGUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
-------------- -------------- -------------- ------------- -------------- ------------------
Net sales . . . . . . . $ 20,867 $ 39,351 $ 93,040 $ - $ (3,601) $ 149,657
Cost of sales . . . . . 13,876 18,771 50,695 - (3,601) 79,741
-------------- -------------- -------------- ------------- -------------- ------------------
Gross profit. . . . . . 6,991 20,580 42,345 - - 69,916
Operating expenses:
Selling, technical and
administrative. . . . . 9,702 7,961 24,525 - - 42,188
Research and
development . . . . . . 1,789 1,690 1,471 - - 4,950
-------------- -------------- -------------- ------------- -------------- ------------------
11,491 9,651 25,996 - - 47,138
-------------- -------------- -------------- ------------- -------------- ------------------
Operating profit (loss) (4,500) 10,929 16,349 - - 22,778
Equity in earnings of
subsidiaries. . . . . . 18,758 10,878 66 - (29,702) -
Interest income . . . . 25 27 68 - - 120
Interest expense. . . . (7,938) 1,112 (724) - - (7,550)
Miscellaneous income
(expense), net. . . . . 2,766 102 (35) - - 2,833
-------------- -------------- -------------- ------------- -------------- ------------------
13,611 12,119 (625) - - (4,597)
-------------- -------------- -------------- ------------- -------------- ------------------
Earnings (loss) from
continuing operations
before taxes. . . . . . 9,111 23,048 15,724 - (29,702) 18,181
Income tax benefit
(expense) . . . . . . . 3,316 (4,290) (4,846) - - (5,820)
-------------- -------------- -------------- ------------- -------------- ------------------
Earnings from
continuing operations . 12,427 18,758 10,878 - (29,702) 12,361
Discontinued
operations. . . . . . . - - - 66 - 66
Cumulative effect of
accounting change . . . 1,014 - - - - 1,014
-------------- -------------- -------------- ------------- -------------- ------------------
Net earnings (loss) . . $ 13,441 $ 18,758 $ 10,878 $ 66 $ (29,702) $ 13,441
============== ============== ============== ============= ============== ==================
CONSOLIDATED STATEMENTS OF EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
----------- -------------- -------------- -------------- ------------------
Net sales . . . . . . . . . . $ 69,960 $ 120,589 $ 311,403 $ (13,302) $ 488,650
Cost of sales . . . . . . . . 45,348 51,216 173,413 (13,302) 256,675
----------- -------------- -------------- -------------- ------------------
Gross profit. . . . . . . . . 24,612 69,373 137,990 - 231,975
Operating expenses:
Selling, technical and
administrative. . . . . . . . 33,510 22,214 81,117 - 136,841
Research and development. . . 5,103 5,424 5,401 - 15,928
----------- -------------- -------------- -------------- ------------------
38,613 27,638 86,518 - 152,769
----------- -------------- -------------- -------------- ------------------
Operating profit (loss) . . . (14,001) 41,735 51,472 - 79,206
Equity in earnings of
subsidiaries. . . . . . . . . 62,886 37,724 - (107,118)) -
Interest income . . . . . . . 283 16 480 - 779
Interest expense. . . . . . . (23,067) (18) (236) - (23,321)
Miscellaneous income
(expense), net. . . . . . . . 769 129 (367) - 531
----------- -------------- -------------- -------------- ------------------
40,871 37,851 (123) (107,118) (22,011)
----------- -------------- -------------- -------------- ------------------
Earnings (loss) before taxes. 26,870 79,586 51,349 (107,118) 57,195
Income tax benefit
(expense) . . . . . . . . . . 11,451 (16,700) (13,625) - (18,874)
----------- -------------- -------------- -------------- ------------------
Net earnings (loss) . . . . . $ 38,321 $ 62,886 $ 37,724 $ (107,118) $ 38,321
=========== ============== ============== ============== ==================
CONSOLIDATED STATEMENTS OF EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
UNRESTRICTED MACDERMID
GUARANTOR NONGUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
-------------- -------------- -------------- --------------
Net sales . . . . . . . $ 65,938 $ 125,671 $ 278,346 $ - $ (12,175) $ 457,780
