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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 March 31, 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
--------------
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 May 1, 2005
---------------------- ---------------------------
Common Stock, no par value 30,313,697 shares
MACDERMID, INCORPORATED
INDEX
PART I: Financial Information
Item 1: Financial Statements (Unaudited):
Consolidated Condensed Balance Sheets as of March 31, 2005, and
December 31, 2004.
Consolidated Statements of Earnings for the three-month periods
ended March 31, 2005, and 2004.
Consolidated Statements of Cash Flows for the three-month periods ended
March 31, 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 MARCH 31,
------------------------------
2005 2004
------------------------------ ------------
Net sales. . . . . . . . . . . . . . . . $ 170,247 $ 162,012
Cost of sales. . . . . . . . . . . . . . 92,594 84,486
------------------------------ ------------
Gross profit . . . . . . . . . . . . 77,653 77,526
Operating expenses:
Selling, technical and administrative. 46,670 45,360
Research and development . . . . . . . 6,532 5,357
------------------------------ ------------
53,202 50,717
------------------------------ ------------
Operating profit . . . . . . . . . . 24,451 26,809
Other income (expense):
Interest income. . . . . . . . . . . . 622 228
Interest expense . . . . . . . . . . . (7,644) (7,819)
Miscellaneous income (expense) . . . . 30 (258)
------------------------------ ------------
(6,992) (7,849)
Earnings before income taxes . . . . . . 17,459 18,960
Income taxes . . . . . . . . . . . . . . (5,674) (6,067)
------------------------------ ------------
Net earnings . . . . . . . . . . . . . . $ 11,785 $ 12,893
============================== ============
Earnings per common share:
Basic . . . . . . . . . . . . . . . . $ 0.39 $ 0.43
============================== ============
Diluted . . . . . . . . . . . . . . . $ 0.38 $ 0.42
============================== ============
Weighted average common shares
outstanding:
Basic. . . . . . . . . . . . . . . . . 30,293,269 30,266,513
============================== ============
Diluted. . . . . . . . . . . . . . . . 30,809,620 31,041,763
============================== ============
Dividends declared per common share. . . $ 0.06 $ 0.04
------------------------------ ------------
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
MARCH 31, DECEMBER 31,
------------ -------------
2005 2004
------------ -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 133,741 $ 137,829
Accounts receivable, net of allowance
for doubtful receivables of $11,732
and $11,822, respectively. . . . . . . . . . . . 145,019 142,455
Inventories. . . . . . . . . . . . . . . . . . . 84,107 80,445
Prepaid expenses . . . . . . . . . . . . . . . . 8,964 10,183
Deferred income taxes. . . . . . . . . . . . . . 18,160 18,303
------------ -------------
Total current assets . . . . . . . . . . . . 389,991 389,215
Property, plant and equipment, net
of accumulated depreciation of
185,817 and $189,167, respectively . . . . . . . 107,053 110,463
Goodwill . . . . . . . . . . . . . . . . . . . . 194,287 194,287
Intangibles, net of accumulated amortization of
12,458 and $11,933, respectively . . . . . . . . 27,993 28,434
Deferred income taxes. . . . . . . . . . . . . . 32,178 34,675
Other assets, net. . . . . . . . . . . . . . . . 14,883 16,645
------------ -------------
Total assets . . . . . . . . . . . . . . . . . . $ 766,385 $ 773,719
============ =============
See accompanying notes to consolidated financial statements.
