EXHIBIT 13
MACDERMID'S 2002 ANNUAL REPORT TO STOCKHOLDERS
KEY OPERATING METRICS
(In thousands, except per share amounts)
(unaudited) (1)
Twelve Twelve
Months Ended Months Ended Twelve Months Ended
December 31, December 31, March 31,
2002 2001 2001 2000 1999
OPERATING RESULTS
- ------------------------------------------------ ------------- ---------------- -------- ---------- --------
Net sales. . . . . . . . . . . . . . . . . . . . $ 687,561 $ 745,653 $794,776 $ 758,080 $612,801
Gross profit . . . . . . . . . . . . . . . . . . $ 282,767 $ 289,825 $335,566 $ 343,386 $286,429
Net earnings (loss). . . . . . . . . . . . . . . $ 9,349 $ (24,300) $ 34,804 $ 45,358 $ 55,626
Add; the following items included in
reported net earnings:
Impairment costs, net of related tax effects . . 24,052 36,791 3,034 0 0
Restructuring costs, net of related tax effects. 0 14,565 4,211 0 0
Merger costs, net of related tax effects . . . . 0 0 931 4,852 0
Net earnings (excluding impairment,
------------- ---------------- -------- ---------- --------
restructuring and merger charges) (2). . . . . . $ 33,401 $ 27,056 $ 42,980 $ 50,210 $ 55,626
============= ================ ======== ========== ========
Diluted earnings (loss) per common share . . . . $ 0.29 $ (0.77) $ 1.07 $ 1.40 $ 1.72
Diluted earnings per common share
(excluding impairment, restructuring, and
merger charges) (2). . . . . . . . . . . . . . . $ 1.03 $ 0.84 $ 1.33 $ 1.55 $ 1.72
FINANCIAL POSITION AT YEAR END
- ------------------------------------------------ ------------- ---------------- -------- ---------- --------
Working capital. . . . . . . . . . . . . . . . . $ 139,510 $ 140,270 $125,689 $ 133,318 $117,643
Current ratio. . . . . . . . . . . . . . . . . . 1.9 1.8 1.5 1.7 1.6
Total assets . . . . . . . . . . . . . . . . . . $ 707,893 $ 790,885 $884,825 $ 790,492 $737,289
Total debt . . . . . . . . . . . . . . . . . . . $ 323,167 $ 412,363 $472,884 $ 411,258 $410,081
Common shareholders' equity. . . . . . . . . . . $ 217,738 $ 203,431 $230,669 $ 213,254 $163,350
Total debt as a percent of total capitalization. 60.0 67.0 67.2 65.9 71.5
OTHER DATA
- ------------------------------------------------ ------------- ---------------- -------- ---------- --------
Net earnings (excluding impairment,
restructuring and merger charges) (2). . . . . . $ 33,401 $ 27,056 $ 42,980 $ 50,210 $ 55,626
Divided by: net sales. . . . . . . . . . . . . . 687,561 745,653 794,776 758,080 612,801
Return on sales (%) (excluding impairment,
------------- ---------------- -------- ---------- --------
restructuring and merger charges) (2). . . . . . 4.9 3.6 5.4 6.6 9.1
============= ================ ======== ========== ========
Net earnings (excluding impairment,
restructuring and merger charges) (2). . . . . . $ 33,401 $ 27,056 $ 42,980 $ 50,210 $ 55,626
Divided by: average common shareholders'
equity . . . . . . . . . . . . . . . . . . . . . 210,585 217,050 221,962 188,302 134,833
------------- ---------------- -------- ---------- --------
Return on average common equity (%)
(excluding impairment, restructuring and
merger charges) (2). . . . . . . . . . . . . . . 15.9 12.5 19.4 26.7 41.3
============= ================ ======== ========== ========
Cash provided by operations. . . . . . . . . . . $ 126,193 $ 102,970 $ 59,070 $ 59,834 $ 80,456
Capital expenditures (net) . . . . . . . . . . . 4,387 14,214 15,653 23,398 19,935
------------- ---------------- -------- ---------- --------
Owner earnings (3) . . . . . . . . . . . . . . . $ 121,806 $ 88,756 $ 43,417 $ 36,436 $ 60,521
============= ================ ======== ========== ========
<FN>
(1) Includes the fourth quarter from the fiscal year ended March 31, 2001 for the operating results unaudited
column.
(2) Net earnings excluding impairment, restructuring and merger charges, net of related tax effects ("NEE") is
not intended to represent net earnings as defined by generally accepted accounting principles. It should not be
used as an alternative to net earnings as an indicator of operating performance and may not be comparable to
similarly titled measures used by other entities. Management believes NEE is a meaningful measure of the
Corporation's underlying results of operations. Return on sales and return on average common equity incorporates
NEE as the basis for these calculations.
(3) Represents cash flow from operations, less net capital spending. Management believes that Owner Earnings
portrays a meaningful measure of the impact of free cash flow, which is an important factor towards the growth of
intrinsic shareholder value over time. Owner Earnings is not intended to represent cash flow from operations as
defined by generally accepted accounting principles. It should not be used as an alternative to net income as an
indicator of operating performance or to cash flows as a measure of liquidity and may not be comparable to
similarly titled measures used by other entities.
MESSAGE TO SHAREHOLDERS
Dear Shareholders,
What a difference a year makes! Last year we commented about surviving the "100
year flood". We ended 2002 with zero balance on our senior bank revolver and
$32 million in cash in the bank. Granted, we still have $301 million in bonds
due in 2011 and a small amount of joint venture debt, but in two years we went
from $475 million in senior debt to essentially zero. The biggest contributor
to 2002's lower debt balance was $121.8 million in Owner Earnings (OE) generated
during the year. After the end of the year, our Board of Directors approved a
million share repurchase authorization. Yes, a year makes a big difference.
THE RAW NUMBERS. 2002 revenues were $687.6 million compared to $745.7 million
in the comparable prior period. Earnings before charges were $36.1 million or
$1.12 per share compared to $27.2 million or $.84 on the same basis in the prior
year. After charges, earnings were $9.3 million compared to a loss of $24.3
million in the prior year. Owner Earnings of $121.8 were up 37% from last
year's record.
One look at the revenues will tell you the external environment continued to be
difficult. The worldwide printed circuit market was depressed all year and there
has been no sign of recovery. Industrial production in Europe and North America
- - where 75% of our revenues are derived was anemic all year. The printing and
publishing industry experienced another poor year. Like most companies that
serve the industrial economy, the reality is that we tend to follow the external
environment, at least generally. This is especially true now because we spent
the last two years focusing on surviving, not growing. OK, not surviving in the
literal sense, but insuring that we would come out the other end of the 100 year
flood with our options intact. I would like to be able to say we were
successful generating cash, lowering costs, AND focusing on growing, but alas we
were not. I was unable to take my eye off the "ensure we survive" ball long
enough to give attention to anything else. And like it or not, this
organization tends to focus on what I do.
I believe our focus over the last two years was appropriate. We practiced the
adage, "In order to have a brilliant future, first you have to be sure you have
a future". Clearly some of our competitors fared much worse. Several of them
had to take dramatic measures including bankruptcy - and serious shareholder
dilution that verged on bankruptcy - to "survive". The bottom line is I believe
2002 is yet another testament to the strength of MacDermid's culture and
business model. We generated $121.8 million in cash in the midst of one of the
toughest market environments I have ever seen.
A COMMENT ON WEIGHING VS. VOTING: Many of our shareholders know we are long
time followers of what I call "Buffett Principles", taken from the business
philosophies of Warren Buffett. An important Buffett principle is, "In the
short term the stock market is a voting machine and in the long term it is a
weighing machine". This means that at any given point in time the market may
overreact in it's valuation of a particular stock, either too high or too low.
In the case of the late 90's bubble it overreacted towards the whole market.
Just because the market says the dot com is worth so much "per hit", it doesn't
mean it is so - long term. A business model that generates no cash over time is
valueless. Further this principle holds that over time, financial performance
and market value tend to converge. This principle is what drives our cash flow
discipline. Frankly I wouldn't take great comfort if I thought I had to depend
on Wall Street to "vote" on our relative success. Our cash flow in effect
allows us to take matters into our own hands. Here's an overly simple example.
Say we generate $60 million in free cash flow per year for the next ten years.
At the end of ten years we would have $600 million in cash in the bank. Today
our market cap is a little over $600 million. Do you think all else being
equal, our market value would still be $600 million, or equal to only the cash
in the bank? Not likely. Regardless of how depressed Mr. Market felt at the
time, one would assume the more objective 'weighing' would have to take over at
some point. Maybe a better way to look at it is as follows. Assume Mr. Market
was depressed for the whole 10 years, our stock price never moved, and we simply
took the cash and bought back our stock each year. In ten years there would be
one share left that generated $60 million in free cash! I think Mr. Market, no
matter how depressed he was, would offer more than $20 for $60 million in cash
flow! So, we believe that it is a mathematical certainty that if we perform we
will be rewarded over time. The end result is called intrinsic value, defined
as the total amount of cash that can be taken out of a business over its life,
valued in today's dollars. The above example is admittedly superficial and
overly simplistic. However, we have run detailed and sophisticated models and
firmly believe our future is very bright, even using very conservative
assumptions. There is simply no peer company of any size large or small that
comes anywhere close to our cash flow performance. If you want proof, I
recommend you spend the money to come to our meeting for interested shareholders
and investors in Omaha, Nebraska on May 2. At this meeting we will go through
the detailed models and attempt to compare relative valuations over time between
our model and a traditional model.
CASH FLOW. What drives cash flow? As we have such a strong orientation towards
intrinsic value which is driven by cash flow, I believe it is worthwhile to
spend a little more time on the subject. The most important driver of cash flow
is earnings. It would be very difficult to generate exceptional cash flow over
time without earnings. However, earnings don't guarantee cash flow. Another
very important driver of cash flow is capital expenditures, that is, the cash
spent for large items like land, buildings, equipment etc. From an accounting
standpoint, you spend the money up-front for the asset, and then amortize or
expense it over its useful life. So whereas you might have "earnings" of $10
million in a given year, if you spend $10 million in capital expenditures you
actually generate no cash at all. The last large driver of cash flow is working
capital or the funds needed to support revenue. The way most businesses sell to
other businesses is on credit. In this case, you sell and ship a product,
recognize a profit, but until the invoice is actually paid you generate no cash.
Additionally when you sell more, you usually need to have more inventory to
support the higher sales. For MacDermid historically we needed 30 cents or more
in working capital for every dollar in increased sales. Over the last two years
we have brought that number down to more like 25 cents. But nevertheless,
unless you earn incremental after tax profits of 25 or 30 cents for every
incremental dollar in sales growth (very unlikely), you will have to invest in
working capital in excess of the increased profits. This year it worked in
reverse. Our sales went down and therefore we had to invest less in working
capital. That is why the $121.8 million in free cash flow cannot be used in an
intrinsic value calculation. It is simply not sustainable. If we analyze our
cash flow this year we find that out of the $121.8 million in Owner Earnings $53
million came from less working capital. Of the $53 million, $17 million was
simply a result of lower sales. An additional $38 million came from reducing
our investment in inventory and receivables even more than the decline in
revenues. Last year we set an objective of improving our working capital
management and these are gratifying results. We believe there is still room for
improvement, but not at as fast a rate. In 2002 we spent $4.4 million net, in
capital expenditures. That is frugal! For next year our OE will greatly depend
on the external environment. If revenues improve we will have to invest
modestly more in working capital than the additional profits generated. We will
certainly spend more in 2003 in capital expenditures, more on the order of $10
to $12 million. If we have to invest to support revenue growth, Owner Earnings
could very well be dramatically lower than 2002. All else being equal between
2002 and 2003 (including revenues), simple math indicates OE will be reduced by
most of the $53 million in lower working capital, and the higher capital
expenditures of say $8 million. So best case our OE next year might come in
around $60 million. If revenues and earnings go up, which we sure hope, OE will
be even less short term. "Isn't lower OE a bad thing", you ask? Not
necessarily. If OE is temporarily reduced to fund growth in working capital
that leads to more free cash flow in the future, that can be a good investment.
The key is that the future higher cash flow must be sufficient to offset the
lower future value of a dollar compared to the current value that is being
invested.
USE OF CASH. As mentioned above the Board of Directors approved a million share
repurchase authorization. I view share repurchases as a very attractive
alternative to other investments, in many cases. In 1994 we bought back 25% of
our shares outstanding for $30 million. Whereas I view the current situation as
similarly attractive, we are in a very different situation from a capital
structure standpoint. We have a stated target for debt not to exceed 2.5 times
cash flow. We ended the year about on target. That means we have choices about
future cash flow as we generate it. Given the low capital investment required
in our business, we could consider increasing dividends, buying back stock, or
making cash acquisitions. At this time dividends are less attractive because
they are taxed twice, once at the corporate level and again when you receive
them. In addition, dividends are not voluntary, i.e. when we issue dividends,
all shareholders must accept them. In a stock repurchase scheme, you have the
option of selling a few shares and maintaining your proportional ownership, or
not selling and increasing your stake in the future. It is important to
understand that an authorization does not necessarily mean we will actually
acquire the shares. A million shares may seem small, but over time, if we
repeat the process, it can add up. There are some restrictions to acquiring our
own shares in our bond covenants as well. The longer the external environment
remains difficult, the better the chances of us being presented with a very
attractive acquisition candidate. It makes sense to keep some dry powder.
GUTS TO FAIL. In 2002 we took non-cash charges of $39.2 million. That is on
top of $69 million in 2001. Is this an admission of failure? The answer is
absolutely yes. In the late 90's we embarked on a purposeful strategic remake.
We believed we had little choice if we were to better ensure our survival from a
generational standpoint. There is a more detailed discussion of this in the mid
year shareholders message reprinted at the back of this report. MacDermid has
long had a basic philosophical belief in calculated risk taking called "guts to
fail". Basically this holds that one must take risks to gain advantage. We
judge ourselves not by our mistakes, but by the end result, in balance. Here's
how I look at it. I became CEO in 1990. That year we earned $5.3 million.
Owner Earnings were $5.5 million. Shares outstanding were about the same as now
adjusted for 9:1 splits since then. In 1998 earnings were $30.5 million and
Owner Earnings were $27.6 million. 2002 earnings (not counting the charge) were
$36.1 million and Owner Earnings were $121.8 million. By far the most important
question you should ask is, what would earnings have been if we had not embarked
on the strategic remake? I suggest they would have been back to 1990 levels,
perhaps worse. The fact that earnings and cash flow are higher than when we
started the remake in 1998 is in my humble view an unqualified success. This is
especially true given that we are earning at "trough market levels".
THE QUESTION OF THE YEAR. Is MacDermid a one trick pony? In other words we
have proven that we can generate cash like no one else, but can we grow? On the
front cover of this report is our corporate strategy in graphic form. We call
it the "bookend strategy". The strategy holds that we will preferentially
invest in the bookends of R&D on the front end, and technical service on the
back end. This is what is most important to our customers. All other costs in
between the bookends will be controlled very tightly. It may sound simple, but
execution is incredibly difficult, especially for large companies which
represent most of our competitors. In fact, this is a long term strategy. It
depicts how we have always made strategic decisions. "Yes", you ask, "but what
about your admission earlier that you obsessed with keeping your eye on the
'survival' ball"? It's true, we didn't pay as much attention to pushing the
bookends as we might have. We did however insure we maintained the bookends.
----------
The vast majority of our cost reductions over the last two years were between
the bookends. We ended this two year period of "surviving" with our bookends
very much intact. We believe we are the only competitor who can say that. To
emphasize the bookends is a relatively easy switch in prioritization for us.
Our R&D as a percent of sales is the highest it has ever been. We have decided
to maintain that percentage as revenues recover. We are making modest
organizational shifts emphasizing product line management as opposed to having a
sole focus on geographic P&L management. The Clan MacDermid is very responsive.
Just consider how they responded to the cost and cash flow orientation. I
believe the Clan will also respond with vigor to our new innovation and market
share gain orientation. One thing is very clear to me. Our competitors in many
cases are weak. They cut costs indiscriminately, in some cases significantly
reducing the field infrastructure. It should be easy pickings. However, I
remain cautioned as market share gain in this business has always been very
difficult. Customers are very conservative.
SEE YOU IN OMAHA. As mentioned above we will hold a meeting for interested
shareholders and investors in Omaha, Nebraska on May 2, two days after our
normal annual shareholders meeting in Waterbury, Connecticut. In addition we
will hold a four day leadership meeting in Omaha at the same time. One hundred
of our top managers from around the world purchased a $2,000+ share of Berkshire
Hathaway this year in order to attend the meeting. We will attend the Berkshire
meeting en masse and then spend a couple of additional days discussing value
creation. As much as I respect Mr. Buffett and believe in the "Berkshire
Principles", the reason we feel so compatible is due to the MacDermid heritage,
most of which was established by my father Harold Leever 50 years ago. If these
principles seem familiar, it's because they are the foundation of MacDermid.
SHAREHOLDER PRINCIPLES. I urge everyone to study the MacDermid Shareholder
Principles printed on page one of this report. We take these principles
seriously. This year we adopted additional partnership oriented policies to
further reinforce our Philosophy. Examples include;
- Share retention. The Board of Directors decided to require that 75% of
the net shares acquired by option or other share plans, after the cost
of exercise and payment of taxes, be retained permanently while an
executive is an active employee. This applies to Directors as well who
are compensated entirely by restricted shares or options.
- Policy of not repricing options. This should go without saying, but
just to be clear we have adopted a policy not to reprice options
without shareholder approval.
- Formal establishment of a Lead Director. The Board appointed Quinn
Spitzer as Lead Director charged with chairing meetings of the Board
when I am not in attendance, which occurs during a portion of each
meeting of our Board. He also meets one on one with other directors as
well as with members of senior management to insure an unfiltered flow
of information.
- Stock Options. We attempt to treat stock options as if we were
partners in a business. Option holders do not gain unless you do. We
may have the only option plan in existence that is both indexed and
performance based. The options have no value unless we perform better
than the Standard and Poors Specialty Chemical Index. Additionally the
number of options goes up or down depending on our achievement of
preset financial objectives. You should be cheering for us!
CONSERVATIVE APPROACH TO ACCOUNTING. MacDermid has long believed in being
appropriately conservative in our reporting and accounting. The company has no
off balance sheet entities. We have no debt that isn't shown on our books. Our
pension accounting is ahead of the pack. You will note that we changed our
assumptions for 2002 for return and discount that based on a recent study put us
in the most conservative 10% of all companies. We incurred $1 million in higher
pension expense in 2002 as a result. The vast majority of companies are
changing assumptions for 2003. We took the more conservative approach and
reacted early.
THE CLAN MACDERMID. Clan is the Scottish word for family. We are a classic
Scottish family, dedicated, scrappy, and committed to the cause. I'd hate to be
a competitor of MacDermid. We just keep on coming at you. We have the unusual
ability to rally around the tartan. You as a shareholder are lucky to be
partnered with such a fine group of men and women. I am lucky to be their
leader. We have come through a trying period. Our strategy going forward is
simple, the execution of it is not. I promise you maximum effort from a
dedicated Clan MacDermid. Wish us luck. Dan
/s/ Daniel H. Leever
Daniel H. Leever
Chairman of the Board and Chief Executive Officer
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS
(In thousands, except share and per share amounts)
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited) (unaudited)
Twelve Months Nine Months Nine Months
Year Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
-------------- --------------- -------------- --------------
2002 2001 2001 2000
-------------- --------------- -------------- --------------
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 687,561 $ 745,653 $ 533,860 $ 582,995
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 404,794 455,828 326,211 329,593
-------------- --------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 282,767 289,825 207,649 253,402
Operating expenses:
Selling, technical and administrative. . . . . . . . . . 189,414 198,923 144,119 156,281
Amortization . . . . . . . . . . . . . . . . . . . . . . 6,226 10,952 6,084 15,774
Impairment charges 35,371 56,602 51,802 ---
Restructuring costs --- 22,338 21,264 5,589
Merger related costs --- --- --- 1,473
-------------- --------------- -------------- --------------
231,011 288,815 223,269 179,117
-------------- --------------- -------------- --------------
Operating profit (loss) . . . . . . . . . . . . . . . 51,756 1,010 (15,620) 74,285
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . . . 608 1,395 802 1,414
Interest expense . . . . . . . . . . . . . . . . . . . . (35,833) (37,952) (28,291) (25,587)
Miscellaneous income 690 --- --- ---
Miscellaneous expense. . . . . . . . . . . . . . . . . . (3,297) (1,599) (1,203) (2,339)
-------------- --------------- -------------- --------------
(37,832) (38,156) (28,692) (26,512)
-------------- --------------- -------------- --------------
Earnings (loss) before income taxes and minority interests. 13,924 (37,146) (44,312) 47,773
Income tax (expense) benefit. . . . . . . . . . . . . . . . (4,455) 12,956 15,510 (17,581)
Minority interests (120) (110) (110) ---
-------------- --------------- -------------- --------------
Net earnings (loss). . . . . . . . . . . . . . . . . . . $ 9,349 $ (24,300) $ (28,912) $ 30,192
============== =============== ============== ==============
Earnings (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.29 $ (0.77) $ (0.91) $ 0.97
============== =============== ============== ==============
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . $ 0.29 $ (0.77) $ (0.91) $ 0.93
============== =============== ============== ==============
Weighted average number of common
shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . 32,220,066 31,719,065 31,911,570 31,132,118
============== =============== ============== ==============
Diluted. . . . . . . . . . . . . . . . . . . . . . . . 32,475,155 32,386,989 32,381,519 32,402,219
============== =============== ============== ==============
CONSOLIDATED OVERVIEW
IN 2002, MACDERMID, INCORPORATED (THE CORPORATION), COMPLETED ITS FIRST FULL
FISCAL YEAR ENDING DECEMBER 31ST. AFTER RESHAPING ITS BUSINESS SEGMENTS OVER
THE PAST THREE YEARS THROUGH A SERIES OF MERGER AND ACQUISITIONS AND
RESTRUCTURINGS, THE CORPORATION EXPERIENCED A SETTLING YEAR IN 2002 WITH NO
ACQUISITION, DIVESTITURE OR MAJOR RESTRUCTURING OCCURRING. THE FOCUS OF ALL
BUSINESS SEGMENTS, IN EVERY GEOGRAPHIC REGION, WAS A CONCENTRATION TOWARDS
GENERATING MAXIMUM CASH FLOWS. AS A RESULT, THE CORPORATION COMPLETELY PAID
DOWN BORROWINGS UNDER ITS REVOLVING CREDIT FACILITY. CASH FLOWS FROM OPERATIONS
OF $126,193 WERE AN ALL-TIME HIGH. RESULTS FOR 2002 INCLUDED IMPAIRMENT CHARGES
OF $35,371, RESULTING PRIMARILY FROM GOODWILL WRITTEN OFF IN THE ELECTRONICS
MANUFACTURING SEGMENT, UNDER STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142
"GOODWILL AND OTHER INTANGIBLE ASSETS" (SFAS142). ECONOMIC FORECASTS REMAIN
SKEPTICAL AND SO THE CORPORATION CONTINUES TO FOCUS ON WORKING CAPITAL
MANAGEMENT AND PRODUCT DEVELOPMENT THAT WILL YIELD INCREASED SALES FROM THE
DEVELOPMENT OF NEW PRODUCTS AND GENERATE STRONG CASH FLOWS. IN 2001, THE
CORPORATION CHANGED ITS FISCAL YEAR END FROM MARCH 31, TO DECEMBER 31.