Cost of sales . . . . . 42,512 57,430 153,761 - (12,175) 241,528
-------------- -------------- -------------- -------------- -------------- ------------------
Gross profit. . . . . . 23,426 68,241 124,585 - - 216,252
Operating expenses:
Selling, technical and
administrative. . . . . 31,339 25,221 72,413 - - 128,973
Research and
development . . . . . . 5,084 5,119 4,473 - - 14,676
-------------- -------------- -------------- -------------- -------------- ------------------
36,423 30,340 76,886 - - 143,649
-------------- -------------- -------------- -------------- -------------- ------------------
Operating profit (loss) (12,997) 37,901 47,699 - - 72,603
Equity in earnings of
subsidiaries. . . . . . 57,355 31,064 (40) - (88,379) -
Interest income . . . . 105 133 388 - - 626
Interest expense. . . . (24,123) 3,356 (2,452) - - (23,219)
Miscellaneous income
(expense), net. . . . . 3,029 380 (237) - - 3,172
-------------- -------------- -------------- -------------- -------------- ------------------
36,366 34,933 (2,341) - (88,379) (19,421)
-------------- -------------- -------------- -------------- -------------- ------------------
Earnings (loss) from
continuing operations
before taxes. . . . . . 23,369 72,834 45,358 - (88,379) 53,182
Income tax benefit
(expense) . . . . . . . 12,754 (15,479) (14,294) - - (17,019)
-------------- -------------- -------------- -------------- -------------- ------------------
Earnings from
continuing operations . 36,123 57,355 31,064 (88,379) 36,163
Discontinued
operations. . . . . . . - - - (40) - (40)
Cumulative effect of
accounting change . . . 1,014 - - - - 1,014
-------------- -------------- -------------- -------------- -------------- ------------------
Net earnings (loss) . . $ 37,137 $ 57,355 $ 31,064 $ (40) $ (88,379) $ 37,137
============== ============== ============== ============== ============== ==================
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES AND SUBSIDIARIES
------------- -------------- -------------- ------------------
Net cash flows (used in)
provided by operating
activities. . . . . . . . . . . $ (17,419) $ 31,137 $ 43,390 $ 57,108
Investing activities:
Capital expenditures. . . . . . (2,267) (945) (2,721) (5,933)
Proceeds from disposition of
fixed assets. . . . . . . . . . 1 2,211 509 2,721
------------- -------------- -------------- ------------------
Net cash flows (used in)
provided by investing
activities. . . . . . . . . . . (2,266) 1,266 (2,212) (3,212)
Financing activities:
Net proceeds from
(repayments of) short-term
borrowings. . . . . . . . . . . - - (533) (533)
Proceeds from long-term
borrowings. . . . . . . . . . . 25 - - 25
Repayments of long-term
borrowings. . . . . . . . . . . 43,836 (27,040) (17,289) (493)
Issuance of treasury shares . . 31 - - 31
Proceeds from exercise of
stock options . . . . . . . . . 285 - - 285
Dividends paid. . . . . . . . . 20,423 (5,288) (17,558) (2,423)
------------- -------------- -------------- ------------------
Net cash flows provided by
(used in) financing activities. 64,600 (32,328) (35,380) (3,108)
Effect of exchange rate
changes on cash and cash
equivalents . . . . . . . . . . - - (29) (29)
------------- -------------- -------------- ------------------
Net increase (decrease) in
cash and cash equivalents . . . 44,915 75 5,769 50,759
Cash and cash equivalents at
beginning of period . . . . . . 18,295 1,286 41,713 61,294
------------- -------------- -------------- ------------------
Cash and cash equivalents at
end of period . . . . . . . . . $ 63,210 $ 1,361 $ 47,482 $ 112,053
============= ============== ============== ==================
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
UNRESTRICTED MACDERMID
GUARANTOR NONGUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES AND SUBSIDIARIES
---------------- -------------- -------------- -------------- ------------------
Net cash flows (used in)
provided by operating
activities. . . . . . . . . . . $ (19,160) $ 33,233 $ 46,454 $ 1,732 $ 62,259
Investing activities:
Capital expenditures. . . . . . (3,487) (728) (2,443) (521) (7,179)