MACDERMID, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars except share amounts)
MARCH 31, DECEMBER 31,
------------ --------------
2005 2004
------------ --------------
(Unaudited)
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable . . . . . . . . . . . . . . $ 56,983 $ 55,944
Accrued compensation . . . . . . . . . . . . 12,281 12,370
Accrued interest . . . . . . . . . . . . . . 5,826 12,700
Accrued income taxes payable . . . . . . . . 7,399 7,293
Other current liabilities. . . . . . . . . . 35,871 40,805
------------ -------------
Total current liabilities. . . . . . . . 118,360 129,112
Long-term debt and capital lease obligations 300,888 301,077
Retirement benefits, less current portion. . 26,192 26,588
Deferred income taxes. . . . . . . . . . . . 7,164 9,267
Other long-term liabilities. . . . . . . . . 4,172 3,644
------------ -------------
Total liabilities. . . . . . . . . . . . 456,776 469,688
------------ -------------
Shareholders' equity:
Common stock, authorized 75,000,000
shares, issued 46,843,670 at March 31,
2005, and 46,838,700 shares at December
31, 2004, at stated value of $1.00 per share 46,844 46,839
Additional paid-in capital . . . . . . . . . 35,242 33,053
Retained earnings. . . . . . . . . . . . . . 337,046 327,080
Accumulated other comprehensive income . . . 5,157 11,772
Less - cost of common shares held in
treasury, 16,546,763 at March 31, 2005,
16,547,686 at December 31, 2004. . . . . . . (114,680) (114,713)
------------ -------------
Total shareholders' equity . . . . . . . 309,609 304,031
------------ -------------
Total liabilities and shareholders' equity . $ 766,385 $ 773,719
============ =============
See accompanying notes to consolidated financial statements
MACDERMID, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars, unaudited)
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2005 2004
------------------------- --------
Net cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . $ 11,785 $12,893
Adjustments to reconcile earnings from
continuing operations to net cash provided by
operating activities:
Depreciation . . . . . . . . . . . . . . . . . 3,846 4,125
Amortization . . . . . . . . . . . . . . . . . 891 734
Provision for bad debts. . . . . . . . . . . . 517 599
Deferred income taxes. . . . . . . . . . . . . 163 (149)
Stock compensation expense . . . . . . . . . . 2,177 1,560
Changes in assets and liabilities:
(Increase) decrease in receivables. . . . . (7,825) (7,543)
(Increase) decrease in inventories. . . . . (5,547) (3,758)
Decrease in prepaid expenses. . . . . . . . 1,309 1,133
Decrease in accounts payable. . . . . . . . 3,167 5
Decrease in accrued expenses. . . . . . . . (10,541) (8,273)
Increase in income tax liabilities. . . . . 196 3,084
Other . . . . . . . . . . . . . . . . . . . 1,885 1,567
------------------------- --------
Net cash flows provided by operating
activities. . . . . . . . . . . . . . . . . 2,023 5,977
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . (3,006) (1,301)
Proceeds from disposition of fixed assets. . 16 519
Proceeds from disposition of business. . . . 263 -
------------------------- --------
Net cash flows used in investing activities. (2,727) (782)
Cash flows from financing activities:
Net short-term borrowings (repayments) . . . 142 (201)
Repayments of long-term borrowings . . . . . (204) (121)
Issuance from treasury shares. . . . . . . . 33 31
Proceeds from exercise of stock options. . . 17 54
Dividends paid . . . . . . . . . . . . . . . (1,212) -
------------------------- --------
Net cash flows used in financing activities. (1,224) (237)
Effect of exchange rate changes on cash
and cash equivalents . . . . . . . . . . . . . (2,160) 307
------------------------- --------
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . (4,088) 5,265
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . . . 137,829 61,294
------------------------- --------
Cash and cash equivalents at end of period . . $ 133,741 $66,559
========================= ========
Cash paid for interest . . . . . . . . . . . . $ 14,226 $14,320
========================= ========
Cash paid for income taxes . . . . . . . . . . $ 5,085 $ 2,720
========================= ========
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 March 31, 2005, and the results of operations for
the three- month periods ended March 31, 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. 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 2,417,950 and 1,551,100 shares of common stock were outstanding as of
March 31, 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 March 31, 2005, and 2004, respectively.
The following table reconciles basic weighted-average common shares outstanding
to diluted weighted-average common shares outstanding:
THREE MONTHS ENDED MARCH 31,
2005 2004
------ ------
Basic common shares. . . . . . . 30,293,269 30,266,513
Dilutive effect of stock options 516,351 775,250
------------- ----------
Diluted common shares. . . . . . 30,809,620 31,041,763
------------- ----------
NOTE 3. 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 recognized
during the three-month periods ended March 31, 2005, and 2004, related to the
stock awards $134 and $70, respectively. 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 March 31, 2005, and 2004, we charged $2,043
and $1,490, 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-month periods ended
March 31, 2005, and 2004, would have been reduced to the following pro forma
amounts:
2005 2004
-------- --------
Net earnings available for common shareholders as reported . . . . . . . . $11,785 $12,893
-------- --------
Add: stock based employee compensation expense included in
reported net income, net of related tax effects. . . . . . . . . . . . . 1,469 1,061
Deduct: total stock based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (1,469) (1,139)
-------- --------
Pro forma net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . $11,785 $12,815
Net earnings per common share:
Basic
As reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.39 $ 0.43
Pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.39 $ 0.42
Diluted
As reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.38 $ 0.42
Pro forma. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.38 $ 0.41
NOTE 4. Goodwill and Other Intangible Assets
Acquired intangible assets as of March 31, 2005, and December 31, 2004, are as
follows:
AS OF
MARCH 31, 2005 DECEMBER 31, 2004
--------------------------------------- ---------------------------------------
Gross Carrying Accumulated Net Gross Carrying Accumulated Net
Amount Amortization Amount Amount Amortization Amount
-------------- ------------ ------- -------------- ------------ -------
Patents. . $ 17,566 $ (8,411) $ 9,155 $ 17,566 $ (8,087) $ 9,479
Trademarks 20,155 (2,166) 17,989 20,135 (2,115) 18,020
Others . . 2,731 (1,882) 849 2,666 (1,731) 935
------------- ------------ -------- -------------- ------------ --------
Total . $ 40,452 $ (12,459) $ 27,993 $ 40,367 $ (11,933) $ 28,434
============= ============ ======== ============== ============ ========
Included in the table above is the net carrying amount of $16,233 at March 31,
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 month periods ended March 31,
2005, and 2004, was $409 and $437, 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 $1,600 down
to $1,100 over the next five years.
