Exhibit 13
2004 Annual Report to Shareholders
Message to Shareholders
Dear Shareholder,
In 2004, net sales were $660.8 million, compared to $619.9 in 2003. Net earnings
were $53.2 million, or $1.72 per share. As we pointed out last year, GAAP
earnings in 2003 of $56.4 million, or $1.80 per share, included income we do not
take credit for. We prefer to compare to the number our board of directors uses
both to evaluate the business and for executive compensation purposes. On that
basis, in 2003 we earned $1.55 per share(1). We consider the 11% increase to be
solid.
We again reported outstanding Owner Earnings(2), which we define as cash from
operations less net capital expenditures. Owner Earnings in 2004 were $76.7
million or 11.6% of sales. This outstanding cash generation enabled us to end
the year with $137.8 million of cash on our balance sheet. We have total
long-term obligations of $301.3 million (consisting primarily of long-term
bonds), resulting in net debt of $163.5 million
Earnings quality continues to be good. Operating profit was 16% of sales. Return
on average equity was strong at 19.6%. Net capital expenditures were a modest
$8.5 million, or 1.3% of sales, a very low amount by any standards. This
achievement can be attributed to our constant focus on justifying every cent of
your funds before it is spent.
Yes We Can! You will note throughout this report a new branding initiative for
MacDermid. Yes We Can! is designed to send the message to our customers that
they can depend on us to solve their production problems, anticipate their
future needs, and generally be seen as hyper-responsive. It is also a prime
example of differentiating costs. In the paragraph above we mentioned capital
spending and the fact that we justify spending every cent of your funds. Yet,
here we are embarking on a branding exercise that will be quite costly. So,
which is it, to spend or not to spend? The answer is both. Culturally, we think
of ourselves as a team of cost-conscious owner operators. Clearly, the
difference between "must have" and "nice to have" expenditures are solely in the
eye of the beholder. If we are not vigilant, we could easily end up wasting
your money. Ask anyone at MacDermid - we are vigilant. Being frugal is one of
our core values. Last year we produced $76+ million in owner earnings on $660
million in revenue. This is important to you as a shareholder. The ability to
generate owner earnings while producing greater value to our customers gives us
options to build long-term value that we wouldn't otherwise have.
Last year we said we believed MacDermid was entering a new chapter. I believe
it is worthwhile exploring the chapters we have completed thus far. Since
beginning this journey in fiscal 1991, we have gone through three distinct
phases. Phase I, which began in the early 90's, focused on internal
restructuring - a rebuilding of our foundation. Phase II started in 1995 and
focused on internal growth and acquisition investment. The last phase, which
focused on cash flow, began in 2001 when we experienced the 100 year flood in
the electronics business, and ended in 2003. Let's review each phase briefly.
- - Phase I - 1991-1995 - Building the foundation. We started this phase in a
full blown recession. Our company needed to change. We were far too internally
focused. We had enjoyed decades of steady growth, but our markets had become
more mature. We were wholly unprepared for this new reality. We responded by
restructuring. We closed six of eight plants in the U.S., divested our
microelectronics business, and installed new management. The results?
1991 1995
------ ------
Net sales (in millions). . . . . . . . . . . . . . . . $151.4 $182.1
====== ======
Diluted earnings per share (adjusted for stock splits) $ .21 $ .38
====== ======
Owners earnings (in millions) (2). . . . . . . . . . . $ 8.7 $ 20.1
====== ======
The defining event of Phase I was the stock buyback in 1994. Before we tendered
for our shares there were 3.5 million shares outstanding. It was almost
universally believed that with so few shares outstanding, and therefore, so
little float, a buyback would not be successful. Even if it was successful, we
would have so little float left we would lack viability as a public company.
Besides, they argued, the stock hadn't moved in ten years! Why would you want to
buy it back? We argued that we had improved the performance of the company in a
fundamental way, and that there was uncommon earnings leverage in our business
model. We just needed a little help from our end-markets to prove it. Mr. Market
(the investment community) still didn't believe us. So, in mid 1994 we tendered
for 25% of the outstanding shares. Eight hundred thousand shares traded the day
we announced the offer. So much for illiquidity! I will never forget the phone
call I received from a representative of the largest U.S.-based mutual fund who
was one of our largest shareholders. He was ecstatic we had tendered at $30 a
share when the stock had been stuck in the mid $20's for almost ten years. He
also told me that with so few shares outstanding, we would be a $20 stock after
the tender. A year later in 1995 we finally got some help from our markets. Our
EPS was double what it had been the year prior to the buyback and our stock
closed the year at $65 a share (prior to a 9:1 split since then). So much for
common wisdom.
Phase II - 1996-2000 - Strategic remake. At the end of Phase I we were almost
entirely dependent on our electronic chemicals business. It represented almost
all of our earnings. We felt we had little choice but to reduce the
concentration of risk. In this regard, we differ from most companies. Our
ownership of MacDermid is concentrated. Your CEO and many others own MRD as
their primary asset. More than 90% of my net worth is comprised of MRD stock.
100% of my investment and retirement assets are MRD. This is true of many others
at MacDermid, especially your more senior executives. Any real risk to the
entity is intolerable. Additional and important motivation to expand our
horizons came from the belief that we could implant the MacDermid culture and
business discipline on acquired businesses to add much more value than would be
the norm in acquisitions. Therefore, we embarked on a five year diversification
effort. We acquired Hercules' printing business in 1995, the W. Canning metal
finishing and Offshore Fluids business in 1998, and PTI's printing business in
1999. The results are impressive.
1995 2000
------ ------
Net sales (in millions) . . . . . . . . . . . . . . . . . $182.1 $758.1
====== ======
Diluted earnings per share (adjusted for stock splits)(1) $ .38 $ 1.52
====== ======
Owner earnings (in millions) (2). . . . . . . . . . . . . $ 20.1 $ 43.5
====== ======
Our stock peaked at $46 a share after 9 for 1 stock splits during this period
(two separate 3 for 1 splits in 1996 and 1998). On the same share count as we
had for the stock buy back, it would be $414 a share! At $46 a share, the PE
ratio was 27, quite heady for an industrial company. By 2000, in addition to
enjoying much higher earnings, our revenues were much more balanced. Thank
goodness. Little did we know that the electronics market would decline by 50%
from one day to the next. We were severely criticized for expanding into lower
growth businesses and thereby hurting our long term growth prospects. Our view
was that we would trade a lower upside for a much more assured survivability
every time.
- - Phase III - 2001-2003 - Insure survivability. We entered this period with
$461 million in long-term obligations, primarily senior bank debt. The
electronics market was a disaster. We had invested millions in a "venture
capital like" opportunity called Viatek. This was a revolutionary new technology
for producing inexpensive printed circuit boards. We had not been able to
demonstrate that Viatek carried production yields high enough to capture the
cost advantages. Then when the western market almost evaporated overnight, we
were faced with investing even more, and the goal line had been moved as a
result of hyper-efficient Asian manufacturers. The big labor savings we planned
on were simply less important when confronted with Asian prices. We wrote off a
total of $46 million related to these investments at a time when our electronics
business was in a free fall and our senior debt was at an all time high. Our
earnings tanked. The impact of the volume losses due to the hundred year flood
was approximately $1.00 in earnings per share. Not helping matters were
integration problems in some of the acquired businesses. We were unable to get
all of the acquired management to embrace our culture, especially the
accountability and discipline. This turned out to be a mixed blessing. We
experienced delays in gaining the value from some of these acquisitions. This
was especially true with W. Canning and PTI. But, by going through this exercise
we learned a powerful lesson; we have to move quickly to determine if an
acquired manager has the interest and ability to step up to our level of
intensity. Our culture is unique enough that outsiders often have difficulty
fitting in easily. In times of stress this difficulty is magnified. When we
found out they could not make it with us, we replaced the acquired managers with
our own proven managers. The results were immediate and striking.
2000 2003
------ ------
Net sales (in millions). . . . . $758.1 $619.9
====== ======
Diluted earnings per share (1) . $ 1.52 $ 1.55
====== ======
Owner earnings (in millions) (2) $ 43.5 $ 80.7
====== ======
The bad news was that while we were figuring this out, our stock went from $46
to $12 a share. Fortunately, however, our survivability was assured due to the
strength of our business model, and the speed at which the new management teams
we had placed in the acquired businesses implemented the needed changes. This
resulted in positive cash generation throughout this period. Had we been forced
to ask for more credit, it could have been a very different picture. We proved
beyond any doubt the power of the Clan MacDermid. Between 2001 and 2004 we paid
down $160 million in debt, generated $125 million in cash .after buying back
$51.8 million in stock. If we told the market in 2001 we would be doubling our
dividend soon, most would have laughed. Since then we tripled it. Yes, we proved
that the level of ownership and accountability at MacDermid is rare and
valuable.
What is the point of going back over all this history? Simply to illustrate why
we have confidence in Phase IV. Many counted us out in the early 90's when our
revenues were seemingly stuck in a rut. But we did grow. Value was created. We
diversified out of a strategic problem of over-concentration. Now we have a very
evenly balanced business concentration. Then most recently in Phase III, we
fundamentally improved the results of acquired businesses by implementing our
strong culture. Each phase required a different set of skills.
Now we are in Phase IV. Last year we discussed the MacDermid Business Process.
This is the blueprint we will use to lead us forward. This is clearly a growth
initiative. It has three parts. 1) The strategy process in which we make sure we
are investing in the right projects; those projects that address the market
needs which are most likely to result in significant growth opportunities. 2)
The operations process identifies the 'vital few' initiatives that will insure
we bridge from day-to-day projects to the longer term strategy. This insures the
organization is appropriately focused both short and long term. 3) Finally the
people process is designed to identify and develop management talent and provide
bench depth. Given the unique nature of our culture, this is critical. Yes, we
have had some success with senior management that came along with acquisitions.
But, we have also replaced many that couldn't or wouldn't step up to our
culture. As a result we believe it is critical to aggressively build our
management capacity from within.
We are a year into Phase IV, which began when Stephen Largan was appointed
President of MacDermid. It is his charge to lead the business processes and lay
the foundation for growth. This is a much different direction than we have
traveled recently, when we were focused on survival. Through this process, we
have identified and are tracking 100 initiatives across the corporation. Almost
all are directed at innovation or top line sales. This focus on initiatives to
drive organic growth is a dramatic and exciting shift in emphasis. The inherent
earnings leverage of our business model and our unwavering commitment to
discipline on capital expenditure and S G & A costs will give us outsized
benefits from any revenue growth.
In addition to the focus on organic growth, we ended the year with $137.8
million in cash on our balance sheet. It is likely that if we don't make an
investment, we will end 2005 with cash approaching $200 million. Clearly this
gives us the opportunity to supplement our organic growth with one or more
attractive acquisitions. However, our discipline and commitment to ensuring high
returns on our invested capital mean that we are extremely picky when we
evaluate a potential acquisition. To date we have been unsuccessful in finding
one that meets our high threshold for attractive returns on a risk adjusted
basis. We looked at several during 2004, but just couldn't make the numbers
work. To us, to do nothing is far better than to do something that is
ill-advised. We will always err on the side of caution. We need to have a lot of
confidence that any deal we make has sufficient margin for error in valuation
and execution. It is more likely we would acquire a small business where the
competitive landscape is more limited, or the synergies as a portion of value
would be higher. We think it is also more likely that a larger transaction will
take the form of a stock deal rather than cash. That is because it is extremely
difficult for us to win an all-cash auction in this environment of
hyper-liquidity from private equity and hedge funds. However, we have something
the private world does not - a currency other than cash. We think it is possible
that a company may want to ride our equity and corporate management team by
accepting our stock for at least a portion of the payment rather than selling
their business for cash. By participating in the upside, it is possible, and we
believe likely, that they will ultimately receive far more value than an
all-cash deal. After all, our compounded return since we began this journey is
21.1%.
We have $301.5 million face value in 9 1/8% bonds outstanding. They are callable
in mid 2006. This is an obvious use of cash if we can't find a higher returning
investment before then.
Whether we grow primarily through organic growth, acquisitions or some
combination remains to be seen. For now, we are focused on solidifying our
foundation for growth by developing a system to prioritize our internal
investments in innovation and top line sales initiatives, by building our bench
of talent, and by rolling out a corporate wide brand.
In this current phase, we are asking for the Clan MacDermid to shift direction
yet one more time. They have never failed us, and I fully expect we will be
successful this time as well. We haven't forgotten our basic philosophy, printed
on the inside front cover of this report. We won't lose sight of our frugal
nature that has bought us this far. We will embrace the strengths in our culture
and shift our orientation to grow. If we are successful, the future will be
bright indeed. Thank you for your confidence.
Sincerely,
Daniel H. Leever
Chairman of the Board and
Chief Executive Officer
(1) - 2000 AND 2003 ADJUSTED EARNINGS PER SHARE
- -------------------------------------------------------
MacDermid believes that the financial results for 2000 and 2003 should be
adjusted when compared to other periods to remove the gain that we recorded on
the option to repurchase our shares in 2003 and to remove the extraordinary
charge from the retirement of debt in 2000. A reconciliation of this
adjustments to earnings per share is shown in the table below.
2000 2003
----- ------
Net earnings per diluted share as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.40 $1.80
Add extraordinary charge from debt retirement . . . . . . . . . . . . . . . . . . . . . . . . . . .12 -
Less discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (.18)
Less cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . - (.03)
----- ------
Earnings per share from continuing operations before accounting change and extraordinary charge. 1.52 1.59
Less gain on exercise of option to repurchase our shares (net of tax) . . . . . . . . . . . . . . - (.04)
----- ------
Adjusted income from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.52 $1.55
===== ======
(2) - OWNER EARNINGS
- -----------------------
MacDermid believes that owner earnings is an appropriate measure of performance
and cash flow generation from normal business activities. It is calculated
directly from the cash flow statement as net cash flows provided by operating
activities, less capital expenditures plus proceeds received from the
disposition of fixed assets. This calculation is shown below for all periods
mentioned.
(amounts in millions)
--------------------------------------------------------
2004 2003 2000 1995 1991
---------------------- ------- ------- ------ ------
Net cash flows provided by operating activities $ 85.3 $ 91.4 $ 59.1 $20.7 $11.1
Capital Expenditures. . . . . . . . . . . . . . (12.5) (12.5) (22.4) (4.0) (3.2)
Proceeds from the disposition of fixed assets . 3.9 1.8 6.8 3.4 .8
---------------------- ------- ------- ------ ------
Owner earnings. . . . . . . . . . . . . . . . . $ 76.7 $ 80.7 $ 43.5 $20.1 $ 8.7
====================== ======= ======= ====== ======
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(in thousands of dollars, except shares and per share amounts)
Unless otherwise noted in this report, any description of us includes MacDermid,
Inc. (MacDermid) as a consolidated entity, the Advanced Surface Finishing
segment (ASF), the Printing Solutions segment (MPS), and our other corporate
entities.
CONSOLIDATED OVERVIEW
EXECUTIVE OVERVIEW
Our consolidated business consists of two business segments, Advanced Surface
Finishing and Printing Solutions. The Advanced Surface Finishing (ASF) segment
supplies chemicals used for finishing metals and non-metallic surfaces for
automotive and other industrial applications, electro-plating metal surfaces,
etching, and imaging to create electrical patterns on circuit boards for the
electronics industry, and offshore lubricants and cleaners for the offshore oil
and gas markets. The Printing Solutions (MPS) segment supplies an extensive
line of offset printing blankets, photo-polymer plates and digital printers for
use in the commercial printing and packaging industries for image transfer. In
both of our business segments, we continue to invest significant resources in
research and development and intellectual properties such as patents,
trademarks, copyrights and trade secrets as our business depends on these
activities for our financial stability and future growth.
Our products are sold in a competitive, global economy, which exposes us to
certain currency, economic and regulatory risks and opportunities. Approximately
60% of our net sales and identifiable assets for the year ended and as of
December 31, 2004, are denominated in currencies other than the U.S. dollar,
predominantly the Euro, British Pound Sterling, and the Hong Kong dollar. We do
not manage our foreign currency exposure in a manner that would eliminate the
effects of changes in foreign exchange rates on our earnings, cash flows and
fair values of assets and liabilities, and as such our financial performance
could be positively or negatively impacted by changes in foreign exchange rates
in any given reporting period. For the year ended December 31, 2004, net sales,
net earnings and net assets and liabilities were positively impacted by the
effect of foreign currency translation resulting primarily from the Euro and the
British Pound Sterling strengthening against the U.S. dollar compared to the
previous year, as discussed further below.
We focus on growing revenues and the generation of cash from operations in order
to build shareholder value. Specifically, we plan to improve top line sales
growth over the longer term by focusing on:
- - utilizing our technical service and outstanding products to penetrate
global markets for all products,
- - supporting working capital initiatives focused on maximizing cash flows
during a period of continued economic uncertainty in our primary markets,
- - emphasizing efficiency improvements throughout the organization,
- - adding new products through internal research and development, relying
heavily on our internal knowledge base,
- - strengthening the common identity of our products through a new branding
initiative called "Yes We Can!" and
- - acquiring strategically sound companies or products.
Our competitors include many large multi-national chemical firms based in
Europe, Asia, and the U.S. New competitive products or pricing policies of our
competitors can materially affect demand for and pricing of our products, which
could have a significant impact on our financial results.
Our performance for the year ended December 31, 2004, reflects the results of
our key opportunities, philosophies and risks, as outlined above. Specifically,
we experienced a positive impact on our financial results due to higher sales of
proprietary goods in the ASF segment and favorable foreign currency translation
as discussed above. Our printing solutions business suffered the impacts of a
soft sales market, resulting in an offsetting decrease in consolidated net
sales. We also began realizing the benefits of cost-saving initiatives
implemented in 2003.
From a cash flow standpoint, we continue to maintain a high level of liquidity,
with working capital of over $250,000. We generate substantial amounts of cash
from our normal operations, resulting in a total increase in cash of $76,535
between December 31, 2003, and 2004.
The following summary of results further explains the results of our operations
during the years ended December 30, 2004, 2003, and 2002, in addition to an
analysis of our liquidity during 2004.
SUMMARY OF THE CONSOLIDATED RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003,
AND 2002.
Year Ended 2003 Currency Year Ended 2002 Currency
December 31, to 2004 Adjusted December 31, to 2003 Adjusted
2004 2003 %change %change 2002 %change %change
-------- -------- ------- -------- ----------- ------- --------
Favorable Favorable
(Unfavorable) (Unfavorable)
Net sales. . . . . . . . $660,785 $619,886 6.6% 2.0% $611,490 1.4% (3.6%)
Cost of sales. . . . . . 347,544 329,271 (5.5%) (0.7%) 337,012 2.3% 6.7%
--------- --------- ---------
Gross profit . . . . 313,241 290,615 7.8% 3.3% 274,478 5.9% 0.2%
Gross profit percentage. 47.4% 46.9% ** ** 44.9% ** **
Operating expenses . . . 207,831 191,465 (8.5%) (3.9%) 190,345 (0.6%) 5.1%
Operating profit . . 105,410 99,150 6.3% 2.2% 84,133 17.8% 12.1%
Interest income
(expense), net . . . . . (29,615) (30,178) 1.9% 1.8% (33,883) 10.9% 13.1%
Other income (expense) . 1,942 4,314 ** ** (2,651) ** **
--------- --------- ---------
Earnings from
continuing operations
before income taxes
and cumulative effect
of accounting change . . 77,737 73,286 6.1% 1.0% 47,599 54.0% 43.4%
Income taxes . . . . . . (24,513) (23,466) (4.5%) 0.3% (16,122) (45.6%) (34.7)%
--------- --------- ---------
Earnings from
continuing operations
before cumulative
effect of accounting
change . . . . . . . . . 53,224 49,820 6.8% 1.6% 31,477 58.3% 48.0%
Discontinued
operations, net of tax . - 5,592 ** ** (22,128) ** **
Cumulative effect of
accounting change. . . . - 1,014 ** ** - ** **
--------- --------- ---------
Net earnings . . . . . . $ 53,224 $ 56,426 (5.7%) (9.7%) $ 9,349 503.6% 379.4%
========= ========= =========
Diluted earnings
per share. . . . . . . . $ 1.72 $ 1.80 (4.4%) (8.5%) $ 0.29 520.7% 386.5%
========= ========= =========
Comprehensive income . . $ 62,641 $ 74,587 (16.0%) ** 13,142 467.5% **
========= ========= =========
<FN>
* Currency adjusted percent change is calculated based on a constant foreign exchange rate
period-over-period. Management believes this more accurately reflects true fluctuation in
the business without the effect of changing exchange rates.