ACCORDINGLY, THE TRANSITION PERIOD ENDED DECEMBER 31, 2001, CONSISTED OF ONLY
NINE MONTHS.
NET SALES FOR FISCAL 2002 WERE $687,561, WHICH WAS $58,092, OR 8% LESS THAN
NET SALES OF $745,653 FOR THE SAME PERIOD IN 2001. PROPRIETARY SALES, WHICH
DECREASED $36,271 OR 6%, WERE ROUGHLY 82% OF NET SALES FOR BOTH FISCAL 2002 AND
THE SAME PERIOD IN 2001. THERE WAS AN APPROXIMATE 2% POSITIVE EFFECT ON
TRANSLATED SALES RESULTING FROM FOREIGN CURRENCIES, PRIMARILY THE EURO,
STRENGTHENING AGAINST THE US DOLLAR DURING THE YEAR. AS A RESULT, PROPRIETARY
SALES FOR FISCAL 2002, ON A COMPARABLE BASIS EXCLUDING THE EFFECT OF FOREIGN
CURRENCY, WERE 8% LESS THAN THE SAME PERIOD IN 2001.
COST OF SALES WAS $404,794 FOR FISCAL 2002 AS COMPARED TO $455,828 FOR THE
SAME PERIOD IN 2001. THIS RESULTED IN A GROSS PROFIT PERCENTAGE OF 41.1% FOR
FISCAL 2002 AS COMPARED TO 38.9% FOR THE SAME PERIOD IN 2001. THE GROSS PROFIT
IMPROVEMENT IS THE RESULT OF PLANT CLOSINGS AND COST REDUCTION EFFORTS
ASSOCIATED WITH PREVIOUS RESTRUCTURING ACTIVITIES. SELLING, TECHNICAL AND
ADMINISTRATIVE ("ST&A") EXPENSES IN FISCAL 2002 WERE $189,414 AS COMPARED TO
$198,923 IN THE SAME PERIOD IN 2001. THIS INCLUDES EMPLOYEE STOCK OPTION EXPENSE
OF $3,145 FOR FISCAL 2002 AND $619 FOR THE SAME PERIOD IN 2001 INCLUDED IN ST&A,
AS A RESULT OF APPLYING THE FAIR VALUE EXPENSE METHOD OF ACCOUNTING UNDER
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION (SFAS123). AMORTIZATION EXPENSE WAS $6,226 IN FISCAL 2002 AS
COMPARED TO $10,952 IN THE SAME PERIOD IN 2001, AS A RESULT OF THE APPLICATION
OF SFAS142 AND STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
(SFAS121). AFTER GIVING EFFECT TO IMPAIRMENT CHARGES OF $35,371 IN FISCAL 2002
AND IMPAIRMENT AND RESTRUCTURING CHARGES OF $78,940 IN THE SAME PERIOD IN 2001,
OPERATING PROFIT WAS $51,756 FOR FISCAL 2002 AS COMPARED TO $1,010 FOR THE SAME
PERIOD IN 2001. EXCLUDING THE IMPAIRMENT AND RESTRUCTURING CHARGES, OPERATING
PROFIT FOR FISCAL 2002 WOULD HAVE BEEN $87,127 AS COMPARED TO $79,950 IN THE
SAME PERIOD IN 2001.
AS A RESULT OF THE ABOVE DISCUSSION, FISCAL 2002 DILUTED EARNINGS PER SHARE
OF $0.29 COMPARES TO A DILUTED LOSS PER SHARE OF $0.77 FOR THE SAME PERIOD IN
2001. FOREIGN CURRENCY TRANSLATION RESULTED IN HIGHER REPORTED EARNINGS OF $0.01
PER SHARE FOR FISCAL 2002. THE CORPORATION ACHIEVED AN EARNINGS IMPROVEMENT
DESPITE WEAK SALES VOLUMES IN THE ELECTRONICS AND COMMERCIAL PRINTING AND
PUBLICATION MARKETS, DUE TO A FULL YEAR OF COST SAVINGS FROM PREVIOUS YEARS
RESTRUCTURINGS, LOWER AMORTIZATION OF INTANGIBLES AND AN IMPROVED EFFECTIVE TAX
RATE IN FISCAL 2002.
ACQUISITIONS
There were no acquisitions during fiscal 2002 or transition year 2001. During
fiscal 2001, the Corporation acquired a 60% interest in Eurocir S.A., a printed
circuit board manufacturer based in Spain. The fiscal year ended March 31, 2001
consolidated operating results include the operations of Eurocir S.A. since
January 1, 2001. This acquisition was financed through bank borrowings under
the Corporation's revolving credit facility. The total purchase price of
approximately $31,000 was accounted for as a purchase transaction and included
inventory, fixed assets and goodwill of approximately $27,000. Minority
interest amounts are included in the financial statements at December 31, 2002
and 2001. There is no minority interest separately identified in the financial
statements at March 31, 2001 because the final determination of purchase
allocations had not been completed as of the balance sheet date and the amounts
were not considered material to the financial statement presentation. The
purchase and sale agreement includes a put and call arrangement for the
remaining 40% interest which expires after the fifth anniversary of the closing
date. The purchase price for the remaining 40% is based on a multiple of
earnings from operations before interest, taxes on earnings, depreciation and
amortization ("EBITDA") during the period ending on the fifth anniversary of the
closing date. During 2002, printed circuit board markets increasingly
deteriorated in Europe and North America. Due to this situation, discounted
cash flows for Eurocir S.A. were assessed pursuant to the provisions of SFAS142,
which resulted in the goodwill associated with this business determined to be
impaired. The Corporation charged $27,389 against earnings in the fourth
quarter of 2002 to write-off this balance.
On June 13, 2000, the Corporation acquired the assets, subject to certain
liabilities, of the digital graphics business unit of VirtualFund.com, Inc.
(Colorspan) and the results of Colorspan are included in the consolidated
operating results since that date. The acquisition was financed through bank
borrowings under the Corporation's revolving credit facility. The total
purchase price of approximately $47,000 was accounted for as a purchase
transaction and included inventory, fixed assets, goodwill of approximately
$25,000 and other intangible assets of approximately $17,000. During transition
year 2001, digital printing equipment sales increasingly fell short of forecast
due to factors such as delayed product introduction. This resulted in future
budgeted cash flows being reduced. As a result, the recoverability of Colorspan
goodwill and other intangible assets were assessed, pursuant to the provisions
of SFAS121 and SFAS142, and written-off with $40,675 charged to earnings during
the last quarterly period of transition year 2001.
RESTRUCTURING
In the last quarter of transition year 2001, the Corporation announced the
closure of certain of its Printing Solutions (formerly Graphic Arts) and
Advanced Surface Finishing manufacturing facilities. The activities of the
affected locations have been relocated to other facilities in order to run those
operations more cost effectively. In connection with these actions,
restructuring charges of $1,859 for severance related costs and $7,807 for
facility closing costs, disposal services and asset write-offs were recorded
during the transition year ended December 31, 2001. Total cash payments of
$3,023 and other charges of $6,643 have been made since inception. In addition,
an $11,598 charge, consisting of a cash charge of $709 for severance related
costs and other charges of $10,889 for asset write-offs was taken for the
closure of the production activities at Dynacircuits. At December 31, 2002,
this restructuring action has been completed and no provisions remain in the
consolidated balance sheet.
During the second quarter of fiscal year ended March 31, 2001 a
restructuring program was begun in an effort to reposition operations in both
Printing Solutions and Advance Surface Finishing. The Corporation took action
to reduce its cost structure on operations that had increased significantly from
acquisitions over the previous two years. In connection with these actions,
restructuring charges of $6,133 for severance and $530 for lease cancellation
and asset write-offs were recorded during fiscal year ended March 31, 2001.
Total cash payments of $5,904 and other charges of $759 have been made since
inception. At December 31, 2002, this restructuring action has been completed
and no provisions remain in the consolidated balance sheet.
TWELVE MONTHS ENDED DECEMBER 31, 2002 VS. TWELVE MONTHS ENDED DECEMBER 31, 2001
SALES, COSTS AND EXPENSES:
Printing Solutions:
Net sales of $282,896 decreased 5% in fiscal 2002 for Printing Solutions
due to weaker market conditions worldwide in printing and publication markets.
Proprietary products represent approximately 99% of the net sales for the
Printing Solutions segment. Net proprietary sales of $279,660 decreased 5% from
net proprietary sales of $293,105 for the same period 2001. Foreign currency
translation had the effect of increasing sales approximately 1%.
Costs as a percentage of sales decreased slightly in fiscal 2002 from the
same period in 2001. As a result, gross profit percentage was 41.7% in fiscal
2002 as compared to 40.1% for the same period in 2001. This was primarily a
result of a full year of cost savings from a plant closing during transition
year 2001.
ST&A expenses were $69,215 for fiscal 2002 as compared to $75,288 for the
same period in 2001. ST&A as a percentage of sales, 24.5% for fiscal 2002
compares to 25.4% for the same period in 2001. This decrease was largely a
result of management's focus on savings from selling and office support
synergies. Research and development expenses of $10,491 in fiscal 2002 compares
to $12,873 for the same period in 2001. Total amortization expense was $600 for
fiscal 2002 and $1,898 for the same period in 2001. The decrease is due to the
discontinuation of goodwill amortization. The twelve month period in 2001
includes impairment and restructuring costs of $32,188. The resulting operating
profit (after amortization and impairment and restructuring costs) was $48,244
for fiscal 2002 and $9,587 for the same period in 2001.
Advanced Surface Finishing:
Net sales of $324,180 decreased 10% in fiscal 2002 for Advanced Surface
Finishing. Proprietary products represent approximately 88% of the net sales
for the Advanced Surface Finishing segment. Net proprietary sales of $284,628
decreased 7% from net proprietary sales of $307,454 for the same period in 2001.
Sales were soft to the electronics markets as customer volumes have decreased.
Foreign currency translation had the effect of increasing sales approximately
2%.
Costs as a percentage of sales decreased slightly in fiscal 2002 from the
same period in 2001. As a result, gross profit percentage was 48.3% in fiscal
2002 compared to 46.6% for the same period in 2001. The most significant factors
were a product mix that continues to shift towards newer technologies and a full
year of cost savings from a plant closing during transition year 2001.
ST&A expenses were $113,926 for fiscal 2002 as compared to $115,403 for the
same period in 2001. ST&A as a percentage of sales, 35.1% for fiscal 2002
compares to 32.1% for the same period in 2001. This increase was principally due
to certain sales support costs that are fixed in nature and higher insurance
costs. Research and development expenses of $8,613 in fiscal 2002 compares to
$8,242 for the same period in 2001. Total amortization expense was $5,599 for
fiscal 2002 and $8,657 for the same period in 2001. The decrease is due to the
discontinuation of goodwill amortization. Fiscal 2002 includes impairment costs
of $982 and the same period in 2001 includes impairment and restructuring costs
of $31,209. The resulting operating profit (after amortization and impairment
and restructuring costs) was $35,913 for fiscal 2002 and $12,221 for the same
period in 2001.
Electronics Manufacturing:
Printed circuit board sales of $80,485 in fiscal 2002 decreased 10% from
$89,904 for the same period in 2001. Foreign currency translation had the
effect of increasing sales approximately 5% for fiscal 2002. Net sales continue
to reflect a slowdown in technology spending and weaker consumer confidence.
Costs as a percentage of sales decreased in fiscal 2002 from the same
period in 2001. As a result, gross profit percentage increased to 10.3% in
fiscal 2002 from 3.8% for the same period in 2001. This improvement is due to
the closure of the Dynacircuits facility during transition year 2001.
ST&A expenses were $6,274 for fiscal 2002 as compared to $8,232 for the
same period in 2001. ST&A as a percentage of sales, 7.8% for fiscal 2002
compares to 9.2% for the same period in 2001. Total amortization expense was $27
for fiscal 2002 and $396 for the same period in 2001. The decrease is due to the
discontinuation of goodwill amortization. Fiscal 2002 includes impairment costs
of $34,389 and the same period in 2001 includes impairment and restructuring
costs of $15,543. The resulting operating losses (after amortization and
impairment and restructuring costs) were $32,401 for fiscal 2002 and $20,798 for
the same period in 2001.
INCOME TAXES: The overall effective income tax rate decreased to 32% in fiscal
2002 from 35% for the same period in 2001. The reduction in the income tax rate
is primarily attributable to a change in the earnings mix from higher to lower
tax jurisdictions and the implementation of domestic tax minimization
strategies.
NET EARNINGS: The Corporation reduced its bank debt by over $80,000 during
fiscal 2002, resulting in net interest expense of $35,225 for fiscal 2002 as
compared to $36,557 for the same period in 2001. A diluted earnings per share
of $0.29 for fiscal 2002, compares to a diluted loss per share of $0.77 for the
same period in 2001. Foreign currency translation resulted in increased
reported earnings of $0.01 per share for fiscal 2002.
NINE MONTHS ENDED DECEMBER 31, 2001 VS. NINE MONTHS ENDED DECEMBER 31, 2000
SALES, COSTS AND EXPENSES:
Printing Solutions:
Net sales of $219,595 decreased 6% in transition year 2001 for Printing
Solutions. Proprietary products represent approximately 99% of the Printing
Solutions segment. Net proprietary sales of $216,748 decreased 7% from net
proprietary sales of $232,570 for the same period in 2000. Foreign currency
translation had the effect of reducing sales approximately 1%. The Colorspan
acquisition added $6,599 proprietary sales. Net proprietary sales would have
decreased 9% from the previous year, without the effects related to this
acquisition and foreign currency exchange. The decrease was due to weak demand
for printing plates used with advertising as well as declining printer and
hardware sales.
Costs as a percentage of sales increased somewhat in transition year 2001
over the same period in 2000. This was due to increased costs for printer and
hardware products and higher overhead costs. As a result, gross profit
percentage was 40.0% in transition year 2001 as compared to 41.4% for the same
period in 2000.
ST&A expenses were $56,969 for transition year 2001 as compared to $62,423
for the same period in 2000. This 9% decrease was largely a result of savings
from restructuring for management and office support redundancies. ST&A as a
percentage of sales was 26.0% as compared to 26.6% for the same period in the
previous year. Research and development expenses of $8,738 decreased 6% from the
same period in the previous year. Total amortization expense was $507 for
transition year 2001 as compared to $6,683 for the same period in 2000. The
decrease is due to the discontinuation of goodwill amortization. The resulting
operating profit of $30,169 (after amortization) for transition year 2001
increased 8% over the same period in 2000.
Advanced Surface Finishing:
Net sales of $250,963 decreased 26% in transition year 2001 for Advanced
Surface Finishing. Proprietary sales represent approximately 89% of total sales
for transition year 2001. Net proprietary sales of $218,297 decreased 22% from
net proprietary sales of $280,161 for the same period in 2000. Foreign currency
translation had the effect of reducing sales approximately $7,216, or 2%.
Divestitures accounted for $7,645 proprietary sales. Net proprietary sales
would have decreased approximately 20% from the same period in the previous
year, without the effects related to the divestitures and foreign currency
exchange. The decrease was primarily due to weak demand in worldwide markets
for electronics chemistry.
Costs as a percentage of sales decreased slightly for transition year 2001.
Most significantly due to a product mix shift towards newer technologies and a
more efficient pricing structure for certain other products. As a result, gross
profit percentage was 47.0% in transition year 2001 as compared to 46.5% for the
same period in 2000.
ST&A expenses were $81,054 for transition year 2001 as compared to $93,056
for the same period in 2000. This 13% decrease was principally due to lower
selling expenses associated with reduced sales activity. ST&A as a percentage of
sales was 32.3%, as compared to 27.4% for the same period in the previous year,
because the elimination of these costs lagged behind the decrease in sales.
Research and development expenses of $6,185 decreased 19% from the same period
in the previous year. Total amortization expense was $5,550 for transition year
2001 as compared to $9,091 for the same period in 2000. The decrease is
principally due to the discontinuation of goodwill amortization. As a result,
operating profit of $30,273 (after amortization) for transition year 2001
decreased 47% from the same period in 2000.
Electronics Manufacturing:
The Electronics Manufacturing segment was newly formed by the acquisitions
of the remaining interest in the Dynacircuits joint venture, in July 2000 and a
60% majority interest in Eurocir S.A., in January 2001. The Dynacircuits
operations ceased, effective September 30, 2001. The circuit board sales of the
Electronics Manufacturing segment are non-proprietary and gross profit is
significantly less than the specialty chemical business.
Net sales were $63,302 for transition year 2001 as compared to $8,532 for
the same period in 2000. The increase is due to nine months of sales in
transition year 2001 with none in the comparable period, for Eurocir S.A.
Costs as a percentage of sales were in line with operating expectations for
Eurocir, while continuing in excess of normal operating levels for Dynacircuits,
for transition year 2001. Therefore, gross profit percentage was 4.9% for
transition year 2001. Costs were in excess of sales for the same period last
year due to start-up costs at Dynacircuits. ST&A expenses were $6,096 for
transition year 2001 as compared to $802 for the same period in 2000, a result
of the Eurocir S.A. acquisition in transition year 2001. Operating losses
totaled $2,995 (after amortization) for transition year 2001 as compared to
$4,143 for the same period in 2000.
INCOME TAXES: The overall effective income tax rate decreased to 35% in
transition year 2001 from 36.8% in the same period in 2000. The rate decrease
was a result of a combination of non-deductible goodwill charges in the prior
year, an increase in the deferred tax asset valuation reserve and the change in
earnings mix from higher to lower taxed jurisdictions.
NET EARNINGS: Transition year 2001 resulted in a diluted loss per share of
$0.91. This compares to a diluted earnings per share of $0.93 for the same
period in the previous year. Foreign currency translation resulted in lower
reported earnings of $0.02 per share for transition year 2001. Overall,
transition year 2001 net sales were 8% lower than the comparable period in 2000.
However, proprietary sales were down 17% and this was somewhat offset with
printed circuit board sales, which carry a much lower gross margin. Expenses,
excluding charges for restructuring, impairment and merger related costs in each
of the years, were reduced 5% and amortization expense was 61% lower, as a
result of the elimination of goodwill amortization. Interest expense increased
11% over the same period in the previous year due to higher interest rates as a
result of a bond offering completed on June 20, 2001, partially offset by a
reduction in debt balances of $63,000. As a result, diluted earnings per share,
excluding charges for restructuring, impairment and merger related costs in each
of the years, was $0.57 for transition year 2001 as compared to $1.07 for the
same period in 2000.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management must
undertake decisions that impact the reported amounts and related disclosures.
Such decisions include the selection of the appropriate accounting principles to
be applied and also assumptions upon which accounting estimates are based.
Management applies judgement based on its understanding and analysis of the
relevant circumstances to reach these decisions. By their nature, these
judgments are subject to an inherent degree of uncertainty, accordingly actual
results could differ significantly from the estimates applied.
The Corporation's critical accounting policies include the following:
Revenue Recognition: The Corporation recognizes revenue, including freight
charged to customers, when products are shipped and the customer takes ownership
and assumes the risk of loss, collection of the relevant receivable is probable,
persuasive evidence that an arrangement exists and the sales price is fixed or
determinable. The Corporation's shipping terms are customarily "FOB shipping
point" and do not include right of inspection or acceptance provisions.
Equipment sales arrangements may include right of inspection or acceptance
provisions in which case revenue is deferred until these provisions have been
satisfied.
Account Receivable: The Corporation performs ongoing credit evaluations of
its customers and adjusts credit limits based upon payment history and the
customer's credit worthiness. The Corporation continually monitors collections
and payments from its customers and maintains a provision for estimated credit
losses based upon historical experience and any specific customer collection
issues that it has identified. While such credit losses have historically been
within management's expectations and the provisions for bad debts established,
there is no guarantee that the Corporation will continue to experience the same
credit loss rates as in the past.
Inventories: The Corporation values inventory at lower of average cost or
replacement market. Management regularly reviews obsolescence to determine that
inventories are appropriately reserved. In making any determination, historical
write-offs, customer demand, alternative product uses, usage rates and
quantities of stock on hand are considered. Inventory in excess of the
Corporation's estimated usage requirements is written down to its estimated net
realizable value.
Goodwill and other long-lived assets: The Corporation records property,
plant and equipment at cost. Depreciation and amortization of property, plant
and equipment are provided over the estimated useful lives of the respective
assets, on the straight-line basis. The Corporation categorizes and depreciates
its assets over periods ranging from 3-5 years for computers, software,
furniture, fixtures and autos, 5-20 years for machinery and equipment, and 5-30
years for building and building improvements. Leasehold improvements are
amortized over the lesser of the useful life of the asset or the life of the
lease. Expenditures for maintenance and repairs are charged directly to expense;
renewals and betterments, which significantly extend the useful lives are
capitalized. Costs and accumulated depreciation and amortization on assets
retired or disposed of are removed from the accounts and any resulting gains or
losses are credited or charged to earnings. Patents and various other intangible
assets are amortized on a straight-line basis over their estimated useful lives
as determined by an appropriate valuation. The present periods of amortization
are 15 years for patents and range between 5 and 30 years for other separately
identified intangible assets. The Corporation assesses the carrying value of
goodwill and other long-lived assets in accordance with SFAS142 and SFAS144. In
many instances, projected future cash flows are used in these assessments.
Estimation factors, including but not limited to, the timing of new product
introductions, market conditions and competitive environment could affect
previous projections.
Environmental Matters: The nature of the Corporation's operations and
products exposes it to the risk of liabilities or claims with respect to
environmental cleanup or other matters, including those in connection with the
disposal of hazardous materials. As such, the Corporation is subject to
extensive U.S. and foreign laws and regulations relating to environmental
protection and worker health and safety, including those governing: discharges
of pollutants into the air and water; the management and disposal of hazardous
substances and wastes; and the cleanup of contaminated properties. The
Corporation has incurred, and will continue to incur, significant costs and
capital expenditures in complying with these laws and regulations. The
Corporation could incur significant additional costs, including cleanup costs,
fines and sanctions and third-party claims, as a result of violations of or
liabilities under environmental laws. In order to ensure compliance with
applicable environmental, health and safety laws and regulations, the
Corporation maintains a disciplined environmental and occupational safety and
health compliance program, which includes conducting regular internal and
external audits at its plants to identify and categorize potential environmental
exposure. It is the Corporation's policy to review these environmental issues in
light of historical experience and to reserve for those that both a liability
has become probable and the cost is reasonably estimable, in accordance with
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies".