The goodwill carrying amount for the Advanced Surface Finishing segment was
$122,157 as of March 31, 2005, and December 31, 2004. The goodwill carrying
amount for the Printing Solutions segment was $72,130 as of March 31, 2005, and
December 31, 2004.
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 5. Comprehensive Income
The components of comprehensive income for the three-month periods ended March
31, 2005, and 2004, are as follows:
THREE MONTHS ENDED MARCH 31,
2005 2004
------ ------
Net earnings . . . . . . . . $ 11,785 $ 12,893
Other comprehensive income:
Foreign currency translation
adjustment. . . . . . . . (6,779) 600
Other. . . . . . . . . . . . 164 -
------------------- ---------
Comprehensive income . . . . $ 5,170 $ 13,493
=================== =========
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 MARCH 31,
2005 2004
------ ------
Results of operations by segment:
Net sales:
Advanced Surface Finishing
Total segment net sales . . . . . . $ 101,308 $ 95,555
Intersegment sales. . . . . . . . . (2,167) (2,067)
-------------- ---------
Net external sales for the segment 99,141 93,488
Printing Solutions. . . . . . . . . 71,106 68,524
-------------- ---------
Consolidated net sales . . . . . $ 170,247 $ 162,012
============== =========
Operating profit (loss):
Advanced Surface Finishing . . . $ 14,135 $ 14,737
Printing Solutions . . . . . . . 10,316 12,072
-------------- ---------
Consolidated operating profit. $ 24,451 $ 26,809
============== =========
AS OF
MARCH 31, DECEMBER 31,
2005 2004
-------- -----------
Identifiable assets by segment:
Advanced Surface Finishing. . . $ 484,503 $ 499,119
Printing Solutions. . . . . . . 279,038 277,488
Unallocated corporate assets. . 130,414 132,035
Intercompany eliminations . . . (127,570) (134,923)
----------- -------------
Consolidated assets. . . . . $ 766,385 $ 773,719
=========== =============
NOTE 7.
The major components of inventory as of March 31, 2005 and December 31, 2004,
were as follows:
MARCH 31, 2005 DECEMBER 31, 2004
--------------- ------------------
Finished goods . . . . . . $ 45,914 $ 43,802
Raw materials and supplies 31,283 29,563
Equipment. . . . . . . . . 6,910 7,080
--------------- ------------------
Inventories. . . . . . . . $ 84,107 $ 80,445
=============== ==================
NOTE 8. Pension and postretirement Benefits Plans
The following table shows the components of the net periodic pension benefit
costs we incurred in the three month ended March 31, 2005, and 2004:
THREE MONTHS ENDED MARCH 31,
2005 2004
------------------ -----------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
------------------ -----------------
Net periodic benefit cost:
Service Costs . . . . . . . . . . . $ 936 $ 144 $ 936 $ 130
Interest Costs. . . . . . . . . . . 898 815 898 694
Expected return on plan assets. . . (798) (807) (876) (805)
Amortization of prior service costs 6 - 6 -
Recognized actuarial (gain)/loss. . 83 286 83 194
------ ------ ------- ------
Net periodic benefit cost . . . . . $1,125 $ 438 $1,047 $ 213
====== ====== ======= ======
The estimated net periodic benefit cost for our other postretirement benefits
was $160 for the three-months ended March 31, 2005, and 2004..