Proceeds from disposition of
fixed assets. . . . . . . . . . 1,590 - 98 - 1,688
---------------- -------------- -------------- -------------- ------------------
Net cash flows (used in)
provided by investing
activities. . . . . . . . . . . (1,897) (728) (2,345) (521) (5,491)
---------------- -------------- -------------- -------------- ------------------
Financing activities:
Net proceeds from
(repayments of) short-term
borrowings. . . . . . . . . . . 33,919 (25,528) (13,171) 45 (4,735)
Proceeds from long-term
borrowings. . . . . . . . . . . - - - 3,570 3,570
Repayments of long-term
borrowings. . . . . . . . . . . - - (383) (4,984) (5,367)
Proceeds from stock options . . 812 - - - 812
Purchase of treasury shares . . (51,753) - - - (51,753)
Dividends paid. . . . . . . . . 32,728 (7,638) (27,936) - (2,846)
---------------- -------------- -------------- -------------- ------------------
Net cash flows provided by
(used in) financing activities. 15,706 (33,166) (41,490) (1,369) (60,319)
Effect of exchange rate
changes on cash and cash
equivalents . . . . . . . . . . - - 1,635 2 1,637
---------------- -------------- -------------- -------------- ------------------
Net increase (decrease) in
cash and cash equivalents . . . (5,351) (661) 4,254 (156) (1,914)
Cash and cash equivalents at
beginning of period . . . . . . 14,153 2,314 15,268 284 32,019
---------------- -------------- -------------- -------------- ------------------
Cash and cash equivalents at
end of period . . . . . . . . . $ 8,802 $ 1,653 $ 19,522 $ 128 $ 30,105
================ ============== ============== ============== ==================
ITEM 2:
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
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 imprint electrical patterns on circuit boards for the
electronics industry, and offshore lubricants and cleaners for the offshore oil
and gas markets. The Printing Solutions (MPS) segment supplies a complete line
of offset printing blankets, photo-polymer plates and digital printers for use
in the commercial printing and packaging industries for image transfer. In 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. As of
September 30, 2004, approximately 60% of our net sales and 70% our identifiable
assets were denominated in currencies other than the US dollar, predominantly
the Euro, British Pound Sterling (GBP), Yen (Yen), and the Hong Kong Dollar. 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. During all periods presented, net sales and net
earnings were positively impacted by the effect of foreign currency translation
resulting primarily from the aforementioned currencies strengthening against the
US dollar compared to the same periods in 2003, as discussed further below.
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, and
- - acquiring strategically sound companies or products.
Our competitors include many large multi-national chemical firms based in
Europe, Asia, and the US. 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 third quarter and first nine months of 2004 reflects the
results of our key opportunities, philosophies and risks, as outlined above.
Specifically, we continued to experience a positive impact on our financial
results due to higher sales of proprietary goods in the ASF segment, especially
industrial products and electronics. We also experienced favorable foreign
currency translation for all periods presented as discussed above. Our MPS
business suffered the impacts of a soft sales market and decreased volume,
resulting in an offsetting decrease in consolidated net sales. We also began
realizing the benefits of cost-saving initiatives implemented in 2003, which had
a positive effect on margins and operating profits.
From a cash flow standpoint, we continue to maintain a high level of liquidity
as we have in previous quarters as we generate substantial amounts of cash from
our normal operations. We have not taken on a significant portion of new debt
and have benefited year-over-year from lower debt repayments.