** Not a meaningful statistic.
SUMMARY OF KEY SEGMENTED RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003,
AND 2002.
YEAR ENDED . . 2003 CURRENCY YEAR ENDED 2002 CURRENCY
DECEMBER 31, . TO 2004 ADJUSTED DECEMBER 31, TO 2003 ADJUSTED
2004 2003 %CHANGE %CHANGE* 2002 %CHANGE %CHANGE*
----------- ---------- ---------- --------- ------------ -------- --------
Favorable Favorable
(Unfavorable) (Unfavorable)
ADVANCED SURFACE
FINISHING
Total net sales. . $386,723 $ 348,131 11.1% 5.1% $ 328,594 5.9% 0.6%
Operating profit . $ 62,728 $ 50,858 23.3% 16.0% $ 35,888 41.7% 30.2%
Operating profit
percentage . . . . 16.2% 14.6% ** ** 10.9% ** **
PRINTING SOLUTIONS
Total net sales. . $274,062 $ 271,755 0.8% (2.2%) $ 282,896 (3.9%) (8.5%)
Operating profit . $ 42,682 $ 48,292 (11.6%) (13.1%) $ 48,245 0.1% (2.1%)
Operating profit
percentage . . . . 15.6% 17.8% ** ** 17.1% ** **
CONSOLIDATED TOTAL
Total net sales. . $660,785 $ 619,886 6.6% 2.0% $ 611,490 1.4% (3.6%)
Operating profit . $105,410 $ 99,150 6.3% 2.2% $ 84,133 17.8% 12.1%
Operating profit
percentage . . . . 16.0% 16.0% ** ** 13.8% ** **
<FN>
* Currency adjusted percent change is calculated based on a constant foreign exchange rate
period-over-period. Management believes this more accurately reflects true fluctuation in the
business without the effect of changing exchange rates.
** Not a meaningful statistic.
2004 VS. 2003
- ---------------
NET SALES
We experienced an increase in sales of $40,899, or 6.6% during the year ended
December 31, 2004, when compared with the previous year. While our consolidated
sales increase benefited from favorable foreign currency exchange rates, our
sales increased almost $12,700, or 2.0% on a constant-dollar basis. Sales of
proprietary products represented approximately 94% of our total sales in both
2004 and 2003. Our ASF business led our overall sales growth due in large part
to better performance from our U.S. operating units and volume growth in Asia.
We experienced growth in both our electronics and industrial product lines
within this reporting segment. While growth in industrial products was
concentrated in the U.S., we experienced most of our growth in our electronics
product lines in Asia, particularly in China and Japan. Partially offsetting
this growth was a reduction in overall sales volume in our Printing Solutions
segment caused by a soft market and the effects of changes in our distribution
system wherein we are beginning to sell directly to our customers in some
geographic markets of the business.
COST OF SALES AND GROSS PROFIT
Cost of sales decreased slightly when excluding the effects of foreign currency
translation. This decrease, when coupled with the year-over-year increase in
sales, caused an increase in gross profit margin during 2004. Increases in
gross profit margin were driven by lower production costs, particularly in the
ASF segment in the United States, where we realized the benefits of cost-saving
initiatives implemented in 2003. This was partially offset by lower gross
profit margins in our MPS segment as a result of a soft market, lower volume and
the resulting de-leveraging of fixed overhead costs.
OPERATING EXPENSES
Operating expenses increased 8.5% during the year ended December 31, 2004, when
compared with the same period the previous year. Excluding the effects of
foreign currency, operating expenses increased 3.9%. Contributing to this
increase were increases in research and development expense, particularly in our
MPS segment in the Americas and Europe. We also saw an increase in selling and
technical expense in our ASF segment, especially in our operations in Asia as
our business grew in that region. Also contributing to higher costs were higher
costs from corporate, including relocation and other employee-related costs.
Overall average headcount excluding headcount from discontinued operations
increased slightly from the previous year.
OPERATING PROFIT
Operating profit during 2004 was $6,260 higher than in 2003, representing growth
of approximately 6.3% year-over-year. As a percentage of net sales, operating
profit was a steady 16% in both 2004 and 2003. Our operating profit increases
were due in large part to the improved business conditions in the ASF segment
and favorable foreign currency rates, as discussed above.
INTEREST INCOME (EXPENSE)
Interest income (expense), net remained relatively constant in 2004 compared
with 2003. We experienced some benefit this year as a result of higher interest
income earned from holding higher cash balances during the year. This balance
consists primarily of interest expense on our outstanding fixed interest rate
bonds.
OTHER INCOME
We realized a gain of $2,214 on the purchase of treasury stock from a third
party on September 22, 2003, representing the difference between the market
price of the shares on the date of purchase and the actual purchase price
pursuant to an outstanding purchase and sale agreement (described further at
Footnote 11 to our Consolidated Financial Statements, "Common and Treasury
Stock."). In 2004, we realized a foreign currency exchange loss of $1,541.
This was partially offset by gains from the disposal of a small joint venture
interest and other non-operating activities.
INCOME TAX EXPENSE
Our effective tax rate for the year ended December 31, 2004, was 31.5%, down
from 32.0% in 2003. In the third fiscal quarter of 2004, our tax rate increased
from 32% to 33% primarily as a result of U.S. taxes on foreign repatriations in
excess of available current foreign tax credits and foreign tax credit
carry-forwards. As a result of tax planning strategies, we realized a benefit
from the expected future utilization of tax loss carryforwards in Europe in the
fourth quarter of 2004. These tax loss carryforwards had previously been
reserved.
EARNINGS FROM CONTINUING OPERATIONS
Earnings from continuing operations before the cumulative effect of accounting
change increased 6.8% year-over-year, or 1.6% on a currency adjusted basis.
This increase is due primarily to an increase in our gross profit percentage
coupled with lower interest expense, which was partially offset by higher
operating costs, as discussed above.
DISCONTINUED OPERATIONS
In 2003, we sold our 60% interest in Eurocir S.A. (Eurocir) to the 40%
stakeholders of Eurocir. The sale, which represented substantially all of our
electronics manufacturing segment, was treated as a discontinued operation and
is more fully described in the discussion of 2003 vs. 2002 results. There were
no significant divestitures in 2004.
NET EARNINGS
2004 net earnings decreased 5.7% from 2003, or 9.7% on a currency adjusted
basis. This decrease was due to one-time gains experienced in 2003 related to
the disposal of our Eurocir business and a cumulative effect of an accounting
change. Excluding these factors, net earnings increased 6.8%, or 1.6% on a
currency-adjusted basis, year-over-year due to the factors described above.
DILUTED EARNINGS PER SHARE
Diluted earnings per share decreased 4.4% in year 2004 compared to year 2003.
On a currency-adjusted basis, this decrease was 8.5%. Much of this decrease is
due to gains in 2003 related to the disposal of our Eurocir business and a
one-time gain for the cumulative effect of an accounting change. Excluding
these one-time gains, earnings per share increased $0.13 per share from $1.59 in
2003 to $1.72 in 2004. This increase in diluted earnings per share was due to
favorable foreign currency rates and growth in the business, as well as a
reduction in the average number of shares outstanding due to the stock
repurchase in 2003, as described more fully in Footnote 11 to our Consolidated
Financial Statements, "Common and Treasury Stock."
OTHER COMPREHENSIVE INCOME
Other comprehensive income decreased by $11,946 for the year ended December 31,
2004 compared to the previous year. This decrease is a result of the decrease
in net earnings described above and a decrease in the foreign currency
translation adjustment recognized during the year. We hold assets
that are denominated in currencies that have been strengthening against the U.S.
dollar over the last several years, primarily the Euro, British Pound Sterling
and the Japanese Yen. The strengthening of these currencies was less in 2004
than 2003 which resulted in a smaller amount of foreign currency translation
being recognized this year.
2003 VS. 2002
- ---------------
NET SALES
Net sales for the year ended December 31, 2003, were approximately 1% higher
than the year ended December 31, 2002. This increase was driven primarily by
favorable changes in foreign currency exchange rates. On a constant-dollar
basis, our sales decreased approximately $23,200, or 3.6%, year-over-year.
Sales of our proprietary products, which made up 93.8% of total sales in 2003,
decreased 4.7% year-over-year when excluding the positive effects of favorable
foreign currency translation. Decreases in proprietary sales were driven by our
MPS segment, which experienced a decrease of 8.5% or approximately $25,000 on a
currency adjusted basis. The sales decreases in MPS were due to the elimination
of certain unprofitable product lines, changing sales practices for printing
blankets products lines in the United States and weak demand for printing plates
used in publication markets during 2003. Partially offsetting the MPS sales
decrease was a 0.6% increase on a currency adjusted basis in our ASF segment.
COST OF SALES AND GROSS PROFIT
Cost of sales decreased from 2002 to 2003 by 2.3%. Increases due to foreign
currency translation were more than offset by decreases predominantly resulting
from lower sales and increased plant efficiencies. As a result, our gross
profit percentage increased from 44.9% in 2002 to 46.9% in 2003.
We experienced decreases in cost of sales in both our ASF and MPS segments
primarily as a result of lower sales. The ASF segment experienced an increase
in plant closings and cost reduction efforts associated with restructuring
activities in the years leading up to 2003 as well as a shift in product mix to
technologies that are more efficient and carry more favorable margins. The
gross profit percentage in the ASF segment increased from 47.6% in 2002 to 50.1%
in 2003. In the MPS segment, plant closings and restructuring activities in the
years leading up to 2003 resulted in an increase in the MPS gross profit
percentage from 41.7% in 2002 to 42.7% in 2003 as benefits from these activities
were realized.
OPERATING EXPENSES
Operating expenses were relatively flat from 2002 to 2003. Excluding the
negative effects of foreign currency exchange rates, operating expenses
decreased 5.1% year-over-year. This decrease was due largely to a decrease in
headcount resulting from restructuring activities in the years leading up to
2003 and lower amortization. Partially offsetting these decreases was a 3.9%
increase in research and development expense as we continue to invest in our
future product growth.
OPERATING PROFIT
Operating profit increased significantly from 2002 to 2003 as a result of higher
gross profit and the realization of benefits created through cost-reduction
efforts as described above. As a percent of sales, operating profit increased
from approximately 14.0% in 2002 to approximately 16.0% in 2003.
INTEREST INCOME (EXPENSE)
Net interest expense decreased approximately $3,705 between 2002 and 2003
primarily as a result of debt payoff activity during those two years. In 2002,
we reduced bank debt by approximately $80,000. In 2003, we paid off the
remaining portion of our term loans and other debt, excluding our senior
subordinated debt and capitalized lease obligations. Lower average debt
balances in 2003 resulted in lower interest expense compared to 2002.
OTHER INCOME (EXPENSE)
Other income (expense) fluctuated from a $2,651 expense to $4,314 in income
between 2002 and 2003. This change was largely the result of changes in the
fair value of our interest rate swap and realized foreign exchange gains and
losses. In addition, we experienced a gain on the purchase of our treasury
stock, as described more fully in Footnote 11 to our Consolidated Financial
Statements, "Common and Treasury Stock."
INCOME TAX EXPENSE
Our effective tax rate attributable to continuing operations decreased to 32% in
2003 versus 33.9% in 2002. The rate decrease was primarily a result of the
utilization of foreign tax credits and a change in earnings mix from higher rate
tax jurisdictions to lower rate tax jurisdictions.
EARNINGS FROM CONTINUING OPERATIONS
Earnings from continuing operations before the cumulative effect of accounting
change increased 54% in 2003 versus 2002. On a currency adjusted basis, this
increase was 43.4%. The year-over-year increase was the result of a higher
gross profit margin and lower interest expense in 2003 than in 2002, coupled
with an increase in other income of $6,965, resulting from the factors discussed
above.
DISCONTINUED OPERATIONS
On December 9, 2003, we divested our share in Eurocir, a printed circuit board
manufacturer located in Europe, which represented significantly all of our
electronics manufacturing segment. Accordingly, the sale was accounted for
under Financial Accounting Standard No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS No. 144), as a discontinued operation. The
operating results and cash flows from operations have therefore been segregated
from the financial results of continuing operations in our consolidated
statements of earnings and consolidated statements of cash flows for all periods
presented.
The sales price of $5,000 consisted of $3,000 of consideration received upon
closing and $2,000 of interest-bearing notes due in 2009. As of December 31,
2004, and 2003, $2,000 was included in other long-term assets related to these
notes.
The amounts segregated from continuing operations in our consolidated statements
of earnings consisted of the following:
YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------- -------------------
Net sales . . . . . . . . . . . . . . . . . . . . . $ 78,747 $ 80,485
Loss before income taxes and minority interest. . . $ (940) $ (33,674)
Income tax (expense) benefit. . . . . . . . . . . . (12) 11,666
Minority interest . . . . . . . . . . . . . . . . . - (120)
------------------- -------------------
Loss from discontinued operations before
gain on sale. . . . . . . . . . . . . . . . . . . . (952) (22,128)
Gain on sale of discontinued operations, net of tax 6,544 -
------------------- -------------------
Discontinued operations, net of tax . . . . . . . . $ 5,592 $ (22,128)
=================== ===================
Included in discontinued operations for the year ended December 31, 2003, was a
pre-tax gain on disposal of discontinued operations of $5,630 with a tax benefit
of $914 resulting in an after-tax gain of $6,544, recorded in the fourth
quarter. Included in discontinued operations for the year ended December 31,
2002, was a pre-tax charge of $27,389 for goodwill impairment and $7,000 for
other asset impairment recognized pursuant to the provisions of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets (FAS No. 142),
and Financial Accounting Standard No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS No. 144), respectively.
NET EARNINGS
Net earnings increased significantly year-over-year. The loss from discontinued
operations was significantly higher in 2002 versus 2003 due to asset impairments
as discussed above in 2002 which increased the loss, versus a gain from the sale
of these operations in 2003. Interest expense was lower due to lower debt
balances. Also contributing to year-over-year increases in net earnings were
improved gross margins and decreases in operating expenses and cost of sales due
to cost-reduction initiatives such as plant closures and headcount reduction.
Additionally, in 2003 we recognized a benefit from the cumulative effect of
change in accounting principle related to outstanding options to purchase our
own stock.
DILUTED EARNINGS PER SHARE
In addition to the factors above, diluted earnings per share were positively
impacted by the repurchase of over 2,200 shares of our stock during 2003 as
described more fully in Footnote 11 to our Consolidated Financial Statements,
"Common and Treasury Stock." This resulted in lower average shares outstanding
in 2003 compared to 2002.
OTHER COMPREHENSIVE INCOME
Other comprehensive income increased by $61,445 for the year ended December 31,
2003 compared to the previous year. This increase is a result of the increase
in net earnings described above, an increase in foreign currency translation
adjustment recognized during the year and an increase in the amount of minimum
pension liability recognized. We hold assets that are denominated in
currencies that have been strengthening against the U.S. dollar over the last
two years, primarily the Euro, British Pound Sterling and the Japanese Yen. The
strengthening in 2003 was greater than the strengthening in 2002 which resulted
in a larger amount of foreign currency translation being recognized this year.
Changes in actuarial assumptions in 2002 caused a decrease in the minimum
pension liability recognized in that year.
LIQUIDITY AND CAPITAL RESOURCES
The table below summarizes our cash flows for the years ended December 31, 2004,
and 2003:
2004 2003 VARIANCE
-------- --------- ----------
Cash provided by (used in):
Continuing operations . . . . . . . . . $85,277 $ 94,552 $ (9,275)
Discontinued operations . . . . . . . . - (3,135) 3,135
-------- --------- ----------
Total Operating Activities. . . . . . . 85,277 91,417 (6,140)
Investing Activities. . . . . . . . . . (8,534) (5,704) (2,830)
Financing Activities. . . . . . . . . . (4,017) (57,972) 53,955
Effect of exchange rate changes on cash 3,809 1,534 2,275
-------- --------- ----------
Net change in cash. . . . . . . . . . . $76,535 $ 29,275 $ 47,260
======== ========= ==========
The majority of our liquidity is derived from cash produced from operations.
Our cash flow provided by operating activities was $85,277 during 2004, which
was a $6,140 decrease from cash provided in the previous year. Year-over-year
changes in cash flow from operating activities were driven by the cash impact of
discontinued operations and changes in tax assets and liabilities, inventories,
and accounts receivable. In 2003, cash used in discontinued operations had the
effect of decreasing net cash provided by operating activities by $3,135.
Excluding the effect of discontinued operations, cash provided by operating
activities decreased $9,275 or nearly 10%, year-over-year. Tax planning
strategies in 2004 reduced the negative impacts of tax activities on cash flows
in 2004 when compared to 2003. Inventories and accounts receivable increased
during 2004 as a result of increased sales activity in the year in contrast to
2003, when proactive working capital measures had the effect of reducing
inventories and other current accounts.
Cash used in investing activities increased $2,830 for the year ended December
31, 2004, when compared with the previous year. 2003 benefited from proceeds
from the disposition of our Electronics Manufacturing segment, as described more
fully in Footnote 16 to our Consolidated Financial Statements, "Discontinued
Operations." In 2004, we earned higher proceeds from fixed asset dispositions
due in large part to the sale of equipment formerly associated with our
Electronics Manufacturing segment for approximately $1,700, as described further
in Footnote 4 to our Consolidated Financial Statements, "Property, Plant and
Equipment."
On May 7, 2003, we purchased 1,350,000 shares of our own stock from one of our
shareholders for approximately $30,500. On September 22, 2003, we
purchased all of the remaining shares owned by that shareholder for an
additional $21,293. As a result, our net cash used in financing activities
decreased significantly during the 2004 year compared with the prior year.
Excluding the effects of these purchases, net cash used in financing activities
decreased approximately $2,200 year-over-year. This change was driven by higher
net debt repayments during 2003 compared with 2004.
We increased our quarterly dividend from $0.02 to $0.03 in the third quarter of
2003. The dividend was increased again in the first quarter of 2004 to $0.04,
bringing our annual dividend to $0.16 per share from $0.10 per share in 2003.
However, due to the timing of dividend funding, cash dividends paid during 2004
were consistent with those paid in 2003.
The Board of Directors from time to time authorizes the purchase of issued and
outstanding shares of MacDermid, Inc.'s common stock. Such additional shares
may be acquired through privately negotiated transactions or on the open market.
Any future repurchases by us will depend on various factors, including the
market price of the shares, our business and financial position and general
economic and market conditions. Additional shares acquired pursuant to such
authorizations will be held in our treasury and will be available for us to
issue various corporate purposes without further shareholder action (except as
required by applicable law or the rules of any securities exchange on which the
shares are then listed). At December 31, 2004, the outstanding authorization to
purchase approximately 798,280 shares would cost approximately $28,818.
We believe that we have the financial flexibility to deliver shareholder value
while meeting our contractual obligations. Future estimated contractual cash
commitments for the years subsequent to December 31, 2004, are summarized in the
following table:
LESS THAN 2-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
-------- ------- -------- ------- --------
Long-term debt . . . . . . . . $301,632 $ - $ - $ 132 $301,500
Semi-annual bond interest. . . 192,584 27,512 55,024 55,024 55,024
Capital leases . . . . . . . . 824 264 396 54 110
Operating leases . . . . . . . 21,651 6,838 7,082 3,493 4,238
Pension funding requirements . 33,500 5,500 14,000 14,000 -
Purchase obligations and other 1,943 1,943 - - -
-------- ------- -------- ------- --------
Total contractual cash
commitments. . . . . . . . . $552,134 $42,057 $ 76,502 $72,703 $360,872
======== ======= ======== ======= ========
As of December 31, 2004, we had cash and cash equivalents of $137,829 and net
working capital of $260,103. At December 31, 2003, we had cash and cash
equivalents of $61,294 and net working capital of $179,692. Excluding our
non-monetary items (prepaid expenses and deferred taxes) our working capital was
$231,617 as of December 31, 2004, compared to $148,595 at December 31, 2003. We
have a long-term credit arrangement, which consists of a combined revolving loan
facility that permits borrowings, denominated in U.S. dollars and foreign
currencies, of up to $50,000. There has been no balance outstanding or activity
on this revolving loan facility for any of the periods presented. We have other
uncommitted credit facilities which presently total approximately $42,400.