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 March 31, 2005, $587 of contributions have been made. We currently expect
to contribute $5,388 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, 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. In the first quarter of 2005 we have determined that the effect of
this adoption was not material.
NOTE 9. 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 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 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 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 $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.
NOTE 10. 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 Condensed Consolidating
Balance Sheets as of March 31, 2005, and December 31, 2004; the Condensed
Consolidating Statements of Earnings for the three-month periods ending March
31, 2005, and 2004; and the Condensed Consolidating Statements of Cash Flows for
the three months ending March 31, 2005, and 2004.
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 2005
(Unaudited) MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
--------- -------------- -------------- -------------- -----------------
Net sales . . . . . . . . . . $22,519 $ 45,004 $ 110,543 $ (7,819) $ 170,247
Cost of sales . . . . . . . . 15,170 22,027 63,216 (7,819) 92,594
-------- -------------- -------------- -------------- ------------------
Gross profit. . . . . . . . . 7,349 22,977 47,327 - 77,653
Operating expenses:
Selling, technical and
administrative. . . . . . . . 10,889 8,256 27,525 - 46,670
Research and development. . . 1,679 2,271 2,582 - 6,532
-------- -------------- -------------- -------------- ------------------
12,568 10,527 30,107 - 53,202
-------- -------------- -------------- -------------- ------------------
Operating (loss) profit . . . (5,219) 12,450 17,220 - 24,451
Equity in earnings of
subsidiaries. . . . . . . . . 19,880 11,652 - (31,532) -
Interest income . . . . . . . 340 1 281 - 622
Interest expense. . . . . . . (7,570) - (74) - (7,644)
Miscellaneous income
(expense), net. . . . . . . . 154 262 (386) - 30
-------- -------------- -------------- -------------- ------------------
12,804 11,915 (179) (31,532) (6,992)
-------- -------------- -------------- -------------- ------------------
Earnings (loss) before taxes. 7,585 24,365 17,041 (31,532) 17,459
Income tax benefit
(expense) . . . . . . . . . . 4,200 (4,485) (5,389) - (5,674)
-------- -------------- -------------- -------------- ------------------
Net earnings (loss) . . . . . $11,785 $ 19,880 $ 11,652 $ (31,532) $ 11,785
======== ============== ============== ============== ==================
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 2004
(Unaudited) MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
--------- -------------- -------------- -------------- -----------------
Net sales . . . . . . . . . . $23,480 $ 39,815 $ 103,204 $ (4,487) $ 162,012
Cost of sales . . . . . . . . 15,749 16,822 56,402 (4,487) 84,486
-------- -------------- -------------- -------------- ------------------
Gross profit. . . . . . . . . 7,731 22,993 46,802 - 77,526
Operating expenses:
Selling, technical and
administrative. . . . . . . . 10,191 7,303 27,866 - 45,360
Research and development. . . 1,898 1,696 1,763 - 5,357
-------- -------------- -------------- -------------- ------------------
12,089 8,999 29,629 - 50,717
-------- -------------- -------------- -------------- ------------------
Operating (loss) profit . . . (4,358) 13,994 17,173 - 26,809
Equity in earnings of
subsidiaries. . . . . . . . . 20,543 10,635 - (31,178) -
Interest income . . . . . . . 30 7 191 - 228
Interest expense. . . . . . . (8,017) 1,210 (1,012) - (7,819)
Miscellaneous income
(expense), net. . . . . . . . 35 325 (618) - (258)
-------- -------------- -------------- -------------- ------------------
12,591 12,177 (1,439) (31,178) (7,849)
-------- -------------- -------------- -------------- ------------------
Earnings (loss) before taxes. 8,233 26,171 15,734 (31,178) 18,960
Income tax benefit
(expense) . . . . . . . . . . 4,660 (5,628) (5,099) - (6,067)
-------- -------------- -------------- -------------- ------------------
Net earnings (loss) . . . . . $12,893 $ 20,543 $ 10,635 $ (31,178) $ 12,893
======== ============== ============== ============== ==================
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005
(Unaudited)
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
--------- -------------- -------------- -------------- -----------------
Assets
Current assets:
Cash and cash equivalents . $ 66,454 $ 785 $ 66,502 $ - $ 133,741
Accounts receivables, net . 10,690 18,491 115,838 - 145,019
Due (to) from affiliates. . 22,565 102,715 (125,280) - -