The following summary of results further explains the results of our operations
during the three- and nine-month periods ended September 30, 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 NINE MONTHS ENDED SEPTEMBER 30, 2004
THREE MONTHS ENDED CURRENCY NINE MONTHS ENDED CURRENCY
SEPTEMBER 30, ADJUSTED SEPTEMBER 30, ADJUSTED
2004 2003 %CHANGE %CHANGE* 2004 2003 %CHANGE %CHANGE*
--------- --------- -------- --------- --------- --------- -------- ---------
Favorable(Unfavorable) Favorable(Unfavorable)
Net sales . . . . . . . $161,585 $149,657 8.0% 4.0% $488,650 $457,780 6.7% 1.9%
Cost of sales . . . . . 85,210 79,741 (6.9%) (2.9%) 256,675 241,528 (6.3%) (1.2%)
--------- --------- --------- ---------
Gross profit. . . . 76,375 69,916 9.2% 5.3% 231,975 216,252 7.3% 2.7%
--------- --------- --------- ---------
Gross profit percentage 47.3% 46.7% ** ** 47.5% 47.2% ** **
Operating expenses. . . 50,629 47,138 (7.4%) (3.4%) 152,769 143,649 (6.3%) (1.7%)
--------- ---------
Operating profit. . 25,746 22,778 13.0% 9.2% 79,206 72,603 9.1% 4.6%
Interest income
(expense), net. . . . . (7,287) (7,430) 1.9% 1.9% (22,542) (22,593) 0.2% 0.2%
Other income. . . . . . 92 2,833 ** ** 531 3,172 ** **
--------- --------- --------- ---------
(7,195) (4,597) (56.5%) (53.5%) (22,011) (19,421) (13.3%) (11.7%)
--------- --------- --------- ---------
Earnings from
continuing operations
before income taxes . . 18,551 18,181 2.0% (1.8%) 57,195 53,182 7.6% 2.1%
Income taxes. . . . . . (6,508) (5,820) (11.8%) (7.2%) (18,874) (17,019) (10.9%) (4.8%)
--------- --------- --------- ---------
Earnings from
continuing operations . 12,043 12,361 (2.6%) (6.0%) 38,321 36,163 6.0% 0.8%
Discontinued
operations, net of tax. - 66 ** ** - (40) ** **
Cumulative effect of
accounting change . . . - 1,014 ** ** - 1,014 ** **
--------- --------- --------- ---------
Net earnings. . . . . . $ 12,043 $ 13,441 (10.4%) (13.6%) $ 38,321 $ 37,137 3.2% (1.7%)
========= ========= ========= =========
Diluted earnings
per share . . . . . . . $ 0.39 $ 0.43 (9.3%) (13.3%) $ 1.24 $ 1.17 6.0% 0.8%
========= ========= ========= =========
* 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 NINE MONTHS ENDED SEPTEMBER 30, 2004
THREE MONTHS ENDED CURRENCY NINE MONTHS ENDED CURRENCY
SEPTEMBER 30, ADJUSTED SEPTEMBER 30, ADJUSTED
2004 2003 %CHANGE %CHANGE* 2004 2003 %CHANGE %CHANGE*
--------- --------- -------- --------- -------- -------- -------- ---------
Favorable(Unfavorable) Favorable(Unfavorable)
ADVANCED SURFACE
FINISHING
Total net sales. . $ 96,136 $ 85,442 12.5% 7.4% 286,000 256,040 11.7% 5.4%
Operating profit . $ 16,276 $ 12,578 29.4% 22.9% 46,742 37,339 25.2% 17.2%
Operating profit
percentage . . . . 16.9% 14.7% ** ** 16.3% 14.6% ** **
PRINTING SOLUTIONS
Total net sales. . $ 65,449 $ 64,215 1.9% (0.5%) 202,650 201,740 0.5% (2.7%)
Operating profit . $ 9,470 $ 10,200 (7.2%) (8.4%) 32,464 35,264 (7.9%) (9.5%)
Operating profit
percentage . . . . 14.5% 15.9% ** ** 16.0% 17.5% ** **
CONSOLIDATED TOTAL
Total net sales. . $161,585 $149,657 8.0% 4.0% 488,650 457,780 6.7% 1.9%
Operating profit . $ 25,746 $ 22,778 13.0% 9.2% 79,206 72,603 9.1% 4.6%
Operating profit
percentage . . . . 15.9% 15.2% ** ** 16.2% 15.9% ** **
* 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 nine-month periods ended September 30, 2004, our net sales
grew at 8% and 6.7%, respectively, compared to the same periods in 2003. On a
currency-adjusted basis, net sales grew 4.0% and 1.9%, respectively, primarily
representing volume increases in our ASF business. Our ASF business benefited
from volume growth in both our electronics and industrial products divisions,
especially in Asia, where volume growth was concentrated primarily in China. In
the Americas, a healthier economy also aided in volume growth in the electronics
and industrial products division. Offsetting these increases was a reduction in
overall sales volume in our Printing Solutions segment caused by a soft market,
the timing of bulk sales, some of which we believe will be pushed into the
fourth quarter, and the effects of changes in our distribution system wherein we
beginning to sell directly to our customer in some segments of the business.