The following table reflects our ability to fund both our required obligations
and our shareholder growth initiatives for 2005, using our current financial
resources:
Cash and cash equivalents as of December 31, 2004 . . . . . $137,829
Other net current monetary assets and liabilities
as of December 31, 2004 93,788
--------
231,617
Available borrowings under revolving loan facility. . . . . 50,000
Availability under other uncommitted credit facilities. . . 42,400
--------
Total cash available and potentially available. . . . . 324,017
Contractual cash commitments due in next year . . . . . . . 42,057
Expected 2005 capital expenditures. . . . . . . . . . . . . 15,000
Expected 2005 dividend payments . . . . . . . . . . . . . . 7,264
--------
Excess of cash available and potentially available over
requirements . . . . . . . . . . . . . . . . . . . $302,096
========
Environmental Issues:
The nature of the our operations, as manufacturers and distributors of specialty
chemical products and systems, expose us to the risk of liability or claims with
respect to environmental cleanup or other matters, including those in connection
with the disposal of hazardous materials. As such, we are subject to extensive
U.S. and foreign laws and regulations relating to environmental protection and
worker health and safety, including those governing discharges of pollutants
into the air and water, the management and disposal of hazardous substances and
wastes, and the cleanup of contaminated properties. We have incurred, and will
continue to incur, significant costs and capital expenditures in complying with
these laws and regulations. We could incur significant additional costs,
including cleanup costs, fines and sanctions and third-party claims, as a result
of violations of or liabilities under environmental laws. In order to ensure
compliance with applicable environmental, health and safety laws and
regulations, we maintain a disciplined environmental and occupational safety and
health compliance program, which includes conducting regular internal and
external audits at our plants to identify and categorize potential environmental
exposure.
We are named as a potentially responsible party ("PRP") at two Superfund sites,
Fike-Artel in Nitro, West Virginia and Solvent Recovery Service in Southington,
Connecticut. There are many other PRPs involved at these sites. With respect
to both of these sites, we have entered into cost sharing agreements with the
applicable PRP groups and our allocated cost share with regard to each of these
sites is deminimus at 0.2%. Our ongoing costs with respect to each site
generally range from about $2-$4 thousand dollars per quarter. As a result of
the deminimus nature of the costs no specific reserve has been established. We
have also been contacted with requests for information with regard to two
additional sites, Whitney Barrel in Massachusetts and the Lake Calumet Cluster
site in Illinois. We have found no information connecting us or our subsidiaries
to these sites and have not received a PRP notice regarding these two additional
sites. As a result no reserve is deemed appropriate in this regard at this
time. While the ultimate costs of such liabilities are difficult to predict, we
do not expect that our costs associated with these sites will be material.
In addition, some of our facilities have an extended history of chemical
processes or other industrial activities. Contaminants have been detected at
some of these sites, with respect to which we are conducting environmental
investigations and/or cleanup activities. These sites include certain sites
acquired in the December 1998, acquisition of W. Canning plc, such as the
Kearny, New Jersey and Waukegan, Illinois sites. We have established an
environmental remediation reserve of $1,700, predominantly attributable to those
Canning sites that we believe will require environmental remediation. With
respect to those sites, we also believe that our Canning subsidiary is entitled
under the Acquisition Agreement ("the acquisition agreement") to withhold a
deferred purchase price payment of approximately $1,600. We estimate the range
of cleanup costs at the Canning sites between $2,000 and $5,000 and have
recorded a $3,300 accrual (comprised of the foregoing $1,700 reserve and the
$1,600 deferred purchase price) related to these costs, representing
management's best estimate of total costs within this range. Investigations
into the extent of contamination, however, are ongoing with respect to these
sites. To the extent our liabilities exceed the $1,600 deferred purchase price,
we may be entitled to additional indemnification payments. Such recovery may be
uncertain, however, and would likely involve significant litigation expense. We
have instituted an arbitration to enforce the obligations of other parties to
the acquisition agreement concerning the remediation of the Kearney, New Jersey
and Waukegan, Illinois sites. The arbitration has been concluded with a
confirmation, in our favor, that the former primary shareholders of the entity
that operated the Kearney, New Jersey site are responsible for its remediation
to applicable state standards and an order to establish a time line for
completion of the remediation. We expect that the remediation will take several
years. We are continuing to monitor the environmental condition at the Waukegan
site. Significant remediation activities have already been concluded on the
Waukegan site, however, it has not yet been determined whether additional
remediation activities will be required. We are also in the process of
characterizing contamination at our Huntingdon Avenue, Waterbury, Connecticut
site which was closed in the quarter ended September 30, 2003. The extent of
required remediation activities at the Huntingdon Avenue site has not yet been
determined. We have recorded a reserve of $650 with regard to this remediation.
We do not anticipate that we will be materially affected by environmental
remediation costs, or any related claims, at any contaminated sites, including
the Canning sites and the Huntingdon Avenue, Waterbury, Connecticut site. It is
difficult, however, to predict the final costs and timing of costs of site
remediation. Ultimate costs may vary from current estimates and reserves, and
the discovery of additional contaminants at these or other sites or the
imposition of additional cleanup obligations, or third-party claims relating
thereto, could result in significant additional costs.
Legal Proceedings:
From time to time there are various legal proceedings pending against us. We
consider all such proceedings to be ordinary litigation incident to the nature
of our business. Certain claims are covered by liability insurance. We believe
that the resolution of these claims, to the extent not covered by insurance,
will not individually or in the aggregate, have a material adverse effect on our
financial position or results of operations. To the extent reasonably
estimable, reserves have been established regarding pending legal proceedings.
FORWARD-LOOKING STATEMENTS
This report and our other reports include forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements relate to analyses and other information that is based on forecasts
of future results and estimates of amounts not yet determinable. These
statements also relate to future prospects, developments and business
strategies. The statements contained in this report that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties.
The words "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "plan," "predict," "project," "will" and similar terms and phrases,
including references to assumptions, have been used to identify forward-looking
statements. These forward-looking statements are made based on management's
expectations and beliefs concerning future events affecting us and are subject
to uncertainties and factors relating to our operations and business
environment, all of which are difficult to predict and many of which are beyond
our control, that could cause actual results to differ materially from those
matters expressed in or implied by these forward-looking statements.
The following factors are among those that may cause actual results to differ
materially from the forward-looking statements:
Risk in foreign markets
Approximately 60% of our sales and gross profit in 2004 was contributed by our
foreign-based subsidiaries. As such, we are highly subject to various risks
inherent to conducting business outside of our country of domicile, including,
but not limited to, the impact of social and economic instability in some of the
countries in which we do business and impacts of governmental change or
governmental instability in some regions in which our products are sold or
produced. Most notably, we operate in challenging environments that are
experiencing periods of rapid social and political change in countries such as
China, Mexico, Brazil, and other Latin American and Asian countries. Likewise,
because we do not hedge our foreign currency translation risks, our results of
operations could be significantly impacted on a U.S. dollar basis from relative
strengthening or weakening of the dollar against other currencies.
Acquisitions and dispositions
We have in the past and may in the future make strategic acquisitions or dispose
of portions of our business. We do not receive any assurance with respect to
these transactions that we will be successful in realizing our objectives, or
that realization may not take longer than expected, or that there will not be
unintended adverse consequences to the completion of these transactions.
Supply
We are subject to increases in raw materials prices and periodic limitations in
the availability of materials needed to manufacture goods. These factors may
disrupt our supply chain and may have an adverse effect on our financial
results.
Technology
We rely on our patents and trademarks and the protection that these intellectual
property rights provide to us for our financial stability and future growth.
Successful defense of these rights is paramount to our future success.
Likewise, our success in developing and implementing new technologies and other
intellectual property will have a significant effect on our future financial
results.
Products and Sales
We operate in a fast-paced industry that relies on new technologies and
successful new product implementation for financial success and stability. We
cannot be assured that we will have success in developing and introducing new
products, nor can we be assured of their success in the marketplace. Likewise,
we may experience a shift in our sales mix from more- to less-profitable
products which we are not able to anticipate.
Environmental and Legal Risk
The nature of our operations, as manufacturers and distributors of specialty
chemical products and systems, expose us to the risk of liability or claims with
respect to environmental cleanup or other matters, including those related to
the disposal of hazardous materials. We have been named as a potentially
responsible party at two Superfund sites in the United States and are currently
subject to environmental investigations and/or cleanup activities at various
other sites in the midwestern and eastern portions of the United States. These
matters are more thoroughly described in our discussion of environmental and
legal matters in the Footnotes to our Consolidated Financial Statements. While
we do not expect that current litigation will have a material impact on our
results of operations, ultimate costs of cleanup could vary significantly from
our estimates. Likewise, we are not able to predict or anticipate other
litigation or cleanup costs at contaminated sites not currently known to the
company.
We are also subject to litigation in the normal course of business. The costs
and other effects of pending litigation and administrative actions against us
cannot be determined with certainty. While management does not believe that any
current proceedings will have a material adverse effect on our business, there
can be no assurance that the outcome of such proceedings will be as expected.
Please refer to Footnote 14 in our Consolidated Financial Statements.
All forward-looking statements should be considered in light of these factors.
We undertake no obligation to update forward-looking statements or risk factors
to reflect new information, future events or otherwise.
CRITICAL ACCOUNTING ESTIMATES
In preparing our Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States of America, management must
make estimates and assumptions that effect reported amounts in our consolidated
financial statements. Management uses their best judgment based on their
understanding and analysis of the relevant circumstances to reach these
decisions. These judgments, by nature, are subject to an inherent degree of
uncertainty. Accordingly, actual results could differ significantly from the
estimates applied. Management has reviewed our critical accounting estimates
with our Audit Committee and our Board of Directors.
Our critical accounting estimates include the following:
Allowance for doubtful receivables: We maintain an allowance for estimated
credit losses based upon our historical collections experience and any specific
customer collection issues that we have identified through continuous monitoring
of customer collections and payments. Historically, our provisions for such bad
debts based on historical experience have adequately matched actual experience,
however, there is no guarantee that we will continue to experience the same
credit loss rates as in the past. Further, we are not able to predict future
changes in the financial condition of our customers. If circumstances related
to our customers deteriorate or if credit loss rates change considerably from
past experience, our estimates of the recoverability of our trade receivables
could be materially affected, we may be required to record additional
allowances. During the years ended December 31, 2004, 2003 and 2002, we
recorded an allowance for doubtful receivables of $3,562, $2,606 and $4,773,
respectively in the selling, technical and administrative expense line on our
Consolidated Statements of Income.
Reserve for obsolete inventories: We value inventory at lower of average cost or
market and maintain a reserve for estimated inventory obsolescence, which is
regularly reviewed by management. Our calculation of the reserve for obsolete
inventories considers historical write-offs, customer demand, product evolution,
usage rates and quantities of stock on hand. Based on this information, we
reserve against obsolete and slow-moving inventory up to the inventory's net
realizable value. Significant changes in any of the factors used to estimate
this allowance could materially affect our allowance and may require us to
record additional reserves, which are expensed through the cost of sales line in
our consolidated statements of income. Historically, our reserve has been
adequate to cover actual expense. During the years ended December 31, 2004,
2003 and 2002, we held reserves of $15,274, $16,179 and $16,292, respectively
related to our inventories.
Goodwill and intangible assets: We evaluate the carrying value of our goodwill
and indefinite-lived intangible assets annually, or more often if circumstances
warrant, in accordance with Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets (FAS No. 142). Our evaluations require us
to estimate future cash flows to be generated by our goodwill and
indefinite-lived intangible assets in order to assess the recoverability of
these assets. This process requires us to make significant judgments and
assumptions about future business conditions, including future revenues and
discount rates, based upon the best information available to us at the time of
the assessment. Changes in any of the assumptions we use to perform our
impairment testing could have a material effect on our assessment of the
recoverability of these assets, and could thereby require us to write down these
assets to our estimated net realizable value. If an asset is found to be
impaired, the impairment would be recorded in the operating expense line on our
consolidated statements of income. In 2002, we recorded a charge of $982 in
general and administrative expense to write off goodwill in our ASF segment that
was no longer supported by our discounted cash flow analysis. Also included in
discontinued operations for 2002 were pre-tax charges of $27,389 for a goodwill
impairment recognized pursuant to the provisions of FAS No. 142. We performed
goodwill and intangible asset impairment testing during our fourth fiscal
quarter of 2004 and determined that no balance was impaired. Based on our
annual assessment, we do not expect that any impairments are forthcoming.
Joint ventures: We hold interests in various other entities which manufacture
products similar or complimentary to our products. We generally apply the equity
method of accounting to investments where we own 20% or more of the entity's
equity and where we do not exercise significant influence. Our share of income
from these joint ventures is recorded in the miscellaneous income (expense) line
of the consolidated statements of income. Management regularly evaluates the
recoverability of these investments. If there is significant doubt about our
ability to recover our investment, we impair or reserve against the investment
in miscellaneous income (expense) in our consolidated statements of income up to
the asset's estimated realizable value. The value of the investments and
impairments related to these ventures have historically been immaterial.
Income taxes: As of December 31, 2004, 2003 and 2002, we recorded deferred tax
assets related to income tax loss carryforwards, investment credits and other
items of $84,476, $101,782 and $93,938, respectively. These assets were offset
by valuation allowances of $11,952, $17,246, and $14,103, respectively, thereby
resulting in net deferred tax asset of $72,524, $84,536, $79,835 for each year.
We determine our income tax valuation by considering multiple factors, including
the tax jurisdiction, the carryforward period, and our income tax planning
strategies. We record a valuation allowance when, based on available evidence,
we conclude that it is more likely than not that a portion or all of a deferred
tax asset will not be realized. This valuation allowance could change
significantly if tax laws change in any of the jurisdictions where we do
business or if any of our assumptions used in the calculation of the allowance
change significantly. We cannot reasonably foresee any of these changes and
base our valuations on best evidence at the time of the assessment.
Environmental and Other Legal Matters: The nature of our business exposes us to
the risk of liability of claims with respect to environmental cleanup or other
matters, including those in connection with the disposal of hazardous materials.
As such, from time to time, we are subject to costs associated with the cleanup
of various contaminated sites (See Footnote 14 to our Consolidated Financial
Statements, "Contingencies, Environmental and Legal Matters"). Because there are
often many parties that are held responsible for paying for cleanup, we must
estimate our reserve based on the best information we have at the time of
assessment. It is our policy to review environmental issues in light of both
historical experience and current information and reserve accordingly. We are
unable to predict what our actual costs will be for environmental cleanup with
complete accuracy. Significant changes in third party cleanup estimates or
departures from past experience could have a material impact on our reserves for
environmental issues.
We are also subject to litigation in the ordinary course of business (see
Footnote 14, Contingencies, Environmental and Legal Matters).
We reserve for legal and environmental contingencies when a liability for those
contingencies has become probable and the cost is reasonably estimable, in
accordance with Statement of Financial Accounting Standards No. 5, Accounting
for Contingencies (FAS No. 5). Any significant litigation or significant change
in our estimates of cleanup costs could materially affect our financial results
and cause us to increase our provision for related costs. Any provision made
for these costs are expensed to selling, technical and administrative expenses.
Historically, our legal and environmental provisions have adequately matched
actual expense.
Employee Benefit Plans: We sponsor a defined benefit pension plan and a
retirement medical benefit plan for our domestic employees providing retirement
benefits based upon years of service and compensation levels. We also sponsored
a defined benefit pension plan for our United Kingdom-based employees employed
at our 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 affect current year and future
year pension expense and the projected benefit obligation. The plan discount
rate assumption was changed to 6.0% in 2004 from 6.25% in 2003 and the rate of
compensation increase assumption was changed to 4.5% in 2003 from 5.0% in 2002.
The net effect of changing these assumptions resulted in an increase of
approximately $1,600 in the projected benefit obligation and is expected to keep
pension expense flat in 2005. Management estimates that a 100 basis point drop
in the discount rate for the valuation at December 31, 2004, will increase the
plan's projected benefit obligation by approximately $2,000 and increase the
plan's pension expense by approximately $1,500. However, these increases could
be offset by other factors such as favorable asset experience or additional cash
contributions to the plan.