Employee Benefit Plans: The Corporation sponsors a defined benefit plan and
a retirement medical benefit plan for its domestic employees providing
retirement benefits based upon years of service and compensation levels. The
Corporation also sponsored a defined benefit plan for its United Kingdom based
employees employed at its Canning subsidiary that was frozen as of April 6,
1997, when the plan was converted from a defined benefit plan to a defined
contribution plan. The projected benefit obligations and pension expenses from
both of these plans is dependent upon various factors such as the discount rate,
actual return on plan assets and the funding of the plan. Management can neither
predict the future interest rate environment, which directly impacts the
selection of future discount rates, nor predict future asset returns that the
pension plan will experience. Changes in these assumptions will effect current
year and future year pension expense and the projected benefit obligation. The
effect of changing the plan discount rate assumption to 6.75% in 2002, from
7.25% in transition year 2001, increased the projected benefit obligation by
approximately $3,500 and is expected to increase pension expense in 2003 by
approximately $700. Management estimates that a 50 basis point drop in the
discount rate for the valuation at December 31, 2003, will increase the plan's
projected benefit obligation by approximately $4,500 and increase the plan's
pension expense by approximately $1,000. However, these increases could be
offset by other factors such as favorable asset experience or additional cash
contributions to the plan.
NEW ACCOUNTING STANDARDS AND ACCOUNTING CHANGES
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations (SFAS143) which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS143 requires recognition of asset retirement obligations as a
liability rather than a contra-asset. Adoption of SFAS143, effective January 1,
2003, will not have a material effect on the Corporation's financial statements.
Effective January 1, 2002, the Corporation adopted Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS144) which excludes from the definition of long-lived
assets goodwill and other intangibles that are not amortized in accordance with
SFAS142. SFAS144 requires long-lived assets to be disposed of by sale to be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
SFAS144 also expands the reporting of discontinued operations to include
components of an entity that have been or will be disposed of rather than
limiting such discontinuance to a segment of a business. Prior to the adoption
of SFAS144, the impairment of long-lived assets was assessed under the
provisions of SFAS121. SFAS144 retained the requirements of SFAS121 to
recognize an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure an impairment
loss as the difference between the carrying amount and fair value of the asset.
The adoption of SFAS144 did not have any impact on the carrying amount of the
Corporation's long-lived assets.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS145). SFAS145, among other
things, rescinds SFAS No. 4, which required all gains and losses from the
extinguishment of debt to be classified as an extraordinary item and amends SFAS
No. 13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Adoption of SFAS145, effective January 1, 2003,
will not have a material effect on the Corporation's financial statements.
In July 2002 the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS146) which requires companies to recognize costs associated with exit or
disposal activities when a liability is incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of SFAS146 are effective
for exit or disposal activities that are initiated after December 31, 2002.
Adoption of SFAS146, effective January 1, 2003, will not have a material effect
on the Corporation's financial statements.
In January 2003, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-based Compensation - Transition and
Disclosure (SFAS148) which amends SFAS123 to provide alternative methods of
transition for enterprises that elect to change to the SFAS123 fair value method
of accounting for stock-based employee compensation. Since the Corporation
adopted the fair value method of accounting for stock-based employee
compensation for the reporting year ended December 31, 2001, the alternative
methods of transition to that method provided by SFAS148 will have no effect on
the its financial statements. SFAS148 also amends the disclosure requirements
of SFAS123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The required disclosures
have been provided in these financial statements, and the disclosures to be
provided in interim financial reports will be provided for interim periods
beginning in 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN45) Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which requires that a liability be
recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN45 requires disclosures about the guarantees that an entity has
issued, including product warranty liabilities. The Corporation does not
maintain any warranty expense or related liabilities for its core specialty
chemicals business. Warranties for certain ancillary business are not material.
The Corporation adopted FIN45 at December 31, 2002 and it did not have a
material effect on its consolidated financial statements.
In January 2003, the FASB issued FIN No. 46 (FIN46) Consolidation of
Variable Interest Entities and Interpretation of Accounting Research Bulletin
No. 51. FIN46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. The Corporation does not expect that the adoption of FIN46
will have a significant effect on its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources and uses of cash in the fiscal year ended December 31,
2002, the nine-month period ended December 31, 2001 and the fiscal year ended
March 31, 2001 were as follows:
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
2002 2001 2001
------------- -------------- ------------
Cash provided by:
Operations. . . . . . . . . . . $ 126,193 $ 83,565 $ 59,070
Proceeds from disposition of
fixed assets and businesses . . 2,890 2,431 16,749
Exercise of stock options 360 --- ---
Net increase in borrowings --- --- 32,962
------------- -------------- ------------
$ 129,443 $ 85,996 $ 108,781
Cash used for:
Capital expenditures. . . . . . 7,277 6,934 22,437
Business acquisitions --- --- 88,630
Purchase of treasury shares . . 822 635 196
Dividend payments . . . . . . . 2,581 1,929 2,493
Deferred financing fees --- 8,837 ---
Net decrease in borrowings 104,021 62,577 ---
------------- -------------- ------------
$ 114,701 $ 80,912 $ 113,756
Effect of exchange rates. . . . $ 210 ($563) ($2,595)
------------- -------------- ------------
Net increase (decrease) in cash $ 14,952 $ 4,521 ($7,570)
============= ============== ============
Cash flows from operations are used to fund dividend payments to
shareholders ($0.08 per common share for fiscal 2002), working capital
requirements of the Corporation, capital expenditures and repayment of debt.
The Corporation has paid cash dividends continuously since 1948. During the
year ended December 31, 2002, cash flows provided by operations of $126,193 were
51% greater than $83,565 cash flows provided by operations for nine months ended
December 31, 2001. Cash flows from operations consisted of net income of $9,349
plus non-cash charges of $27,185 for depreciation and amortization, impairment
charges of $35,371, stock options compensation of $3,145, bad debt provision of
$5,292 and other changes in working capital of $45,851. Significant cash flows
were generated in fiscal 2002 due to reduced working capital, as a result of
proactive working capital measures during a period of sales decline. The high
level of cash flows generated by these measures may not repeat should working
capital requirements increase as a result of increased sales from economic
recoveries worldwide. From time-to-time MacDermid utilizes additional outside
sources to fund overall needs, including major capital projects for new and
upgraded research and technical, manufacturing and administrative facilities and
for business acquisitions. In certain years, the Corporation has embarked on
programs that have required significant amounts of funds in excess of those
available from cash flows from operations. The Corporation continues to
generate significant cash flows in excess of working capital requirements. As a
result, the Corporation managed a net repayment of debt amounting to $104,021 in
fiscal 2002 and $62,577 in transition year 2001.
New opportunities for business acquisitions, which become available from
time to time, are evaluated individually as they arise based upon MacDermid's
criteria for technological improvement and innovation, potential for earnings
growth and compatibility with the existing distribution channels. Management
intends to pursue those opportunities that have a strong potential to enhance
shareholder value. There were no acquisitions in 2002 or transition year 2001.
In January 2001, the Corporation acquired a 60% interest in Eurocir S.A., an
electronics printed circuit board manufacturer for approximately $31,000 as part
of its plan to further the application of its ViaTek process for the production
of double-sided circuit boards.
Capital spending is managed on a worldwide basis for new and upgraded
technical equipment and facilities. Capital spending during the year ended
December 31, 2002 was $7,277 (less $2,890 dispositions is $4,387 net) compared
to $6,934 (less $2,431 dispositions is $4,503 net) for the nine months ended
December 31, 2001. For 2003, planned new capital projects total approximately
$13,000.
The Board of Directors has, from time to time, authorized the purchase of
issued and outstanding shares of the Corporation's common stock. Pursuant to
these authorizations, MacDermid acquired 39,799 shares during fiscal 2002 and
32,044 shares during transition year 2001 in privately negotiated purchases.
Treasury shares may be used for transfer or sale to employee benefit plans,
business acquisitions or for other corporate purposes. At December 31, 2002, the
outstanding authorization to purchase up to 102,483 shares would cost
approximately $2,342 if exercised at the NYSE closing price on that date.
Subsequently, the Board of Directors authorized an additional 1,000,000 shares,
on February 25, 2003.
The Corporation's financial position remains strong and, other than the
satisfaction of debt obligations, there are no long-range commitments, which
would have a significant impact upon results of operations, financial condition
or liquidity. The Corporation had domestic and foreign short-term uncommitted
credit lines with banks approximating $54,000 ($5,124 outstanding at December
31, 2002) in addition to a $175,000 committed revolving credit facility (no
borrowings outstanding at December 31, 2002). Management believes that
additional borrowing could be obtained if needed.
Contractual cash commitments for the fiscal years subsequent to December
31, 2002 are summarized in the following table:
Obligation . . . . . . . . . . . . Next Year 2-4 Years 5 Years or More Total
- ---------------------------------- ---------- ---------- ---------------- --------
Long-term debt . . . . . . . . . . $ 5,000 $ 7,949 $ 302,158 $315,107
Capital leases . . . . . . . . . . 1,230 1,291 415 2,936
Operating leases . . . . . . . . . 8,973 10,228 5,179 24,380
---------- ---------- ---------------- --------
Total contractual cash commitments $ 15,203 $ 19,468 $ 307,752 $342,423
ENVIRONMENTAL AND LEGAL MATTERS
Environmental Issues:
The nature of the Corporation's operations, as manufacturers and distributors of
specialty chemicals and systems, and products, including raw materials, expose
it to the risk of liabilities or claims with respect to environmental cleanup or
other matters, including those in connection with the disposal of hazardous
materials. As such, the Corporation is subject to extensive U.S. and foreign
laws and regulations relating to environmental protection and worker health and
safety, including those governing: discharges of pollutants into the air and
water; the management and disposal of hazardous substances and wastes; and the
cleanup of contaminated properties. The Corporation has incurred, and will
continue to incur, significant costs and capital expenditures in complying with
these laws and regulations. The Corporation could incur significant additional
costs, including cleanup costs, fines and sanctions and third-party claims, as a
result of violations of or liabilities under environmental laws. In order to
ensure compliance with applicable environmental, health and safety laws and
regulations, the Corporation maintains a disciplined environmental and
occupational safety and health compliance program, which includes conducting
regular internal and external audits at its plants to identify and categorize
potential environmental exposure.
The Corporation has been named as a potentially responsible party ("PRP")
at three Superfund sites. There are many other PRPs involved at each of these
sites. The Corporation has recorded its best estimate of liabilities in
connection with site clean-up based upon the extent of its involvement, the
number of PRPs and estimates of the total costs of the site clean-up that
reflect the results of environmental investigations and remediation estimates
produced by remediation contractors. While the ultimate costs of such
liabilities are difficult to predict, the Corporation does not expect that its
costs associated with these sites will be material.
In addition, some of the Corporation's facilities have an extended history
of chemical processes or other industrial activities. Contaminants have been
detected at some of these sites, with respect to which the Corporation is
conducting environmental investigations and/or cleanup activities. These sites
include certain sites acquired in the December 1998 acquisition of W. Canning
plc, such as the Kearny, New Jersey and Waukegan, Illinois sites. The
Corporation has established an environmental remediation reserve, predominantly
attributable to those Canning sites that it believes will require environmental
remediation. With respect to those sites, it also believes that its Canning
subsidiary is entitled under the acquisition agreement to withhold a deferred
purchase price payment of approximately $2,000. The Corporation estimates the
range of cleanup costs at its Canning sites between $2,000 and $5,000.
Investigations into the extent of contamination, however, are ongoing with
respect to some of these sites. To the extent the Corporation's liabilities
exceed $2,000, it may be entitled to additional indemnification payments. Such
recovery may be uncertain, however, and would likely involve significant
litigation expense. The Corporation does not anticipate that it will be
materially affected by environmental remediation costs, or any related claims,
at any contaminated sites, including the Canning sites. It is difficult,
however, to predict the final costs and timing of costs of site remediation.
Ultimate costs may vary from current estimates and reserves, and the discovery
of additional contaminants at these or other sites or the imposition of
additional cleanup obligations, or third-party claims relating thereto, could
result in significant additional costs.
Legal Proceedings:
On June 25, 2002, the U.S. Environmental Protection Agency brought an
administrative complaint against the Adams, Massachusetts manufacturing facility
owned by MacDermid Printing Solutions, LLC, alleging that the facility violated
certain regulations and permit requirements regarding air emissions and related
record keeping matters. The allegations arise primarily out of conduct that
allegedly occurred prior to the Corporation's acquisition of the facility
through its December 1999 acquisition of Polyfibron Technologies, Inc. The
Corporation has entered into a settlement with the EPA regarding these
allegations. The settlement required a payment of $230 and resolved the issues
alleged.
On January 30, 1997, the Corporation was served with a subpoena from a
federal grand jury in Connecticut requesting certain documents relating to an
accidental spill from its Huntingdon Avenue, Waterbury, Connecticut facility
that occurred in November of 1994, together with other information relating to
operations and compliance at the Huntingdon Avenue facility. The Corporation
was subsequently informed that it was a subject of the grand jury's
investigation in connection with alleged criminal violations of the federal
Clean Water Act pertaining to its wastewater handling practices. In addition,
two of the Corporation's former employees, who worked at the Huntington Avenue
facility, pled guilty in early 2001 to misdemeanor violations under the Clean
Water Act in connection with the above matter. These individuals were sentenced
to fines of $25 and $10 and 2 years probation, as well as community service.
In a separate matter, on July 26, 1999, the Corporation was named in a
civil lawsuit commenced in the Superior Court of the State of Connecticut
brought by the Connecticut Department of Environmental Protection alleging
various compliance violations at its Huntingdon Avenue and Freight Street
locations between the years 1992 through 1998 relating to wastewater discharges
and the management of waste materials. The complaint alleges violations of its
permits issued under the Federal Clean Water Act and the Resource Conservation
and Recovery Act, as well as procedural, notification and other requirements of
Connecticut's environmental regulations over the foregoing period of time.
The Corporation voluntarily resolved both of these matters on November 28,
2001. As a result, MacDermid, Incorporated is required to pay fines and
penalties totaling $2,500, without interest, over six quarterly installments. As
of December 31, 2002, the Corporation has paid $2,042 and will pay the remaining
amount of $458 during the quarter ending March 31, 2003. In addition, the
Corporation is required to pay $1,550 to various local charitable and
environmental organizations and causes. As of December 31, 2002, the Corporation
has paid $1,420 and a final payment for these donations of $130 will be paid on
April 30, 2003. The Corporation has been placed on probation for two years and
will perform certain environmental audits, as well as other environmentally
related actions. The Corporation had recorded liabilities during the negotiation
period and therefore its results of operations and financial position were not
affected by these arrangements.
Various other legal proceedings are pending against the Corporation. The
Corporation considers all such proceedings to be ordinary litigation incident to
the nature of its business. Certain claims are covered by liability insurance.
The Corporation believes 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.
FORWARD LOOKING STATEMENTS
This report and other Corporation reports include forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to analyses and other information that is based on
forecasts of future results and estimates of amounts not yet determinable. These
statements also relate to future prospects, developments and business
strategies. The statements contained in this report that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties.
The words "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "plan," "predict," "project," "will" and similar terms and phrases,
including references to assumptions, have been used to identify forward-looking
statements. These forward-looking statements are made based on management's
expectations and beliefs concerning future events affecting the Corporation and
are subject to uncertainties and factors relating to its operations and business
environment, all of which are difficult to predict and many of which are beyond
its control, that could cause actual results to differ materially from those
matters expressed in or implied by these forward-looking statements. The
following factors are among those that may cause actual results to differ
materially from the forward-looking statements: acquisitions and dispositions,
environmental liabilities, changes in general economic, business and industry
conditions, changes in current advertising, promotional and pricing levels,
changes in political and social conditions and local regulations, foreign
currency fluctuations, inflation, significant litigation; changes in sales mix,
competition, disruptions of established supply channels, degree of acceptance of
new products, difficulty of forecasting sales at various times in various
markets, the availability, terms and deployment of capital, and the other
factors discussed elsewhere in this report.
All forward-looking statements should be considered in light of these
factors. The Corporation undertakes no obligation to update forward-looking
statements or risk factors to reflect new information, future events or
otherwise.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share and per share amounts)
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
-------------- ------------------- ------------
2002 2001 2001
-------------- ------------------- ------------
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 687,561 $ 533,860 $ 794,776
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 404,794 326,211 459,210
-------------- ------------------- ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 282,767 207,649 335,566
Operating expenses:
Selling, technical and administrative. . . . . . . . . . 189,414 144,119 211,073
Amortization . . . . . . . . . . . . . . . . . . . . . . 6,226 6,084 20,641
Impairment charges . . . . . . . . . . . . . . . . . . . 35,371 51,802 4,800
Restructuring costs --- 21,264 6,663
Merger related costs --- --- 1,473
-------------- ------------------- ------------
231,011 223,269 244,650
-------------- ------------------- ------------
Operating profit (loss) . . . . . . . . . . . . . . . 51,756 (15,620) 90,916
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . . . 608 802 2,007
Interest expense . . . . . . . . . . . . . . . . . . . . (35,833) (28,291) (35,251)
Miscellaneous income 690 --- ---
Miscellaneous expense. . . . . . . . . . . . . . . . . . (3,297) (1,203) (2,735)
-------------- ------------------- ------------
(37,832) (28,692) (35,979)
-------------- ------------------- ------------
Earnings (loss) before income taxes and minority interests. 13,924 (44,312) 54,937
Income tax (expense) benefit. . . . . . . . . . . . . . . . (4,455) 15,510 (20,133)
Minority interests (120) (110) ---
-------------- ------------------- ------------
Net earnings (loss). . . . . . . . . . . . . . . . . . . $ 9,349 $ (28,912) $ 34,804
============== =================== ============
Earnings (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.29 $ (0.91) $ 1.12
============== =================== ============
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . $ 0.29 $ (0.91) $ 1.07
============== =================== ============
Weighted average number of common
shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . 32,220,066 31,911,570 31,153,006
============== =================== ============
Diluted. . . . . . . . . . . . . . . . . . . . . . . . 32,475,155 32,381,519 32,400,385
============== =================== ============
<FN>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
-------------- ------------------- ------------
2002 2001 2001
-------------- ------------------- ------------
Net earnings (loss) . . . . . . . . . . . $ 9,349 $ (28,912) $ 34,804
Other comprehensive income:
Foreign currency translation . . . . . 10,977 (3,690) (7,597)
Minimum pension liability (net of tax) (7,460) 6,716 (9,670)
Hedging activities (net of tax) 276 (276) ---
-------------- ------------------- ------------
Comprehensive income (loss) . . . . . . . $ 13,142 $ (26,162) $ 17,537
============== =================== ============
<FN>
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
December 31,
--------- --------
2002 2001
--------- --------
Current assets:
Cash and equivalents . . . . . . . . . . . . . . $ 32,019 $ 17,067
Accounts receivable, less allowance for doubtful
receivables of $12,743 and $14,642. . . . . . 142,806 164,230
Inventories. . . . . . . . . . . . . . . . . . . 85,738 111,034
Prepaid expenses . . . . . . . . . . . . . . . . 5,457 8,068
Deferred income taxes. . . . . . . . . . . . . . 22,598 13,831
--------- --------
Total current assets . . . . . . . 288,618 314,230
--------- --------
Net property, plant and equipment. . . . . . . . 132,581 152,482
Goodwill . . . . . . . . . . . . . . . . . . . . 194,200 222,571
Patents, trademarks and other intangibles. . . . 31,825 37,425
Deferred income taxes. . . . . . . . . . . . . . 32,186 32,109
Other assets, net. . . . . . . . . . . . . . . . 28,483 32,068
--------- --------
$ 707,893 $790,885
========= ========
<FN>
See accompanying notes to consolidated financial statements.