Inventories, net. . . . . . 6,137 26,684 51,286 - 84,107
Prepaid expenses. . . . . . 1,326 1,866 5,772 - 8,964
Deferred income taxes . . . 12,908 - 5,252 - 18,160
--------- -------------- -------------- -------------- -----------------
Total current assets. . . . 120,080 150,541 119,370 - 389,991
Property, plant and
equipment, net. . . . . . . 16,327 32,712 58,014 - 107,053
Goodwill. . . . . . . . . . 21,680 68,574 104,033 - 194,287
Intangibles, net. . . . . . - 4,836 23,157 - 27,993
Investments in subsidiaries 461,043 224,975 - (686,018) -
Deferred income taxes . . . 16,959 - 15,219 - 32,178
Other assets, net . . . . . 6,935 2,743 5,205 - 14,883
--------- -------------- -------------- -------------- -----------------
$643,024 $ 484,381 $ 324,998 $ (686,018) $ 766,385
========= ============== ============= =============== =================
Current liabilities:
Accounts and dividends
payable . . . . . . . . . $ 9,159 $ 8,005 $ 39,819 $ - $ 56,983
Accrued compensation. . . . 1,086 1,654 9,541 - 12,281
Accrued interest. . . . . . 5,733 - 93 - 5,826
Accrued income taxes
payable . . . . . . . . . . (6,694) 8,512 5,581 - 7,399
Other current liabilities . 15,262 4,970 15,639 - 35,871
--------- -------------- -------------- -------------- -----------------
Total current liabilities . 24,546 23,141 70,673 - 118,360
Long-term obligations . . . 300,416 217 255 - 300,888
Retirement benefits, less
current portion . . . . . . 5,100 - 21,092 - 26,192
Deferred income taxes . . . - - 7,164 - 7,164
Other long-term liabilities 3,353 (20) 839 - 4,172
--------- -------------- -------------- -------------- -----------------
Total liabilities . . . . . 333,415 23,338 100,023 - 456,776
--------- -------------- -------------- -------------- -----------------
Total shareholders' equity. 309,609 461,043 224,975 (686,018) 309,609
--------- -------------- -------------- -------------- -----------------
Total Liabilities and
Shareholders' Equity. . . . $643,024 $ 484,381 $ 324,998 $ (686,018) $ 766,385
========= ============== ============== ============== =================
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004
MACDERMID
GUARANTOR NONGUARANTOR 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
--------- ------------- -------------- -------------- -----------------
$662,572 $ 470,667 $ 328,375 $ (687,895) $ 773,719
========= ============= ============== ============== =================
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
--------- ------------- -------------- -------------- -----------------
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
THREE MONTHS ENDED MARCH 31, 2005
(Unaudited)
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES AND SUBSIDIARIES
--------- -------------- -------------- -----------------
Net cash flows (used in)
provided by operating
activities. . . . . . . . . . . $(17,337) $ 7,467 $ 11,893 $ 2,023
Investing activities:
Capital expenditures. . . . . . (696) (485) (1,825) (3,006)
Proceeds from disposition of
fixed assets and business . . . - - 279 279
--------- -------------- -------------- -----------------
Net cash flows (used in)
provided by investing
activities. . . . . . . . . . . (696) (485) (1,546) (2,727)
Financing activities:
Net proceeds from
(repayments of) short-term
borrowings. . . . . . . . . . . 8,822 (8,067) (613) 142
Repayments of long-term
borrowings. . . . . . . . . . . - (57) (147) (204)
Issuance of treasury shares . . 33 - - 33
Proceeds from exercise of
stock options . . . . . . . . . 17 - - 17
Dividends paid. . . . . . . . . 6,103 1,239 (8,554) (1,212)
--------- -------------- -------------- -----------------
Net cash flows provided by
(used in) financing activities. 14,975 (6,885) (9,314) (1,224)
Effect of exchange rate
changes on cash and cash
equivalents . . . . . . . . . . - - (2,160) (2,160)
--------- -------------- -------------- -----------------
Net increase (decrease) in
cash and cash equivalents . . . (3,058) 97 (1,127) (4,088)
Cash and cash equivalents at
beginning of period . . . . . . 69,512 688 67,629 137,829
--------- -------------- -------------- -----------------
Cash and cash equivalents at
end of period . . . . . . . . . $ 66,454 $ 785 $ 66,502 $ 133,741
========= ============== ============== =================
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
(Unaudited)
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES AND SUBSIDIARIES
--------- -------------- -------------- -----------------
Net cash flows (used in)
provided by operating
activities. . . . . . . . . . . $(18,353) $ 14,849 $ 9,481 $ 5,977
Investing activities:
Capital expenditures. . . . . . (118) (475) (708) (1,301)
Proceeds from disposition of
fixed assets. . . . . . . . . . - 512 7 519