CONSOLIDATED STATEMENTS OF EARNINGS AND OTHER COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------- ------------ ------------
Net sales . . . . . . . . . . . . . . . . . . . . . . $ 660,785 $ 619,886 $ 611,490
Cost of sales . . . . . . . . . . . . . . . . . . . . 347,544 329,271 337,012
------------------------- ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . . . 313,241 290,615 274,478
Operating expenses:
Selling, technical and administrative . . . . . . . . 185,915 171,510 171,143
Research and development. . . . . . . . . . . . . . . 21,916 19,955 19,202
------------------------- ------------ ------------
207,831 191,465 190,345
------------------------- ------------ ------------
Operating profit. . . . . . . . . . . . . . . . . . . 105,410 99,150 84,133
Interest income . . . . . . . . . . . . . . . . . . . 1,399 873 575
Interest expense. . . . . . . . . . . . . . . . . . . (31,014) (31,051) (34,458)
Miscellaneous income. . . . . . . . . . . . . . . . . 3,483 4,314 616
Miscellaneous expense . . . . . . . . . . . . . . . . (1,541) - (3,267)
------------------------- ------------ ------------
(27,673) (25,864) (36,534)
------------------------- ------------ ------------
Earnings from continuing operations
before income taxes and cumulative
effect of accounting change . . . . . . . . . . . . . 77,737 73,286 47,599
Income tax expense. . . . . . . . . . . . . . . . . . (24,513) (23,466) (16,122)
------------------------- ------------ ------------
Earnings from continuing operations before
cumulative effect of accounting change. . . . . . . . 53,224 49,820 31,477
Discontinued operations, net of tax . . . . . . . . . - 5,592 (22,128)
Cumulative effect of accounting change, net
of tax. . . . . . . . . . . . . . . . . . . . . . . . - 1,014 -
------------------------- ------------ ------------
Net earnings. . . . . . . . . . . . . . . . . . . . . $ 53,224 $ 56,426 $ 9,349
========================= ============ ============
Basic earnings per common share:
Continuing operations . . . . . . . . . . . . . . . . $ 1.76 $ 1.60 $ 0.98
Discontinued operations . . . . . . . . . . . . . . . - 0.18 (0.69)
Cumulative effect of accounting change. . . . . . . . - 0.03 -
------------------------- ------------ ------------
Net earnings per share. . . . . . . . . . . . . . . . $ 1.76 $ 1.81 $ 0.29
========================= ============ ============
Diluted earnings per common share:
Continuing operations . . . . . . . . . . . . . . . . $ 1.72 $ 1.59 $ 0.98
Discontinued operations . . . . . . . . . . . . . . . - 0.18 (0.69)
Cumulative effect of accounting change. . . . . . . . - 0.03 -
------------------------- ------------ ------------
Net earnings per share. . . . . . . . . . . . . . . . $ 1.72 $ 1.80 $ 0.29
========================= ============ ============
Weighted average number of common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . 30,278,133 31,241,288 32,220,066
Diluted . . . . . . . . . . . . . . . . . . . . . . . 30,961,108 31,430,398 32,475,155
Other comprehensive income:
Net earnings. . . . . . . . . . . . . . . . . . . . . $ 53,224 $ 56,426 $ 9,349
Foreign currency translation. . . . . . . . . . . . . 9,424 18,466 10,977
Minimum pension liability, net of tax . . . . . . . . (59) (305) (7,460)
Mark-to-market of external investments. . . . . . . . 52 - -
Hedging activities, net of tax. . . . . . . . . . . . - - 276
------------------------- ------------ ------------
Comprehensive income. . . . . . . . . . . . . . . . . $ 62,641 $ 74,587 $ 13,142
========================= ============ ============
<FN>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31,
2004 2003
-------------------- ----------
ASSETS:
- --------------------------
Current assets:
- ------------------
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 137,829 $ 61,294
Accounts receivable, net of allowance for doubtful
receivables of $11,822 and $11,908, respectively . . . . . . . 142,455 137,149
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . 80,445 75,775
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 10,183 8,137
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 18,303 22,960
-------------------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . 389,215 305,315
Property, plant and equipment, net of accumulated
depreciation of $189,167 and $172,741, respectively. . . . . . 110,463 113,642
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,287 194,200
Intangibles, net of accumulated amortization of $11,933 and
$10,266, respectively. . . . . . . . . . . . . . . . . . . . . 28,434 30,061
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 34,675 31,759
Other assets, net. . . . . . . . . . . . . . . . . . . . . . . 16,645 22,258
-------------------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 773,719 $ 697,235
==================== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
- --------------------
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 54,732 $ 53,153
Dividends payable. . . . . . . . . . . . . . . . . . . . . . . 1,212 908
Accrued compensation . . . . . . . . . . . . . . . . . . . . . 12,370 11,860
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 12,700 12,732
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . 7,293 3,220
Short-term notes payable . . . . . . . . . . . . . . . . . . . 489 940
Current installments of long-term obligations. . . . . . . . . 264 558
Other current liabilities. . . . . . . . . . . . . . . . . . . 40,052 42,252
-------------------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . 129,112 125,623
-------------------- ----------
Long-term obligations. . . . . . . . . . . . . . . . . . . . . 301,077 301,203
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 9,267 6,232
Retirement benefits, less current portion. . . . . . . . . . . 26,588 20,679
Other long-term liabilities. . . . . . . . . . . . . . . . . . 3,644 4,486
-------------------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 469,688 458,223
-------------------- ----------
Shareholders' equity:
- -----------------------
Common stock, authorized 75,000,000 shares, issued 46,838,700
at December 31, 2004, and 46,813,138 shares at December 31,
2003, at stated value of $1.00 per share . . . . . . . . . . . 46,839 46,813
Additional paid-in capital . . . . . . . . . . . . . . . . . . 33,053 25,884
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 327,080 278,705
Accumulated other comprehensive income . . . . . . . . . . . . 11,772 2,355
Less - cost of common shares held in treasury, 16,547,686 at
December 31, 2004, 16,548,604 at December 31, 2003.. . . . . . (114,713) (114,745)
-------------------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . 304,031 239,012
-------------------- ----------
Total liabilities and shareholders' equity . . . . . . . . . . $ 773,719 $ 697,235
==================== ==========
<FN>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------- --------- ----------
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . . . $ 53,224 $ 56,426 $ 9,349
------------------------- --------- ----------
Adjustments to reconcile net income to
net income from continuing operations:
Earnings (loss) from discontinued operations,
net of tax . . . . . . . . . . . . . . . . . - 5,592 (22,128)
------------------------- --------- ----------
Income from continuing operations . . . . . . 53,224 50,834 31,477
Adjustments to reconcile earnings from
continuing operations to net cash provided by
operating activities:
Depreciation. . . . . . . . . . . . . . . . . 16,148 15,793 16,361
Amortization. . . . . . . . . . . . . . . . . 3,009 3,301 6,222
Provision for bad debts . . . . . . . . . . . 3,562 2,606 4,773
Deferred income taxes . . . . . . . . . . . . 5,679 12,094 7,047
Stock compensation expense. . . . . . . . . . 6,544 4,219 4,028
Impairment charges. . . . . . . . . . . . . . - - 982
Changes in assets and liabilities:
(Increase) decrease in receivables. . . . . . (2,580) 3,450 23,607
(Increase) decrease in inventories. . . . . . (1,857) 8,059 29,313
(Increase) decrease in prepaid expenses . . . (1,720) (2,283) 2,884
Increase (decrease) in accounts payable . . . (1,960) (554) (599)
Decrease in accrued expenses. . . . . . . . . (3,661) (427) (3,531)
Increase (decrease) in income tax liabilities 3,843 (8,890) (8,652)
Other . . . . . . . . . . . . . . . . . . . . 5,046 6,350 3,400
------------------------- --------- ----------
Cash provided by continuing operations. . . . 85,277 94,552 117,312
Cash provided by discontinued operations. . . - (3,135) 8,881
------------------------- --------- ----------
Net cash flows provided by operating
activities. . . . . . . . . . . . . . . 85,277 91,417 126,193
------------------------- --------- ----------
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . (12,447) (12,527) (7,277)
Proceeds from disposition of fixed assets . . 3,913 1,823 2,890
Dispositions of businesses. . . . . . . . . . - 5,000 -
------------------------- --------- ----------
Net cash flows used in investing activities (8,534) (5,704) (4,387)
Cash flows from financing activities:
Net repayments of short-term borrowings . . . (520) (1,480) (18,356)
Proceeds from long-term borrowings. . . . . . 24 3,570 82,611
Repayments of long-term borrowings. . . . . . (537) (5,367) (168,276)
Proceeds from exercise of stock options . . . 619 812 360
Issuance (acquisition) of treasury stock. . . 32 (51,753) (822)
Dividends paid. . . . . . . . . . . . . . . . (3,635) (3,754) (2,581)
------------------------- --------- ----------
Net cash flows used in financing activities (4,017) (57,972) (107,064)
Effect of exchange rate changes on cash
and cash equivalents. . . . . . . . . . . . . 3,809 1,534 210
------------------------- --------- ----------
Net increase in cash and cash equivalents . . 76,535 29,275 14,952
Cash and cash equivalents at beginning of
year. . . . . . . . . . . . . . . . . . . 61,294 32,019 17,067
------------------------- --------- ----------
Cash and cash equivalents at end of year. . . $ 137,829 $ 61,294 $ 32,019
========================= ========= ==========
Cash paid for interest. . . . . . . . . . . . $ 30,014 $ 31,467 $ 38,663
========================= ========= ==========
Cash paid for income taxes. . . . . . . . . . $ 16,804 $ 17,785 $ 9,829
========================= ========= ==========
<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 December 31, 2001 . $ 46,410 $ 16,923 $ 218,619 $ (19,579) $ (58,942) $ 203,431
Stock awards . . . . . . . . . 50 833 - - - 883
Exercise of stock options. . . 180 180 - - - 360
Stock compensation . . . . . . - 3,145 - - - 3,145
Net earnings . . . . . . . . . - - 9,349 - - 9,349
Dividends declared . . . . . . - - (2,581) - - (2,581)
Tax benefit adjustment . . . . - 180 - - - 180
Currency translation . . . . . - - - 10,977 - 10,977
Increase in minimum pension
liability, net of tax. . . . . - - - (7,460) - (7,460)
Hedging activities, net of tax - - - 276 - 276
Shares acquired. . . . . . . . - - - - (822) (822)
------------ -------- ---------- ---------------- ---------- ---------------
Balance at December 31, 2002 . 46,640 21,261 225,387 (15,786) (59,764) 217,738
Stock awards . . . . . . . . . 5 109 - - - 114
Exercise of stock options. . . 168 644 - - - 812
Stock compensation . . . . . . - 4,104 - - - 4,104
Net earnings . . . . . . . . . - - 56,426 - - 56,426
Dividends declared . . . . . . - - (3,108) - - (3,108)
Tax benefit adjustment . . . . - (234) - - - (234)
Currency translation . . . . . - - - 18,446 - 18,446
Increase in minimum pension
liability, net of tax. . . . . - - - (305) - (305)
Shares acquired. . . . . . . . - - - - (54,981) (54,981)
------------ -------- ---------- ---------------- ---------- ---------------
Balance at December 31, 2003 . 46,813 25,884 278,705 2,355 (114,745) 239,012
Stock awards . . . . . . . . . 2 68 - - - 70
Exercise of stock options. . . 24 595 - - - 619
Stock compensation . . . . . . - 6,474 - - - 6,474
Net earnings . . . . . . . . . - - 53,224 - - 53,224
Dividends declared . . . . . . - - (4,849) - - (4,849)
Tax benefit adjustment . . . . - 32 - - - 32
Currency translation . . . . . - - - 9,424 - 9,424
Increase in minimum pension
liability, net of tax. . . . . - - - (59) - (59)
Shares released from treasury. - - - - 32 32
Other. . . . . . . . . . . . . - - - 52 - 52
------------ -------- ---------- ---------------- ---------- ---------------
Balance at December 31, 2004 . $ 46,839 $ 33,053 $ 327,080 $ 11,772 $(114,713) $ 304,031
============ ======== ========== ================ ========== ===============
<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
Business Description MacDermid, Incorporated and its subsidiaries
(collectively, "us" or "we") was established in Waterbury, Connecticut, in 1922.
We develop, produce and market 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 create 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).
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 and footnotes have been
reclassified to conform to the current year presentation.
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.
Cash and Cash Equivalents For the purpose of the consolidated statements of cash
flows, we consider all highly liquid debt instruments purchased with an initial
maturity of three months or less to be cash equivalents.
Credit Risk Management Approximately 42% of our products are sold to the
printing industry and 25% of our products are sold to manufacturers of printed
circuit boards. This level of concentration exposes us to certain collection
risks which are subject to a variety of factors, including economic and
technological change within these industries. As is common in our industry, we
generally do not require collateral or other security as a condition of sale,
rather relying on credit approval, balance limitation and monitoring procedures
to control credit risk on our trade accounts receivable. We establish a reserve
against possible uncollectible amounts based on historical experience and
specific knowledge about our customers' ability to pay.
Inventories. Inventories are stated at the lower of average cost or market.
Management regularly reviews inventories for obsolescence and calculates a
proper reserve based on historical write-offs, customer demand, product
evolution, usage rates and quantities of stock on hand. Inventory in excess of
our estimated usage requirements is written down to its estimated net realizable
value.
Property, Plant and Equipment and Other Long-Lived Assets Property, plant and
equipment are stated at cost less accumulated depreciation. We record
depreciation on a straight-line basis over the estimated useful life of each
asset.
Estimated useful lives by asset class are as follows:
Furniture, fixtures, automobiles, computers, etc 3 to 5 years
Machinery, equipment, buildings, building improvements 5 to 30 years
Leasehold improvements lesser of useful life or lease life
Maintenance and repair costs are charged directly to expense; renewals and
betterments which significantly extend the useful life of the asset are
capitalized. Costs and accumulated depreciation and amortization on assets
fully depreciated, retired or disposed of are removed from the accounts and any
resulting gains or losses are credited or charged to earnings accordingly.
We assess our long-lived assets for impairment whenever events or changes in
circumstances indicate their carrying value may not be recoverable. In
determining recoverability of an asset, we must determine the asset's fair
value, which, if a stated market price is not available, may require us to make
significant assumptions about the future cash generating ability of the asset.
If we determine that an asset is impaired, we charge the difference between the
asset's fair value and book value to expense in the period the impairment is
identified.
Goodwill and Other Intangible Assets. We account for goodwill and other
intangible assets under Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (FAS No. 142). Pursuant to FAS No. 142, we
do not amortize goodwill and other intangible assets that have indefinite useful
lives. Definite-lived intangible assets such as patents and various other
intangible assets are amortized on a straight-line basis over their estimated
useful lives, which are currently 15 years for patents and range between 5 and
30 years for other separately identifiable intangible assets. In accordance
with FAS No. 142, we test all goodwill and other intangible assets with
indefinite lives for impairment on an annual basis, or more often if
circumstances warrant. See further discussion of testing and impairments at
Footnote 5, Goodwill and Other Intangible Assets.
Employee Benefits. We sponsor a variety of employee benefit programs, most of
which are non-contributory. The accounting policies we use to account for these
plans are as follows:
Retirement. We provide a defined contribution 401K retirement plan for
substantially all domestic employees. We also maintain two non-contributory
defined benefit pension plans, one domestic and one foreign. The projected unit
credit actuarial method is used for financial reporting purposes in accordance
with Financial Accounting Standard No. 87, "Employers' Accounting for Pensions,"
(FAS No. 87). In addition, we contribute to an employee stock ownership plan,
which provide retirement benefits based upon amounts credited to employee
accounts within the plans. Our funding policy for qualified plans is consistent
with federal or other local regulations and customarily equals the amount
deducted for Federal and local income tax purposes. Foreign subsidiaries
contribute to other plans, which may be administered privately or by government
agencies in accordance with local regulations.
Post-retirement We currently accrue 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 We currently accrue for post-employment disability benefits to
employees meeting specified service requirements. The post-employment benefits
plan is unfunded.
Financial Instruments The carrying amounts of our financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, approximate fair value due to the short-term maturity of
these instruments. The fair value of long-term debt was $334,665, or
approximately $34,280 higher than its carrying value. The fair value of
long-term obligations for our interest rate swap (see Footnote 9, Long-term
Obligations) was determined based on quoted market value from the bank holding
the investment.
Foreign Operations. The assets and liabilities of our foreign subsidiaries are
translated into U.S. dollars using foreign currency exchange rates prevailing as
of the balance sheet date. Revenue and expense accounts are translated at
weighted-average foreign currency exchange rates for the periods presented.
Translation of the financial statements resulted in an increase in equity of
$9,424 and $18,446 in 2004 and 2003, respectively, and are reported as a
separate component of other comprehensive income in our Consolidated Statements
of Changes in Stockholders' Equity. Foreign currency transactions included in
the Consolidated Statements of Earnings resulted in a loss of $1,541 in 2004 and
a gain of $39 and $576 in 2003 and 2002, respectively.
Revenue Recognition. We recognize 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. Our 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.
Expenses
Cost of Sales Cost of sales consists primarily of raw material costs and
related purchasing and receiving costs used in the manufacturing process,
direct, salary and wages and related fringe benefits, packaging costs, shipping
and handling costs, plant overhead and other costs associated with the
manufacture and distribution of our products.
Selling, technical and administrative expenses Selling, technical and
administrative expenses 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 Research and development is expensed as incurred.
Income Taxes. The provision for income taxes includes federal, foreign, state
and local income taxes currently payable in the U.S. and abroad. 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.
Stock-based Plans. We grant stock options to our Board of Directors and to our
employees. We also grant stock awards to our Board of Directors. The stock
awards are granted at fair market value and the related expense is recognized at
the date of grant. The amount of expense recognized during the years ended
December 31, 2004, 2003, and 2002 related to the stock awards was $70, $114 and
$883, respectively. Effective April 1, 2001, we adopted the fair value expense
recognition provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation (SFAS 123), prospectively, to all stock
options granted, modified or settled after April 1, 2001. Accordingly,
compensation expense is measured using the fair value at the date of grant for
options granted after April 1, 2001. The resulting expense is amortized over
the period in which the options are earned. During the years ended December 31,
2004, 2003, and 2002, we charged $6,474, $4,104 and $3,145, respectively, to
expense related to stock options. Previously, and since April 1, 1996, we had
adopted the disclosure requirements of SFAS 123 and continued to account for our
stock options by applying the expense recognition provisions of APB Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25").
Had we used the fair value expense recognition method of accounting for all
stock options granted under our plans between April 1, 1996, and April 1, 2001,
net earnings and net earnings per common share for the years ended December 31,
2004, 2003, and 2002, would have been reduced to the following pro forma
amounts:
YEARS ENDED DECEMBER 31,
2004 2003 2002
-------------------------- -------- --------
Net income available for common shareholders:
As reported . . . . . . . . . . . . . . . . . $ 53,224 $56,426 $ 9,349
Add: stock based employee compensation
expense included in reported net income, net
of related tax effects. . . . . . . . . . . . 4,385 2,868 2,663
Deduct: total stock based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects . . . . . . . . . . . . . (4,462) (3,263) (3,329)
-------------------------- -------- --------
Pro forma net income. . . . . . . . . . . . . $ 53,147 $56,031 $ 8,683
========================== ======== ========
Net income per common share:
Basic
As reported . . . . . . . . . . . . . . . . . $ 1.76 $ 1.81 $ 0.29
========================== ======== ========
Pro forma . . . . . . . . . . . . . . . . . . $ 1.76 $ 1.79 $ 0.27
========================== ======== ========
Diluted
As reported . . . . . . . . . . . . . . . . . $ 1.72 $ 1.80 $ 0.29
========================== ======== ========
Pro forma . . . . . . . . . . . . . . . . . . $ 1.72 $ 1.78 $ 0.27
========================== ======== ========
Recent Accounting Standards
The Financial Accounting Standards Board (FASB) finalized Staff Position No. FAS
106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (FAS 106-1), in
January 2004. FAS 106-1 permits the deferral of application of Statement of
Financial Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other than Pensions, to the Medicare Prescription Drug Bill. We
deferred application of FAS106-1 until the issuance of final guidance by the
FASB.
In May 2004, the FASB issued Staff Position No. FAS 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003, (FAS 106-2). FAS 106-2 gives guidance on proper
accounting and disclosure treatment for changes in company-sponsored
single-employer defined benefit postretirement health care plans affected by the
Medicare Prescription Drug Bill. FAS 106-2 is effective for the first interim
or annual period beginning after June 15, 2004. We implemented FAS 106-2 during
our third fiscal quarter of 2004, however because the U.S. Federal Government
has not yet finalized legislation related to the exact calculation of a Federal
subsidy for qualifying plans, we have not yet been able to assess the impact the
adoption of this pronouncement will have on our current or future financial
results.
The Financial Accounting Standards Board (FASB) finalized Staff Position No. FAS
109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004 (FAS 109-1), and Staff Position No. FAS 109-2,
Accounting and Disclosure for the Foreign Earnings Provision within the American
Jobs Creation Act of 2004 (FAS 109-2), in December 2004. The American Jobs
Creation Act of 2004 (the Act) provides for a temporary 85% dividends received
deduction on certain foreign earnings repatriated during a one-year period. The
deduction would result in a 5.25% Federal tax rate on qualifying earnings
repatriated under the Act. We are not in a position to determine the impact of
the Act on our income tax expense for 2005. See Footnote 8, "Income Taxes," for
further discussion.
In November 2004, the FASB issued Statement No. 151, Inventory Costs - an
amendment of ARB No. 43, Chapter 4 (FAS 151). FAS 151 clarifies the accounting
treatment of abnormal amounts of idle facility expense, freight, handling costs
and spoilage such that these items be recognized as current-period charges
regardless of whether they meet the criterion established in Accounting Research
Bulletin (ARB) No. 43 Chapter 4. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005, with earlier
application permitted. We are assessing the impact that FAS 151 will have on
our financial statements.
In December 2004, the FASB issued a revision (the revision) of FASB Statement
No. 123, Accounting for Stock-Based Compensation, (FAS 123) which also
supersedes APB Opinion No 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. The revision establishes standards for the
accounting treatment of transactions in which an entity exchanges its equity
instruments for goods or services, as well as certain transactions in which the
entity may settle based on the fair value or exchange of the entity's equity
instruments. In addition to providing additional guidance on how to measure and
report fair value of these equity instruments, the pronouncement also gives
guidance on option expense, related tax benefits, and cash flow treatment, among
other things. The revision is effective for us as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005. We are
assessing the impact that the revision will have on our financial statements.
2. EARNINGS PER SHARE
The following table reconciles basic weighted-average common shares outstanding
to diluted weighted-average common shares outstanding and shows the calculation
for basic and diluted earnings per share:
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------ ----------- ------------
Earnings from continuing operations before
cumulative effect of accounting change. . . $ 53,224 $ 49,820 $ 31,477
Discontinued operations, net of tax . . . . - 5,592 (22,128)
Cumulative effect of accounting change, net
of tax. . . . . . . . . . . . . . . . . . . - 1,014 -
------------------------ ----------- ------------
Net income. . . . . . . . . . . . . . . . . $ 53,224 $ 56,426 $ 9,349
======================== =========== ============
Basic shares outstanding. . . . . . . . . . 30,278,133 31,241,288 32,220,066
Dilutive effect of stock options. . . . . . 682,975 189,110 255,089
------------------------ ----------- ------------
Diluted shares outstanding. . . . . . . . . 30,961,108 31,430,398 32,475,155
======================== =========== ============
Basic earnings per common share:
Continuing operations . . . . . . . . . . . $ 1.76 $ 1.60 $ 0.98
Discontinued operations . . . . . . . . . . - 0.18 (0.69)
Cumulative effect of accounting change. . . - 0.03 -
------------------------ ----------- ------------
Net earnings per share. . . . . . . . . . . $ 1.76 $ 1.81 $ 0.29
======================== =========== ============
Diluted earnings per common share:
Continuing operations . . . . . . . . . . . $ 1.72 $ 1.59 $ 0.98
Discontinued operations . . . . . . . . . . - 0.18 (0.69)
Cumulative effect of accounting change. . . - 0.03 -
------------------------ ----------- ------------
Net earnings per share. . . . . . . . . . . $ 1.72 $ 1.80 $ 0.29
======================== =========== ============
Anti-dilutive securities. . . . . . . . . . 1,919,950 1,521,710 1,162,300
The dilutive effects of stock options were determined by applying the treasury
stock method, assuming we were to purchase common shares with the proceeds from
stock option exercises. Anti-dilutive securities were not included in our
calculation because the stock options' exercise prices were greater than the
average market price of the common shares during the periods presented.