COST OF SALES AND GROSS PROFIT
Cost of sales during the three months ended September 30, 2004, increased
approximately $5.5 million when compared to the same period in the prior year
driven by the strengthening of foreign currencies, particularly the Euro, the
GBP, the Yen and the Hong Kong dollar. Excluding the effects of foreign
currency, our cost of sales for the quarter increased slightly due to increased
volume in the ASF segment offset partially by lower volume in the MPS segment.
From a gross profit perspective, margins increased slightly, driven by favorable
product mix in the ASF segment offset slightly by the de-leveraging of fixed
overhead costs in the MPS segment caused by lower volume.
On a year-to-date basis, cost of sales increased at a pace consistent with our
increase in net sales over the same period in the prior year. The increase was
attributable to the same factors as in the quarter. Gross margin was fairly
consistent year-over-year, representing the full-year effects of the factors
above and the benefits of cost-saving initiatives implemented in 2003 in our
Americas ASF business.
OPERATING EXPENSES
Operating expenses increased 7.4% during the third quarter of 2004 compared to
the third quarter of 2003 due primarily to the effect of foreign currency
translation rates. Excluding the effects of foreign currency translation,
operating expenses increased 3.2% due to increases in employee-related costs,
increases in research and development activity and a few large bad debt
write-offs during the quarter.
Year-to-date, 2004 operating expenses increased compared to the previous year
almost entirely due to foreign currency fluctuation. On a currency-adjusted
basis, operating expenses increased almost 2% year-over-year. This 2% increase
was driven by the same factors as the quarterly comparison above, however these
year-to-date trends were partially offset by the realization of benefits
resulting from cost reduction efforts throughout 2003.
OPERATING PROFIT
During the three- and nine-months ended September 30, 2004, operating profit
grew approximately 13% and 9%, respectively. As a percent of sales, operating
profit was a relatively constant 15% to 16% for all periods presented. Our
operating profit increases were the result of improved business conditions in
the ASF segment as discussed above and favorable currency exchange rates.
INTEREST INCOME (EXPENSE)
Interest income (expense), net remained relatively constant for the three- and
nine-months ended September 30, 2004, when compared to the same periods in the
prior year. This balance consists primarily of interest on our outstanding
bonds.
OTHER INCOME
We realized a gain of approximately $2.2 million on the purchase of treasury
stock from a third party on September 22, 2003, representing the difference
between the market price of the shares on the date of purchase and the actual
purchase price pursuant to an outstanding purchase and sale agreement (described
further in Note 2, Earnings per share and other common share information). This
gain in 2003 is the primary cause of the year-over-year decrease in other income
during the three and nine months ended September 30, 2004.