LIABILITIES & SHAREHOLDERS ' EQUITY
December 31,
---------- ---------
2002 2001
---------- ---------
Current liabilities:
Notes payable. . . . . . . . . . . . . . . . . $ 5,124 $ 12,961
Current installments of long-term obligations. 6,230 5,614
Accounts payable . . . . . . . . . . . . . . . 63,819 61,388
Dividends payable. . . . . . . . . . . . . . . 646 643
Accrued compensation . . . . . . . . . . . . . 11,560 10,068
Accrued interest . . . . . . . . . . . . . . . 13,043 14,507
Accrued expenses, other. . . . . . . . . . . . 44,959 58,311
Income taxes . . . . . . . . . . . . . . . . . 3,727 10,468
---------- ---------
Total current liabilities. . . . 149,108 173,960
---------- ---------
Long-term obligations. . . . . . . . . . . . . 311,813 393,788
Retirement benefits, less current
portion . . . . . . . . . . . . . . . . . . 19,688 12,308
Other long-term liabilities. . . . . . . . . . 1,138 281
Deferred income taxes. . . . . . . . . . . . . 5,535 4,364
---------- ---------
Total liabilities. . . . . . . . 487,282 584,701
---------- ---------
Minority Interest. . . . . . . . . . . . . . . 2,873 2,753
Contingencies
Shareholders' equity:
Common stock. Authorized 75,000,000
shares;
issued 46,639,757 shares in 2002 and
46,409,757 shares in 2001 at a stated value of
$1.00 per share . . . . . . . . . . . . . . 46,640 46,410
Additional paid-in capital . . . . . . . . . . 21,261 16,923
Retained earnings. . . . . . . . . . . . . . . 225,387 218,619
Accumulated other comprehensive income:
Foreign currency translation. . . . . . . . (5,372) (16,349)
Additional minimum pension liability. . . . (10,414) (2,954)
Hedging activities --- (276)
Less cost of common shares held in
treasury, 14,349,453 and 14,309,654 in 2002
and 2001, respectively. . . . . . . . . . . . (59,764) (58,942)
---------- ---------
Total shareholders' equity . . . 217,738 203,431
---------- ---------
$ 707,893 $790,885
========== =========
<FN>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
-------------- ------------------- ------------
2002 2001 2001
-------------- ------------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss). . . . . . . . . . . . $ 9,349 $ (28,912) $ 34,804
Adjustments to reconcile net earnings
(loss) to
net cash provided by operating
activities:
Depreciation of fixed assets. . . . . . 20,959 17,990 22,193
Amortization. . . . . . . . . . . . . . 6,226 6,084 20,641
Provision for bad debts . . . . . . . . 5,292 5,986 3,859
Deferred income taxes . . . . . . . . . (4,994) (27,950) (5,479)
Stock compensation. . . . . . . . . . . 4,028 664 28
Minority interests 120 110 ---
Impairment charges. . . . . . . . . . . 35,371 51,802 4,800
Changes in assets and liabilities net of
effects from acquisitions and
dispositions:
Decrease (increase) in receivables. . . 27,684 24,618 (8,742)
Decrease (increase) in inventories. . . 31,071 30,336 (16,131)
Decrease (increase) in prepaid
expenses . . . . . . . . . . . . . . . . . . 2,884 (1,709) 435
Increase (decrease) in accounts
payable. . . . . . . . . . . . . . . . . . . (3,651) (20,099) 108
Increase (decrease) in accrued
expense. . . . . . . . . . . . . . . . . . . (3,455) 14,269 (5,092)
Increase (decrease) in income tax
Liabilities . . . . . . . . . . . . . (9,509) (102) 5,818
Other . . . . . . . . . . . . . . . . . 4,818 10,478 1,828
-------------- ------------------- ------------
Net cash flows provided by
Operating activities . . . . . . 126,193 83,565 59,070
-------------- ------------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . (7,277) (6,934) (22,437)
Proceeds from disposition of fixed
assets . . . . . . . . . . . . . . . . . . . 2,890 2,431 6,784
Acquisitions of businesses --- --- (88,630)
Dispositions of businesses --- --- 9,965
Net cash flows used in investing
-------------- ------------------- ------------
activities . . . . . . . . . . . (4,387) (4,503) (94,318)
-------------- ------------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term
borrowings . . . . . . . . . . . . . . . . . (18,356) (2,822) (14,749)
Proceeds from long-term borrowings . . . . 82,611 388,346 105,344
Repayments of long-term borrowings . . . . (168,276) (448,101) (57,633)
Bond financing fees --- (8,837) ---
Exercise of stock options 360 --- ---
Acquisition of treasury stock. . . . . . . (822) (635) (196)
Dividends paid . . . . . . . . . . . . . . (2,581) (1,929) (2,493)
-------------- ------------------- ------------
Net cash flows provided by (used
in)
Financing activities . . . . . . (107,064) (73,978) 30,273
EFFECT OF EXCHANGE RATE CHANGES ON
CASH
AND EQUIVALENTS. . . . . . . . . . . . . . 210 (563) (2,595)
-------------- ------------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH
EQUIVALENTS. . . . . . . . . . . . . . . . 14,952 4,521 (7,570)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF
YEAR . . . . . . . . . . . . . . . . . . . 17,067 12,546 20,116
-------------- ------------------- ------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR . . . . . . . . . . . . . . . . . . . . $ 32,019 $ 17,067 $ 12,546
============== =================== ============
CASH PAID FOR INTEREST . . . . . . . . . . . $ 38,663 $ 14,339 $ 33,593
============== =================== ============
CASH PAID FOR INCOME TAXES . . . . . . . . . $ 9,829 $ 14,102 $ 20,592
============== =================== ============
<FN>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY
------- ----------- --------- -------------- --------- -------------
Balance at March 31, 2000 . . 45,412 13,866 217,149 (5,062) (58,111) 213,254
Stock options --- 45 --- --- --- 45
Stock awards (cancelled) (4) (13) --- --- --- (17)
Net earnings --- --- 34,804 --- --- 34,804
Cash dividends --- --- (2,493) --- --- (2,493)
Tax benefit --- 2,539 --- --- --- 2,539
Currency translation --- --- --- (7,597) --- (7,597)
Increase in minimum pension
liability --- --- --- (9,670) --- (9,670)
Shares acquired --- --- --- --- (196) (196)
------- ----------- --------- -------------- --------- -------------
Balance at March 31, 2001 . . 45,408 16,437 249,460 (22,329) (58,307) 230,669
------- ----------- --------- -------------- --------- -------------
Stock awards --- 664 --- --- --- 664
Exercise of warrants 1,002 (1,002) --- --- --- ---
Net loss --- --- (28,912) --- --- (28,912)
Cash dividends --- --- (1,929) --- --- (1,929)
Tax benefit --- 824 --- --- --- 824
Currency translation --- --- --- (3,690) --- (3,690)
Reduction in minimum pension
Liability --- --- --- 6,716 --- 6,716
Hedging activities --- --- --- (276) --- (276)
Shares acquired --- --- --- --- (635) (635)
------- ----------- --------- -------------- --------- -------------
Balance at December 31, 2001. 46,410 16,923 218,619 (19,579) (58,942) 203,431
------- ----------- --------- -------------- --------- -------------
Stock options 180 3,325 --- --- --- 3,505
Stock awards 50 833 --- --- --- 883
Net earnings --- --- 9,349 --- --- 9,349
Cash dividends --- --- (2,581) --- --- (2,581)
Tax benefit --- 180 --- --- --- 180
Currency translation --- --- --- 10,977 --- 10,977
Increase in minimum pension
Liability --- --- --- (7,460) --- (7,460)
Hedging activities --- --- --- 276 --- 276
Shares acquired --- --- --- --- (822) (822)
------- ----------- --------- -------------- --------- -------------
Balance at December 31, 2002. 46,640 21,261 225,387 (15,786) (59,764) 217,738
======= =========== ========= ============== ========= =============
<FN>
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS DESCRIPTION. MacDermid, Incorporated and its subsidiaries
(collectively, the "Corporation" or "MacDermid") was established in Waterbury,
Connecticut, in 1922. The Corporation develops, produces and markets a broad
line of specialty chemical products that are used worldwide. These products are
supplied to the metal and plastic finishing markets (for automotive and other
applications), the electronics industry (to imprint electrical patterns on
circuit boards), the offshore oil and gas markets (for oil drilling and
exploration) and to the commercial printing and packaging industries (for image
transfer and offset printing applications). The Corporation, through its
majority owned subsidiary, also designs and manufactures electronic circuit
boards.
The Board of Directors on May 21, 2001 voted to change the Corporation's
fiscal year to December 31st. This change was effective December 31, 2001.
Accordingly, the Corporation reported a nine month transition year from April 1,
2001 through December 31, 2001, reflecting the Corporation's nine months of
operations, comprehensive income/(loss), cash flows and changes in stockholders'
equity.
(B) PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of the parent corporation and all of its
majority-owned domestic and foreign subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
amounts in the prior periods of the consolidated financial statements have been
reclassified to conform with the current year presentation.
(C) USE OF ESTIMATES. The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(D) CASH AND CASH EQUIVALENTS. For the purpose of the consolidated statements of
cash flows, the Corporation considers all highly liquid debt instruments
purchased with an initial maturity of three months or less to be cash
equivalents.
(E) CONCENTRATIONS OF CREDIT RISK. The Corporation's business operations consist
principally of the manufacture and sale of specialty chemicals, supplies and
related equipment to customers throughout much of the world. Approximately 40%
of the business is concentrated in the printing industry used for a wide variety
of applications, including offset blankets, printing plates, textile blankets
and rubber based covers for industrial rollers, while 30% of the business is
concentrated with manufacturers of printed circuit boards which are used in a
wide variety of end-use applications, including computers, communications and
control equipment, appliances, automobiles and entertainment products. As is
usual for this business, the Corporation generally does not require collateral
or other security as a condition of sale, rather relying on credit approval,
balance limitation and monitoring procedures to control credit risk of trade
account financial instruments. Management believes that reserves for losses,
which are established based upon review of account balances and historical
experience, are adequate.
(F) INVENTORIES. Inventories are stated at the lower of average cost or
replacement market. Management regularly reviews obsolescence to determine that
inventories are appropriately reserved. In making any determination, historical
write-offs, product evolution, usage rates and quantities of stock on hand are
considered. Inventory in excess of the Corporation's estimated usage
requirements is written down to its estimated net realizable value.
(G) PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS. Property, plant
and equipment are stated at cost. Depreciation and amortization of property,
plant and equipment are provided over the estimated useful lives of the
respective assets, principally on the straight-line basis. The Corporation
categorizes and depreciates its assets over periods ranging from 3 to 5 years
for computers, software, furniture, fixtures and autos and over periods ranging
from 5 to 20 years for machinery, equipment, buildings and building
improvements. Capital leases are amortized over the lesser of the useful life
of the asset or the life of the lease. Expenditures for maintenance and repairs
are charged directly to expense; renewals and betterments which significantly
extend the useful lives are capitalized. Costs and accumulated depreciation and
amortization on assets retired or disposed of are removed from the accounts and
the gains or losses resulting therefrom, if any, are credited or charged to
earnings.
Patents and various other intangible assets are amortized on a
straight-line basis over their estimated useful lives as determined by
management's evaluation. The present periods of amortization are 15 years for
patents and range between 5 and 30 years for other separately identified
intangible assets.
Effective January 1, 2002, the Corporation adopted Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS144) which requires the Corporation to assess depreciated
or amortized long-lived asset groups for impairment whenever events or changes
in circumstances indicate their carrying value may not be recoverable. The
impairment, if any, is measured by the difference between carrying value and
estimated fair value and charged to expense in the period identified. Estimated
fair value is generally based on a projected discounted cash flow method using a
discount rate determined by management to be commensurate with the risk inherent
in the business underlying the asset in question. The remaining amortization
periods are periodically evaluated and are revised if considered necessary.
Prior to the adoption of SFAS144, the impairment of long-lived assets was
assessed under the provisions of Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed of (SFAS121). Fiscal 2002 includes a $7,000 charge to earnings for
assets written down from the application of SFAS144. Transition year 2001
includes an $11,598 charge to earnings and fiscal 2001 includes a $3,945 charge
to earnings for assets written down from the application of SFAS121. These
assets have been removed from service and management will evaluate future use or
potential sale.
(H) GOODWILL AND OTHER INTANGIBLE ASSETS. The Corporation adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS142), as of April 1, 2001. Pursuant to SFAS142, goodwill and intangible
assets with indeterminable lives will no longer be amortized, but instead the
carrying amounts will be periodically compared to the current fair value and, if
impairment occurs, an adjustment to the carrying amount will be required with a
charge to expense in the period identified. During 2002, printed circuit board
markets increasingly deteriorated in Europe and North America. Due to this
situation, discounted cash flows for Eurocir S.A. were assessed pursuant to the
provisions of SFAS142, which resulted in the goodwill associated with this
business determined to be impaired. As a result, the Corporation charged
$27,389 against earnings in the fourth quarter of 2002 to write-off the Eurocir
S.A. goodwill balance. During transition year 2001, digital printing equipment
sales increasingly fell short of forecast due to factors such as delayed product
introduction. This resulted in future budgeted cash flows being reduced. As a
result, the recoverability of Colorspan goodwill and other intangible assets
were assessed pursuant to the provisions of SFAS142 and SFAS121 and written-off
during the last quarterly period of transition year 2001. The Corporation
charged $44,963 against earnings in transition year 2001 for Colorspan goodwill
and other intangible assets, as well as certain other intangible assets that
were determined to be impaired. See Note 1(q) to Consolidated Financial
Statements, Acquisitions.
(I) EMPLOYEE BENEFITS. The Corporation sponsors a variety of employee benefit
programs, most of which are non-contributory.
RETIREMENT. Non-contributory pension and profit sharing retirement plans and a
defined contribution 401K retirement plan covers substantially all domestic
employees. The Corporation maintains a domestic and a foreign defined benefit
pension plan. The projected unit credit actuarial method is used for financial
reporting purposes. In addition, the Corporation contributes to domestic profit
sharing and employee stock ownership plans, which provide retirement benefits
based upon amounts credited to employee accounts within the plans. The
Corporation's funding policy for qualified plans is consistent with federal or
other regulations and customarily equals the amount deducted for income tax
purposes. Foreign subsidiaries contribute to plans, which may be administered
privately or by government agencies in accordance with local regulations.
POST-RETIREMENT. The Corporation currently accrues for post-retirement health
care benefits for U.S. employees hired prior to April 1, 1997. The
post-retirement health care plan is unfunded.
POST-EMPLOYMENT. The Corporation currently accrues for post-employment
disability benefits to employees meeting specified service requirements. The
post-employment benefits plan is unfunded.
(J) FINANCIAL INSTRUMENTS. Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments (SFAS107) requires that
reporting entities provide, to the extent practicable, the fair value of
financial instruments, both assets and liabilities. The Corporation's
outstanding long-term fixed rate bonds bear interest of 9.125%, which compares
to 8.5% at fair market value based on the market price of the Corporation's bond
issue at December 31, 2002. The fair value of these outstanding bonds at
December 31, 2002, is approximately $324,000. The carrying amounts for the
Corporation's other financial instruments approximate fair value because of the
short maturity or variable rates of those instruments.
Under Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS133), adopted by the
Corporation on April 1, 2001, hedge accounting provides for the deferral of
gains or losses on derivative instruments until such time as the related
transactions occur. For those derivatives that do not meet the requirements of
this pronouncement, the Corporation recognizes periodic increases or decreases
in the fair value of the derivative with a charge to earnings. Interest rate
swap agreements have been employed by the Corporation to optimize borrowing
costs by reducing exposure to possible future changes in interest rates.
Interest rate swaps outstanding at December 31, 2002, have not been designated
as part of a hedge. Net receipts or payments on the swaps are accrued and
recognized as adjustments to interest expense. The estimated fair value of
these financial instruments at December 31, 2002 is a liability of $3,422 based
on the quoted market price from the banks holding the instruments. On January
7, 2003, the Corporation paid the fair market value of $1,053 to purchase the
release from liability on some of these instruments. For the year ended
December 31, 2002, there were charges to earnings of $2,611 and a deferred gain,
net of income taxes, of $276 recorded to accumulated other comprehensive income.
(K) FOREIGN OPERATIONS. The assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at year-end rates of exchange while revenue and
expense accounts are translated at weighted-average rates in effect during the
periods. Translation of the financial statements resulted in an increase in
equity of $10,977 in 2002 and a decrease in equity of $3,690 in transition year
2001 and $7,597 in fiscal year 2001. Foreign currency transactions included in
the consolidated statements of earnings resulted in a gain of $650 in 2002 and
losses of $362 and $475 in transition year 2001 and fiscal year 2001,
respectively.
(L) REVENUE RECOGNITION. The Corporation recognizes revenue, including freight
charged to customers, when products are shipped and the customer takes ownership
and assumes the risk of loss, collection of the relevant receivable is probable,
persuasive evidence that an arrangement exists and the sales price is fixed or
determinable. The Corporation's shipping terms are customarily "FOB shipping
point" and do not include right of inspection or acceptance provisions.
Equipment sales arrangements may include right of inspection or acceptance
provisions in which case revenue is deferred until these provisions have been
satisfied.
(M) OPERATING EXPENSES. Cost of sales consists primarily of raw material costs
and related purchasing and receiving costs used in the manufacturing process,
salary and wages, fringe benefits, packaging costs, plant overhead and other
costs associated with the manufacture and distribution of the Corporation's
products.
Selling, technical and administrative expenses (ST&A) consist primarily of
personnel and travel costs, advertising and marketing expenses, product
development expenses, administrative expenses associated with accounting,
finance, legal, human resource, risk management and overhead associated with
these functions.
Research and development costs are expensed as incurred, under ST&A, and
were $19,104 in 2002, $14,922 in transition year 2001 and $24,466 in fiscal year
2001.
(N) INCOME TAXES. The provision for income taxes includes federal, foreign,
state and local income taxes currently payable. Deferred income taxes are
recognized at currently enacted tax rates for temporary differences between the
financial reporting and income tax basis of assets and liabilities. Deferred
taxes are not provided on the undistributed earnings of subsidiaries operating
outside the United States that will be permanently reinvested.
(O) STOCK-BASED PLANS. Effective April 1, 2001, the Corporation adopted the fair
value expense recognition provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation (SFAS123)
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. Previously, and
since April 1, 1996, the Corporation had adopted the disclosure requirements of
SFAS123 and continued to account for its stock options by applying the expense
recognition provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB25").
Had the Corporation used the fair value expense recognition method of
accounting for its stock option plans (beginning in 1996) and charged
compensation cost against income, over a period consistent with the terms of the
grant, based on the fair value at the date of grant, net earnings and net
earnings per common share for the year ended December 31, 2002, the transition
year ended December 31, 2001 and fiscal year ended March 31, 2001 would have
been reduced to the following pro forma amounts:
(In thousands, except per share amounts)
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
2002 2001 2001
-------------- ------------------- ------------
Net earnings available for
common
shareholders
As reported. . . . . . . . . . . $ 9,349 $ (28,912) $ 34,804
Add: stock based employee
compensation expense included in
reported net income, net of related
tax effects . . . . . . . . . . . . 2,739 402 --
Deduct: total stock based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax effects . . . . . . . . (3,425) (994) (1,190)
-------------- ------------------- ------------
Pro forma. . . . . . . . . . . . $ 8,663 $ (29,504) $ 33,614
============== =================== ============
Net earnings per common share
Basic
As reported. . . . . . . . . . . $ 0.29 $ (0.91) $ 1.12
Pro forma. . . . . . . . . . . . $ 0.27 $ (0.92) $ 1.08
Diluted
As reported. . . . . . . . . . . $ 0.29 $ (0.91) $ 1.07
Pro forma. . . . . . . . . . . . $ 0.27 $ (0.92) $ 1.04
The pro forma information above includes stock options granted between April 1,
1995 and March 31, 2001. Effects of applying FAS 123, using the fair
value-based method of accounting, is not representative of the pro forma effect
on earnings in future years because it does not take into consideration pro
forma compensation expense related to stock options granted prior to 1996.
(P) COMMON SHARE DATA. Statement of Financial Accounting Standards No. 128,
Earnings Per Share (SFAS128) requires the presentation of basic and diluted
earnings per share (EPS). EPS is calculated based upon net earnings available
for common shareholders after deduction for preferred dividends. The
computation of basic EPS is based upon the weighted-average number of common
shares outstanding during the period. Diluted EPS is computed based upon the
weighted-average number of common shares outstanding plus the effect of all
dilutive contingently issuable common shares from stock options, stock awards
and warrants that were outstanding during the period. Dilutive contingently
issuable common shares are excluded from the computation in periods in which the
result would have an anti-dilutive effect on earnings per share. There were
options and warrants totaling 1,162,300 and 469,949 for 2002 and transition year
2001, respectively, excluded from the diluted EPS calculation because they were
anti-dilutive.
The following table reconciles basic weighted-average common shares
outstanding to diluted weighted-average common shares outstanding:
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
2002 2001 2001
------------ ----------------- ----------
Basic. . . . . . . . . . . . . . 32,220,066 31,911,570 31,153,006
Dilutive effect of stock options 255,089 257,866 246,027
Dilutive effect of warrants --- 212,083 1,001,352
------------ ----------------- ----------
Diluted. . . . . . . . . . . . . 32,475,155 32,381,519 32,400,385
============ ================= ==========
(Q) ACQUISITIONS. Late in fiscal 2001, the Corporation acquired a 60% interest
in Eurocir S.A., a printed circuit board manufacturer based in Spain. The total
purchase price of approximately $31,000 was accounted for as a purchase
transaction and included inventory, fixed assets and goodwill of approximately
$27,000. The consolidated operating results have included the results of
Eurocir S.A. since January 1, 2001. Minority interest amounts are reflected in
the financial statements at December 31, 2002 and 2001. There is no minority
interest separately identified in the financial statements for fiscal 2001
because the amounts were not considered material to the financial statement
presentation and final determination of purchase allocations had not been
completed as of the balance sheet date. The purchase and sale agreement
includes a put and call arrangement for the remaining 40% interest which expires
after the fifth anniversary of the closing date. The purchase price for the
remaining 40% is based on a multiple of earnings from operations before
interest, taxes on earnings, depreciation and amortization ("EBITDA") during the
period ending on the fifth anniversary of the closing date. The acquisition was
financed through bank borrowings under the revolving credit facility. During
2002, printed circuit board markets increasingly deteriorated in Europe and
North America. Due to this situation, discounted cash flows for Eurocir S.A.
were assessed pursuant to the provisions of SFAS142, which resulted in the
goodwill associated with this business determined to be impaired. Accordingly,
the Corporation charged $27,389 against earnings in the fourth quarter of 2002
to write-off the Eurocir S.A. goodwill balance.
On June 13, 2000, the Corporation acquired the assets, subject to certain
liabilities, of the digital graphics business unit of VirtualFund.com, Inc. and
those results are included in the consolidated operating results since that
date. The acquisition was financed through bank borrowings under the revolving
credit facility. The total purchase price of approximately $47,000 was
accounted for as a purchase transaction and included inventory, fixed assets,
goodwill of approximately $25,000 and other intangible assets of approximately
$17,000. During transition year 2001, digital printing equipment sales
increasingly fell short of forecast due to factors such as delayed product
introduction. This resulted in future budgeted cash flows being reduced. As a
result, the recoverability of Colorspan goodwill and other intangible assets
were assessed, pursuant to the provisions of SFAS121 and SFAS142, and
written-off with $40,675 charged to earnings during the last quarterly period of
transition year 2001.
The following table shows the balance for acquisition reserves included in
other accrued liabilities on the Consolidated Balance Sheet at December 31,
2002. The payment column includes amounts paid of $210 in fiscal 2002, $312 in
transition year 2001 and $621 in fiscal 2001. The activity is shown cumulative
since inception and the remaining balance will be paid periodically through
fiscal 2008:
(In thousands)
Description . . . . . Inception Adjustments Payment Balance
- --------------------- ---------- ------------- -------- --------
U.S. facilities . . . $ 3,550 $ 1,035 $ 3,374 $ 1,211
Overseas facilities . 650 (150) 73 427
U.S. redundancies . . 700 500 1,200 --
Overseas redundancies 1,350 2,600 3,950 --
U.S. environmental. . 2,000 -- 188 1,812
---------- ------------- -------- --------
Total . . . . . . . . $ 8,250 $ 3,985 $ 8,785 $ 3,450
========== ============= ======== ========
(R) RESTRUCTURING CHARGES. In the last quarter of transition year 2001, the
Corporation announced the closure of certain of its Printing Solutions (formerly
Graphic Arts) and Advanced Surface Finishing manufacturing facilities. The
activities of the affected locations have been relocated to other facilities in
order to run those operations more cost effectively. In connection with these
actions, restructuring charges of $1,859 for severance related costs and $7,807
for facility closing costs, disposal services and asset write-offs were recorded
during the transition year ended December 31, 2001. Total cash payments of
$3,023 and other charges of $6,643 have been made since inception. In addition,
an $11,598 charge, consisting of a cash charge of $709 for severance related
costs and other charges of $10,889 for asset write-offs was taken for the
closure of the production activities at Dynacircuits. At December 31, 2002,
this restructuring action has been completed and no provisions remain in the
consolidated balance sheet.
During the second quarter of fiscal year ended March 31, 2001 a
restructuring program was begun in an effort to reposition operations in both
Printing Solutions and Advance Surface Finishing. The Corporation took action
to reduce its cost structure on operations that had increased significantly from
acquisitions over the previous two years. In connection with these actions,
restructuring charges of $6,133 for severance and $530 for lease cancellation
and asset write-offs were recorded during fiscal year ended March 31, 2001.