3. INVENTORIES
The major components of inventory as of December 31, 2004, and 2003 were as
follows:
AS OF DECEMBER 31,
2004 2003
------------------- -------
Finished goods . . . . . . $ 43,802 $37,396
Raw materials and supplies 29,563 30,062
Equipment. . . . . . . . . 7,080 8,317
------------------- -------
Total net inventories. . . $ 80,445 $75,775
=================== =======
4. PROPERTY, PLANT AND EQUIPMENT
The major components of property, plant and equipment as of December 31, 2004,
and 2003 were as follows:
AS OF DECEMBER 31,
2004 2003
-------------------- ----------
Land and improvements. . . . . . . . . . $ 11,256 $ 10,990
Buildings and improvements . . . . . . . 106,292 102,069
Machinery, equipment, and fixtures . . . 182,082 173,324
-------------------- ----------
Total property, gross of depreciation. . 299,630 286,383
Less accumulated depreciation. . . . . . (189,167) (172,741)
-------------------- ----------
Total property, plant and equipment, net $ 110,463 $ 113,642
==================== ==========
We retained a building and equipment with a net book value of $2,500 that was
associated with our Electronics Manufacturing segment that was discontinued in
2003 (see Footnote 16, "Discontinued Operations). These items were not
classified as held for sale as of December 31, 2003. The equipment retained had
a net book value of $1,500 and was sold in 2004 for $1,700
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Acquired intangible assets as of December 31, 2004, and 2003, are as follows:
As of
December 31, 2004 December 31, 2003
------------------------------------------------------------------------------------------
Gross Carrying Accumulated Net Gross Carrying Accumulated Net
Amount Amortization Amount Amount Amortization Amount
------------------ ------------------- ------- --------------- -------------- -------
Patents. . $ 17,566 $ (8,087) $ 9,479 $ 17,566 $ (6,851) $10,715
Trademarks 20,135 (2,115) 18,020 20,133 (1,951) 18,182
Others . . 2,666 (1,731) 935 2,628 (1,464) 1,164
------------------ ------------------- ------- --------------- -------------- -------
Total . $ 40,367 $ (11,933) $28,434 $ 40,327 $ (10,266) $30,061
================== =================== ======= =============== ============== =======
Included in the table above is the net carrying amount of $16,233 at December
31, 2004, and December 31, 2003, for trademarks which are not being amortized
due to the indefinite life associated with these assets. Amortization expense
related to amortization of intangible assets for the years ended December 31,
2004, 2003, and 2002, was $1,752, $2,093 and $2,454, respectively.
Amortization expense for intangible assets is expected to approximate $1,700 for
each of the next five years.
The goodwill carrying amount for the Advanced Surface Finishing segment was
$122,157 and $122,070 as of December 31, 2004, and 2003, respectively. The
goodwill carrying amount for the Printing Solutions segment was $72,130 as of
December 31, 2004, and 2003.
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (FAS No. 142), stipulates that we are required to perform
goodwill and other intangible asset impairment tests on at least an annual basis
and more frequently in certain circumstances. We performed our annual
impairment testing for 2004 during our fourth fiscal quarter and determined that
no goodwill or other intangible assets were impaired. In 2002, we included a
charge of $27,389 in our discontinued operations during the last quarter of 2002
related to impaired goodwill in our ASF segment because our impairment testing
under FAS No. 142 revealed the goodwill was impaired as a result of the
increasingly deteriorating printed circuit board markets in Europe and North
America. We also wrote off $982 in our ASF segment because it was determined
that the net book value was no longer supported by our discounted cash flow
analysis.
6. STOCK COMPENSATION PLANS
We provide stock compensation to certain of our employees and members of our
Board of Directors through an equity incentive plan and through four different
stock option plans. These plans have different terms and features as described
below
Equity Incentive Plan
In 1996, we adopted a non-qualified equity incentive plan, approved by the
shareholders in July 1995. The plan provides for the issuance of up to 900,000
shares. Certain employees and members of our Board of Directors have been
granted a total of 624,610 restricted shares, having market prices of between
$4.75 and $38.31 on the dates of grant. There have been 93,520 shares
forfeited under this plan leaving 368,910 shares available for future issuance.
All shares of restricted stock issued under this plan must be held and cannot be
sold or transferred, except to us for a period of four years from the date of
the award. We recognize compensation expense for shares issued under this plan
equal to the market value of the shares on the date of grant. Compensation
expense relating to this plan was $70, $114 and $883 for the years ended
December 31, 2004, 2003 and 2002, respectively
Stock Option Plans
In 1993, we adopted a non-qualified stock option plan, approved by shareholders
in July 1992 (the 1992 plan). The plan provides for the issuance of up to
2,700,000 shares. We have granted options totaling 2,874,065 shares of which
328,500 share have been forfeited, leaving 154,435 options available for future
issuance under this plan. Options granted under the 1992 plan are generally
exercisable after a four year vesting period at a fixed price that can be as low
as two-thirds of the market price at the grant date. The options are
exercisable into restricted shares of common stock, which cannot be sold or
transferred, except back to us at cost, during the four-year period commencing
with the exercise date. There are 12,065 options outstanding for this plan as
of December 31, 2004 at an exercise price of $32.75 per share. No compensation
expense was recognized for this plan during the years ended December 31, 2004,
2003, and 2002. During 2004 an employee allowed 135,000 shares in this plan to
expire unexercised. These shares may be re-instated pending shareholder
approval in 2005. If shareholder approval is not received these shares will be
forfeited.
We adopted a non-qualified stock option plan, approved by shareholders in July
1999 (the 1999 plan). The plan provides for the issuance of up to 1,500,000
shares. We have granted options totaling 1,006,650 shares of which 166,050 have
been forfeited, leaving 659,400 options available for future issuance under this
plan. Options granted under the 1999 plan generally are exercisable during a
ten-year period beginning with the grant date, at a fixed 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. There are 829,600
options outstanding for this plan as of December 31, 2004 at exercise prices
ranging from $30.33 to $55.50 per share. No compensation expense was recognized
for this plan during the years ended December 31, 2004, 2003, and 2002.
We adopted a non-qualified key executive stock option plan, approved by
shareholders in July 2001 (the 2001 executive plan). The plan, as amended by
our shareholders in 2004, provides for the issuance of up to 5,000,000 shares.
We have granted options totaling 3,046,494 of which 497,000 have been forfeited,
leaving 2,450,506 options available for future issuance under this plan.
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 options are exercisable into unrestricted shares of common
stock, except as otherwise provided at the time of grant. The option price is
variable either up or down, based upon the market price at date of grant,
adjusted for our stock price performance in comparison to the Standard and Poors
Specialty Chemicals Index during the six years following the date of grant. The
options initially had exercise prices ranging from $16.75 to $38.65 per share,
the exercise prices of these options as of December 31, 2004 now range from
$22.07 to $45.05 per share based on our stock price performance. The number of
options exercisable is also variable either up or down based upon a multiple
determined by our cumulative percentage of owner earnings growth, defined as
cash flow from operations less net capital expenditures, and in some cases
earnings per share growth during the four year vesting period, based on targets
set at the time of grant. The multiple can range from 50% to 200% of the
original shares issued. We recognize compensation expense on the number of
shares that we expect to issue based on our historical progress and our future
expectations of meeting the targets established at the time of grant. There are
2,507,494 shares outstanding for this plan which we have adjusted to 3,238,465
shares as of December 31, 2004 for purposes of recognizing compensation expense.
Compensation expense of $5,929, $3,601 and $2,555 was recognized for this plan
for the years ended December 31, 2004, 2003 and 2002 respectively.
Also, in 2001, we adopted a non-qualified all employee stock option plan,
approved by shareholders in July 2001 (the 2001 employee plan). The plan
provides for the issuance of up to 1,000,000 shares. Certain employees have
been granted options totaling 674,375 of which 290,825 option have been
forfeited, leaving 616,450 options available for future issuance. 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 fixed 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. As of December 31, 2004 there were 379,800
options outstanding under this plan at exercise prices ranging from $16.75 to
$38.65 per share. Compensation expense of $545, $503 and $590 was recognized
for this plan for the years ended December 31, 2004, 2003 and 2002 respectively.
The activity in our fixed price stock option plans (the 1992 plan, 1999 plan and
the 2001 all employee plan) is summarized in the following table for the years
ended December 31, 2004, 2003 and 2002:
FIXED OPTION PLANS:
OPTIONS EXERCISABLE AT YEAR-END
-------------------------------
WEIGHTED- WEIGHTED-
OUTSTANDING AVERAGE AVERAGE
OPTIONS EXERCISE PRICE SHARES EXERCISE PRICE
-------------------------------- --------------- ---------- -----------------
As of December 31, 2001 2,025,965 $ 26.39 1,468,715 $ 30.05
Granted in 2002 30,250 $ 20.02
Exercised in 2002 (180,000) $ 2.00
Forfeited in 2002 . . . (161,450) $ 16.75
-------------------------------- ---------------
As of December 31, 2002 1,714,765 $ 29.75 1,288,715 $ 33.97
Granted in 2003 . . . . 50,100 $ 23.79
Exercised in 2003 . . . (135,500) $ 1.94
Forfeited in 2003 . . . (92,375) $ 18.01
-------------------------------- ---------------
As of December 31, 2003 1,536,990 $ 32.71 1,153,715 $ 37.72
Granted in 2004 . . . . 36,775 $ 32.33
Exercised in 2004 . . . (14,250) $ 27.23
Forfeited in 2004 . . . (203,050) $ 42.50
Allowed to expire . . . (135,000) $ 1.79
-------------------------------- ---------------
As of December 31, 2004 1,221,465 $ 34.56 841,665 $ 41.74
================================ ===============
The following table summarizes information about fixed stock options outstanding
at December 31, 2004.
WEIGHTED-AVERAGE
REMAINING WEIGHTED-
CONTRACTUAL LIFE AVERAGE
RANGE OF EXERCISE PRICES. SHARES (YEARS) EXERCISE PRICE
- ------------------------- ---------------- ----------- ---------------
16.75 - $21.81 . . . . . 338,875 6.6 $ 17.13
28.26 - $38.65 . . . . . 258,690 5.8 $ 30.56
45.00 - $55.50 . . . . . 623,900 4.3 $ 45.67
---------------- ----------- ---------------
1,221,465 5.3 $ 34.56
================ =========== ===============
The activity in our indexed price stock option plan (2001 executive plan) is
summarized in the following table for the years ended December 31, 2004, 2003
and 2002:
INDEXED OPTION PLANS:
OPTIONS EXERCISABLE AT YEAR-END
-------------------------------
WEIGHTED- WEIGHTED-
OUTSTANDING AVERAGE AVERAGE
OPTIONS EXERCISE PRICE SHARES EXERCISE PRICE
--------------------------------- --------------- -------- --------------
As of December 31, 2001 670,500 $ 16.75 - -
Granted . . . . . . . . 977,869 $ 19.54
Exercised . . . . . . . - $ -
Forfeited . . . . . . . (200,000) $ 17.66
--------------------------------- ---------------
As of December 31, 2002 1,448,369 $ 18.51 - -
Granted . . . . . . . . 893,125 $ 22.96
Exercised . . . . . . . (32,500) $ 17.57
Forfeited . . . . . . . (119,500) $ 18.58
--------------------------------- ---------------
As of December 31, 2003 2,189,494 $ 20.33 - -
Granted . . . . . . . . 505,000 $ 38.65
Exercised . . . . . . . (9,500) $ 21.17
Forfeited . . . . . . . (177,500) $ 24.50
--------------------------------- ---------------
As of December 31, 2004 $ 2,507,494 $ 23.72 - -
================================= ================
The following table summarizes information about indexed stock options
outstanding at December 31, 2004.
WEIGHTED-AVERAGE
REMAINING WEIGHTED-
CONTRACTUAL LIFE AVERAGE
RANGE OF EXERCISE PRICES. SHARES (YEARS) EXERCISE PRICE
------------------ ----------- ---------------
16.75 - $22.51 . . . . . 2,002,494 7.3 $ 20.04
28.49 - $38.65 . . . . . 505,000 9.1 $ 38.31
------------------ ----------- ---------------
2,507,494 7.7 $ 23.72
================== =========== ===============
Application of the fair value expense recognition method of accounting for
options resulted in expense included in the results of operations of $6,474,
$4,104, and $3,145, as of December 31, 2004, 2003 and 2002 respectively. The
following table summarizes the weighted-average grant-date fair value of options
granted during the years ended December 31, 2004, 2003 and 2002. The
fair-values were determined by utilizing the Black-Scholes option-pricing model
using the key assumptions listed below:
2004 2003 2002
-------------------- ------------------- ---------------------
INDEXED FIXED INDEXED FIXED INDEXED FIXED
- ---------------------------- --------- --------- -------- --------- --------- ----------
Weighted-average fair value. $ 10.46 $ 16.28 $ 7.63 $ 13.28 $ 8.61 $ 11.28
Risk-free interest rate. . . 1.60% 3.85% 2.03% 2.94% 1.84% 4.24%
Expected option life (years) 6 years 6 years 6 years 6 years 6 years 6 years
Expected volatility. . . . . 24.6% 50% 34.6% 60.0% 39.1% 53.0%
Dividend yield . . . . . . . 0.30% 0.51% 0.37% 0.39% 0.38% 0.38%
7. PENSION, POST-RETIREMENT AND POST-EMPLOYMENT PLANS
We have a defined benefit pension plan, defined contribution profit sharing plan
and an employee stock ownership plan. These plans are available to
substantially all of our domestic employees. Aggregate amounts charged to
earnings for these plans for the years ended December 31, 2004, 2003, and 2002
were $5,132, $5,222 and $5,709, respectively. As of January 1, 2005, we changed
our defined contribution profit sharing and employee stock ownership plans to
eliminate profit sharing contributions and remove age restrictions imposed on
MacDermid, Inc. stock held for investment purposes in the plan.
Domestic pension
We sponsor a domestic pension plan that is available to substantially all of our
domestic employees that provides retirement benefits based upon years of service
and compensation levels. We also sponsor a Supplemental Executive Retirement
Plan (SERP) for certain domestic executive officers. The SERP is a
non-qualified plan and entitles executive officers to the difference between the
benefits actually paid to them under the Pension Plan and the benefits which
they would have received under the Pension Plan were it not for certain
restrictions imposed under the IRS Code relating to the amount of benefits
payable under the Pension Plan. Covered compensation under the SERP includes an
employee's annual salary and bonus.
At December 31, 2004, the accumulated benefit obligation was $52,770. The
measurement date used each year to determine pension and other postretirement
benefits is September 30, at which time the minimum contribution level for the
following year is determined. The estimated future benefit payments are
presently expected to approximate $2,000 - $2,500 per year for each of the next
five years and $18,279 in the aggregate for the five years after that. We
expect to contribute pension funding requirements of $1,700 in 2005 and
approximately $2,000 each of the four years thereafter. The plans' assets
consist primarily of bonds, guaranteed investment contracts and listed stocks,
including 393,255 shares of our common stock having a market value of $14,197 at
December 31, 2004, and $13,465 at December 31, 2003. The weighted-average asset
allocation of our pension benefit plan was 28% debt securities, 69% equity
securities, and 3% cash at December 31, 2004. The Board of Directors has
appointed an investment committee that meets at least four times per year in
order to assess risk factors, rates of return, and asset allocation limitations
as prescribed by the committee's investment policy statement. In addition, an
annual review is conducted in order to ensure that proper funding levels are
maintained for the plan and that the plan can meet its long-term retirement
obligations. Return on asset (ROA) assumptions are determined annually based on
a review of the asset mix as well as individual ROA performances, benchmarked
against indexes such as the S&P 500 index and Russell 2000 index.
As of January 1, 2005, we amended our defined benefit pension plan and SERP to
reflect a retirement age of 65 years old from 60 years old. This change will
have an effect on the accumulated benefit obligation going forward.
Foreign pension
We also have a retirement and death benefit plan, covering employees located in
the United Kingdom. As of April 6, 1997, this plan was 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.
At December 31, 2004, the accumulated benefit obligation was $67,067. The
measurement date used each year to determine pension and other postretirement
benefits is September 30, at which time the minimum contribution level for the
following year is determined. The estimated future benefit payments are
presently expected to approximate $2,300 - $2,600 per year for each of the next
five years and $14,200 in the aggregate for the five years after that. We
expect to contribute pension funding requirements of $3,800 in 2005 and
approximately $5,000 each of the four years thereafter. The plans' assets
consist primarily of bonds, guaranteed investment contracts and listed stocks.
The weighted-average asset allocation of our pension benefit plan was 34% debt
securities and 66% equity securities. An independent trustee committee
appointed by both management and the employees in the plan meet in order to
assess risk factors, rates of return, and asset allocation limitations as
prescribed by the committee's investment policy statement. In addition, an
annual review is conducted in order to ensure that proper funding levels are
maintained for the plan and that the plan can meet its long-term retirement
obligations.
Our other foreign subsidiaries maintain benefit plans that are consistent with
statutory practices that are not significant individually or in the aggregate.
Post-retirement benefits
We sponsor a defined benefit postretirement medical and dental plan that covers
all of our domestic full-time employees hired prior to April 1, 1997, who retire
after age 55 with at least 10-20 years of service (depending on the date of
hire). Eligible employees receive a subsidy from us towards the purchase of
their retiree medical benefits. This subsidy level is based on the date of
retirement from MacDermid, Inc. All domestic employees who retired prior to
March 31, 1989 received a medical subsidy of $2,625 during calendar year 2004.
Those retiring from MacDermid, Inc. after April 1, 1989 received a medical
subsidy of $1,868 during calendar year 2004. The annual increase in our costs
for post-retirement medical is subject to a cap of 5% for those retiring prior
to March 31, 1989 and 3% for those retiring after April 1, 1989. 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,
2004, was comprised of 64% retirees,12% fully eligible active participants, and
24% other active participants. The annual increase in cost is 3% and 5% for
post-retirement medical benefits, based on the date of retirement, since our
contributions are at a defined cap. The medical cost rate assumption has no
effect on the amounts reported due to the cap on contributions paid by
MacDermid, Inc. There is no assumed rate increase for dental benefits since it
is a scheduled plan.