--------- -------------- -------------- -----------------
Net cash flows (used in)
provided by investing
activities. . . . . . . . . . . (118) 37 (701) (782)
Financing activities:
Net proceeds from
(repayments of) short-term
borrowings. . . . . . . . . . . 29,515 (14,804) (14,912) (201)
Repayments of long-term
borrowings. . . . . . . . . . . - - (121) (121)
Issuance of treasury shares . . 31 - - 31
Proceeds from exercise of
stock options . . . . . . . . . 54 - - 54
Dividends paid. . . . . . . . . 11,279 235 (11,514) -
--------- -------------- -------------- -----------------
Net cash flows provided by
(used in) financing activities. 40,879 (14,569) (26,547) (237)
Effect of exchange rate
changes on cash and cash
equivalents . . . . . . . . . . - - 307 307
--------- -------------- -------------- -----------------
Net increase (decrease) in
cash and cash equivalents . . . 22,408 317 (17,460) 5,265
Cash and cash equivalents at
beginning of period . . . . . . 18,295 1,286 41,713 61,294
--------- -------------- -------------- -----------------
Cash and cash equivalents at
end of period . . . . . . . . . $ 40,703 $ 1,603 $ 24,253 $ 66,559
========= ============== ============== =================
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 create 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 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. 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. Approximately
60% of our net sales and identifiable assets for the three-month period ended
and as of March 31, 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 three-month period
ended March 31, 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 exchange
rates that were in effect in the first quarter 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.SNew 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 three months ended March 31, 2005, reflects the results
of our key opportunities, philosophies and risks, as outlined above.
Specifically, we improved top line sales growth 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 increased our operating expense. Taken
together these activities resulted in a decrease in net income when compared to
the same period in 2004.
From a cash flow standpoint, we continue to maintain a high level of liquidity,
with working capital of $271,631 which has increased by $11,528 from the end of
2004. Cash decreased $4,088 this quarter due to increases in capital spending,
higher tax payments, investments in working capital and the payment of bond
interest.
The following summary of results further explains the results of our operations
during the three-month periods ended March 31, 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 ENDED MARCH 31, 2005:
THREE MONTHS ENDED CURRENCY-
MARCH 31, ADJUSTED
2005 2004 %CHANGE %CHANGE*
---------- ---------- -------- --------
FAVORABLE (UNFAVORABLE)
Net sales . . . . . . . . . . . . . . . $ 170,247 $ 162,012 5.1% 3.1%
Cost of sales . . . . . . . . . . . . . 92,594 84,486 (9.6%) (7.4%)
---------- ---------- -------- --------
Gross profit. . . . . . . . . . . . 77,653 77,526 0.2% (1.6%)
Gross profit percentage . . . . . . . . 45.6% 47.9% ** **
Operating expenses. . . . . . . . . . . 53,202 50,717 (4.9%) (3.0%)
---------- ---------- -------- --------
Operating profit. . . . . . . . . . 24,451 26,809 (8.8%) (10.4%)
Interest income (expense), net. . . . . (7,022) (7,591) 7.5% 7.5%
Other income, net . . . . . . . . . . . 30 (258) ** **
---------- ---------- -------- --------
(6,992) (7,849) 10.9% 11.3%
---------- ---------- -------- --------
Earnings before income taxes. . . . . . 17,459 18,960 (7.9%) (9.9%)
Income taxes. . . . . . . . . . . . . . (5,674) (6,067) 6.5% 8.8%
---------- ---------- -------- --------
Net earnings. . . . . . . . . . . . . . $ 11,785 $ 12,893 (8.6%) (10.5%)
========== ========== ======== ========
Diluted earnings per share . . . . . . $ 0.38 $ 0.42 (9.5%) (11.6%)
========== ========== ======== ========
* 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 ENDED MARCH 31, 2005:
THREE MONTHS ENDED CURRENCY-
MARCH 31, ADJUSTED
2005 2004 %CHANGE %CHANGE*
---------- ---------- -------- --------
FAVORABLE (UNFAVORABLE)
ADVANCED SURFACE FINISHING
Total net sales . . . . . . . . . . . . $ 99,141 $ 93,488 6.0% 3.6%
Operating profit. . . . . . . . . . . . $ 14,135 $ 14,738 (4.1%) (6.2%)
Operating profit percentage . . . . . . 14.3% 15.8% ** **
PRINTING SOLUTIONS
Total net sales . . . . . . . . . . . . $ 71,106 $ 68,524 3.8% 2.3%
Operating profit. . . . . . . . . . . . $ 10,316 $ 12,072 (14.5%) (15.5%)
Operating profit percentage . . . . . . 14.5% 17.6% ** **
CONSOLIDATED TOTAL
Total net sales . . . . . . . . . . . . $ 170,247 $ 162,012 5.1% 3.1%
Operating profit. . . . . . . . . . . . $ 24,451 $ 26,809 (8.8%) (10.4%)