Total cash payments of $5,904 and other charges of $759 have been made since
inception. At December 31, 2002, this restructuring action has been completed
and no provisions remain in the consolidated balance sheet.
(S) RECENT ACCOUNTING STANDARDS. In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations (SFAS143) which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS143 requires recognition of asset
retirement obligations as a liability rather than a contra-asset. Adoption of
SFAS143, effective January 1, 2003, will not have a material effect on the
Corporation's financial statements.
Effective January 1, 2002, the Corporation adopted Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS144) which excludes from the definition of long-lived
assets goodwill and other intangibles that are not amortized in accordance with
SFAS142. SFAS144 requires long-lived assets to be disposed of by sale to be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
SFAS144 also expands the reporting of discontinued operations to include
components of an entity that have been or will be disposed of rather than
limiting such discontinuance to a segment of a business. Prior to the adoption
of SFAS144, the impairment of long-lived assets was assessed under the
provisions of SFAS121. SFAS144 retained the requirements of SFAS121 to
recognize an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure an impairment
loss as the difference between the carrying amount and fair value of the asset.
The adoption of SFAS144 did not have any impact on the carrying amount of the
Corporation's long-lived assets.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS145). SFAS145, among other
things, rescinds SFAS No. 4, which required all gains and losses from the
extinguishment of debt to be classified as an extraordinary item and amends SFAS
No. 13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Adoption of SFAS145, effective January 1, 2003,
will not have a material effect on the Corporation's financial statements.
In July 2002 the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS146) which requires companies to recognize costs associated with exit or
disposal activities when a liability is incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of SFAS146 are effective
for exit or disposal activities that are initiated after December 31, 2002.
Adoption of SFAS146, effective January 1, 2003, will not have a material effect
on the Corporation's financial statements.
In January 2003, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-based Compensation - Transition and
Disclosure (SFAS148) which amends SFAS123 to provide alternative methods of
transition for enterprises that elect to change to the SFAS123 fair value method
of accounting for stock-based employee compensation. Since the Corporation
adopted the fair value method of accounting for stock-based employee
compensation for the reporting year ended December 31, 2001, the alternative
methods of transition to that method provided by SFAS148 will have no effect on
its financial statements. SFAS148 also amends the disclosure requirements of
SFAS123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The required disclosures
have been provided in these financial statements, and the disclosures to be
provided in interim financial reports will be provided for interim periods
beginning in 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN45) Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which requires that a liability be
recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN45 requires disclosures about the guarantees that an entity has
issued, including product warranty liabilities. The Corporation does not
maintain any warranty expense or related liabilities for its core specialty
chemicals business. Warranties for certain ancillary business are not material.
The Corporation adopted FIN45 at December 31, 2002 and it did not have a
material effect on its consolidated financial statements.
In January 2003, the FASB issued FIN No. 46 (FIN46) Consolidation of
Variable Interest Entities and Interpretation of Accounting Research Bulletin
No. 51. FIN46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. The Corporation does not expect that the adoption of FIN46
will have a significant effect on its consolidated financial statements.
2.VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
The major components of the allowance for doubtful receivables at December 31,
2002 and 2001, and March 31, 2001 were as follows:
(In thousands)
BALANCE
BALANCE ADDITIONS AT
AT CHARGED ADDITIONS END
BEGINNING TO DUE TO OF
OF PERIOD EARNINGS ACQUISITIONS DEDUCTIONS* PERIOD
---------- ---------- ------------- ------------ --------
March 31, 2001. . $ 10,541 $ 3,859 $ 894 $ 3,536 $ 11,758
========== ========== ============= ============ ========
December 31, 2001 $ 11,758 $ 5,986 --- $ 3,102 $ 14,642
========== ========== ============= ============ ========
December 31, 2002 $ 14,642 $ 5,292 --- $ 7,191 $ 12,743
========== ========== ============= ============ ========
<FN>
* Bad debts charged off less recoveries and translation adjustments.
3.INVENTORIES
The major components of inventory at December 31, were as follows:
(In thousands)
2002 2001
------- --------
Finished goods . . . . . . $43,639 $ 57,882
Raw materials and supplies 30,625 38,199
Equipment. . . . . . . . . 11,474 14,953
------- --------
Inventories . . . . . . $85,738 $111,034
======= ========
4.PROPERTY, PLANT AND EQUIPMENT
The major components of property, plant and equipment (at cost) at December 31,
were as follows:
(In thousands)
2002 2001
-------- --------
Land and improvements. . . . . . . . $ 9,635 $ 11,359
Buildings and improvements . . . . . 90,168 91,345
Machinery, equipment and fixtures. . 185,529 190,012
-------- --------
285,332 292,716
Less accumulated depreciation and
amortization . . . . . . . . . . . . 152,751 140,234
-------- --------
Net property, plant and equipment $132,581 $152,482
======== ========
5.GOODWILL AND OTHER INTANGIBLE ASSETS
The Corporation adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS142) as of April 1, 2001. The fair
value of goodwill using the expected value of future cash flows was in excess of
the carrying value upon adoption. During 2002, printed circuit board markets
increasingly deteriorated in Europe and North America. Due to this situation,
discounted cash flows for Eurocir S.A. were assessed pursuant to the provisions
of SFAS142, which resulted in the goodwill associated with this business
determined to be impaired. The Corporation charged $27,389 against earnings in
the fourth quarter of 2002 to write-off the Eurocir S.A. goodwill balance. In
addition, $982 was charged against earnings to write off certain other goodwill
in certain reportable units no longer supported by discounted cash flows, under
Advance Surface Finishing. During transition year 2001, digital printing
equipment sales increasingly fell short of forecast due to factors such as
delayed product introduction. This resulted in future budgeted cash flows being
reduced. As a result, the recoverability of Colorspan goodwill and other
intangible assets were assessed pursuant to the provisions of SFAS121 and
SFAS142 and written-off during the last quarterly period of transition year
2001. The Corporation charged $44,963 against earnings in transition year 2001
for Colorspan goodwill and other intangibles (see Note 1(q) to Consolidated
Financial Statements, Acquisitions), as well as certain other intangible assets
that were determined to be impaired.
The carrying amounts of Goodwill by segment (Advanced Surface Finishing
("ASF"), Printing Solutions ("PS") and Electronics Manufacturing ("EM")) as of
December 31, 2002 and 2001, are as follows:
(In thousands) . . . . . . . . . . ASF PS EM Total
--------- --------- --------- ---------
Balance as of April 1, 2001. . . . $115,878 $ 96,042 $ 24,178 $236,098
Goodwill added during the year . . 6,396 -- 2,930 9,326
Goodwill impaired during the year. -- (23,792) -- (23,792)
Effects of currency translation. . 778 (120) 281 939
--------- --------- --------- ---------
Balance as of December 31, 2001. . $123,052 $ 72,130 $ 27,389 $222,571
Goodwill impaired during the year. (982) -- (27,389) (28,371)
--------- --------- --------- ---------
Balance as of December 31, 2002. . $122,070 $ 72,130 -- $194,200
========= ========= ========= =========
Acquired intangible assets at December 31, 2002 and 2001 are as follows:
(In thousands)
2002 2001
-------------- --------------
Gross Carrying Accumulated Net Gross Carrying Accumulated Net
Amount Amortization Amount Amount Amortization Amount
--------------- -------------- ------- --------------- -------------- -------
Patents . . . $ 19,698 $ (8,123) $11,575 $ 20,865 $ (8,357) $12,508
Trademarks. . 27,481 (8,788) 18,693 28,281 (8,093) 20,188
Manufacturing
Process . . . -- -- -- 5,252 (5,252) --
Others. . . . 3,607 (2,050) 1,557 19,612 (14,883) 4,729
--------------- -------------- ------- --------------- -------------- -------
Total. . . $ 50,786 $ (18,961) $31,825 $ 74,010 $ (36,585) $37,425
=============== ============== ======= =============== ============== =======
Included in the table above, is the net carrying amount of $16,233 at December
31, 2002 and 2001 for trademarks which are not being amortized due to the
indefinite life associated with these assets.
Additional Transitional
Disclosures:. . . . . . . . . . . . Year Ended Nine Months Ended Year Ended
(in thousands). . . . . . . . . . . December 31, December 31, March 31,
2002 2001 2001
------------- ------------------- -----------
Reported net earnings (loss). . . . $ 9,349 $ (28,912) $ 34,804
Add back: Goodwill amortization. . -- -- 6,781
------------- ------------------- -----------
Adjusted net earnings (loss). . . . $ 9,349 $ (28,912) $ 41,585
Basic earnings (loss) per share:
Reported net earnings (loss). . . $ 0.29 $ (0.91) $ 1.12
Goodwill amortization . . . . . . -- -- $ 0.21
------------- ------------------- -----------
Adjusted net earnings (loss). . . $ 0.29 $ (0.91) $ 1.33
Diluted earnings (loss) per share:
Reported net earnings (loss) . . $ 0.29 $ (0.91) $ 1.07
Goodwill amortization. . . . . . -- -- $ 0.21
------------- ------------------- -----------
Adjusted net earnings (loss). . . $ 0.29 $ (0.91) $ 1.28
Aggregate amortization expense of intangible assets for 2002 was $2,454.
Estimated amortization expense for the Corporation's intangible assets is
expected to approximate $2,500 for each of the next five fiscal years.
6.NOTES PAYABLE
Notes payable at December 31, 2002 and 2001 consisted of outstanding borrowings
under available lines of credit. The terms of the lines of credit generally
provide for interest rates at or below the prime rate on the date of borrowing
for its domestic borrowings and vary with local currency exchange rate changes
with its foreign borrowings. The lines of credit aggregate approximately
$54,000 at December 31, 2002 and can be withdrawn at any time at the option of
the banks. The weighted-average interest rates on short-term borrowings
outstanding at the end of December 31, 2002 and 2001 were 4.3% and 5.0%,
respectively.
7.EMPLOYEE BENEFIT & STOCK OPTION PLANS
PENSION, POST-RETIREMENT & POST-EMPLOYMENT BENEFITS
The Corporation has defined benefit pension, defined contribution profit sharing
and employee stock ownership plans for substantially all of its domestic
employees. Aggregate amounts charged to earnings for these plans for the year
ended December 31, 2002, transition year ended December 31, 2001 and fiscal year
ended March 31, 2001 were $5,709, $3,168 and $2,347, respectively.
PENSION. The domestic pension plan provides retirement benefits based upon years
of service and compensation levels. Plan assets at fair value consist primarily
of listed stocks, bonds and guaranteed investment contracts, and included
393,255 shares of the Corporation's common stock having a market value of $8,986
at December 31, 2002 and $6,666 at December 31, 2001. The Corporation also has
a retirement and death benefit plan, covering employees located in Great
Britain. As of April 6, 1997, this plan converted from a defined benefit to a
defined contribution basis for pensionable service after that date. The
obligation has been recognized for past service benefits, which continue on the
defined benefit basis. The Corporation's other foreign subsidiaries maintain
benefit plans that are consistent with statutory practices and are not
significant.
POST-RETIREMENT BENEFITS. The Corporation sponsors a defined benefit
post-retirement medical and dental plan that covers all of its domestic
full-time employees, hired prior to April 1, 1997, who retire after age 55 with
at least 10 to 20 years of service (depending upon the date of hire). Eligible
employees retiring after March 31, 1998 are required to contribute the full cost
of the plan until they reach age 65. At age 65 the Corporation will contribute
a portion of the cost. The Corporation's subsidy level is subject to a cap,
which increases 3% each year. Retirees will be required to contribute the plan
cost in excess of the cap in addition to other required contributions.
The projected benefit obligation for the post-retirement plan at December
31, 2002 comprised 60% retirees, 9% fully eligible active participants and 31%
other active participants. The annual increase in cost is 3% for
post-retirement medical benefits (no assumed rate increase for dental benefits
since it is a scheduled plan) since the Corporation's contributions are at the
defined cap. The medical cost trend rate assumption has no effect on the
amounts reported due to the cap on contributions paid by the Corporation.
POST-EMPLOYMENT BENEFITS. The Corporation sponsors a defined benefit,
post-employment compensation continuation plan that covers all of its full time
domestic employees. Employees who have completed at least six months of
service, become permanently disabled and are unable to return to work are
eligible to receive a benefit under the plan. The benefit may range from one
week to a maximum of six months of compensation. The estimated ongoing
after-tax annual cost is not material.
The following table sets forth the components of the pension and post-retirement
benefit plans with respect to the Consolidated Balance Sheets at December 31,
2002 and 2001:
(in thousands)
Post Retirement
---------- ------------
Pension Benefits Benefits
---------- ---------- ----------
2002 2001 2002 2001
---------- ---------- ---------- ------------
Domestic Foreign Domestic Foreign Domestic Domestic
---------- ---------- ---------- --------- ---------- ------------
Reconciliation of Projected
Benefit Obligation:
Projected benefit obligation
at
Beginning of year . . . . . . $ 42,187 $ 39,758 $ 39,064 $ 47,037 $ 5,975 $ 5,532
Service cost (benefits
earned
During the period). . . . . . 3,836 479 2,726 514 126 91
Interest cost on the
projected
Benefit obligation. . . . . . 3,010 2,279 2,132 2,088 417 313
Plan participants
contribution. . . . . . . . . -- 214 -- 148 -- --
Plan amendments . . . . . . . 103 -- -- -- 892 --
Actuarial (gain)/loss
excluding
Assumption change . . . . . . (1,238) 2,692 (1,005) (9,056) (450) 364
Actuarial (gain)/loss due to
Assumption change . . . . . . 3,220 -- -- -- 314 --
Benefits paid . . . . . . . . (1,654) (1,549) (730) (1,245) (380) (325)
Translation difference. . . . -- 4,458 -- 272 -- --
---------- ---------- ---------- --------- ---------- ------------
Projected benefit obligation
at
End of year . . . . . . . . . 49,464 48,331 42,187 39,758 6,894 5,975
---------- ---------- ---------- --------- ---------- ------------
Reconciliation of Fair Value
of
Plan Assets:
Fair value of plan assets at
Beginning of year . . . . . . 31,752 38,453 34,806 41,045 -- --
Actual return on plan assets
(net of expenses) . . . . . . 4,266 (3,472) (2,324) (2,048) -- --
Employer contribution . . . . 1,729 363 -- 261 380 325
Plan participants
contribution. . . . . . . . . -- 214 -- 148 -- --
Benefits paid . . . . . . . . (1,654) (1,549) (730) (1,245) (380) (325)
Translation difference. . . . -- 3,769 -- 292 -- --
---------- ---------- ---------- --------- ---------- ------------
Fair value of plan assets at
end of year . . . . . . . . . 36,093 37,778 31,752 38,453 -- --
---------- ---------- ---------- --------- ---------- ------------
Funded Status:
Funded status . . . . . . . . (13,267) (10,554) (10,435) (1,304) (6,894) (5,975)
Unrecognized net actuarial
Loss. . . . . . . . . . . . . 7,730 14,878 7,662 4,835 1,718 1,980
Unamortized prior service
cost. . . . . . . . . . . . . 192 -- 114 -- -- --
Plan amendments . . . . . . . -- -- -- -- 892 --
---------- ---------- ---------- --------- ---------- ------------
Net amount recognized . . . . (5,345) 4,324 (2,659) 3,531 (4,284) (3,995)
Amounts recognized in the
Consolidated Balance Sheet
consists of:
Accrued benefit liability . . (5,345) (10,554) (2,659) (1,304) (4,284) (3,995)
Accumulated other
Comprehensive income. . . . . -- 14,878 -- 4,835 -- --
---------- ---------- ---------- --------- ---------- ------------
Net amount recognized . . . . $ (5,345) $ 4,324 $ (2,659) $ 3,531 $ (4,284) $ (3,995)
========== ========== ========== ========= ========== ============
Weighted Average
Assumptions:
Discount rate . . . . . . . . 6.75% 5.5% 7.25% 6.0% 6.75% 7.25%
Rate of compensation
increase. . . . . . . . . . . 5.0% 4.5% 5.0% 4.5% -- --
Long-term rate of return on
Assets. . . . . . . . . . . . 8.0% 8.0% 9.0% 8.0% -- --
Annual increase in cost of
Medical benefits. . . . . . . -- -- -- -- 3.0% 3.0%
The following table sets forth the components of net periodic benefit cost of
the pension and post-retirement benefit plans with respect to the Consolidated
Statements of Earnings for the year ended December 31, 2002, transition year
ended December 31, 2001 and fiscal year ended March 31, 2001:
(in thousands)
Pension Benefits Post Retirement Benefits
---------- ---------- --------- ----------- ---------
March
---------
December 31, March 31, December 31, 31,
---------- ---------- ---------- --------- --------- ----------- ---------
2002 2001 2001 2002 2001 2001
---------- ---------- ---------- --------- ----------- ---------
Domestic Foreign Domestic Foreign Domestic Foreign Domestic Domestic Domestic
---------- ---------- ---------- --------- ---------- --------- --------- ----------- ---------
Net Periodic
Benefit Expense:
Service cost . . . $ 3,836 $ 479 $ 2,726 $ 514 $ 3,056 $ 735 $ 126 $ 91 $ 109
Interest cost on
the projected
Benefit obligation 3,010 2,279 2,132 2,088 2,482 2,357 417 313 387
Expected return
on plan
Assets. . . . . . (2,483) (2,525) (2,322) (2,424) (3,540) (3,165) -- -- --
Amortization of
prior service
Cost . . . . . . . 25 -- 12 -- 58 -- 126 -- 80
Amortization of
transition
Obligation . . . . -- -- -- (332) (229) -- -- -- --
Recognized
actuarial
(gain)/loss . . . 280 723 38 590 (179) (117) -- 104 --
Curtailment gain . -- -- -- -- (339) -- -- -- --
Net periodic
---------- ---------- ---------- --------- ---------- --------- --------- ----------- ---------
benefit cost . . . $ 4,668 $ 956 $ 2,586 $ 436 $ 1,309 $ (190) $ 669 $ 508 $ 576
========== ========== ========== ========= ========== ========= ========= =========== =========
EMPLOYEE STOCK INCENTIVE PLANS
1992 PLAN: In 1993, the Corporation adopted a non-qualified stock option plan,
approved by shareholders in July 1992 (the 1992 plan), for the issuance of up to
2,700,000 shares under which certain employees have been granted options
totaling 2,545,565 shares. Options granted under the 1992 plan are generally
exercisable, at a price equal to two-thirds of the market price at the grant
date, during a four-year period beginning with the grant date. The options are
exercisable into restricted shares of common stock, which cannot be sold or
transferred, except back to the Corporation at cost, during the four-year period
commencing with the exercise date.
For options granted prior to April 1, 2001, compensation expense, which is
equal to the difference between the fair market value of the Corporation's
common stock on the date of an option grant and the exercise price of the
underlying shares was amortized over a six-year period. There was no
compensation expense for this plan in 2002. Compensation expense relating to
this plan was $45 for both transition year 2001 and fiscal year ended March 31,
2001.
1995 PLAN: In 1996, the Corporation adopted a non-qualified equity incentive
plan, approved by the shareholders in July 1995 (the 1995 plan), for the
issuance of up to 900,000 shares under which certain employees have been granted
a total of 472,947 restricted shares, having market prices of between $4.75 and
$38.31 on the dates of grant. All shares of restricted stock issued under the
1995 plan must be held and cannot be sold or transferred, except to the
Corporation for a period of four years from the date of the award. No
compensation expense was charged during 2002, transition year ended December 31,
2001 or fiscal year ended March 31, 2001.
1998 PLAN: In 1999, the Corporation adopted a non-qualified stock option plan,
approved by shareholders in July 1999 (the 1998 plan), for the issuance of up to
1,500,000 shares under which certain employees have been granted options
totaling 1,006,650 shares. Options granted under the 1998 plan generally are
exercisable during a ten-year period beginning with the grant date, at a price
equal to a one-third-premium over market price at the date of grant. The
options are exercisable into unrestricted shares of common stock, except as
otherwise provided, under the terms of the plan, at the time of grant. No
compensation expense was charged during 2002, transition year ended December 31,
2001 or fiscal year ended March 31, 2001.
2001 PLANS: In 2001, the Corporation adopted a non-qualified key executive stock
option plan, approved by shareholders in July 2001 (the 2001 executive plan),
for the issuance of up to 3,000,000 shares under which certain employees have
been granted options totaling 1,448,369 shares. Options granted under the 2001
executive plan generally are exercisable during a six-year period beginning at
the vesting date, which is four years after the grant date. The option price is
variable, based upon the market price at date of grant, adjusted for the
Corporation's performance in comparison to the Standard and Poors Specialty
Chemicals Index during the exercise period. The number of options is variable
based upon a multiple determined by the Corporation's cumulative percentage
owner earnings growth during the four year vesting period. The options are
exercisable into unrestricted shares of common stock, except as otherwise
provided at the time of grant.
Also, in 2001, the Corporation adopted a non-qualified all employee stock
option plan, approved by shareholders in July 2001 (the 2001 employee plan), for
the issuance of up to 1,000,000 shares under which certain employees have been
granted options totaling 426,050 shares. Options granted under the 2001
employee plan generally are exercisable during a six-year period beginning at
the vesting date, which is four years after the grant date, at a price equal to
the market price at the date of grant. The options are exercisable into
unrestricted shares of common stock, except as otherwise provided at the time of
grant.
Options issued under the Corporation's stock incentive plans and
outstanding at December 31, 2002 have exercise prices ranging from $1.79 to
$55.50, expiring periodically through fiscal 2012, summarized in the following
table as of December 31, 2002 and 2001, and March 31, 2001:
FIXED OPTION PLANS INDEXED OPTION PLANS
------------------- --------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF OPTIONS EXERCISE PRICE OF OPTIONS EXERCISE PRICE
------------------- ----------------- ---------- -----------------
Outstanding March 31, 2000. . . . . 1,203,715 $ 30.16 -- --
Fiscal 2001 activity:
Granted. . . . . . . . . . . . . 265,000 $ 30.33 -- --
Exercised. . . . . . . . . . . . -- -- -- --
Forfeited. . . . . . . . . . . . -- -- -- --
Outstanding at March 31, 2001. . 1,468,715 $ 30.30 -- --
Transition year 2001 activity:
Granted. . . . . . . . . . . . . 557,250 $ 16.75 670,500 $ 16.75
Exercised. . . . . . . . . . . . -- -- -- --
Forfeited. . . . . . . . . . . . -- -- -- --
Outstanding at December 31, 2001 2,025,965 $ 26.39 670,500 $ 16.75
Fiscal 2002 activity:
Granted. . . . . . . . . . . . . 30,250 $ 20.02 977,869 $ 19.54
Exercised. . . . . . . . . . . . (180,000) $ 2.00 -- --
Forfeited. . . . . . . . . . . . (161,450) $ 16.75 (200,000) $ 17.66
Outstanding at December 31, 2002 1,714,765 $ 29.75 1,448,369 $ 18.51
Total options exercisable under fixed option plans were 1,288,715 as of December
31, 2002 and 1,468,715 as of December 31, 2001 and March 31, 2001. There are no
options exercisable under the indexed option plans for all periods presented.