Post-employment benefits
We sponsor a defined benefit post-employment compensation continuation plan that
covers all of our 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,
2004, and 2003. Our 2003 domestic pension disclosure has been adjusted to
include our SERP plan in order to conform to current year presentation.:
Pension Benefits Postretirement Benefits
-------------------------------------------- ----------------------
2004 2003 2004 2003
--------------------- --------------------- ---------- ----------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC DOMESTIC
---------- --------- ---------- --------- ---------- ----------
RECONCILIATION OF PROJECTED BENEFIT
OBLIGATION:
Projected benefit obligation at
beginning of year. . . . . . . . . . . . $ 61,050 $ 54,811 $ 51,506 $ 48,331 $ 6,927 $ 6,894
Service cost . . . . . . . . . . . . . . 3,857 541 3,682 568 128 116
Interest cost on projected benefit
obligation . . . . . . . . . . . . . . . 3,755 2,895 3,417 2,702 421 405
Plan participant contributions . . . . . - 349 - 300 202 -
Plan amendments. . . . . . . . . . . . . (611) - - - - (702)
Actuarial (gain)/loss excluding
assumption change. . . . . . . . . . . . (958) 6,686 1,391 480 (531) 87
Actuarial (gain)/loss due to
assumption change. . . . . . . . . . . . 1,636 - 2,957 - (171) 392
Benefits paid. . . . . . . . . . . . . . (1,968) (2,285) (1,903) (2,841) (585) (265)
Translation difference . . . . . . . . . - 4,070 - 5,271 - -
---------- --------- ---------- --------- ---------- ----------
Projected benefit obligation at end of
year . . . . . . . . . . . . . . . . $ 66,761 $ 67,067 $ 61,050 $ 54,811 $ 6,391 $ 6,927
---------- --------- ---------- --------- ---------- ----------
RECONCILIATION OF FAIR VALUE OF PLAN
ASSETS:
Fair value of plan assets at beginning
of year. . . . . . . . . . . . . . . . . $ 43,101 $ 44,880 $ 36,093 $ 37,778 $ - $ -
Actual return on plan assets, net of
expenses . . . . . . . . . . . . . . . . 2,358 3,785 4,762 4,368 - -
Employer contribution. . . . . . . . . . 3,383 1,608 4,149 1,155 383 265
Plan participant contribution. . . . . . - 349 - 300 202 -
Benefits paid. . . . . . . . . . . . . . (1,968) (2,285) (1,903) (2,841) (585) (265)
Translation difference . . . . . . . . . - 3,332 - 4,120 - -
---------- --------- ---------- --------- ---------- ----------
Fair value of plan assets at end of year $ 46,874 $ 51,669 $ 43,101 $ 44,880 $ - $ -
---------- --------- ---------- --------- ---------- ----------
FUNDED STATUS:
Funded status. . . . . . . . . . . . . . $ (19,887) $(15,398) $ (17,949) $ (9,931) $ (6,391) $ (6,927)
Unrecognized net actuarial loss. . . . . 12,067 15,398 10,638 15,312 1,142 2,097
Contributions after measurement date . . 1,000 - 692 - 96 -
Unamortized prior service cost . . . . . (457) - 181 - 156 173
Plan amendments. . . . . . . . . . . . . - - - - - -
---------- --------- ---------- --------- ---------- ----------
Net amount recognized. . . . . . . . . . $ (7,277) $ - $ (6,438) $ 5,381 $ (4,997) $ (4,657)
---------- --------- ---------- --------- ---------- ----------
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS:
Accrued benefit liability. . . . . . . . $ (7,277) $(15,398) $ (6,438) $ (9,931) $ (4,997) $ (4,657)
Accumulated other comprehensive
income . . . . . . . . . . . . . . . - 15,398 - 15,312 - -
---------- --------- ---------- --------- ---------- ----------
Net amount recognized. . . . . . . . . . $ (7,277) $ - $ (6,438) $ 5,381 $ (4,997) $ (4,657)
========== ========= ========== ========= ========== ==========
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate. . . . . . . . . . . . . . 6.0% 5.6% 6.25% 5.5% 6.00% 6.25%
Rate of compensation increase. . . . . . 4.5% 3.0% 4.5% 4.5% - -
Long-term rate of return on assets . . . 8.0% 7.5% 8.0% 8.0% - -
The components of net periodic benefit cost of the pension and postretirement
benefit plans with respect to the consolidated statements of earnings for the
year ended December 31, 2004, 2003, and 2002 were as follows:
PENSION BENEFITS:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
--------------------- --------------------- ---------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
---------- --------- ---------- --------- ---------- ---------
NET PERIODIC BENEFIT EXPENSE:
Service cost . . . . . . . . . . . . . $ 3,857 $ 541 $ 3,683 $ 568 $ 3,836 $ 479
Interest cost on the projected benefit
obligation . . . . . . . . . . . . . . 3,755 2,895 3,417 2,702 3,010 2,279
Expected return on plan assets . . . . (3,505) (3,359) (2,864) (3,127) (2,483) (2,525)
Amortization of prior service cost . . 28 - 28 - 25 -
Amortization of transition obligation. - - - - - -
Recognized actuarial (gain)/loss . . . 394 812 282 684 280 723
---------- --------- ---------- --------- ---------- ---------
Net periodic benefit cost. . . . . . . $ 4,529 $ 888 $ 4,546 $ 827 $ 4,668 $ 956
========== ========= ========== ========= ========== =========
POSTRETIREMENT BENEFITS:
YEAR ENDED DECEMBER 31,
2004 2003 2002
---------- --------- ----------
NET PERIODIC BENEFIT EXPENSE:
Service cost . . . . . . . . . . . . . $ 128 $ 116 $ 126
Interest cost on the projected benefit
obligation . . . . . . . . . . . . . . 421 405 417
Expected return on plan assets . . . . - - -
Amortization of prior service cost . . 18 17 126
Amortization of transition obligation. 156 100 -
Recognized actuarial (gain)/loss . . . - - -
---------- --------- ----------
Net periodic benefit cost. . . . . . . $ 723 $ 638 $ 669
========== ========= ==========
8. INCOME TAXES
Income tax expense (benefit) is allocated as follows:
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------- -------- ---------
Income tax expense. . . . . . . . . . . . . $ 24,513 $23,466 $ 16,122
Discontinued operations . . . . . . . . . . - (902) (11,666)
Shareholders' equity for the tax effects of
stock-based compensation expense in
excess of amounts recognized for financial
reporting purposes, and for the tax effects
of minimum pension liability, hedging
activities and foreign currency translation (4) 127 2,386
------------------------- -------- ---------
Total . . . . . . . . . . . . . . . . . . . $ 24,509 $22,691 $ 6,842
========================= ======== =========
Income tax expense (benefit) attributable to income from continuing operations
for 2004, 2003, and 2002 consisted of:
CURRENT DEFERRED TOTAL
----------------------------------------
DECEMBER 31, 2004
----------------------------------------
U.S. Federal. . . . . . $ 3,534 $ 2,627 $ 6,161
State and local . . . . 387 499 886
Foreign . . . . . . . . 18,646 (1,180) 17,466
------------------- ---------- -------
$ 22,567 $ 1,946 $24,513
=================== ========== =======
----------------------------------------
DECEMBER 31, 2003
----------------------------------------
U.S. Federal. . . . . . $ 6,186 $ 6,511 $12,697
State and local . . . . 993 2,610 3,603
Foreign . . . . . . . . 4,193 2,973 7,166
------------------- ---------- -------
$ 11,372 $ 12,094 $23,466
=================== ========== =======
----------------------------------------
DECEMBER 31, 2002
----------------------------------------
U.S. Federal. . . . . . $ (803) $ 5,873 $ 5,070
State and local . . . . (271) 864 593
Foreign . . . . . . . . 10,149 310 10,459
------------------- ---------- -------
$ 9,075 $ 7,047 $16,122
=================== ========== =======
Income tax expense (benefit) attributable to continuing operations differed from
the amounts computed by applying the U.S. Federal statutory tax rates to pretax
income for 2004, 2003 and 2002, as a result of the following:
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------- -------- --------
U.S. Federal statutory tax rate. . . . . . 35.0% 35.0% 35.0%
========================= ======== ========
Taxes computed at U.S. statutory rate. . . $ 27,208 $25,650 $16,660
State income taxes, net of Federal benefit 576 792 499
Foreign tax rate differential. . . . . . . 3,044 3,535 (3,377)
Export tax benefits. . . . . . . . . . . . (1,160) (1,273) (769)
Net change in valuation allowance. . . . . (5,294) (3,995) 3,904
Other, net . . . . . . . . . . . . . . . . 139 (1,243) (795)
------------------------- -------- --------
Actual income taxes. . . . . . . . . . . . $ 24,513 $23,466 $16,122
========================= ======== ========
Effective tax rate . . . . . . . . . . . . 31.5% 32.0% 33.9%
========================= ======== ========
Earnings from continuing operations before income taxes and cumulative effect of
an accounting change included foreign earnings of $57,570, $56,613, and $40,046
for 2004, 2003, and 2002, respectively.
We have not recognized a deferred tax liability for the undistributed earnings
of foreign subsidiaries that arose in 2004 and prior years because we do not
expect to repatriate those earnings in the foreseeable future. A deferred tax
liability will be recognized when we expect that we will recover those earnings
in a taxable transaction, such as the receipt of dividends or sale of the
investment, net of foreign tax credits. A determination of the deferred tax
liability related to the undistributed earnings of foreign subsidiaries is not
practical. The undistributed earnings of those subsidiaries were approximately
$178,503 at December 31, 2004.
We are currently evaluating the impact of the American Jobs Creation Act of 2004
(the Act) enacted on October 22, 2004. The Act provides for a temporary 85%
dividends received deduction on certain foreign earnings repatriated during a
one-year period. The deduction would result in a 5.25% Federal tax rate on
qualifying earnings repatriated under the Act. We are not in a position to
determine the impact of the Act on our income tax expense for fiscal 2005. We
are in the process of interpreting recent regulatory guidance in order to
determine whether repatriation under the Act would be beneficial. We expect to
complete our evaluation by June 30, 2005. The range of reasonably possible
amounts that could be repatriated under the Act is $0 to $75,000. The
additional Federal income tax net of foreign tax credits would be $0 to $3,500.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 2004, and 2003 are as
follows:
AS OF DECEMBER 31,
2004 2003
-------------------- ---------
DEFERRED TAX ASSETS:
Accounts receivable, primarily due to allowance for doubtful
doubtful accounts. . . . . . . . . . . . . . . . . . . . . . $ 1,550 $ 1,912
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 5,313 5,831
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . 5,028 4,675
Acquisition accrued liabilities. . . . . . . . . . . . . . . 5,533 6,909
Employee benefits. . . . . . . . . . . . . . . . . . . . . . 15,830 17,448
Research and development tax credits . . . . . . . . . . . . 2,555 2,244
Foreign tax credits. . . . . . . . . . . . . . . . . . . . . 3,655 4,360
Net operating losses . . . . . . . . . . . . . . . . . . . . 19,665 23,885
Impairment and asset write-downs . . . . . . . . . . . . . . 24,292 28,236
Alternative minimum tax credits. . . . . . . . . . . . . . . 1,055 1,043
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 5,239
-------------------- ---------
Total gross assets . . . . . . . . . . . . . . . . . . . . . 84,476 101,782
Valuation reserve. . . . . . . . . . . . . . . . . . . . . . (11,952) (17,246)
-------------------- ---------
Total gross deferred tax assets. . . . . . . . . . . . . . . 72,524 84,536
-------------------- ---------
DEFERRED TAX LIABILITIES:
Plant and equipment, primarily due to depreciation . . . . . 7,806 5,140
Intangibles and other assets . . . . . . . . . . . . . . . . 16,927 21,375
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,080 9,534
-------------------- ---------
Total gross deferred tax liabilities . . . . . . . . . . . . 28,813 36,049
-------------------- ---------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . $ 43,711 $ 48,487
==================== =========
The valuation allowance for deferred tax assets was $11,952 and $17,246 at
December 31, 2004, and 2003, respectively. The net change in the valuation
allowance for 2004 includes a decrease of $2,210 related to foreign net
operating losses and a decrease of $3,119 related to foreign tax credits which
management feels are more likely than not to be realized. In assessing
whether deferred tax assets will be realized, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, tax
planning strategies and expiration dates of certain deferred tax assets in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believe it is more likely than not that we
will realize the benefits of these deductible differences, net of the existing
valuation allowances at December 31, 2004.
At December 31, 2004, we have net operating losses of approximately $804 for
Federal, $55,772 for state and $44,840 for foreign that are available for carry
forward. The majority of the state net operating losses expire during the years
2014 through 2023. The majority of the foreign net operating loss carry
forwards expire during the years 2007 through 2013.
The large difference between the Federal net operating loss carryforward and the
total of the state net operating loss carry forwards is due to the nature of how
we file our tax returns for state income tax purposes versus Federal income tax
purposes. We file a consolidated tax return for Federal purposes. Any losses
incurred by members of the consolidated group can be offset against income of
other members. The consolidated group is generally profitable for Federal
income tax purposes so significant tax losses have not been generated. Many
states require that separate returns be filed for each member of the
consolidated group with a taxable presence in that particular state. Some of
the federal consolidated group members generate losses on a stand-alone basis
based on their particular businesses or functions. Additionally, some states
which allow for the filing of a consolidated return have variations in state
laws regarding the inclusion of certain items of income.
The deferred tax asset associated with the state net operating loss
carryforwards is calculated using an average rate of 7.18%. This results in a
deferred tax asset of $4,005. There is a valuation allowance which has provided
for 100% of this deferred tax asset because it is less likely than not that the
asset will be utilized based on the company's domestic operations and structure.
The deferred tax asset associated with the foreign net operating loss
carryforwards is calculated using the statutory tax rates of the relevant
foreign tax jurisdictions. This results in a deferred tax asset of $15,378 as
of December 31, 2004. A valuation allowance of $5,654 has been provided against
the deferred tax assets associated with certain foreign net operating loss carry
forwards because the recent results of the business units associated with loss
carry forwards indicate that it is more likely than not that the benefits from
net operating loss carryforwards will not be realized.
In addition, we have approximately $3,655 of foreign tax credits, $2,555 of
research and development tax credits and $1,055 of alternative minimum tax
credits that are available for carryforward. These carryforward periods range
from 5 years to unlimited.
9. DEBT AND CAPITAL LEASES
Our debt and capital lease obligations as of December 31, 2004, and 2003
consisted of the following:
AS OF DECEMBER 31,
2004 2003
-------------------- ---------
Notes payable . . . . . . . . . . . . . . . . . . . . . . $ 489 $ 940
==================== =========
Senior Subordinated Notes, 9 1/8%, unsecured, due 2011. . $ 300,385 $300,265
Term loan, variable rate, unsecured, due 2008 . . . . . . 132 365
Capitalized lease obligations . . . . . . . . . . . . . . 824 1,131
-------------------- ---------
Total long-term obligations, inclusive of current portion 301,341 301,761
Less current portion. . . . . . . . . . . . . . . . . . . (264) (558)
-------------------- ---------
Total long-term borrowings. . . . . . . . . . . . . . . . $ 301,077 $301,203
==================== =========
Unamortized bond discount included in Senior
subordinated notes. . . . . . . . . . . . . . . . . . . . 1,115 1,235
-------------------- ---------
Total principal due on long-term borrowings . . . . . . . $ 302,456 $302,996
==================== =========
Minimum future principal payments on debt and capital leases subsequent to
December 31, 2004, are as follows:
CAPITAL LEASES LONG-TERM DEBT TOTAL
--------------- --------------- --------
2005 . . . $ 264 $ - $ 264
2006 . . . 336 - 336
2007 . . . 60 - 60
2008 . . . 26 132 158
2009 . . . 28 - 28
Thereafter 110 301,500 301,610
--------------- --------------- --------
Total. . . $ 824 $ 301,632 $302,456
=============== =============== ========
Notes payable
Our notes payable balance December 31, 2004, and 2003 is made up of outstanding
foreign borrowings under available lines of credit. Our domestic borrowings
provide for interest rates at or below the prime rate on the date of borrowing.
There were no borrowings on our domestic lines of credit as of December 31,
2004. Our foreign borrowings carry interest rates that vary with local currency
exchange rate changes. Our aggregate borrowing capacity under these lines of
credit approximate $13,118 at December 31, 2004, 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, 2004 and 2003 were
1.6% and 3.3%, respectively.
Senior unsubordinated notes
On June 20, 2001, we issued 9 1/8% Senior Subordinated Notes ("Bond Offering"),
due 2011, for the face amount of $301,500. Interest on this Bond Offering is
due semi-annually on January 15th and July 15th. The proceeds from the Bond
Offering were used to pay down the term loans, revolving credit facilities and
other previously existing debt facilities. At June 2001, we had an outstanding
interest rate swap agreement that hedged one of our previously existing term
loans. When this term loan was extinguished through the Bond Offering, the swap
became an open position. See Footnote 15, "Derivatives and Other Financial
Instruments," for further discussion.
The Bond Offering was fully, jointly and severally, irrevocably and
unconditionally guaranteed by our domestic subsidiaries at the time of issuance.
See Footnote 18, "Guarantor Financial Information," for further information
about the guarantee.
Term loans
We have one outstanding term loan which had an outstanding balance of $132 as of
December 31, 2004. The loan is unsecured and bears a variable interest rate,
which was 3.11% at December 31, 2003, and 2004. Interest on this loan is due in
semi-annual installments. The balance is due in 2008.
Revolving Credit facility
We have a $50,000 committed revolving credit facility that expires in 2006. We
can borrow foreign currencies and U. S. dollars against this facility.
Commitment fees under the revolving credit lines are variable, ranging from 25
to 62.5 basis points on the unused balance. Under the credit agreement, we are
subject to covenants which require us to meet certain qualitative and
quantitative thresholds. Under these covenants, we are required to maintain a
net worth greater than $183,000, a ratio of earnings before income taxes (EBIT)
to interest expense greater than 2.5 to 1.0, and a ratio of total debt to
earnings before tax, depreciation and amortization (EBITDA) of no less than 3.5
to 1.0. We were in compliance with all of these covenants as of December 31,
2004. The revolving credit facility bears interest at a variable rate, which is
based on a ratio of our debt to earnings before certain expenses. The rates
were set from 1.25% to 1.875% above the applicable London interbank market rate
("LIBOR"). At December 31, 2004, and 2003, there were no borrowings outstanding
under this facility.
Other debt facilities
We carry various short-term debt facilities worldwide which are used to fund
short-term cash needs when the need arises. No amounts were outstanding on any
of these facilities as of December 31, 2004, or 2003. We also have various
overdraft facilities available to us. Our borrowing capacity under these
overdraft facilities was $29,320 at December 31, 2004. Some of these overdraft
lines carry variable interest rates. As of December 31, 2004, our overdraft
lines bore interest rates ranging up to 5.0%.
10. SEGMENT REPORTING
We operate on a worldwide basis, supplying proprietary chemicals for two
distinct segments, Advanced Surface Finishing and Printing Solutions. These
segments are managed separately as each segment has differences in technology
and marketing strategies. Chemicals supplied by the Advanced Surface Finishing
segment are used for cleaning, activating, polishing, mechanical plating and
galvanizing, electro-plating, phosphatising, stripping and coating, filtering,
anti-tarnishing and rust retarding for metal and plastic surfaces associated
with automotive and industrial applications. The Advanced Surface Finishing
segment also supplies chemicals for etching copper and imprinting electrical
patterns for various electronics applications and lubricants and cleaning agents
associated with offshore oil and gas operations. The products supplied by the
Printing Solutions segment include offset printing blankets and photo-polymer
plates used in packaging and newspaper printing, offset printing applications,
and digital printers and related supplies. Net sales for all of our products
fall into one of these two business segments.
The results of operations for each business segment include certain corporate
operating costs which are allocated based on the relative burden each segment
bears on those costs. Identifiable assets for each business segment are
reconciled to total consolidated assets including unallocated corporate assets.
Unallocated corporate assets consist primarily of cash, deferred tax assets,
deferred bond financing fees and certain other long term assets not directly
associated with the support of the individual segments. Intersegment loans and
accounts receivable are included in the calculation of identifiable assets and
are eliminated separately.
The following table gives relevant information regarding each segment's results
of operations:
2004 2003 2002
--------- --------- ---------
Net sales:
Advanced Surface Finishing
Total segment net sales . . . . . . . . . . . $395,062 $355,459 $336,416
Intersegment sales. . . . . . . . . . . . . . (8,339) (7,328) (7,822)
--------- --------- ---------
Net external sales for the segment . . . . . 386,723 348,131 328,594
Printing Solutions. . . . . . . . . . . . . . 274,062 271,755 282,896
--------- --------- ---------
Consolidated net sales . . . . . . . . . . $660,785 $619,886 $611,490
========= ========= =========
Depreciation and amortization:
Advanced Surface Finishing . . . . . . . . $ 9,874 9,705 $ 12,598
Printing Solutions . . . . . . . . . . . . 9,283 9,389 9,985
--------- --------- ---------
Consolidated depreciation and amortization $ 19,157 $ 19,094 $ 22,583
========= ========= =========
Operating profit:
Advanced Surface Finishing . . . . . . . . $ 62,728 $ 50,858 $ 35,888
Printing Solutions . . . . . . . . . . . . 42,682 48,292 48,245
--------- --------- ---------
Consolidated operating profit. . . . . . $105,410 $ 99,150 $ 84,133
========= ========= =========
Capital expenditures:
Advanced Surface Finishing . . . . . . . . $ 8,032 $ 6,348 $ 2,521
Printing Solutions . . . . . . . . . . . . 2,282 2,481 3,195
Corporate. . . . . . . . . . . . . . . . . 2,133 3,075 182
Discontinued Operations. . . . . . . . . . - 623 1,379
--------- --------- ---------
Consolidated capital expenditures. . . . $ 12,447 $ 12,527 $ 7,277
========= ========= =========
Total assets by segment as of December 31, 2004, and 2003 were as follows:
As of
December 31, December 31,
2004 2003
-------------- --------------
Advanced Surface Finishing . $ 499,119 $ 513,729
Printing Solutions . . . . . 277,488 268,204
Unallocated corporate assets 132,035 88,039
Intercompany eliminations. . (134,923) (172,737)
-------------- --------------
Consolidated assets . . . $ 773,719 $ 697,235
============== ==============
Sales and assets by geographic region were:
UNITED OTHER ASIA
STATES AMERICAS EUROPE PACIFIC CONSOLIDATED
--------- --------- -------- -------- -------------
Year Ended December 31, 2004
Net sales. . . . . . . . . . $250,793 $ 18,986 $240,063 $150,943 $ 660,785
Identifiable assets. . . . . $328,814 $ 8,823 $342,695 $ 93,387 $ 773,719
Year Ended December 31, 2003
Net sales. . . . . . . . . . $247,883 $ 18,508 $220,568 $132,927 $ 619,886
Identifiable assets. . . . . $293,851 $ 8,710 $310,479 $ 84,195 $ 697,235
Year Ended December 31, 2002
Net sales. . . . . . . . . . $274,759 $ 20,376 $199,108 $117,247 $ 611,490
Identifiable assets. . . . . $311,108 $ 9,477 $319,286 $ 68,022 $ 707,893
11. COMMON AND TREASURY STOCK
Our Restated Certificate of Incorporation provides for 75 million authorized
common shares. Common shares are summarized in the following table:
YEAR ENDED DECEMBER 31,
2004 2003 2002
----------------------- ---------- -----------
Balance, beginning of year 46,813,138 46,639,757 46,409,757
Shares issued:
Options exercised. . . . . 23,750 168,000 180,000
Stock awards . . . . . . . 1,812 5,381 130,000
Shares cancelled:
Stock awards . . . . . . . - - (80,000)
----------------------- ---------- -----------
Balance - end of year. . . 46,838,700 46,813,138 46,639,757
======================= ========== ===========
The Board of Directors has from time-to-time authorized the purchase of issued
and outstanding shares of our common stock. Any future repurchases under these
authorizations will depend on various factors, including the market price of our
shares, our business and financial position and general economic and market
conditions. Additional shares acquired pursuant to such authorization will be
held in the our treasury and will be available for us 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. On May 7, 2003, the Board of Directors voted
in favor of an authorization to purchase up to 3,000,000 of its common shares,
replacing all previous authorizations. Also on that date, we executed a
purchase and sale agreement with CVC to acquire all of their 2,201,720
outstanding MacDermid, Incorporated common shares. We purchased from CVC,
1,350,000 common shares on May 7, 2003, for $22.60 per share and 851,720 common
shares on September 22, 2003, for $25.00 per share. At December 31, 2004,
authorization to purchase 798,280 common shares remained outstanding.