Operating profit percentage . . . . . . 14.4% 16.5% ** **
* 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 months ended March 31, 2005, our net sales grew by 5.1%,
compared to the same period in 2004. On a currency-adjusted basis, net sales
grew by 3.1%, 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 benefited this quarter 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
COST OF SALES AND GROSS PROFIT
Cost of sales during the three months ended March 31, 2005, increased $8,108
when compared to the same period in the prior year. Strengthening foreign
currencies contributed approximately $1,408 to this increase. Excluding the
effects of foreign currency, our cost of sales for the quarter increased by
7.4%. This increase was larger than our currency adjusted sales increase of
3.1% which resulted in a decrease in our gross profit percentage from 47.9% in
the first quarter of 2004 to 45.6% in our current quarter. Both of our segments
contributed to this margin decrease. In our ASF segment our margin decrease was
most significant in our highly competitive Asian region where we experienced
some pricing pressures and we had 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.
OPERATING EXPENSES
Operating expenses increased 4.9% during the first quarter of 2005 compared to
the same quarter in 2004, or 3.0% 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 and other employee
costs.
OPERATING PROFIT
During the three months ended March 31, 2005, operating profit decreased
approximately 8.8%. As a percent of sales, operating profit was a decrease from
16.5% in the first quarter of 2004 to14.4% in the first quarter of 2005. Our
operating profit decrease was the result of the decrease gross profit
percentages and higher operating expenses noted above.
INTEREST INCOME (EXPENSE)
Interest income (expense), net decreased for the three months ended March 31,
2005, when compared to the same periods in the prior year. This decrease was
due to a 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
Other income was $288 higher in the first quarter of 2005 compared to the same
quarter in 2004 as a result of lower foreign exchange loss and more income from
the mark-to-market of our interest rate hedge.
INCOME TAX EXPENSE
Our effective tax rate for the three months ended March 31, 2005, was 32.5%,
representing a slight increase from 32% in the same period in 2004. This
increase in the tax rate was due in part to an increase in the percentage of
taxable income in tax jurisdictions with a higher tax rate.
NET EARNINGS
Net earnings during the quarter ended March 31, 2005 decreased by approximately
$1,108 or 8.6% compared to the same period in 2004. As discussed above, this
decrease was due primarily to a lower gross profit percentage and higher
operating expenses which were partially offset by higher interest income and
higher other income.
DILUTED EARNINGS PER SHARE
Diluted earnings per share decreased approximately 9.5% during the first quarter
of 2005 when compared with the first quarter of 2004 due to the same factors
described above for net income.
OTHER COMPREHENSIVE INCOME
Other comprehensive income decreased by $8,323 for the first quarter of 2005
compared to the same quarter in the previous year. This decrease is a result of
the decrease in net earnings described above and a negative impact on the
foreign currency translation adjustment recognized during the current quarter.
We hold assets that are denominated in currencies that have weakened against the
U.S. dollar in the first quarter of 2005. These currencies were primarily the
Euro, Great British Pound and Japanese Yen. In the first quarter of 2004 these
currencies were mixed against the U.S. dollar which resulted in a small positive
impact from currency translation.
LIQUIDITY AND CAPITAL RESOURCES
The table below summarizes our cash flows for the three months ended March 31,
2005, and 2004:
2005 2004 VARIANCE
-------- ------- --------
Cash provided by (used in):
Operating Activities. . . . . . . . . . $ 2,023 $5,977 $(3,954)
Investing Activities. . . . . . . . . . (2,727) (782) (1,945)
Financing Activities. . . . . . . . . . (1,224) (237) (987)
Effect of exchange rate changes on cash (2,160) 307 (2,467)
-------- ------- --------
Net change in cash. . . . . . . . . . . $(4,088) $5,265 $(9,353)
======== ======= ========
Cash flow from operating activities declined during the three months ended March
31, 2005, compared to the same period in 2004 primarily as a result of lower
income, the timing of tax payments and changes in our inventory, accounts
receivable and accrued expenses. Increases in accounts receivable and
inventories are a result of our current focus on driving growth in sales.