The following table summarizes information about fixed stock options outstanding
at December 31, 2002:
EXERCISE. . . NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE
PRICES. . . . OUTSTANDING REMAINING LIFE EXERCISE PRICE
- ------------- ----------- ---------------- -----------------
1.79-$1.89 . 270,000 1.1 years $ 1.84
16.75-$20.29 426,050 8.6 years $ 16.98
30.33-$32.75 277,065 7.2 years $ 30.44
45.00-$55.50 741,650 6.3 years $ 46.98
----------- ---------------- -----------------
1,714,765 6.2 years $ 29.75
The following table summarizes information about indexed stock options
outstanding at December 31, 2002:
EXERCISE. . . NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE
PRICES. . . . OUTSTANDING REMAINING LIFE EXERCISE PRICE
- ------------- ----------- ---------------- -----------------
16.75-$21.40 1,448,369 8.8 years $ 18.51
The weighted-average grant-date fair value of options granted in 2002 was
$11.28 for fixed options and $8.61 for indexed options and in transition year
2001 was $6.14 for fixed options and $3.75 for indexed options. The application
of the fair value expense recognition method of accounting for options resulted
in the following expense included in the results of operations: for 2002, $590
for fixed options and $2,555 for indexed options and for transition year 2001,
$357 for fixed options and $262 for indexed options. The weighted-average
grant-date fair value of fixed options granted in fiscal year 2001 was $6.96.
The fair-values were determined by utilizing the Black-Scholes option-pricing
model and the following key assumptions:
December 31, 2002 December 31,2001 March 31, 2001
------------------ ---------------- ---------------
(indexed) (fixed) (indexed) (fixed) (fixed)
Risk-free interest rate 1.84% 4.24% 2.11% 4.65% 6.50%
Expected option life. . 6 years 6 years 6 years 6 years 6 years
Expected volatility . . 39.1% 53.0% 19.6% 30.0% 30.0%
Dividend yield. . . . . 0.38% 0.38% 0.48% 0.48% 0.40%
8.INCOME TAXES
Income tax expense (benefit) for fiscal 2002, transition year 2001 and fiscal
2001 consisted of:
(In thousands)
Current Deferred Total
------------------- ---------- ---------
December 31, 2002
-------------------
U.S. Federal. . $ (803) $ 3,422 $ 2,619
State and local (271) 864 593
Foreign . . . . 10,523 (9,280) 1,243
------------------- ---------- ---------
Totals. $ 9,449 $ (4,994) $ 4,455
=================== ========== =========
December 31, 2001
-------------------
U.S. Federal. . $ 2,292 $ (23,804) $(21,512)
State and local 783 (3,584) (2,801)
Foreign . . . . 9,365 (562) 8,803
------------------- ---------- ---------
Totals. $ 12,440 $ (27,950) $(15,510)
=================== ========== =========
March 31, 2001
-------------------
U.S. Federal. . $ 4,981 $ (1,758) $ 3,223
State and local 939 (363) 576
Foreign . . . . 19,692 (3,358) 16,334
------------------- ---------- ---------
Totals. $ 25,612 $ (5,479) $ 20,133
=================== ========== =========
The deferred tax provision, in the table above, does not reflect the tax effect
of items credited directly to equity under Statement of Financial Accounting
Standards No. 87, Employers' Accounting for Pensions, hedging activities under
SFAS133 and the effect of foreign currency translation on foreign deferred tax
assets and liabilities which totaled $2,566 for fiscal 2002 and $2,057 for
transition year 2001.
Income tax expense (benefit) differed from the amounts computed by applying the
U.S. Federal statutory tax rates to pretax income for fiscal 2002, transition
year 2001 and fiscal 2001 as a result of the following:
(In thousands)
December 31, March 31,
---------- --------- -----------
2002 2001 2001
---------- --------- -----------
U.S. Federal statutory tax rate 35% 35% 35%
========== ========= ===========
Taxes computed at U.S.
Statutory rate . . . . . . . $ 4,873 $(15,510) $ 19,148
State income taxes, net of
federal benefit. . . . . . . 499 (2,471) 375
Foreign tax rate differential . (3,256) (1,518) (2,024)
Export tax benefits . . . . . . (769) (478) (861)
Change in valuation reserve . . 3,904 4,211 --
Non-deductible goodwill . . . . -- -- 2,250
Other, net. . . . . . . . . . . (796) 256 1,245
---------- --------- -----------
Actual income taxes. . . . . $ 4,455 $(15,510) $ 20,133
========== ========= ===========
Effective tax rate. . . . . . . 32.0% 35.0% 36.8%
========== ========= ===========
Earnings before income taxes included foreign earnings of $13,372 for fiscal
2002, $29,914 for transition year 2001 and $50,584 for fiscal 2001.
The Corporation has not recognized a deferred tax liability for the
undistributed earnings of foreign subsidiaries that arose in fiscal 2002 and
prior years because the Corporation does not expect to repatriate those earnings
in the foreseeable future. A deferred tax liability will be recognized when the
Corporation expects that it will recover those earnings in a taxable
transaction, such as the receipt of dividends or sale of the investment, net of
foreign tax credits. At December 31, 2002, the undistributed earnings of those
subsidiaries were approximately $174,131. A determination of the deferred tax
liability relating to the undistributed earnings of foreign subsidiaries is not
practical.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 2002 and 2001 are as
follows:
(In thousands)
2002 2001
--------- ---------
Deferred tax assets:
Accounts receivable, primarily due to
Allowance for doubtful accounts. . . . $ 2,238 $ 3,035
Inventories . . . . . . . . . . . . . . 5,287 5,294
Accrued liabilities . . . . . . . . . . 5,638 6,791
Acquisition accrued liabilities . . . . 6,909 7,101
Employee benefits . . . . . . . . . . . 13,674 11,286
Foreign tax credits . . . . . . . . . . 7,114 3,211
Net operating losses. . . . . . . . . . 6,896 5,820
Impairment and asset write-downs. . . . 36,527 25,052
Alternative minimum tax credits . . . . 1,043 172
Other . . . . . . . . . . . . . . . . . 8,612 8,202
--------- ---------
Total gross assets . . . . . . . . . 93,939 75,964
Valuation reserve. . . . . . . . . . (14,103) (10,031)
--------- ---------
Total gross deferred tax assets . 79,835 65,933
Deferred tax liabilities:
Plant and equipment, primarily due
to
Depreciation.. . . . . . . . . . . . . 3,901 4,221
Intangibles and other assets. . . . . . 17,471 11,579
Other . . . . . . . . . . . . . . . . . 9,214 8,557
--------- ---------
Total gross deferred tax liabilities 30,586 24,357
--------- ---------
Net deferred asset. . . . . . . . $ 49,249 $ 41,576
========= =========
The Corporation has recorded a valuation reserve to reflect the estimated
amount of deferred tax assets that may not be realized due to the expiration of
tax credits and net operating loss carry-forwards. The valuation reserve for
deferred tax assets was $14,103 and $10,031 at December 31, 2002 and 2001,
respectively. The net change in the valuation reserve for fiscal 2002 was an
increase of $4,072. The increase in valuation reserve is related to an increase
in foreign tax credits and foreign net operating losses, which may not be
realized. The increase in the valuation reserve related to foreign net operating
losses is reported in the rate reconciliation as foreign rate differential.
Management believes it is more likely than not, the remaining net deferred tax
assets of $49,249 will be realized as the results of future operations are
expected to generate sufficient taxable income.
During fiscal 2002, transition year 2001 and fiscal 2001, the lapse of
restrictions upon stock exercised under the stock option and award plans
resulted in a tax benefit of $180, $824 and $2,539, respectively, which were
recorded as increases to additional paid-in capital.
At December 31, 2002,the Corporation has approximately $2,200 of federal
net operating losses and $17,600 of foreign net operating losses that are
available for carryforward. The carryforward periods range from 5 years to
unlimited.
9.LONG-TERM OBLIGATIONS
Long-term obligations at December 31, 2002 and 2001 consisted of the following:
(In thousands)
2002 2001
-------- --------
Senior subordinated notes, unsecured, 9
1/8% interest at December 31, 2002 due
in 2011 . . . . . . . . . . . . . . . . . . $300,156 $300,057
Term loans, unsecured, variable interest
(5.75% at December 31, 2002) due in
quarterly installments to 2008. . . . . . . 7,859 9,785
Term loans, collaterized, variable interest
(4.75% at December 31, 2002) due in
quarterly installments to 2006. . . . . . . 4,864 2,404
Term loan, unsecured, variable interest
(4.26% at December 31, 2002) due in
semi-annual installments to 2005. . . . . . 508 604
Revolving loan, unsecured, variable
interest, expiring in 2003
5.00% at December 31, 2001 . . . . . . -- 9,000
5.59% at December 31, 2001 . . . . . . -- 6,699
5.59% at December 31, 2001 . . . . . . -- 27,122
6.32% at December 31, 2001 . . . . . . -- 38,084
Capitalized lease obligations . . . . . . . 2,936 3,279
Other, due in varying amounts to 2008 . . . 1,720 2,368
-------- --------
Total long-term obligations . . . . . . . . 318,043 399,402
Less current portion. . . . . . . . . . . . 6,230 5,614
-------- --------
Long-term portion . . . . . . . . . . . . . $311,813 $393,788
======== ========
Minimum future principal payments on long-term obligations subsequent to
December 31, 2002 are as follows:
(In thousands)
2003 . . . $ 6,230
2004 . . . 3,295
2005 . . . 3,998
2006 . . . 1,947
2007 . . . 1,236
Thereafter 301,337
--------
Total. . . $318,043
========
The Corporation has a $175,000 committed revolving credit facility that
expires in 2003. The Corporation can borrow foreign currencies and U. S. dollars
against this facility. Commitment fees under the revolving credit lines are
variable, ranging from 25 to 75 basis points on the unused balance. Under these
loans, the most restrictive covenants provide that earnings before interest and
taxes, as defined in the credit agreement, as a ratio to interest expense must
be greater than 1.5 to 1; consolidated net worth must be at least $159,018 and
earnings before interest, taxes, depreciation and amortization, as defined in
the credit agreement, as a ratio to total debt shall not exceed 4.25 to 1. The
revolving credit facility bears interest at a variable rate, which is based on a
ratio of the Corporation's debt to earnings before certain expenses. The rates
were set from 1.25% to 3.00% above the applicable London interbank market rate
("LIBOR"). At December 31, 2002 there were no borrowings outstanding under this
facility.
The Corporation has entered into interest rate swap agreements for the
purpose of reducing its exposure to possible future changes in interest rates
applicable to the term and revolving loans. The fixed rates are compared to the
applicable three-month LIBOR rates as a basis for payment, or receipt of the
rate differential as applied to the notional amount of each swap transaction.
At December 31, 2002, the Corporation has:
Notional US dollar coverage $25,000 expires December 31, 2005 compares a
fixed 5.5950% rate to US LIBOR.
Notional (Euro 7,747) US dollar coverage $6,906 expires June 30, 2004
compares fixed 4.9000% rate to EUROBOR
Notional (Euro 7,747) US dollar coverage $6,906 expires September 30, 2005
compares fixed 5.1240% rate to
EUROBOR
Notional (Euro 6,817) US dollar coverage $6,078 expires June 30, 2005
compares fixed 4.8825% rate to EUROBOR
None of these swaps have been designated as hedges for accounting purposes. On
January 7, 2003, the Corporation paid the fair market value of $1,053 to
purchase the release from liability on the instruments tied to the EUROBOR rate.
10.SEGMENT REPORTING
The Corporation operates on a worldwide basis, supplying proprietary chemicals
for two distinct segments, Advanced Surface Finishing and Printing Solutions. A
third segment, Electronics Manufacturing designs and manufactures printed
circuits boards in Europe through a majority owned subsidiary. These three
segments, under which the Corporation operates, are managed separately as each
segment has differences in technology and marketing strategies. The Advanced
Surface Finishing segment's proprietary chemical compounds are primarily used
for automotive, electronic and other industrial applications. In automotive and
other applications its products are used for cleaning, activating, polishing,
mechanical plating, mechanical galvanizing, electro-plating, phosphatizing,
stripping and coating, filtering, anti-tarnishing and rust retarding for metal
and plastic surfaces. In electronics applications its products are used to etch
copper and imprint electrical patterns on circuit boards and in offshore oil and
gas exploration its chemicals and fluids are used in hydraulic systems as
lubricants and cleaning agents to assist in drilling and logging operations.
The Printing Solutions segment's complete line of offset and textile printing
blankets and photo-polymer plates are used by commercial printing and packaging
industries. These products allow for both image transfer in flexographic
applications and in offset printing applications. Its products are used to
improve print quality and productivity for commercial printing. It also
manufactures and markets a complete line of digital printers with color graphics
and other features. The Electronics Manufacturing segment is a designer and
manufacturer of both single-sided and double-sided printed circuit boards in
Europe through its majority owned subsidiary Eurocir SA.
The business segments reported below are the segments of the Corporation
for which separate financial information is available and for which operating
results are reviewed by executive management to assess performance of the
Corporation. The accounting policies of the business segments are the same as
those described in the Note 1 to Consolidated Financial Statements, Summary of
Significant Accounting Policies.
Net sales for all of the Corporation's products fall into one of the three
business segments. The business segment results of operations include certain
operating costs, which are allocated based on the relative burden each segment
bears on those costs. Operating income amounts are evaluated before
amortization of intangible assets and non-recurring charges. The business
segment identifiable assets which follow are reconciled to total consolidated
assets including unallocated corporate assets which consist primarily of
deferred tax assets, equity method investments and certain other long term
assets not directly associated with the support of the individual operations.
Worldwide operations are summarized by business segment in the following tables:
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
2002 2001 2001
-------------- ------------------- ------------
NET SALES TO UNAFFILIATED
CUSTOMERS:
Printing Solutions. . . . . . . $ 282,896 $ 219,595 $ 311,767
Advanced Surface Finishing. . . 324,180 250,963 447,875
Electronics Manufacturing . . . 80,485 63,302 35,134
-------------- ------------------- ------------
Consolidated Net Sales. . . . . $ 687,561 $ 533,860 $ 794,776
============== =================== ============
OPERATING PROFIT:
Printing Solutions. . . . . . . $ 48,844 $ 30,676 $ 48,045
Advanced Surface Finishing. . . 42,494 35,822 82,481
Electronics Manufacturing . . . 2,015 (2,968) (6,033)
-------------- ------------------- ------------
93,353 63,530 124,493
Amortization of Intangibles . . (6,226) (6,084) (20,641)
Impairment, Restructuring and
Merger Costs. . . . . . . . . . (35,371) (73,066) (12,936)
-------------- ------------------- ------------
Consolidated Operating Profit
(Loss). . . . . . . . . . . . . $ 51,756 $ (15,620) $ 90,916
============== =================== ============
AMORTIZATION:
Printing Solutions. . . . . . . $ 600 $ 507 $ 8,788
Advanced Surface Finishing. . . 5,599 5,550 11,484
Electronics Manufacturing . . . 27 27 369
-------------- ------------------- ------------
Consolidated Amortization . . . $ 6,226 $ 6,084 $ 20,641
============== =================== ============
DEPRECIATION:
Printing Solutions. . . . . . . $ 9,209 $ 7,653 $ 9,481
Advanced Surface Finishing. . . 6,799 6,666 9,219
Electronics Manufacturing . . . 4,598 3,325 3,282
Corporate . . . . . . . . . . . 353 346 211
-------------- ------------------- ------------
Consolidated Depreciation . . . $ 20,959 $ 17,990 $ 22,193
============== =================== ============
CAPITAL EXPENDITURES:
Printing Solutions. . . . . . . $ 3,195 $ 1,079 $ 4,832
Advanced Surface Finishing. . . 2,521 2,829 11,534
Electronics Manufacturing . . . 1,379 3,026 2,781
Corporate . . . . . . . . . . . 182 -- 3,290
-------------- ------------------- ------------
Consolidated Capital Spending.. $ 7,277 $ 6,934 $ 22,437
============== =================== ============
IDENTIFIABLE ASSETS:
Printing Solutions. . . . . . . $ 410,087 $ 431,353 $ 345,849
Advanced Surface Finishing. . . 136,436 177,253 426,869
Electronics Manufacturing . . . 95,961 132,296 91,665
Corporate . . . . . . . . . . . 65,409 49,983 20,442
-------------- ------------------- ------------
Consolidated Assets . . . . . . $ 707,893 $ 790,885 $ 884,825
============== =================== ============
Worldwide operations are summarized by geographic region (determined by customer
location) in the following table:
(In thousands)
UNITED OTHER ASIA
STATES AMERICAS EUROPE PACIFIC CONSOLIDATED
--------- --------- --------- -------- --------------
Year Ended December 31,
- ---------------------------
2002
- ---------------------------
Net sales to unaffiliated
customers . . . . . . . . . $274,759 $ 20,376 $275,179 $117,247 $ 687,561
Operating profit (loss) . . 27,841 4,970 (1,266) 20,211 51,756
Identifiable assets . . . . 304,546 26,811 323,772 52,764 707,893
Nine Months Ended December
- ---------------------------
31, 2001
- ---------------------------
Net sales to unaffiliated
customers . . . . . . . . . $226,638 $ 16,129 $205,465 $ 85,628 $ 533,860
Operating profit (loss) . . (51,413) 3,811 18,933 13,049 (15,620)
Identifiable assets . . . . 205,625 19,950 481,842 83,468 790,885
Year Ended March 31, 2001
- ---------------------------
Net sales to unaffiliated
customers . . . . . . . . . $370,199 $ 28,019 $261,141 $135,417 $ 794,776
Operating profit. . . . . . 28,496 6,966 31,421 24,033 90,916
Identifiable assets . . . . 364,182 16,224 416,717 87,702 884,825
11.COMMON AND TREASURY STOCK
The Corporation's Restated Certificate of Incorporation provides for 75 million
authorized common shares.
Common shares issued are summarized in the following table at December 31, 2002
and 2001 and March 31, 2001:
SHARES
----------
December 31, March 31,
----------- ---------- -----------
2002 2001 2001
----------- ---------- -----------
COMMON STOCK:
Balance - beginning of period. . . 46,409,757 45,408,464 45,412,325
Shares issued - options exercised. 180,000 -- --
Shares issued - stock awards . . . 130,000 -- --
Shares cancelled - stock awards. . (80,000) -- (3,861)
Shares issued - warrants exercised -- 1,001,293 --
----------- ---------- -----------
Balance - end of period. . . . . . 46,639,757 46,409,757 45,408,464
=========== ========== ===========
Between December 29, 1999 and April 30, 2001, there were 1,001,352 warrants
held by Citicorp Mezzanine Partners, L.P. ("Citicorp") which upon exercise of
the warrants, shares of the Corporation's common stock would be issued. Under
the terms of the warrants Citicorp may purchase the common shares at an exercise
price of approximately $.001 per share, at any time between December 29,1999 and
December 29, 2004, inclusive. On May 1, 2001, the Corporation issued 311,520
common shares upon the exercise of the same number of warrants by Citicorp and
cancellation of 18 warrants to cover the exercise price. Then, on June 10, 2001
the Corporation issued 689,773 common shares upon the exercise of the same
number of warrants by Citicorp and cancellation of 41 warrants to cover the
exercise price. As a result, there are no longer any warrants for common stock
of the Corporation outstanding.
The Board of Directors has from time-to-time authorized the purchase of
issued and outstanding shares of the Corporation's common stock. Any future
repurchases under these authorizations will depend on various factors, including
the market price of the shares, the Corporation's business and financial
position and general economic and market conditions. Additional shares acquired
pursuant to such authorization will be held in the Corporation's treasury and
will be available for the Corporation to issue without further shareholder
action (except as required by applicable law or the rules of any securities
exchange on which the shares are then listed). Such shares may be used for
various corporate purposes, including contributions under existing or future
employee benefit plans, the acquisition of other businesses and the distribution
of stock dividends. At December 31, 2002, there was a balance of such
outstanding authorizations totaling 102,483 shares. Subsequently, the Board of
Directors authorized an additional 1,000,000 shares, on February 25, 2003.
Treasury stock activity is summarized in the following table for the year ended
December 31, 2002, the transition year ended December 31, 2001 and the year
ended March 31, 2001:
SHARES
----------
December 31, March 31,
2002 2001 2001
---------- ---------- ----------
TREASURY STOCK:
Balance - beginning of period 14,309,654 14,277,610 14,267,816
Shares acquired . . . . . . . 39,799 32,044 9,794
---------- ---------- ----------
Balance - end of period . . . 14,349,453 14,309,654 14,277,610
========== ========== ==========
12.LEASE COMMITMENTS
The Corporation has leases that expire at various dates through 2011 for certain
office and warehouse space, transportation, computer and other equipment.
Contingent rentals are paid for warehouse space on the basis of the monthly
quantities of materials stored and for transportation and other equipment on the
basis of mileage or usage. Total rental expense for these leases amounted to
$9,758 in fiscal 2002, $7,482 for transition year 2001 and $8,662 in fiscal year
2001, of which $877, $733 and $1,594, respectively, were contingent rentals. In
addition, the Corporation has leased equipment at customers, which are generally
subject to sublease agreements. Net rental expense for these sublease
agreements amounted to income of $368 in fiscal 2002, $338 for transition year
2001 and expense of $1,849 in fiscal 2001.