Treasury stock activity is summarized in the following table for the years ended
December 31, as follows
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------ ----------- ----------
Balance, beginning of year 16,548,604 14,349,453 14,309,654
Shares acquired. . . . . . - 2,201,720 39,799
Shares released. . . . . . (918) (2,569) -
------------------------ ----------- ----------
Balance - end of year. . . 16,547,686 16,548,604 14,349,453
======================== =========== ==========
12. OPERATING LEASE COMMITMENTS
We have leases that expire at various dates through 2013 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 $9,323,
$8,883, and $9,758 for 2004, 2003 and 2002, respectively, of which $699, $1,017,
and $877, respectively, were contingent rentals. In addition, we have leased
equipment at customers, which is generally subject to sublease agreements. Net
rental expense for these sublease agreements amounted to income of $368 for
2002.
Minimum operating lease commitments for the fiscal years subsequent to December
31, 2004, are as follows:
OPERATING
----------
2005 . . . $ 6,838
2006 . . . 4,346
2007 . . . 2,736
2008 . . . 1,898
2009 . . . 1,595
Thereafter 4,238
----------
Total. . . $ 21,651
==========
13. OTHER INCOME (EXPENSE)
The major components of other income (expense) for the years ended December 31,
2004, 2003, and 2002 were as follows:
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------- ------ --------
MISCELLANEOUS INCOME:
Interest rate swaps . . . . . . . . $ 1,099 $ 633 $ -
Non-operating provision adjustments 892 919 -
Joint ventures. . . . . . . . . . . 810 11 40
CVC call and put gain . . . . . . . - 2,214 -
Foreign exchange. . . . . . . . . . - 39 576
Other . . . . . . . . . . . . . . . 682 498 -
------------------------- ------ --------
Total miscellaneous income. . . . . $ 3,483 $4,314 $ 616
========================= ====== ========
MISCELLANEOUS EXPENSE:
Foreign exchange. . . . . . . . . . $ (1,541) $ - $ -
Interest rate swaps . . . . . . . . - - (2,611)
Other . . . . . . . . . . . . . . . - - (656)
------------------------- ------ --------
$ (1,541) $ - $(3,267)
========================= ====== ========
14. CONTINGENCIES, ENVIRONMENTAL AND LEGAL MATTERS
Environmental Issues:
The nature of the our operations, as manufacturers and distributors of specialty
chemical products and systems, expose us to the risk of liability or claims with
respect to environmental cleanup or other matters, including those in connection
with the disposal of hazardous materials. As such, we are subject to extensive
U.S. and foreign laws and regulations relating to environmental protection and
worker health and safety, including those governing discharges of pollutants
into the air and water, the management and disposal of hazardous substances and
wastes, and the cleanup of contaminated properties. We have incurred, and will
continue to incur, significant costs and capital expenditures in complying with
these laws and regulations. We could incur significant additional costs,
including cleanup costs, fines and sanctions and third-party claims, as a result
of violations of or liabilities under environmental laws. In order to ensure
compliance with applicable environmental, health and safety laws and
regulations, we maintain a disciplined environmental and occupational safety and
health compliance program, which includes conducting regular internal and
external audits at our plants to identify and categorize potential environmental
exposure.
We are named as a potentially responsible party ("PRP") at two Superfund sites,
Fike-Artel in Nitro, West Virginia and Solvent Recovery Service in Southington,
Connecticut. There are many other PRPs involved at these sites. With respect
to both of these sites, we have entered into cost sharing agreements with the
applicable PRP groups and our allocated cost share with regard to each of these
sites is deminimus at 0.2%. Our ongoing costs with respect to each site
generally range from about $2-$4 thousand dollars per quarter. As a result of
the deminimus nature of the costs no specific reserve has been established. We
have also been contacted with requests for information with regard to two
additional sites, Whitney Barrel in Massachusetts and the Lake Calumet Cluster
site in Illinois. We have found no information connecting us or our subsidiaries
to these sites and have not received a PRP notice regarding these two additional
sites. As a result no reserve is deemed appropriate in this regard at this
time. While the ultimate costs of such liabilities are difficult to predict, we
do not expect that our costs associated with these sites will be material.
In addition, some of our facilities have an extended history of chemical
processes or other industrial activities. Contaminants have been detected at
some of these sites, with respect to which we are conducting environmental
investigations and/or cleanup activities. These sites include certain sites
acquired in the December 1998, acquisition of W. Canning plc, such as the
Kearny, New Jersey and Waukegan, Illinois sites. We have established an
environmental remediation reserve of $1,700, predominantly attributable to those
Canning sites that we believe will require environmental remediation. With
respect to those sites, we also believe that our Canning subsidiary is entitled
under the Acquisition Agreement ("the acquisition agreement") to withhold a
deferred purchase price payment of approximately $1,600. We estimate the range
of cleanup costs at the Canning sites between $2,000 and $5,000 and have
recorded a $3,300 accrual (comprised of the foregoing $1,700 reserve and the
$1,600 deferred purchase price) related to these costs, representing
management's best estimate of total costs within this range. Investigations
into the extent of contamination, however, are ongoing with respect to these
sites. To the extent our liabilities exceed the $1,600 deferred purchase price,
we may be entitled to additional indemnification payments. Such recovery may be
uncertain, however, and would likely involve significant litigation expense. We
have instituted an arbitration to enforce the obligations of other parties to
the acquisition agreement concerning the remediation of the Kearney, New Jersey
and Waukegan, Illinois sites. The arbitration has been concluded with a
confirmation, in our favor, that the former primary shareholders of the entity
that operated the Kearney, New Jersey site are responsible for its remediation
to applicable state standards and an order to establish a time line for
completion of the remediation. We expect that the remediation will take several
years. We are continuing to monitor the environmental condition at the Waukegan
site. Significant remediation activities have already been concluded on the
Waukegan site, however, it has not yet been determined whether additional
remediation activities will be required. We are also in the process of
characterizing contamination at our Huntingdon Avenue, Waterbury, Connecticut
site which was closed in the quarter ended September 30, 2003. The extent of
required remediation activities at the Huntingdon Avenue site has not yet been
determined. We have recorded a reserve of $650 with regard to this remediation.
We do not anticipate that we will be materially affected by environmental
remediation costs, or any related claims, at any contaminated sites, including
the Canning sites and the Huntingdon Avenue, Waterbury, Connecticut site. It is
difficult, however, to predict the final costs and timing of costs of site
remediation. Ultimate costs may vary from current estimates and reserves, and
the discovery of additional contaminants at these or other sites or the
imposition of additional cleanup obligations, or third-party claims relating
thereto, could result in significant additional costs.
Legal Proceedings:
On January 30, 1997, we were served with a subpoena from a Federal grand jury in
Connecticut requesting certain documents relating to an accidental spill from
our 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. We were subsequently informed that we were
subject to the grand jury's investigation in connection with alleged criminal
violations of the federal Clean Water Act pertaining to out wastewater handling
practices. In addition, two of our former employees who worked at the
Huntingdon Avenue facility pled guilt 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 two years of probation as
well as community service. In a separate matter, on July 26, 1999, we were
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 our Huntingdon Avenue and Freight
Street locations between the years 1992 through 1998 relating to wastewater
discharges and the management of waste materials. The complaint alleged
violations of our permits issued under the Federal Clean Water Act and the
Resource Conservation and Recovery Act ass well as procedural, notification and
other requirements of Connecticut's environmental regulations over the foregoing
period of time.
We voluntarily resolved these matters in November 28, 2001. As a result, we
were required to pay fines and penalties totaling $2,500 over six quarterly
installments, excluding interest. In addition, we were required to pay $1,550
to various local charitable and environmental organizations and causes. As of
June 30, 2003, we had paid the full amounts for both of these arrangements. We
have performed certain environmental audits and other environmentally related
actions and were placed on a two-year probation which ended November 28, 2003.
We had recorded liabilities during the negotiation period and therefore our
results of operating and financial position were not affected by these
arrangements.
From time to time there are various legal proceedings pending against us. We
consider all such proceedings to be ordinary litigation incident to the nature
of our business. Certain claims are covered by liability insurance. We believe
that the resolution of these claims, to the extent not covered by insurance,
will not individually or in the aggregate, have a material adverse effect on our
financial position or results of operations. To the extent reasonably
estimable, reserves have been established regarding pending legal proceedings.
15. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
In the normal course of business, we are exposed to risks such as changes in
foreign currency exchange rates, interest rates and commodity prices. We do not
actively hedge these risks using financial instruments. We do not enter into
derivative instrument contracts for the purposes of speculation or trading.
From time to time when we identify significant foreign currency exposure in one
of our subsidiaries, we will utilize intercompany lending facilities to reduce
our exposure. The impact of these transactions has historically been, and is
expected to continue to be, immaterial. In accordance with Financial Accounting
Standard No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS No. 133), and subsequent revisions of and interpretations to FAS No. 133,
we record all derivative instruments as assets or liabilities on the balance
sheet as fair value. Changes in the fair value of derivatives are either
recorded in income or other comprehensive, as appropriate.
Prior to our bond issue in June 2001, we employed interest rate swap agreements
to stabilize borrowing costs by reducing our exposure to possible future changes
in interest rates on our term and revolving loans. In June 2001, we issued 9
1/8% senior subordinated notes and simultaneously extinguished the majority of
our outstanding debt. As a result, we had one interest rate swap, originally
designated as a hedge against our old debt structure, which became an open
position. This swap, no longer designated as a hedge, exchanges a fixed
interest rate of 5.595% with U.S. LIBOR and has a notional value of $25,000.
The swap expires December 31, 2005, and had a fair value of $637 and $1,736 at
December 31, 2004, and 2003, respectively, based on the quoted market price from
the bank holding the instrument. Net receipts or payments on this swap are
accrued and recognized as miscellaneous expense or income each period. During
the years ended December 31, 2004, and 2003, we recognized income of $1,099 and
$633, respectively, in our consolidated statements of earnings. In 2002, we
recorded an expense of $2,611 in our consolidated statements of earnings related
to this swap.
16. DISCONTINUED OPERATIONS
On December 9, 2003, we sold our 60% interest in Eurocir S.A. (Eurocir) to the
40% stakeholders of Eurocir for $5,000. The sales price consisted of $3,000 of
consideration received upon closing and $2,000 of interest bearing notes,
reflected in other long term assets at December 31, 2003, which are due within
six years.
The Eurocir operations represented substantially all of the remaining
electronics manufacturing segment and as such the sale was accounted for as a
discontinued operation under Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS No.
144). The operating results and cash flows from operations of the electronics
manufacturing segment have been segregated from continuing operations on our
Consolidated Statements of Earnings and Consolidated Statements of Cash Flows
for all periods presented.
The following table presents the amounts segregated from the Consolidated
Statements of Earnings and reflected as earnings (loss) from discontinued
operations:
YEAR ENDED DECEMBER 31,
2003 2002
-------------------------- ----------
Net sales. . . . . . . . . . . . . . . . $ 78,747 $ 80,485
Loss before income taxes and minority
interest . . . . . . . . . . . . . . . . $ (940) $(33,674)
Income tax (expense) benefit . . . . . . (12) 11,666
Minority interest. . . . . . . . . . . . - (120)
-------------------------- ----------
Loss from discontinued operations before
gain on sale . . . . . . . . . . . . . . (952) (22,128)
Gain on sale of discontinued operations,
net of tax . . . . . . . . . . . . . . . 6,544 -
-------------------------- ----------
Discontinued operations, net of tax. . . $ 5,592 $(22,128)
========================== ==========
Included in discontinued operations for the year ended December 31, 2003, was a
pre-tax gain on disposal of discontinued operations of $5,630, which, when
combined with a tax benefit of $914, resulted in an after-tax gain of $6,544.
Included in discontinued operations for the year ended December 31, 2002, were
pre-tax charges of $27,389 for a goodwill impairment and $7,000 for an other
asset impairment recognized pursuant to the provisions of FAS No.142 and FAS
No.144, respectively.
17. ACQUISITIONS
We established acquisition reserves in fiscal year 1999 when we recorded the
acquisition of W. Canning, plc. The reorganization of employees and facilities
has been completed. Five facilities have been closed and those activities have
assimilated elsewhere. Leases associated with these facilities have expired
with the exception of one location, which was leased through March 2008 and has
subsequently been sub-leased to partially offset the future cash payments.
The balance for acquisition reserves included in other accrued liabilities on
the consolidated balance sheet as of December 31, 2004, was immaterial. We made
payments of $227, $335, and $210 in 2004, 2003, and 2002, respectively related
to this reserve. In 2003, the amount of $1,746 was reclassified from accrued
liabilities into other long-term liabilities. Due to the environmental nature
of this balance it will be monitored along with other items of this nature.
18. GUARANTOR FINANCIAL INFORMATION
MacDermid, Inc. ("Issuer") issued 9 1/8% Senior Subordinated Notes ("Bond
Offering") effective June 20, 2001, for the face amount of $301,500, which pay
interest semiannually on January 15th and July 15th and mature in 2011. The
proceeds were used to pay down existing long-term debt. This Bond Offering is
guaranteed by substantially all existing and future directly or indirectly 100%
owned domestic restricted subsidiaries of MacDermid, Inc. ("Guarantors"). The
Guarantors, fully, jointly and severally, irrevocably and unconditionally
guarantee the performance and payment when due of all the obligations under the
Bond Offering. Our foreign subsidiaries ("Nonguarantors") are not guarantors of
the indebtedness under the Bond Offering.
The equity method was used by MacDermid, Inc. with respect to investments in
subsidiaries. The equity method also has been used by subsidiary guarantors
with respect to investments in non-guarantor subsidiaries. Financial statements
for subsidiary guarantors are presented as a combined entity. The financial
information includes certain allocations of revenues and expenses based on
management's best estimates, which are not necessarily indicative of the
financial position, results of operations and cash flows that these entities
would have achieved on a stand-alone basis.
The following financial information sets forth our Condensed Consolidating
Balance Sheets as of December 30, 2004, and December 31, 2003; and the Condensed
Consolidating Statements of Earnings and the Condensed Consolidating Statements
of Cash Flows for the years ending December 31, 2004, 2003, and 2002.