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of tax, in the quarter and year-to-date
ended September 30, 2003, relates to the December 9, 2003, sale of our 60%
interest in Eurocir S.A., a printed circuit board manufacturer located in
Europe. The Eurocir operations represented substantially all of our remaining
electronics manufacturing segment. Accordingly, the sale was accounted for as a
discontinued operation and our presentation of our consolidated statements of
earnings and cash flows has been restated to reflect continuing operations, with
a separate presentation of results from discontinued operations. Please refer
to our 2003 Annual Report to Shareholders for further discussion of this sale.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective July 1, 2003, we adopted Statement of Financial Accounting Standard
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (FAS No. 150). Due to an outstanding purchase and
sale agreement, we experienced a $1.0 million gain, net of tax, for the
cumulative effect of the accounting change. More information regarding this
agreement and its effects is included in Item 1, Note 2, Earnings per share and
other common share information; and in our Annual Report to Shareholders for the
Fiscal Year ended December 31, 2003.
INCOME TAX EXPENSE
Our tax rate for the three- and nine-month periods ended September 30, 2004, was
35% and 33%, respectively, representing an increase from 32% in the same periods
of 2003. This increase in the tax rate was due in part to U.S. taxes on foreign
repatriations in excess of available current foreign tax credits and foreign tax
credit carry-forwards.
NET EARNINGS
Net earnings during the quarter ended September 30, 2004, decreased by
approximately $1.4 million compared to the same period in 2003. As discussed
above, this decrease was due primarily to the benefits experienced as a result
of the cumulative effect of the change in accounting principle and our
discontinued operations in 2003 versus 2004 when these items were not present.
In addition, net earnings was impacted by higher sales offset by lower other
income, as described above.
Year-to-date, net earnings increased by approximately $1.2 million compared to
the first nine months of 2003 due to favorable foreign currency exchange rates.
Excluding the effects of foreign currency, net earnings decreased slightly due
to the factors above.
DILUTED EARNINGS PER SHARE
Diluted earnings per share decreased approximately 9% during the third quarter
when compared with the third quarter of 2003 due to the same factors described
above for net income. Diluted earnings per share increased approximately 6%
during the nine months ended September 30, 2004, versus the same period in the
prior year. In addition to the factors mentioned above for net income, diluted
earnings per share was also favorably impacted by lower average shares
outstanding as a result of the large purchase of treasury shares we made over
the course of 2003.
LIQUIDITY AND CAPITAL RESOURCES
The table below summarizes our cash flows for the nine months ended September
30, 2004, and 2003:
2004 2003 VARIANCE
-------- --------- ----------
Cash provided by (used in):
Continuing operations . . . . . . . . . $57,108 $ 61,602 $ (4,494)
Discontinued operations . . . . . . . . - 657 (657)
-------- --------- ----------
Total Operating Activities. . . . . . . 57,108 62,259 (5,151)
Investing Activities. . . . . . . . . . (3,212) (5,491) 2,279
Financing Activities. . . . . . . . . . (3,108) (60,319) 57,211
Effect of exchange rate changes on cash (29) 1,637 (1,666)
-------- --------- ----------
Net change in cash. . . . . . . . . . . $50,759 $ (1,914) $ 52,673
======== ========= ==========
Cash flow from continuing operations declined during the nine-month period ended
September 30, 2004, compared to the same period in 2003 primarily as a result of
changes in our inventory, accounts receivable and accrued expenses. Increases
in accounts receivable were the result of foreign exchange between the end of
2003 and September 30, 2004, offset by improvements in collections in some parts
of our business. In 2003, accounts receivable decreased due to decreases in
sales year-to-date, thereby causing a large cash flow fluctuation year-over-year
for the nine months ended September 30, 2004, vs. 2003. Increases in inventory
were the result of increased business activity in our ASF business in Asia and
the timing of large orders in our MPS business in the United States which is
expected to push sales into the fourth quarter. The decrease in accrued
expenses was driven by timing of payments overseas. The cash flow from
discontinued operations in the 2003 quarter related to our Eurocir S.A.
operations, which we sold in the fourth quarter of 2003, as previously noted.