Minimum lease commitments under operating leases for the fiscal years
subsequent to December 31, 2002 are as follows:
(In thousands)
NET
COMMITMENTS SUBLEASE COMMITMENTS
------------ --------- ------------
2003 . . . $ 9,140 $ 167 $ 8,973
2004 . . . 4,059 -- 4,059
2005 . . . 3,286 -- 3,286
2006 . . . 2,883 -- 2,883
2007 . . . 2,530 -- 2,530
Thereafter 2,649 -- 2,649
------------ --------- ------------
Total . $ 24,547 $ 167 $ 24,380
============ ========= ============
13.OTHER INCOME (EXPENSE)
The major components of other income (expense) for the year ended December 31,
2002, nine months ended December 31, 2001 and year ended March 31, 2001 were as
follows:
(In thousands)
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
-------------- ------------------ -----------
2002 2001 2001
-------------- ------------------ -----------
Miscellaneous income:
Foreign exchange $ 650 --- ---
Joint ventures 40 --- ---
-------------- ------------------ -----------
Total miscellaneous income $ 690 --- ---
============== ================== ===========
Miscellaneous expense:
Interest rate swaps ($2,611) (410) ---
Foreign exchange --- (362) (475)
Joint ventures --- --- (1,438)
Other. . . . . . . . . . . . . (686) (431) (822)
-------------- ------------------ -----------
Total miscellaneous expense ($3,297) ($1,203) ($2,735)
============== ================== ===========
14.CONTINGENCIES, ENVIRONMENTAL AND LEGAL MATTERS
Environmental Issues:
The nature of the Corporation's operations, as manufacturers and distributors of
specialty chemicals and systems, and products, including raw materials, expose
it to the risk of liabilities or claims with respect to environmental cleanup or
other matters, including those in connection with the disposal of hazardous
materials. As such, the Corporation is subject to extensive U.S. and foreign
laws and regulations relating to environmental protection and worker health and
safety, including those governing: discharges of pollutants into the air and
water; the management and disposal of hazardous substances and wastes; and the
cleanup of contaminated properties. The Corporation has incurred, and will
continue to incur, significant costs and capital expenditures in complying with
these laws and regulations. The Corporation could incur significant additional
costs, including cleanup costs, fines and sanctions and third-party claims, as a
result of violations of or liabilities under environmental laws. In order to
ensure compliance with applicable environmental, health and safety laws and
regulations, the Corporation maintains a disciplined environmental and
occupational safety and health compliance program, which includes conducting
regular internal and external audits at its plants to identify and categorize
potential environmental exposure.
The Corporation has been named as a potentially responsible party ("PRP")
at three Superfund sites. There are many other PRPs involved at each of these
sites. The Corporation has recorded its best estimate of liabilities in
connection with site clean-up based upon the extent of its involvement, the
number of PRPs and estimates of the total costs of the site clean-up that
reflect the results of environmental investigations and remediation estimates
produced by remediation contractors. While the ultimate costs of such
liabilities are difficult to predict, the Corporation does not expect that its
costs associated with these sites will be material.
In addition, some of the Corporation's facilities have an extended history
of chemical processes or other industrial activities. Contaminants have been
detected at some of these sites, with respect to which the Corporation is
conducting environmental investigations and/or cleanup activities. These sites
include certain sites acquired in the December 1998 acquisition of W. Canning
plc, such as the Kearny, New Jersey and Waukegan, Illinois sites. The
Corporation has established an environmental remediation reserve, predominantly
attributable to those Canning sites that it believes will require environmental
remediation. With respect to those sites, it also believes that its Canning
subsidiary is entitled under the acquisition agreement to withhold a deferred
purchase price payment of approximately $2,000. The Corporation estimates the
range of cleanup costs at its Canning sites between $2,000 and $5,000.
Investigations into the extent of contamination, however, are ongoing with
respect to some of these sites. To the extent the Corporation's liabilities
exceed $2,000, it may be entitled to additional indemnification payments. Such
recovery may be uncertain, however, and would likely involve significant
litigation expense. The Corporation does not anticipate that it will be
materially affected by environmental remediation costs, or any related claims,
at any contaminated sites, including the Canning sites. It is difficult,
however, to predict the final costs and timing of costs of site remediation.
Ultimate costs may vary from current estimates and reserves, and the discovery
of additional contaminants at these or other sites or the imposition of
additional cleanup obligations, or third-party claims relating thereto, could
result in significant additional costs.
Legal Proceedings:
On June 25, 2002, the U.S. Environmental Protection Agency brought an
administrative complaint against the Adams, Massachusetts manufacturing facility
owned by MacDermid Graphic Arts, Inc., alleging that the facility violated
certain regulations and permit requirements regarding air emissions and related
record keeping matters. The allegations arise primarily out of conduct that
allegedly occurred prior to the Corporation's acquisition of the facility
through its December 1999 acquisition of Polyfibron Technologies, Inc. The
Corporation has entered into a settlement with the EPA regarding these
allegations. The settlement required a payment of $230 and resolved the issues
alleged.
On January 30, 1997, the Corporation was served with a subpoena from a
federal grand jury in Connecticut requesting certain documents relating to an
accidental spill from its Huntingdon Avenue, Waterbury, Connecticut facility
that occurred in November of 1994, together with other information relating to
operations and compliance at the Huntingdon Avenue facility. The Corporation
was subsequently informed that it is a subject of the grand jury's investigation
in connection with alleged criminal violations of the federal Clean Water Act
pertaining to its wastewater handling practices. In addition, two of the
Corporation's former employees, who worked at the Huntington Avenue facility,
pled guilty in early 2001 to misdemeanor violations under the Clean Water Act in
connection with the above matter. These individuals were sentenced to fines of
$25 and $10 and 2 years probation, as well as community service.
In a separate matter, on July 26, 1999, the Corporation was named in a
civil lawsuit commenced in the Superior Court of the State of Connecticut
brought by the Connecticut Department of Environmental Protection alleging
various compliance violations at its Huntingdon Avenue and Freight Street
locations between the years 1992 through 1998 relating to wastewater discharges
and the management of waste materials. The complaint alleges violations of its
permits issued under the Federal Clean Water Act and the Resource Conservation
and Recovery Act, as well as procedural, notification and other requirements of
Connecticut's environmental regulations over the foregoing period of time.
The Corporation voluntarily resolved both of these matters on November 28,
2001. As a result, MacDermid, Incorporated is required to pay fines and
penalties totaling $2,500, without interest, over six quarterly installments. As
of December 31, 2002, the Corporation has paid $2,042 and will pay the remaining
amount of $458 during the quarter ending March 31, 2003. In addition, the
Corporation is required to pay $1,550 to various local charitable and
environmental organizations and causes. As of December 31, 2002, the Corporation
has paid $1,420 and a final payment for these donations of $130 will be paid on
April 30, 2003. The Corporation has been placed on probation for two years and
will perform certain environmental audits, as well as other environmentally
related actions. The Corporation had recorded liabilities during the negotiation
period and therefore its results of operations and financial position were not
affected by these arrangements.
Various other legal proceedings are pending against the Corporation. The
Corporation considers all such proceedings to be ordinary litigation incident to
the nature of its business. Certain claims are covered by liability insurance.
The Corporation believes 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.
15.FINANCIAL INFORMATION FOR GUARANTORS OF THE CORPORATION'S BOND OFFERING
The Corporation issued 9 1/8% Senior Subordinated Notes ("Bond Offering")
effective June 20, 2001, for the face amount of $301,500, which pay interest
semiannually on January 15th and July 15th and mature in 2011. The proceeds
were used to pay down existing long-term debt. This Bond Offering is guaranteed
by substantially all existing and future directly or indirectly wholly-owned
domestic restricted subsidiaries of the Corporation ("Guarantors"). The
Guarantors, fully, jointly and severally, irrevocably and unconditionally
guarantee the performance and payment when due of all the obligations under the
Bond Offering. The Corporation's unrestricted subsidiaries that result from the
January 2001 Eurocir acquisition and its foreign subsidiaries are not guarantors
of the indebtedness under the Bond Offering. The following financial
information is presented to give additional disclosures to the Corporation's
Consolidated Financial Statements, with respect to: a) MacDermid, Incorporated
(as the issuer), b) the Guarantors, c) the non-guarantor subsidiaries, d) the
unrestricted non-guarantor subsidiaries, e) elimination entries and f) the
Corporation on a consolidated basis for and as of the fiscal year ended December
31, 2002, the transition year ended December 31, 2001 and the fiscal year ended
March 31, 2001. The equity method has been used by the Corporation with respect
to investments in subsidiaries. The equity method also has been used by
subsidiary guarantors with respect to investments in non-guarantor subsidiaries
and by subsidiary non-guarantors with respect to investments in unrestricted
non-guarantor subsidiaries. Financial statements for subsidiary guarantors are
presented as a combined entity. The financial information includes certain
allocations of revenues and expenses based on management's best estimates which
is not necessarily indicative of financial position, results of operations and
cash flows that these entities would have achieved on a stand-alone basis and
should be read in conjunction with the Consolidated Financial Statements of the
Corporation.
CONSOLIDATED STATEMENTS OF EARNINGS YEAR ENDED DECEMBER 31, 2002
MACDERMID
UNRESTRICTED INCORPORATED
MACDERMID GUARANTOR NONGUARANTOR NONGUARANTOR AND
INCORPORATED SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------------- -------------- -------------- -------------- -------------- --------------
Net sales. . . . . . . . $ 95,004 $ 182,348 $ 345,281 $ 80,485 $ (15,557) $ 687,561
Cost of sales. . . . . . 63,916 89,510 194,729 72,196 (15,557) 404,794
-------------- -------------- -------------- -------------- -------------- --------------
Gross profit . . . . . . 31,088 92,838 150,552 8,289 -- 282,767
Operating expenses:
Selling, technical and
administrative . . . . . 48,882 40,393 93,866 6,273 -- 189,414
Amortization of
intangibles. . . . . . . 3,208 1,907 1,084 27 -- 6,226
Impairment and
restructuring costs. . . 470 7,512 -- 27,389 -- 35,371
-------------- -------------- -------------- -------------- -------------- --------------
52,560 49,812 94,950 33,689 -- 231,011
-------------- -------------- -------------- -------------- -------------- --------------
Operating profit (loss). (21,472) 43,026 55,602 (25,400) -- 51,756
Other income (expense):
Equity in earnings of
subsidiaries . . . . . . 28,969 8,467 (28,026) -- (9,410) --
Interest income. . . . . 70 88 417 33 -- 608
Interest expense . . . . (22,795) (5,106) (5,268) (2,664) -- (35,833)
Miscellaneous, net . . . (2,528) 194 (317) 44 -- (2,607)
-------------- -------------- -------------- -------------- -------------- --------------
3,716 3,643 (33,194) (2,587) (9,410) (37,832)
-------------- -------------- -------------- -------------- -------------- --------------
Earnings (loss) before
taxes. . . . . . . . . . (17,756) 46,669 22,408 (27,987) (9,410) 13,924
Income taxes benefit
(expense). . . . . . . . 27,105 (17,700) (13,941) 81 -- (4,455)
Minority interest. . . . -- -- -- (120) -- (120)
-------------- -------------- -------------- -------------- -------------- --------------
Net earnings (loss). . . $ 9,349 $ 28,969 $ 8,467 $ (28,026) $ (9,410) $ 9,349
============== ============== ============== ============== ============== ==============
CONSOLIDATED STATEMENTS OF EARNINGS NINE MONTHS ENDED DECEMBER 31, 2001
MACDERMID
UNRESTRICTED INCORPORATED
MACDERMID GUARANTOR NONGUARANTOR NONGUARANTOR AND
INCORPORATED SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------------- -------------- -------------- -------------- -------------- --------------
Net sales. . . . . . . . $ 80,810 $ 151,899 $ 260,857 $ 55,633 $ (15,339) $ 533,860
Cost of sales. . . . . . 56,389 84,740 150,112 50,309 (15,339) 326,211
-------------- -------------- -------------- -------------- -------------- --------------
Gross profit . . . . . . 24,421 67,159 110,745 5,324 -- 207,649
Operating expenses:
Selling, technical and
administrative . . . . . 31,966 38,866 68,845 4,442 -- 144,119
Amortization of
intangibles. . . . . . . 3,095 2,489 473 27 -- 6,084
Impairment and
restructuring costs. . . 9,108 61,986 1,972 -- -- 73,066
-------------- -------------- -------------- -------------- -------------- --------------
44,169 103,341 71,290 4,469 -- 223,269
-------------- -------------- -------------- -------------- -------------- --------------
Operating profit (loss). (19,748) (36,182) 39,455 855 -- (15,620)
Other income (expense):
Equity in earnings of
subsidiaries . . . . . . (29,106) 24,551 (879) -- 5,434 --
Interest income. . . . . 127 176 479 20 -- 802
Interest expense . . . . (15,539) (11,261) 787 (2,278) -- (28,291)
Miscellaneous, net . . . 950 (14) (2,146) 7 -- (1,203)
-------------- -------------- -------------- -------------- -------------- --------------
(43,568) 13,452 (1,759) (2,251) 5,434 (28,692)
-------------- -------------- -------------- -------------- -------------- --------------
Earnings (loss) before
taxes. . . . . . . . . . (63,316) (22,730) 37,696 (1,396) 5,434 (44,312)
Income taxes benefit
(expense). . . . . . . . 34,404 (6,376) (13,145) 627 -- 15,510
Minority interest. . . . -- -- -- (110) -- (110)
-------------- -------------- -------------- -------------- -------------- --------------
Net earnings (loss). . . $ (28,912) $ (29,106) $ 24,551 $ (879) $ 5,434 $ (28,912)
============== ============== ============== ============== ============== ==============
CONSOLIDATED STATEMENTS OF EARNINGS YEAR ENDED MARCH 31, 2001
MACDERMID
UNRESTRICTED INCORPORATED
MACDERMID GUARANTOR NONGUARANTOR NONGUARANTOR AND
INCORPORATED SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------------- -------------- -------------- -------------- -------------- --------------
Net sales . . . . . . . . $ 165,367 $ 246,335 $ 412,672 $ 21,978 $ (51,576) $ 794,776
Cost of sales . . . . . . 115,020 144,421 230,694 20,651 (51,576) 459,210
-------------- -------------- -------------- -------------- -------------- --------------
Gross profit. . . . . . . 50,347 101,914 181,978 1,327 -- 335,566
Operating expenses:
Selling, technical and
administrative. . . . . . 43,968 52,558 112,936 1,611 -- 211,073
Amortization of
intangibles . . . . . . . 6,101 10,367 3,804 369 -- 20,641
Impairment,
restructuring and merger
costs . . . . . . . . . . -- 12,081 855 -- -- 12,936
-------------- -------------- -------------- -------------- -------------- --------------
50,069 75,006 117,595 1,980 -- 244,650
-------------- -------------- -------------- -------------- -------------- --------------
Operating profit (loss) . 278 26,908 64,383 (653) -- 90,916
Other income (expense):
Equity in earnings of
subsidiaries. . . . . . . 39,928 38,003 (1,010) -- (76,921) --
Interest income . . . . . 394 1,118 488 7 -- 2,007
Interest expense. . . . . (13,272) (14,762) (6,491) (726) -- (35,251)
Miscellaneous, net. . . . 203 (2,409) (817) 288 -- (2,735)
-------------- -------------- -------------- -------------- -------------- --------------
27,253 21,950 (7,830) (431) (76,921) (35,979)
-------------- -------------- -------------- -------------- -------------- --------------
Earnings (loss) before
taxes . . . . . . . . . . 27,531 48,858 56,553 (1,084) (76,921) 54,937
Income taxes benefit
(expense) . . . . . . . . 7,273 (8,930) (18,550) 74 -- (20,133)
-------------- -------------- -------------- -------------- -------------- --------------
Net earnings (loss) . . . $ 34,804 $ 39,928 $ 38,003 $ (1,010) $ (76,921) $ 34,804
============== ============== ============== ============== ============== ==============
CONSOLIDATED BALANCE SHEET DECEMBER 31, 2002
MACDERMID
UNRESTRICTED INCORPORATED
MACDERMID GUARANTOR NONGUARANTOR NONGUARANTOR AND
INCORPORATED SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
------------- -------------- -------------- -------------- -------------- -------------
ASSETS
- ------------------------
Current assets:
Cash and equivalents . . $ 14,153 $ 2,314 $ 15,214 $ 338 $ -- $ 32,019
Accounts receivables,
net. . . . . . . . . . . 10,561 21,322 98,228 12,695 -- 142,806
Due (to)/from affiliates 132,264 (69,017) (36,066) (27,181) -- --
Inventories. . . . . . . 9,002 26,269 42,497 7,970 -- 85,738
Prepaid expenses . . . . 488 1,323 3,646 -- -- 5,457
Deferred income taxes. . 17,059 -- 4,587 952 -- 22,598
------------- -------------- -------------- -------------- -------------- -------------
Total current assets . . 183,527 (17,789) 128,106 (5,226) -- 288,618
------------- -------------- -------------- -------------- -------------- -------------
Property, plant and
equipment, net . . . . . 15,100 42,779 55,129 19,573 -- 132,581
Goodwill, net. . . . . . 21,680 68,574 103,946 -- -- 194,200
Intangibles, net . . . . -- 6,686 25,049 90 -- 31,825
Deferred income taxes. . 31,312 -- 185 689 -- 32,186
Investments in
subsidiaries . . . . . . 314,126 225,676 (21,318) -- (518,484) --
Other assets, net. . . . 8,173 10,130 8,537 1,643 -- 28,483
------------- -------------- -------------- -------------- -------------- -------------
$ 573,918 $ 336,056 $ 299,634 $ 16,769 $ (518,484) $ 707,893
============= ============== ============== ============== ============== =============
MACDERMID
UNRESTRICTED INCORPORATED
MACDERMID GUARANTOR NONGUARANTOR NONGUARANTOR AND
INCORPORATED SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------------- -------------- -------------- -------------- -------------- --------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Current liabilities:
Notes payable. . . . . . . $ -- $ -- $ 1,792 $ 3,332 $ -- $ 5,124
Current installments of
long term obligations. . . -- 146 391 5,693 -- 6,230
Accounts payable . . . . . 11,208 7,975 30,347 14,289 -- 63,819
Dividend payable . . . . . 646 -- -- -- -- 646
Accrued compensation . . . 2,883 2,756 5,244 677 -- 11,560
Accrued interest . . . . . 12,953 -- 11 79 -- 13,043
Accrued expenses other . . 16,061 7,494 19,336 2,068 -- 44,959
Income taxes . . . . . . . (4,763) 2,804 6,201 (515) -- 3,727
-------------- -------------- -------------- -------------- -------------- --------------
Total current liabilities. 38,988 21,175 63,322 25,623 -- 149,108
Long-term obligations. . . 301,732 705 719 8,657 -- 311,813
Accrued postretirement . . 15,462 -- 4,226 -- -- 19,688
Other long term. . . . . . (2) 50 972 118 -- 1,138
Deferred income taxes. . . -- -- 4,719 816 -- 5,535
-------------- -------------- -------------- -------------- -------------- --------------
Total liabilities . . . 356,180 21,930 73,958 35,214 -- 487,282
Minority interests . . . . -- -- -- 2,873 -- 2,873
Shareholders' equity:
Common stock . . . . . . . 46,640 (50) 3,760 3 (3,713) 46,640
Additional paid-in capital 21,261 207,741 109,614 10,260 (327,615) 21,261
Retained earnings. . . . . 225,387 115,397 115,205 (29,917) (200,685) 225,387
Accumulated other
comprehensive income:
Foreign currency
translation. . . . . . . . (5,372) (8,962) (2,903) (1,664) 13,529 (5,372)
Additional minimum
pension liability. . . . . (10,414) -- -- -- -- (10,414)
Less cost common shares
in treasury. . . . . . . . (59,764) -- -- -- -- (59,764)
-------------- -------------- -------------- -------------- -------------- --------------
Total shareholders' equity 217,738 314,126 225,676 (21,318) (518,484) 217,738
-------------- -------------- -------------- -------------- -------------- --------------
$ 573,918 $ 336,056 $ 299,634 $ 16,769 $ (518,484) $ 707,893
============== ============== ============== ============== ============== ==============
CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001
MACDERMID
UNRESTRICTED INCORPORATED
MACDERMID GUARANTOR NONGUARANTOR NONGUARANTOR AND
INCORPORATED SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
------------- -------------- -------------- -------------- -------------- -------------
ASSETS
- ------------------------
Current assets:
Cash and equivalents . . $ 4,419 $ 1,881 $ 10,261 $ 506 $ -- $ 17,067
Accounts receivables,
net. . . . . . . . . . . 14,361 28,107 106,645 15,117 -- 164,230
Due (to)/from affiliates 246,066 (184,474) (39,295) (22,297) -- --
Inventories. . . . . . . 17,442 35,849 49,314 8,429 -- 111,034
Prepaid expenses . . . . 779 2,707 4,582 -- -- 8,068
Deferred income taxes. . 9,781 -- 3,451 599 -- 13,831
------------- -------------- -------------- -------------- -------------- -------------
Total current assets . . 292,848 (115,930) 134,958 2,354 -- 314,230
------------- -------------- -------------- -------------- -------------- -------------
Property, plant and
equipment, net . . . . . 20,231 57,730 54,702 19,819 -- 152,482
Goodwill, net. . . . . . 16,056 80,221 99,187 27,107 -- 222,571
Intangibles, net . . . . -- 11,219 26,106 100 -- 37,425
Deferred income taxes. . 28,376 -- 2,624 1,109 -- 32,109
Investments in
subsidiaries . . . . . . 231,820 224,640 9,192 -- (465,652) --
Other assets, net. . . . 12,153 9,325 9,649 941 -- 32,068
------------- -------------- -------------- -------------- -------------- -------------
$ 601,484 $ 267,205 $ 336,418 $ 51,430 $ (465,652) $ 790,885
============= ============== ============== ============== ============== =============
MACDERMID
UNRESTRICTED INCORPORATED
MACDERMID GUARANTOR NONGUARANTOR NONGUARANTOR AND
INCORPORATED SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------------- -------------- -------------- -------------- -------------- --------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Current liabilities:
Notes payable. . . . . . . $ -- $ -- $ 5,898 $ 7,063 $ -- $ 12,961
Current installments of
long term obligations. . . -- 148 482 4,984 -- 5,614
Accounts payable . . . . . 8,630 9,091 28,649 15,018 -- 61,388
Dividend payable . . . . . 643 -- -- -- -- 643
Accrued compensation . . . 1,830 3,270 4,334 634 -- 10,068
Accrued interest . . . . . 14,486 -- 21 -- -- 14,507
Accrued expenses other . . 21,639 14,980 19,783 1,909 -- 58,311
Income taxes . . . . . . . (2,533) 7,785 5,214 2 -- 10,468
-------------- -------------- -------------- -------------- -------------- --------------
Total current liabilities. 44,695 35,274 64,381 29,610 -- 173,960
Long-term obligations. . . 349,140 802 34,733 9,113 -- 393,788
Accrued postretirement . . 4,218 -- 8,055 35 -- 12,308
Other long term. . . . . . -- 71 210 -- -- 281
Deferred income taxes. . . -- (762) 4,399 727 -- 4,364
-------------- -------------- -------------- -------------- -------------- --------------
Total liabilities. . . . . 398,053 35,385 111,778 39,485 -- 584,701
Minority interests . . . . -- -- -- 2,753 -- 2,753
Shareholders' equity:
Common stock . . . . . . . 46,410 (99) 3,809 3 (3,713) 46,410
Additional paid-in capital 16,923 125,936 100,248 10,260 (236,444) 16,923
Retained earnings. . . . . 218,619 126,625 135,166 (1,891) (259,900) 218,619
Accumulated other
comprehensive income:
Foreign currency
translation. . . . . . . . (16,349) (20,642) (14,583) 820 34,405 (16,349)
Additional minimum
pension liability. . . . . (2,954) -- -- -- -- (2,954)
Hedging activities . . . . (276) -- -- -- -- (276)
Less cost common shares
in treasury. . . . . . . . (58,942) -- -- -- -- (58,942)
-------------- -------------- -------------- -------------- -------------- --------------
Total shareholders' equity 203,431 231,820 224,640 9,192 (465,652) 203,431
-------------- -------------- -------------- -------------- -------------- --------------
$ 601,484 $ 267,205 $ 336,418 $ 51,430 $ (465,652) $ 790,885
============== ============== ============== ============== ============== ==============
CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2002
MACDERMID
UNRESTRICTED INCORPORATED
MACDERMID GUARANTOR NONGUARANTOR NONGUARANTOR AND
INCORPORATED SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------------- -------------- -------------- -------------- -------------- --------------
Cash flows from
operating activities:
Net earnings. . . . . . . . 9,349 28,969 8,467 (28,026) (9,410) 9,349
Adjustments to reconcile
net earnings to net cash
provided by operating
activities:
Depreciation. . . . . . . . 2,372 6,293 7,696 4,598 -- 20,959
Amortization. . . . . . . . 3,208 1,907 1,084 27 -- 6,226
Provision for bad debts . . 750 468 3,555 519 -- 5,292
Deferred income taxes . . . (7,683) 40 2,351 298 -- (4,994)
Stock compensation. . . . . 3,376 606 46 -- -- 4,028
Minority interests. . . . . -- -- -- 120 -- 120
Equity in
(earnings)/losses of
subsidiaries. . . . . . . . (28,969) (8,467) 28,026 -- 9,410 --
Impairment charge . . . . . 470 7,512 -- 27,389 -- 35,371
Changes in assets and
liabilities net of effects
of acquisitions and
dispositions:
Decrease (increase) in
receivables . . . . . . . . 3,048 6,318 14,241 4,077 -- 27,684
Decrease (increase) due
to/from affiliates. . . . . 764 7,361 (9,185) 1,060 -- --
Decrease (increase) in
inventories . . . . . . . . 8,440 9,579 11,294 1,758 -- 31,071
Decrease (increase) in
prepaid expenses. . . . . . 291 1,384 1,209 -- -- 2,884
Increase (decrease) in
accounts payable. . . . . . 2,581 (1,116) (2,064) (3,052) -- (3,651)
Increase (decrease) in
accrued expenses. . . . . . 9,164 (5,856) (6,838) 75 -- (3,455)
Increase (decrease) in
income tax liabilities. . . (4,765) (4,982) 704 (466) -- (9,509)
Other . . . . . . . . . . . 13,655 (1,305) (6,792) (740) -- 4,818
-------------- -------------- -------------- -------------- -------------- --------------
Cash flows provided by
operating activities. . . . 16,051 48,711 53,794 7,637 -- 126,193
-------------- -------------- -------------- -------------- -------------- --------------
Cash flows from
Investing activities:
Capital expenditures. . . . (1,020) (2,303) (2,575) (1,379) -- (7,277)
Proceeds from
disposition of fixed
assets. . . . . . . . . . . 507 1,998 226 159 -- 2,890
Net cash flows (used in)
-------------- -------------- -------------- -------------- -------------- --------------
investing activities. . . . (513) (305) (2,349) (1,220) -- (4,387)
-------------- -------------- -------------- -------------- -------------- --------------
Financing activities:
Short-term (repayments)
borrowings - net. . . . . . 47,345 (34,516) (25,019) (6,166) -- (18,356)
Long-term borrowings. . . . 79,599 -- -- 3,012 -- 82,611
Long-term repayments. . . . (158,507) -- (6,198) (3,571) -- (168,276)
Exercise of stock options . 360 -- -- -- -- 360
Acquisition of treasury
stock . . . . . . . . . . . (822) -- -- -- -- (822)
Dividends paid. . . . . . . 26,221 (13,457) (15,345) -- -- (2,581)
-------------- -------------- -------------- -------------- -------------- --------------
Net cash flows provided
by/(used in) financing
activities. . . . . . . . . (5,804) (47,973) (46,562) (6,725) -- (107,064)
-------------- -------------- -------------- -------------- -------------- --------------
Effect of exchange rate
changes on cash and
cash equivalents. . . . . . -- -- 70 140 -- 210
-------------- -------------- -------------- -------------- -------------- --------------
Net increase (decrease)
in cash and cash
equivalents . . . . . . . . 9,734 433 4,953 (168) -- 14,952
Cash and cash
equivalents at beginning
of year . . . . . . . . . . 4,419 1,881 10,261 506 -- 17,067
-------------- -------------- -------------- -------------- -------------- --------------
Cash and cash
equivalents at end of
year. . . . . . . . . . . . $ 14,153 $ 2,314 $ 15,214 $ 338 $ -- $ 32,019
============== ============== ============== ============== ============== ==============
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED DECEMBER 31, 2001
MACDERMID
UNRESTRICTED INCORPORATED
MACDERMID GUARANTOR NONGUARANTOR NONGUARANTOR AND
INCORPORATED SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------------- -------------- -------------- -------------- -------------- --------------
Cash flows from
operating activities:
Net earnings. . . . . . . . (28,912) (29,106) 24,551 (879) 5,434 (28,912)
Adjustments to reconcile
net earnings to net cash
provided by operating
activities:
Depreciation. . . . . . . . 2,998 5,736 6,035 3,221 -- 17,990
Amortization. . . . . . . . 3,095 2,489 473 27 -- 6,084
Provision for bad debts . . 1,774 1,877 2,072 263 -- 5,986
Deferred income taxes . . . (27,134) (319) 421 (918) -- (27,950)
Stock compensation. . . . . 664 -- -- -- -- 664
Minority interests. . . . . -- -- -- 110 -- 110
Equity in
(earnings)/losses of
subsidiaries. . . . . . . . 29,106 (24,551) 879 -- (5,434) --
Impairment charge . . . . . 7,720 42,110 1,972 -- -- 51,802
Changes in assets and
liabilities net of effects
of acquisitions and
dispositions:
Decrease (increase) in
receivables . . . . . . . . 5,663 6,257 10,447 2,251 -- 24,618
Decrease (increase) due
to/from affiliates. . . . . (4,247) (772) 5,221 (202) -- --
Decrease (increase) in
inventories . . . . . . . . 10,280 13,323 5,539 1,194 -- 30,336
Decrease (increase) in
prepaid expenses. . . . . . (1,512) (259) 45 17 -- (1,709)
Increase (decrease) in
accounts payable. . . . . . (5,331) (5,914) (5,352) (3,502) -- (20,099)
Increase (decrease) in
accrued expenses. . . . . . 17,755 (528) (2,389) (569) -- 14,269
Increase (decrease) in
income tax liabilities. . . 1,477 3,650 (5,127) (102) -- (102)
Other . . . . . . . . . . . (5,043) 14,467 1,785 (731) -- 10,478
-------------- -------------- -------------- -------------- -------------- --------------
Cash flows provided by
operating activities: . . . 8,353 28,460 46,572 180 -- 83,565
-------------- -------------- -------------- -------------- -------------- --------------
Cash flows from
investing activities:
Capital expenditures. . . . (242) (1,023) (2,643) (3,026) -- (6,934)
Proceeds from
disposition of fixed
assets. . . . . . . . . . . 202 7 1,974 248 -- 2,431
Net cash flows (used in)
-------------- -------------- -------------- -------------- -------------- --------------
investing activities. . . . (40) (1,016) (669) (2,778) -- (4,503)
-------------- -------------- -------------- -------------- -------------- --------------
Financing activities:
Short-term (repayments)
borrowings - net. . . . . . 83,552 (11,223) (74,783) (368) -- (2,822)
Long-term borrowings. . . . 336,500 -- 47,357 4,489 -- 388,346
Long-term repayments. . . . (428,406) (9,812) (7,427) (2,456) -- (448,101)
Bond financing fees . . . . (8,837) -- -- -- -- (8,837)
Acquisition of treasury
stock . . . . . . . . . . . (635) -- -- -- -- (635)
Dividends paid. . . . . . . 9,629 (6,761) (4,797) -- -- (1,929)
-------------- -------------- -------------- -------------- -------------- --------------
Net cash flows provided
by/(used in) financing
activities. . . . . . . . . (8,197) (27,796) (39,650) 1,665 -- (73,978)
-------------- -------------- -------------- -------------- -------------- --------------
Effect of exchange rate
changes on cash and
cash equivalents. . . . . . 2 -- (577) 12 -- (563)
-------------- -------------- -------------- -------------- -------------- --------------
Net increase (decrease)
in cash and cash
equivalents . . . . . . . . 118 (352) 5,676 (921) -- 4,521
Cash and cash
equivalents at beginning
of year . . . . . . . . . . 4,301 2,233 4,585 1,427 -- 12,546
-------------- -------------- -------------- -------------- -------------- --------------
Cash and cash
equivalents at end of
year. . . . . . . . . . . . $ 4,419 $ 1,881 $ 10,261 $ 506 $ -- $ 17,067
============== ============== ============== ============== ============== ==============
CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED MARCH 31, 2001
MACDERMID
UNRESTRICTED INCORPORATED
MACDERMID GUARANTOR NONGUARANTOR NONGUARANTOR AND
INCORPORATED SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------------- -------------- -------------- -------------- -------------- --------------
Cash flows from
operating activities:
Net earnings. . . . . . . . 34,804 39,928 38,003 (1,010) (76,921) 34,804
Adjustments to reconcile
net earnings to net cash
provided by operating
activities:
Depreciation. . . . . . . . 3,990 8,738 8,226 1,239 -- 22,193
Amortization. . . . . . . . 6,101 10,367 3,804 369 -- 20,641
Provision for bad debts . . 1,641 1,222 946 50 -- 3,859
Deferred income taxes . . . (2,573) (4,899) 2,056 (63) -- (5,479)
Stock compensation. . . . . 28 -- -- -- -- 28
Equity in
(earnings)/losses of
subsidiaries. . . . . . . . (39,928) (38,003) 1,010 -- 76,921 --
Impairment charge . . . . . -- 3,945 855 -- -- 4,800
Changes in assets and
liabilities net of effects
of acquisitions and
dispositions:
Decrease (increase) in
receivables . . . . . . . . 12,836 (9,092) (11,863) (623) -- (8,742)
Decrease (increase) due
to/from affiliates. . . . . 35,406 191,412 (246,509) 19,691 -- --
Decrease (increase) in
inventories . . . . . . . . 4,752 (12,576) (6,838) (1,469) -- (16,131)
Decrease (increase) in
prepaid expenses. . . . . . 2,156 1,081 (2,783) (19) -- 435
Increase (decrease) in
accounts payable. . . . . . (2,849) (2,996) 1,462 4,491 -- 108
Increase (decrease) in
accrued expenses. . . . . . (7,639) (825) 1,695 1,677 -- (5,092)
Increase (decrease) in
income tax liabilities. . . (1,214) (451) 7,917 (434) -- 5,818
Other . . . . . . . . . . . 58,911 (142,953) 91,799 (5,929) -- 1,828
-------------- -------------- -------------- -------------- -------------- --------------
Cash flows provided by/
(used in) operating
activities. . . . . . . . . 106,422 44,898 (110,220) 17,970 -- 59,070
-------------- -------------- -------------- -------------- -------------- --------------
Cash flows from
Investing activities:
Capital expenditures. . . . (5,193) (3,019) (11,443) (2,782) -- (22,437)
Proceeds from
disposition of fixed
assets. . . . . . . . . . . 3,986 (1,257) 3,982 73 -- 6,784
Acquisition of
businesses. . . . . . . . . (129,435) (34,667) 95,129 (19,657) -- (88,630)
Disposition of
businesses. . . . . . . . . 550 -- 9,415 -- -- 9,965
-------------- -------------- -------------- -------------- -------------- --------------
Net cash flows provided
by/(used in) investing
activities. . . . . . . . . (130,092) (38,943) 97,083 (22,366) -- (94,318)
-------------- -------------- -------------- -------------- -------------- --------------
Financing activities:
Short-term (repayments)
borrowings - net. . . . . . 18,804 (34,701) (4,873) 6,021 -- (14,749)
Long-term borrowings. . . . 17,000 50,000 38,344 -- -- 105,344
Long-term repayments. . . . (23,673) (24,382) (9,578) -- -- (57,633)
Acquisition of treasury
stock . . . . . . . . . . . (196) -- -- -- -- (196)
Dividends paid. . . . . . . 10,295 -- (12,788) -- -- (2,493)
All other . . . . . . . . . -- 2,632 (2,632) -- -- --
-------------- -------------- -------------- -------------- -------------- --------------
Net cash flows provided
by/(used in) financing
activities. . . . . . . . . 22,230 (6,451) 8,473 6,021 -- 30,273
-------------- -------------- -------------- -------------- -------------- --------------
Effect of exchange rate
changes on cash and
cash equivalents. . . . . . (1) 4 (2,400) (198) -- (2,595)
-------------- -------------- -------------- -------------- -------------- --------------
Net increase (decrease)
in cash and cash
equivalents . . . . . . . . (1,441) (492) (7,064) 1,427 -- (7,570)
Cash and cash
equivalents at beginning
of year . . . . . . . . . . 5,742 2,725 11,649 -- -- 20,116
-------------- -------------- -------------- -------------- -------------- --------------
Cash and cash
equivalents at end of
year. . . . . . . . . . . . $ 4,301 $ 2,233 $ 4,585 $ 1,427 $ -- $ 12,546
============== ============== ============== ============== ============== ==============
MANAGEMENT'S STATEMENT OF FINANCIAL RESPONSIBILITY
MacDermid, Incorporated (Logo)
245 Freight Street
Waterbury, CT 06702
To The Shareholders
MacDermid, Incorporated
The financial information in this report, including the audited
consolidated financial statements, has been prepared by management. Preparation
of consolidated financial statements and related data involves the use of
judgment. Accounting principles used in preparing consolidated financial
statements are those that are generally accepted in the United States.
To safeguard Corporate assets, it is important to have a sound but dynamic
system of internal controls and procedures that balances benefits and costs.
The Corporation employs professional financial managers whose responsibilities
include implementing and overseeing the financial control system, reporting on
management's stewardship of assets entrusted to it by share owners and
performing accurate and proper maintenance of the accounts.
Management has long recognized its responsibility for conducting the
affairs of the Corporation and its affiliates in an ethical and socially
responsible manner. MacDermid, Incorporated is dedicated to the highest
standards of integrity. Integrity is not an occasional requirement, but a
continuing commitment.
KPMG LLP conducts an objective, independent review of management's
fulfillment of its obligations relating to the fairness of reported operating
results and financial condition. Their report for 2002 appears below this
statement.
The Audit Committee of the Board of Directors, consisting solely of
Directors independent of MacDermid, Incorporated, maintains an ongoing appraisal
on behalf of the share owners of the effectiveness of the independent auditors
and the Corporation's staff of financial and operating management with respect
to the financial and internal controls.
/s/Gregory M. Bolingbroke /s/Daniel H. Leever
Senior Vice President, Treasurer and Corporate Controller Chairman of the
Board and Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
KPMG LLP (Logo)
Certified Public Accountants
One Financial Plaza
Hartford, CT 06103-4103
The Board of Directors and Shareholders
MacDermid, Incorporated
We have audited the accompanying consolidated balance sheets of MacDermid,
Incorporated and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of earnings, comprehensive income, cash flows and
changes in shareholders' equity for the year ended December 31, 2002, the nine
months ended December 31, 2001 and the year ended March 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MacDermid,
Incorporated and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for the year ended December 31, 2002,
the nine months ended December 31, 2001 and the year ended March 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to Consolidated Financial Statements, Summary of
Significant Accounting Policies, effective April 1, 2001, the Corporation: 1)
changed its method of accounting for employee stock options by adopting the fair
value expense recognition provisions of Statement of Financial Accounting
Standards ("SFAS") 123, Accounting for Stock-Based Compensation, 2) changed its
method of accounting for derivatives to conform to the provisions of SFAS133,
Accounting for Derivative Instruments and Hedging Activities, and 3) changed its
method of accounting for goodwill and other intangibles to conform to the
provisions of SFAS142, Goodwill and Other Intangible Assets.
/s/KPMG LLP
February 4, 2003
FIVE YEAR SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Twelve Months Ended Nine Months Ended Twelve Months Ended
December 31, December 31, March 31,
2002 2001 2001 2000 1999
OPERATING RESULTS
- -------------------------------------------- -------------------- ------------------- -------- ---------- --------
Net sales. . . . . . . . . . . . . . . . . . $ 687,561 $ 533,860 $794,776 $ 758,080 $612,801
Income (loss) before extraordinary charge. . $ 9,349 $ (28,912) $ 34,804 $ 49,120 $ 55,626
Net earnings (loss). . . . . . . . . . . . . $ 9,349 $ (28,912) $ 34,804 $ 45,358 $ 55,626
Diluted earnings (loss) per common share . . $ 0.29 $ (0.91) $ 1.07 $ 1.40 $ 1.72
FINANCIAL POSITION AT YEAR END
- -------------------------------------------- -------------------- ------------------- -------- ---------- --------
Total assets . . . . . . . . . . . . . . . . $ 707,893 $ 790,885 $884,825 $ 790,492 $737,289
Long-term debt (includes short-term portion) $ 318,043 $ 399,402 $461,136 $ 406,697 $406,381
SHARE DATA
- -------------------------------------------- -------------------- ------------------- -------- ---------- --------
Cash dividends per common share. . . . . . . $ 0.08 $ 0.06 $ 0.08 $ 0.08 $ 0.08
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(In thousands, except share and per share amounts)
Fiscal Year 2002 by Quarters
----------- -------- ---------- ---------- ----------
March June September December Total
----------- -------- ---------- ---------- ----------
Net sales. . . . . . . . . . . . . $ 166,956 $176,722 $ 168,146 $ 175,737 $ 687,561
Gross profit . . . . . . . . . . . $ 69,421 $ 75,970 $ 70,964 $ 66,412 $ 282,767
Net earnings (loss). . . . . . . . $ 7,332 $ 9,673 $ 8,665 $ (16,321) $ 9,349
Diluted earnings per common
share. . . . . . . . . . . . . . . $ 0.23 $ 0.30 $ 0.27 $ (0.51) $ 0.29
Transition Year 2001 by Quarters
----------- -------- ---------- ---------- ----------
March June September December Total
----------- -------- ---------- ---------- ----------
Net sales. . . . . . . . . . . . . n/a $185,094 $ 171,663 $ 177,103 $ 533,860
Gross profit . . . . . . . . . . . n/a $ 72,673 $ 66,306 $ 68,670 $ 207,649
Net earnings (loss). . . . . . . . n/a $ 7,899 $ 4,170 $ (40,981) $ (28,912)
Diluted earnings per common share. n/a $ 0.24 $ 0.13 $ (1.28) $ (0.91)
MARKET RANGE TRADING RECORD
2002 2001
----- -----
QUARTER . . . . . . . . . High Low High Low
------ ------ ------ ------
March . . . . . . . . . . $23.44 $16.49 $21.56 $15.70
June. . . . . . . . . . . $23.49 $19.37 $18.85 $16.00
September . . . . . . . . $22.16 $16.97 $18.00 $12.40
December. . . . . . . . . $24.30 $19.18 $17.60 $11.49
Closing price December 31 $22.85 $16.95
DIVIDEND RECORD
2002 2001
------- ------
Record Payable Amount Record Payable Amount
Date Date Declared Date Date Declared
-------- ------- --------- -------- ------- ---------
QUARTER
March . . 3/15/02 4/2/02 $ 0.02 3/15/01 4/2/01 $ 0.02
June. . . 6/17/02 7/1/02 $ 0.02 6/15/01 7/3/01 $ 0.02
September 9/16/02 10/1/02 $ 0.02 9/15/01 10/2/01 $ 0.02
December. 12/16/02 1/3/03 $ 0.02 12/15/01 1/8/02 $ 0.02
CORPORATE INFORMATION
DIRECTORS:
DANIEL H. LEEVER, Chairman of the Board and Chief Executive Officer
DONALD G. OGILVIE, Executive Vice President,American Bankers Association
JOSEPH M. SILVESTRI, Vice President of Citicorp Venture Capital Ltd.
JAMES C. SMITH, Chairman of the Board and Chief Executive
Officer, Webster Financial Corporation
T. QUINN SPITZER, JR., Partner of McHugh Consulting
ROBERT ECKLIN, Executive Vice President of Corning
CORPORATE HEADQUARTERS:
MacDermid, Incorporated
245 Freight Street
Waterbury, Connecticut 06702
(203) 575-5700
AUDITORS:
KPMG LLP
Certified Public Accountants
One Financial Plaza
Hartford, CT 06103-4103
SEC FORM 10-K:
The Annual Report and the SEC Form 10-K report, as well as, periodic reports on
SEC Form 10-Q report are available at the Corporation's website
(www.macdermid.com) as soon as practicable after the reports are filed with the
SEC. These reports are also available without charge by written request to:
Corporate Secretary
MacDermid, Incorporated
245 Freight Street
Waterbury, CT 06702
REGISTRAR OF STOCK AND TRANSFER AGENT:
The Bank of New York, Website - stock.bankofny.com
Send Email to: Shareowner - svcd@bankofny.com
SHAREHOLDERS' QUESTIONS:
Shareholders with questions concerning non-receipt of dividend checks, obtaining
a duplicate 1099 statement, or of a general nature can call 1-877-268-5209 or
should write to:
The Bank of New York
Shareholder Relations Department - 11E
P.O. Box 11258 - Church Street Station
New York, NY 10286
Send certificates for transfer and address changes to:
The Bank of New York
Receive and Deliver Department
P.O. Box 11002 - Church Street Station
New York, NY 10286
A systematic investment service is available to all MacDermid shareholders. The
service permits investment of MacDermid, Incorporated dividends and voluntary
cash payments in additional shares of MacDermid stock.
MARKET & DIVIDEND INFORMATION:
The common shares of MacDermid, Incorporated are traded on the New York Stock
Exchange (Symbol: MRD). Price and shares traded are listed in principal daily
newspapers and are supplied by NYSE. Approximate number of Registered Holders as
of March 1, 2003 is 800. CUSIP-554273 102.
ANNUAL MEETING:
The Annual Meeting of Shareholders will be held on Wednesday, April 30, 2003 at
3:00 p.m., at the Corporate Headquarters, 245 Freight Street, Waterbury, CT.
INVESTORS INFORMATION SESSION:
In addition to the Annual Meeting of Shareholders noted above, MacDermid will
also be holding a separate investors information session on Friday, May 2, 2003
at the Embassy Suites in Omaha, Nebraska at 2:00 p.m.