Accrued expenses decreased due to a higher level of payouts for rebates to
customers and bonuses to employees after the end of 2004 compared to those paid
after the end of 2003. The timing of tax payments also negatively impacted cash
flow from operations. In the first quarter of 2005 we paid taxes totaling
$5,085 compared to tax payments of $2,720 in the first quarter of 2004.
Net cash used in investing activities increased significantly during the three
months ended March 31, 2005, compared to the same period in 2003. Driving this
change was an increase in capital spending in 2005. Most of this capital
spending increase was related to a new plant in China for our ASF segment that
is expected to be completed this year.
Net cash used in financing activities increased by $987 in the quarter ended
March 31, 2005 when compared to the same quarter last year. This increase was
primarily the result of the timing of funding for our quarterly dividend
payments. Our fourth quarter of 2003 dividend payment was funded in December
2003, while our fourth quarter of 2004 dividend payment was funded in January
2005. In the first quarter of 2005 we declared a dividend 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 March 31, 2005, the outstanding authorization
to purchase approximately 800,000 shares would cost approximately $26,000.
We believe that we have the financial flexibility to deliver shareholder value
described above while meeting our contractual obligations. We currently have
$133,741 in cash and cash equivalents and working capital of $271,631 million.
Excluding our non-monetary items, prepaid expenses and deferred taxes, our
working capital is $244,507. 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 $42,400
Future estimated contractual cash commitments for the years subsequent to March 31, 2005,
are summarized in the following table:
LESS THAN 2-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
-------- ------- ------- -------- --------
Long-term debt . . . . . . . . $301,500 $ - $ - $ - $301,500
Semi-annual bond interest. . . 178,828 27,512 55,024 55,024 41,268
Capital leases . . . . . . . . 726 174 401 53 98
Operating leases . . . . . . . 19,298 4,994 6,856 3,410 4,038
Pension funding requirements . 33,388 5,388 14,000 14,000 -
Purchase obligations and other 6,681 6,681 - - -
-------- ------- ------- -------- --------
Total contractual cash
Commitments. . . . . . . . . . $540,421 $44,749 $76,281 $ 72,487 $346,904
======== ======= ======= ======== ========
The following table reflects our ability to fund both our required obligations
and its shareholder growth initiatives for fiscal 2005:
Cash and cash equivalents as of March 31, 2005 . . . . . . . . . . . . $133,741
Other net current monetary assets and liabilities as of March 31, 2005 110,766
--------
244,507
Available borrowings under revolving loan facility . . . . . . . . . . 50,000
Availability under other uncommitted credit facilities . . . . . . . . 42,400
--------
Total cash available and potentially available . . . . . . . . . . 336,907
Contractual cash commitments due in next year. . . . . . . . . . . . . 44,749
Expected capital expenditures for the year . . . . . . . . . . . . . . 12,000
Expected dividend payments in the next year. . . . . . . . . . . . . . 7,264
--------
Excess of cash available and potentially available over
requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $272,894
========
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 did not have an impact on our income tax
expense for the first quarter of 2005. We have not fully evaluated the impact of
the Act on our income tax expense for the remainder of 2005.
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, 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;
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 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 March 31, 2005 foreign currency translation had a slight positive effect
on diluted earnings per share, . The impact of exchange rate changes on
operating cash flows 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 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 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 9.
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.
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 February 10, 2005, regarding earnings for the
fourth quarter and fiscal year ended December 31, 2004.
Amendment to MacDermid, Inc's 401(k)/Employee Stock Ownership Plan as of
February 18, 2005, dated February 15, 2005.
Amendment to the Bylaws of MacDermid, Inc., dated March 3, 2005.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MacDermid, Incorporated
------------------------
(Registrant)
Date: May 9, 2005 /s/ Daniel H. Leever
----------- -----------------------
Daniel H. Leever
Chairman and
Chief Executive Officer
Date: May 9, 2005 /s/ Gregory M. Bolingbroke
----------- -----------------------------
Gregory M. Bolingbroke
Senior Vice President, Finance