Net cash used in investing activities decreased slightly during the nine months
ended September 30, 2004, compared to the same period in 2003. Driving this
change was an increase in proceeds from the disposition of fixed assets
resulting from the sale of equipment in our ASF segment. Capital expenditures
curtailed slightly due primarily to timing. Capital expenditures for the full
2004 fiscal year are currently expected to total approximately $12.5 million.
On May 7, 2003, we purchased 1,350,000 shares of our own stock from one of our
shareholders for approximately $30.5 million. On September 22, 2003, we
purchased all of the remaining shares of that shareholder for an additional
$21.2 million. As a result, our net cash used in financing activities decreased
significantly when comparing the nine months ended September 30, 2004, to the
same period in the prior year. Excluding the effects of this purchase, net cash
used in financing activities were approximately $8.6 million in 2003, resulting
in a change of $5.5 million year-over-year. This change was driven by higher
net debt repayments during the nine months ended September 30, 2003, than during
the same period in 2004.
We increased our quarterly dividend from $0.02 to $0.04 in February of 2004,
bringing our annual dividend to $0.16 per share from $0.12 per share in 2003.
However, cash dividends paid during the first nine months of 2004 were
consistent with the first nine months of 2003 due to the timing of dividend
funding.
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 September 30, 2004, the outstanding
authorization to purchase approximately 1 million shares would cost
approximately $28,960.
We believe that we have the financial flexibility to deliver shareholder value
described above while meeting our contractual obligations. We currently have
approximately $112 million in cash and cash equivalents and working capital of
$233.7 million. Excluding our non-monetary items, prepaid expenses and deferred
taxes, our working capital is approximately $200.1 million. 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 million. 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 $36
million.
Future estimated contractual cash commitments for the years subsequent to
September 30, 2004 are summarized in the following table:
LESS THAN 2-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
-------- ------- -------- ------- --------
Long-term debt . . . . . . . . $300,472 $ 118 $ - $ - $300,354
Semi-annual bond interest. . . 192,584 27,512 55,024 55,024 55,024
Capital leases . . . . . . . . 829 573 103 49 104
Operating leases . . . . . . . 30,233 10,040 10,089 4,855 5,249
Pension funding requirements . 17,136 3,136 7,000 7,000 -
Purchase obligations and other 12,158 12,158 - - -
-------- ------- -------- ------- --------
Total contractual cash
Commitments. . . . . . . . . . $553,412 $53,537 $ 72,216 $66,928 $360,731
======== ======= ======== ======= ========
The following table reflects our ability to fund both our required obligations
and its shareholder growth initiatives for fiscal 2004:
Cash and cash equivalents as September 30, 2004. . . . . . . . . $112,053
Other net current monetary assets as of September 30, 2004 . . . 88,054
--------
200,107
Available borrowings under revolving loan facility . . . . . . . 50,000
Availability under other uncommitted credit facilities . . . . . 36,000
--------
Total cash available and potentially available . . . . . . . 286,107
Contractual cash commitments due in next year. . . . . . . . . . 53,357
Expected 2004 capital expenditures for the remainder of the year 6,500
Expected 2004 dividend payments for the remainder of the year. . 1,211
--------
Excess of cash available and potentially available over
requirements . . . . . . . . . . . . . . . . . . . . . . . $224,859
========
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, 2003.
New Accounting Standards
The Financial Accounting Standards Board (FASB) finalized Staff Position No. FAS
106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (FAS 106-1), in
January 2004. FAS 106-1 permits the deferral of application of Statement of
Financial Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other than Pensions, to the Medicare Prescription Drug Bill. We
deferred application of FAS106-1 until the issuance of final guidance by the
FASB.