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, 2004
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
----------- -------------- -------------- -------------- ------------------
Net sales . . . . . . . . $ 91,275 $ 163,300 $ 423,048 $ (16,838) $ 660,785
Cost of sales . . . . . . 58,852 70,301 235,229 (16,838) 347,544
----------- -------------- -------------- -------------- ------------------
Gross profit. . . . . . . 32,423 92,999 187,819 - 313,241
Operating expenses:
Selling, technical and
administrative. . . . . . 44,400 29,428 112,087 - 185,915
Research and development. 6,647 7,497 7,772 - 21,916
----------- -------------- -------------- -------------- ------------------
51,047 36,925 119,859 - 207,831
----------- -------------- -------------- -------------- ------------------
Operating (loss) profit . (18,624) 56,074 67,960 - 105,410
Equity in earnings of
subsidiaries. . . . . . . 83,761 49,966 - (133,727) -
Interest income . . . . . 590 41 768 - 1,399
Interest expense. . . . . (30,606) (25) (383) - (31,014)
Miscellaneous income
(expense), net. . . . . 1,288 260 394 - 1,942
----------- -------------- -------------- -------------- ------------------
55,033 50,242 779 (133,727) (27,673)
----------- -------------- -------------- -------------- ------------------
Earnings before taxes . . 36,409 106,316 68,739 (133,727) 77,737
Income tax benefit
(expense) . . . . . . . . 16,815 (22,555) (18,773) - (24,513)
----------- -------------- -------------- -------------- ------------------
Net earnings. . . . . . . $ 53,224 $ 83,761 $ 49,966 $ (133,727) $ 53,224
=========== ============== ============== ============== ==================
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, 2003
MACDERMID
UNRESTRICTED INCORPORATED
GUARANTOR NONGUARANTOR NONGUARANTOR AND
ISSUER SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS SUBSIDIARIES
-------------- -------------- -------------- ------------- -------------- --------------
Net sales . . . . . . . $ 88,377 $ 167,451 $ 380,528 $ - $ (16,470) $ 619,886
Cost of sales . . . . . 58,294 77,330 210,117 - (16,470) 329,271
-------------- -------------- -------------- ------------- -------------- --------------
Gross profit. . . . . . 30,083 90,121 170,411 - - 290,615
Operating expenses:
Selling, technical and
administrative. . . . . 41,137 31,290 99,083 - - 171,510
Research and
development . . . . . . 6,689 6,998 6,268 - - 19,955
-------------- -------------- -------------- ------------- -------------- --------------
47,826 38,288 105,351 - - 191,465
-------------- -------------- -------------- ------------- -------------- --------------
Operating profit (loss) (17,743) 51,833 65,060 - - 99,150
Equity in earnings of
subsidiaries. . . . . . 97,767 61,825 5,592 - (165,184) -
Interest income . . . . 142 173 558 - - 873
Interest expense. . . . (32,271) 4,570 (3,350) - - (31,051)
Miscellaneous income
(expense), net. . . . . 3,558 302 454 - - 4,314
-------------- -------------- -------------- ------------- -------------- --------------
69,196 66,870 3,254 - (165,184) (25,864)
-------------- -------------- -------------- ------------- -------------- --------------
Earnings from
continuing operations
before taxes. . . . . . 51,453 118,703 68,314 - (165,184) 73,286
Income tax benefit
(expense) . . . . . . . 3,959 (20,936) (6,489) - - (23,466)
-------------- -------------- -------------- ------------- -------------- --------------
Earnings from
continuing operations . 55,412 97,767 61,825 - (165,184) 49,820
Discontinued
operations. . . . . . . - - - 5,592 - 5,592
Cumulative effect of
accounting change . . . 1,014 - - - - 1,014
-------------- -------------- -------------- ------------- -------------- --------------
Net earnings. . . . . . $ 56,426 $ 97,767 $ 61,825 $ 5,592 $ (165,184) $ 56,426
============== ============== ============== ============= ============== ==============
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, 2002
MACDERMID
INCORPORATED
GUARANTOR NONGUARANTOR DISCONTINUED AND
ISSUER SUBSIDIARIES SUBSIDIARIES OPERATIONS ELIMINATIONS SUBSIDIARIES
-------------- -------------- -------------- ------------ -------------- --------------
Net sales . . . . . . . . . . $ 95,004 $ 182,348 $ 349,695 $ - $ (15,557) $ 611,490
Cost of sales . . . . . . . . 63,916 89,510 199,143 - (15,557) 337,012
-------------- -------------- -------------- ------------ -------------- --------------
Gross profit. . . . . . . . . 31,088 92,838 150,552 - - 274,478
Operating expenses:
Selling, technical and
administrative. . . . . . . . 46,521 35,120 89,502 - - 171,143
Research and development. . . 6,039 7,692 5,471 - - 19,202
-------------- -------------- -------------- ------------ -------------- --------------
52,560 42,812 94,973 - - 190,345
-------------- -------------- -------------- ------------ -------------- --------------
Operating profit (loss) . . . (21,472) 50,026 55,579 - - 84,133
Equity in earnings of
subsidiaries. . . . . . . . . 41,050 13,548 (22,128) - (32,470) -
Interest income . . . . . . . 70 88 417 - - 575
Interest expense. . . . . . . (22,795) (5,106) (6,557) - - (34,458)
Miscellaneous income
(expense), net. . . . . . . . (2,528) 194 (317) - - (2,651)
-------------- -------------- -------------- ------------ -------------- --------------
15,797 8,724 (28,585) - (32,470) (36,534)
-------------- -------------- -------------- ------------ -------------- --------------
Earnings (loss) before taxes. (5,675) 58,750 26,994 - (32,470) 47,599
Income tax benefit
(expense) . . . . . . . . . . 15,024 (17,700) (13,446) - - (16,122)
-------------- -------------- -------------- ------------ -------------- --------------
Earnings from
continuing operations . . . . 9,349 41,050 13,548 - (32,470) 31,477
Discontinued operations,
net of tax. . . . . . . . . . - - - (22,128) - (22,128)
-------------- -------------- -------------- ------------ -------------- --------------
Net earnings (loss) . . . . . $ 9,349 $ 41,050 $ 13,548 $ (22,128) $ (32,470) $ 9,349
============== ============== ============== ============ ============== ==============
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------- ------------- -------------- -------------- -----------------
Assets
- ---------------------------
Current assets:
Cash and cash equivalents . $ 69,512 $ 688 $ 67,629 $ - $ 137,829
Accounts receivables, net . 9,127 18,103 115,225 - 142,455
Due (to) from affiliates. . 47,106 78,199 (125,305) - -
Inventories, net. . . . . . 5,002 22,996 52,447 - 80,445
Prepaid expenses. . . . . . 1,125 2,240 6,818 - 10,183
Deferred income taxes . . . 12,908 - 5,395 - 18,303
---------- ------------- -------------- -------------- -----------------
Total current assets. . . . 144,780 122,226 122,209 - 389,215
Property, plant and
equipment, net. . . . . . . 16,886 33,224 60,353 - 110,463
Goodwill. . . . . . . . . . 21,680 68,574 104,033 - 194,287
Intangibles, net. . . . . . - 5,004 23,430 - 28,434
Investments in subsidiaries 449,641 238,254 - (687,895) -
Deferred income taxes . . . 21,579 - 13,096 - 34,675
Other assets, net . . . . . 8,006 3,385 5,254 - 16,645
---------- ------------- -------------- -------------- -----------------
$ 662,572 $ 470,667 $ 328,375 $ (687,895) $ 773,719
========== ============= ============== ============== =================
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
Liabilities and Shareholders' Equity:
- -------------------------------------
Current liabilities:
Accounts and dividends
payable . . . . . . . . . $ 7,538 $ 7,363 $ 41,043 $ - $ 55,944
Accrued compensation. . . . 3,645 1,884 6,841 - 12,370
Accrued interest. . . . . . 12,692 - 8 - 12,700
Accrued income taxes
payable . . . . . . . . . . (3,467) 5,556 5,204 - 7,293
Other current liabilities . 14,621 5,911 20,273 - 40,805
----------- ------------- ------------- -------------- -----------------
Total current liabilities . 35,029 20,714 73,369 - 129,112
Long-term obligations . . . 300,385 274 418 - 301,077
Retirement benefits, less
current portion . . . . . . 20,395 - 6,193 - 26,588
Deferred income taxes . . . - - 9,267 - 9,267
Other long-term liabilities 2,732 38 874 - 3,644
----------- ------------- ------------- -------------- -----------------
Total liabilities . . . . . 358,541 21,026 90,121 - 469,688
----------- ------------- ------------- -------------- -----------------
Total shareholders' equity. 304,031 449,641 238,254 (687,895) 304,031
----------- ------------- ------------- -------------- -----------------
Total Liabilities and
Shareholders' Equity. . . . $ 662,572 $ 470,667 $ 328,375 $ (687,895) $ 773,719
=========== ============= ============= ============== =================
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------- ------------- -------------- -------------- -----------------
Assets
- ---------------------------
Current assets:
Cash and cash equivalents . $ 18,295 $ 1,286 $ 41,713 $ - $ 61,294
Accounts receivables, net . 10,598 16,523 110,028 - 137,149
Due (to) from affiliates. . 89,236 12,554 (101,790) - -
Inventories, net. . . . . . 6,417 23,343 46,015 - 75,775
Prepaid expenses. . . . . . 1,188 1,925 5,024 - 8,137
Deferred income taxes . . . 17,890 - 5,070 - 22,960
---------- ------------- -------------- -------------- -----------------
Total current assets. . . . 143,624 55,631 106,060 - 305,315
Property, plant and
equipment, net . . . . . 13,962 39,386 60,294 - 113,642
Goodwill. . . . . . . . . . 21,680 68,574 103,946 - 194,200
Intangibles, net. . . . . . - 5,672 24,389 - 30,061
Investments in subsidiaries 391,289 232,851 - (624,140) -
Deferred income taxes . . . 29,601 - 2,158 - 31,759
Other assets, net . . . . . 8,196 6,532 7,530 - 22,258
---------- ------------- -------------- -------------- -----------------
$ 608,352 $ 408,646 $ 304,377 $ (624,140) $ 697,235
========== ============= ============== ============== =================
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS AND SUBSIDIARIES
---------- ------------- -------------- -------------- -----------------
Liabilities and Shareholders' equity
- ------------------------------------
Current liabilities:
Accounts and dividends
payable. . . . . . . . . $ 8,281 $ 7,268 $ 38,512 $ - $ 54,061
Accrued compensation. . . . 3,534 2,025 6,301 - 11,860
Accrued interest. . . . . . 12,658 - 74 - 12,732
Accrued income taxes
payable. . . . . . . . . 13,095 882 (10,757) - 3,220
Other current liabilities . 12,965 6,631 24,154 - 43,750
---------- ------------- -------------- -------------- -----------------
Total current liabilities . 50,533 16,806 58,284 - 125,623
Long-term obligations . . . 300,265 524 414 - 301,203
Retirement benefits, less
current portion . . . . . . 15,123 - 5,556 - 20,679
Deferred income taxes . . . - - 6,232 - 6,232
Other long-term liabilities 3,419 27 1,040 - 4,486
---------- ------------- -------------- -------------- -----------------
Total liabilities . . . . . 369,340 17,357 71,526 - 458,223
---------- ------------- -------------- -------------- -----------------
Total shareholders' equity. 239,012 391,289 232,851 (624,140) 239,012
---------- ------------- -------------- -------------- -----------------
Total liabilities and
stockholders' equity. . . . $ 608,352 $ 408,646 $ 304,377 $ (624,140) $ 697,235
========== ============= ============== ============== =================
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004
MACDERMID
GUARANTOR NONGUARANTOR INCORPORATED
ISSUER SUBSIDIARIES SUBSIDIARIES AND SUBSIDIARIES
------------- ------------- -------------- -------------------
Net cash flows (used in)
provided by operating
activities. . . . . . . . . . . $ (31,175) $ 81,857 $ 34,595 $ 85,277
Investing activities:
Capital expenditures. . . . . . (5,184) (1,676) (5,587) (12,447)
Proceeds from disposition of
assets. . . . . . . . . . . . . 26 2,212 1,675 3,913
------------- ------------- -------------- -------------------
Net cash flows (used in)
provided by investing
activities. . . . . . . . . . . (5,158) 536 (3,912) (8,534)
Financing activities:
Net proceeds from
(repayments of) short-term
borrowings. . . . . . . . . . . 49,882 (70,688) 20,286 (520)
Proceeds from long-term
borrowings. . . . . . . . . . . - - 24 24
Repayments of long-term
borrowings. . . . . . . . . . . - (251) (286) (537)
Issuance of treasury stock. . . 32 - - 32
Proceeds from exercise of
stock options . . . . . . . . . 619 - - 619
Dividends paid. . . . . . . . . 37,017 (12,052) (28,600) (3,635)
------------- ------------- -------------- -------------------
Net cash flows provided by
(used in) financing activities. 87,550 (82,991) (8,576) (4,017)
Effect of exchange rate
changes on cash and cash
equivalents . . . . . . . . . . - - 3,809 3,809
------------- ------------- -------------- -------------------
Net increase (decrease) in
cash and cash equivalents . . . 51,217 (598) 25,916 76,535
Cash and cash equivalents at
beginning of year . . . . . . . 18,295 1,286 41,713 61,294
------------- ------------- -------------- -------------------
Cash and cash equivalents at
end of year . . . . . . . . . . $ 69,512 $ 688 $ 67,629 $ 137,829
============= ============= ============== ===================
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
MACDERMID
UNRESTRICTED INCORPORATED
GUARANTOR NONGUARANTOR NONGUARANTOR AND
ISSUER SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES
---------------- -------------- -------------- -------------- --------------
Net cash flows (used in)
provided by operating
activities. . . . . . . . . . . $ (21,946) $ 49,882 $ 66,616 $ (3,135) $ 91,417
Investing activities:
Capital expenditures. . . . . . (3,854) (1,917) (6,133) (623) (12,527)
Proceeds from disposition of
business and fixed assets . . . 1,590 - 233 5,000 6,823
---------------- -------------- -------------- -------------- --------------
Net cash flows (used in)
provided by investing
activities. . . . . . . . . . . (2,264) (1,917) (5,900) 4,377 (5,704)
---------------- -------------- -------------- -------------- --------------
Financing activities:
Net proceeds from
(repayments of) short-term
borrowings. . . . . . . . . . . 42,724 (40,364) (3,728) (112) (1,480)
Proceeds from long-term
borrowings. . . . . . . . . . . - - - 3,570 3,570
Repayments of long-term
borrowings. . . . . . . . . . . - - (383) (4,984) (5,367)
Proceeds from stock options . . 812 - - - 812
Purchase of treasury stock. . . (51,753) - - - (51,753)
Dividends paid. . . . . . . . . 36,569 (8,629) (31,694) - (3,754)
---------------- -------------- -------------- -------------- --------------
Net cash flows provided by
(used in) financing activities. 28,352 (48,993) (35,805) (1,526) (57,972)
Effect of exchange rate
changes on cash and cash
equivalents . . . . . . . . . . - - 1,588 (54) 1,534
---------------- -------------- -------------- -------------- --------------
Net increase (decrease) in
cash and cash equivalents . . . 4,142 (1,028) 26,499 (338) 29,275
Cash and cash equivalents at
beginning of year . . . . . . . 14,153 2,314 15,214 338 32,019
---------------- -------------- -------------- -------------- --------------
Cash and cash equivalents at
end of year . . . . . . . . . . $ 18,295 $ 1,286 $ 41,713 $ - $ 61,294
================ ============== ============== ============== ==============
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
MACDERMID
UNRESTRICTED INCORPORATED
GUARANTOR NONGUARANTOR NONGUARANTOR AND
ISSUER SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES
--------------- --------------- -------------- -------------- --------------
Net cash flows (used in)
provided by operating
activities. . . . . . . . . . . $ 14,807 $ 48,711 $ 53,794 $ 8,881 $ 126,193
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)
provided by investing
activities. . . . . . . . . . . (513) (305) (2,349) (1,220) (4,387)
--------------- --------------- -------------- -------------- --------------
Financing activities:
Net proceeds from
(repayments of) short-term
borrowings. . . . . . . . . . . 48,589 (34,516) (25,019) (7,410) (18,356)
Proceeds from long-term
borrowings. . . . . . . . . . . 79,599 - - 3,012 82,611
Repayments of long-term
borrowings. . . . . . . . . . . (158,507) - (6,198) (3,571) (168,276)
Proceeds from stock options . . 360 - - - 360
Purchase of treasury stock. . . (822) - - - (822)
Dividends paid. . . . . . . . . 26,221 (13,457) (15,345) - (2,581)
--------------- --------------- -------------- -------------- --------------
Net cash flows provided by
(used in) financing activities. (4,560) (47,973) (46,562) (7,969) (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
=============== =============== ============== ============== ==============
MANAGEMENT'S STATEMENT OF FINANCIAL RESPONSIBILITY
MacDermid, Incorporated
1401 Blake St
Denver, Colorado 80202
To the Shareholders of MacDermid, Incorporated
The financial information in this report, including the audited consolidated
financial statements, has been prepared by the management of MacDermid,
Incorporated. 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. We
employ professional financial management 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
MacDermid, Incorporated and its affiliates in an ethical and socially
responsible manner. We are 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. KPMG LLP's report for 2004 appears in this Annual Report.
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 of our
staff of financial and operating management with respect to the financial
internal controls.
/s/ Gregory M. Bolingbroke /s/ Daniel H. Leever
- ------------------------------- -----------------------
Gregory M. Bolingbroke, Daniel H. Leever,
Senior Vice President, Finance Chairman of the Board
and Chief Executive Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
MacDermid, Incorporated:
We have audited the accompanying consolidated balance sheets of MacDermid,
Incorporated and its subsidiaries (the Corporation) as of December 31, 2004, and
2003, and the related consolidated statements of earnings and other
comprehensive income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Corporation'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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004, and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of MacDermid,
Incorporated's internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 15, 2005, expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
As discussed in Note 1 to the Consolidated Financial Statements, "Summary of
Accounting Policies," effective July 1, 2003, the Corporation adopted Statement
of Financial Accounting Standard No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity."
/s/ KPMG, LLP
Hartford, Connecticut
March 15, 2005
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of MacDermid, Inc. (MacDermid) is responsible for establishing
and maintaining adequate internal control over financial reporting. MacDermid's
internal control system was designed to provide reasonable assurance to the
management and the Board of Directors of MacDermid regarding the preparation and
fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
MacDermid management assessed the effectiveness of MacDermid's internal control
over financial reporting as of December 31, 2004. In making this assessment, it
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on
our assessment we believe that, as of December 31, 2004, MacDermid's internal
control over financial reporting is effective based on those criteria.
/s/ Gregory M. Bolingbroke /s/ Daniel H. Leever
- ------------------------------- -----------------------
Gregory M. Bolingbroke, Daniel H. Leever,
Senior Vice President, Finance Chairman of the Board
and Chief Executive Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
MacDermid, Incorporated
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting that MacDermid,
Incorporated and subsidiaries (MacDermid or the Corporation) maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
MacDermid's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Corporation's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A corporation's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A corporation's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the corporation; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the corporation are
being made only in accordance with authorizations of management and directors of
the corporation; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
corporation's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that MacDermid maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also, in our opinion, MacDermid maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Consolidated Balance Sheets of
MacDermid and subsidiaries as of December 31, 2004, and 2003, and the related
Consolidated Statements of Earnings and Comprehensive Income, Shareholders'
Equity, and Cash Flows for each of the years in the three-year period ended
December 31, 2004, and our report dated March 15, 2005 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG, LLP
Hartford, Connecticut
March 15, 2005
FIVE YEAR SELECTED FINANCIAL DATA
(In thousands except per share data)
NINE MONTHS TWELVE MONTHS
TWELVE MONTHS ENDED ENDED ENDED
-------------------- -------------- --------- ------------------- -----------------
2004 2003 2002 DECEMBER 31, 2001 MARCH 31, 2001
-------------------- -------------- --------- ------------------- -----------------
OPERATING RESULTS:
Net sales. . . . . . . . . . . . . $ 660,785 $ 619,886 $611,490 $ 472,010 $ 759,642
Earnings (loss) from continuing
operations before cumulative
effect of accounting change. . . . $ 53,224 $ 49,820 $ 31,477 $ (17,288) $ 43,753
Earnings (loss) from discontinued
operations, net of tax . . . . . . - 5,592 (22,128) (11,624) (8,949)
Cumulative effect of accounting
change, net of tax . . . . . . . . - 1,014 - - -
-------------------- -------------- --------- ------------------- -----------------
Net earnings (loss). . . . . . . . $ 53,224 $ 56,426 $ 9,349 $ (28,912) $ 34,804
==================== ============== ========= =================== =================
Diluted earnings (loss) per
common share:
Continuing operations. . . . . . . $ 1.72 $ 1.59 $ 0.98 $ (0.54) $ 1.35
Discontinued operations. . . . . . - 0.18 (0.69) (0.37) (0.28)
Cumulative effect of accounting
change . . . . . . . . . . . . . . - 0.03 - - -
-------------------- -------------- --------- ------------------- -----------------
Net income . . . . . . . . . . . . $ 1.72 $ 1.80 $ 0.29 $ (0.91) $ 1.07
==================== ============== ========= =================== =================
FINANCIAL POSITION AT
YEAR END:
- ----------------------------------
Total assets . . . . . . . . . . . $ 773,719 $ 697,235 $707,893 $ 790,885 $ 884,825
Long-term debt (including short-
term portion). . . . . . . . . . . $ 301,341 $ 301,761 $316,467 $ 397,402 $ 459,102
SHARE DATA:
- ----------------------------------
Cash dividends declared per
common share . . . . . . . . . . . $ 0.16 $ 0.10 $ 0.08 $ 0.06 $ 0.08
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited, in thousands except per share data)
2004 BY QUARTERS
---------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER TOTAL
-------- ---------- --------- -------- --------
Net sales . . . . . . . . . . . . . . $162,012 $ 165,053 $ 161,585 $172,135 $660,785
Gross profit. . . . . . . . . . . . . $ 77,526 $ 78,074 $ 76,375 $ 81,266 $313,241
Net earnings. . . . . . . . . . . . . $ 12,893 $ 13,385 $ 12,043 $ 14,903 $ 53,224
Diluted net earnings per common share $ 0.42 $ 0.43 $ 0.39 $ 0.48 $ 1.72
2003 BY QUARTERS
---------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER TOTAL
-------- ---------- --------- -------- --------
Net sales . . . . . . . . . . . . . . $152,803 $ 155,320 $ 149,657 $162,106 $619,886
Gross profit. . . . . . . . . . . . . $ 72,542 $ 73,794 $ 69,916 $ 74,363 $290,615
Earnings from continuing operations
before cumulative effect of
accounting change . . . . . . . . . . $ 11,668 $ 12,134 $ 12,361 $ 13,657 $ 49,820
Net earnings. . . . . . . . . . . . . $ 11,566 $ 12,130 $ 13,441 $ 19,289 $ 56,426
Diluted earnings per common share
from continuing operations. . . . . . $ 0.36 $ 0.38 $ 0.40 $ 0.45 $ 1.59
Diluted net earnings per common share $ 0.36 $ 0.38 $ 0.43 $ 0.63 $ 1.80
MARKET RANGE TRADING RECORD
2004 2003
-------------- --------------
QUARTER HIGH LOW HIGH LOW
- ------------------------- ------ ------ ------ ------
March $39.73 $33.66 $23.84 $20.10
June $35.65 $30.10 $27.08 $20.16
September $33.78 $26.43 $29.68 $26.05
December $37.20 $27.55 $34.84 $26.50
Closing price December 31 $36.10 $34.24
DIVIDEND RECORD
2004 2003
RECORD PAYABLE AMOUNT RECORD PAYABLE AMOUNT
QUARTER DATE DATE DECLARED DATE DATE DECLARED
- ---------- -------- ------- ----- -------- ------- -----
March 3/17/04 4/1/04 $0.04 3/17/03 4/1/03 $0.02
June 6/15/04 7/1/04 $0.04 6/16/03 7/1/03 $0.02
September 9/15/04 10/1/04 $0.04 9/15/03 10/1/03 $0.03
December 12/15/04 1/4/05 $0.04 12/15/03 1/2/04 $0.03
DIRECTORS
DANIEL H. LEEVER, Chairman of the Board and Chief Executive Officer
ROBERT ECKLIN, Executive Vice president, Optical Communications of Corning,
Incorporated
DONALD G. OGILVIE, President and Chief Executive Officer, American Bankers
Association
JOSEPH M. SILVESTRI, Partner 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
CORPORATE HEADQUARTERS:
MacDermid, Incorporated
1401 Blake Street
Denver, CO 80202
(720) 479-3060
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
KPMG, LLP
One Financial Plaza
Hartford, CT 06103-4103
SEC FORM 10-K
The Annual Report, the SEC Form 10-K and periodic reports on SEC Form 10-Q are
available at our website, www.macdermid.com, as soon as practicable after the
reports are filed with the SEC. These reports are also available free of charge
by written request to:
Corporate Secretary
MacDermid, Incorporated
245 Freight Street
Waterbury, CT 06702
CERTIFICATIONS:
We have included, as required under Section 302 of the Sarbanes-Oxley act, the
exhibits to our Form 10-K for 2004 that pertain to the Principle Executive
Officer and Principle Financial Officer certifications. Also, we have an annual
requirement to file a Section 303 12(a) CEO Certification with the NYSE no later
than 30 days after our annual shareholders meeting. Further, we will make this
certification available on our website (www.macdermid.com) as soon as
practicable after filing with the NYSE.
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 AND DIVIDEND INFORMATION
The common shares of MacDermid, Incorporated are traded on the New York Stock
Exchange (NYSE) under the ticker symbol: MRD. Price and shares traded are
listed in principal daily newspapers and are supplied by the NYSE. Approximate
number of Registered Holders as of March 1, 2005 is 773. CUSIP - 554273 102
ANNUAL MEETING:
The Annual Meeting of Shareholders will be held on Thursday May 12, 2005, at
3:00pm at our offices at 245 Freight Street in Waterbury, Connecticut.