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). FAS 106-2 gives guidance on proper
accounting and disclosure treatment for changes in company-sponsored
single-employer defined benefit postretirement health care plans affected by the
Medicare Prescription Dug Bill (the Bill). The Bill stipulates a federal
subsidy for all plans that are at least actuarially equivalent to guidelines set
forth in the Bill. We have determined, based on the latest draft of the
regulations, that our plan as it stands meets the actuarial equivalency test as
stipulated in the Bill, however, the regulations surrounding this Bill are not
yet final. As written, FAS 106-2 is effective for the first interim or annual
period beginning after June 15, 2004, however due to the fact that the
regulations are not final, our adoption of this FAS has had no effect on our
financial statements for the three or nine-month periods ended September 30,
2004. Without finalized regulations, we cannot accurately predict the impact
this Bill or the related FAS 106-2 guidance will have on our financial
statements in the future.
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;
however we do not currently actively hedge any of our foreign currency risk.
We operate manufacturing facilities in ten countries and sell products in over
twenty-five countries. Approximately 60% of our net sales and nearly 70% of our
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 three-month period ending September 30, 2004, foreign currency
translation had a negligible effect on diluted earnings per share, however
during the nine-month period ended September 30, 2004, favorable currency
translation increased diluted earnings per share by approximately $0.06, or 5%,
when compared with the same period in the previous year. The annual impact on
operating cash flows historically has been insignificant.
Our business operations consist principally of manufacture and sale of specialty
chemicals, supplies and related equipment to customers throughout much of the
world. Approximately 41% of our business is concentrated in the printing
business, used for a wide variety of applications, while 59% 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 12, Guarantor
Financial Statements, in Part I, Item 1. Based upon our current debt structure
and expected levels of borrowing for the remainder of 2004, 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 principle executive and financial officers have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-14(c) under
the Securities Exchange Act of 1934) as of September 30, 2004. Based on that
evaluation, they have concluded that our disclosure controls and procedures are
adequate and effective. There have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls
subsequent to the date they completed their evaluation.
Sarbanes-Oxley Section 404 Compliance
Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") will require us to
include an internal control report from management in our Annual Report on Form
10-K for the year ended December 31, 2004, and in subsequent Annual Reports
thereafter. The internal control report must include the following: (1) a
statement of management's responsibility for establishing and maintaining
adequate internal control over financial reporting, (2) a statement identifying
the framework used by management to conduct the required evaluation of the
effectiveness of our internal control over financial reporting, (3) management's
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2004, including a statement as to whether or not internal
control over financial reporting is effective, and (4) a statement that our
independent auditors have issued an attestation report on management's
assessment of internal control over financial reporting.
Management acknowledges its responsibility for establishing and maintaining
internal controls over financial reporting and seeks to continually improve
those controls. In addition, in order to achieve compliance with Section 404 of
the Act within the required timeframe, we have been conducting a process to
document and evaluate out internal controls over financial reporting since 2003.
In this regard, we have dedicated and expanded our internal resources and
adopted a detailed work plan to: (i) assess and document the adequacy of
internal control over financial reporting; (ii) take steps to improve control
processes where required; (iii) validate through testing that controls are
functioning as documented; and (iv) implement a continuous reporting and
improvement process for internal control over financial reporting. We believe
out process for documenting, evaluating and monitoring our internal control over
financial reporting is consistent with the objectives of Section 404 of the Act.
During the first nine months of 2004, we commenced testing of out internal
controls. Testing and remediation of any gaps will continue.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the control system are met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood of
future events. Because of these and other inherent limitations of control
systems, there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
PART II. OTHER INFORMATION
ITEM 1 : Legal Proceedings
Refer to the notes to the consolidated condensed financial statements,
Contingencies and Legal Matters, Note 11.
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
None during the fiscal quarter ended September 30, 2004. Refer to our first
quarter Form 10-Q, dated March 31, 2004, for matters submitted to a vote of
security holders during our first fiscal quarter.
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 August 4, 2004, regarding earnings for the
quarter ended September 30, 2004, in fiscal year 2004.
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: November 8, 2004 /s/ Daniel H. Leever
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Daniel H. Leever
Chairman and
Chief Executive Officer
Date: November 8, 2004 /s/ Gregory M. Bolingbroke
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Gregory M. Bolingbroke
Senior Vice President, Finance