UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

x            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

o               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

COMMISSION FILE NUMBER  1-13889

MacDermid, Incorporated
(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code  (720) 479-3062

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.: 

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes  o    No  x.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

MACDERMID, INCORPORATED
TABLE OF CONTENTS

PART I: Financial Information
Item 1:	Financial Statements (Unaudited):
	Consolidated Statements of Earnings for the three and nine months ended September 30, 2006 and 2005
	Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005
	Notes to Consolidated Financial Statements
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3:	Quantitative and Qualitative Disclosures About Market Risk
Item 4:	Controls and Procedures
PART II: Other Information
Item 1:	Legal Proceedings
Item 1A:	Risk Factors
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3:	Defaults Upon Senior Securities
Item 4:	Submission of Matters to a Vote of Security Holders
Item 5:	Other Information
Item 6:	Exhibits
	Signatures

 

 

 

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

MACDERMID, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands of dollars except per share data)
(Unaudited)

		Three months ended September 30,						Nine months ended September 30,
		2006			2005			2006			2005
Net sales		$	200,295		$	193,260		$	607,910		$	541,788
Cost of sales		116,242			109,978			344,011			300,827
Gross profit		84,053			83,282			263,899			240,961
Operating expenses:
Selling, technical and administrative		52,514			51,387			160,259			147,581
Research and development		7,489			6,684			22,788			19,725
(Gain)/loss on asset sales and business dispositions		(1,108		)	—			1,116			—
Restructuring		1			1,077			2,108			1,462
		58,896			59,148			186,271			168,768
Operating profit		25,157			24,134			77,628			72,193
Other income (expense):
Interest income		858			534			2,399			1,834
Interest expense		(7,354		)	(7,635		)	(21,354		)	(23,004		)
Other, net		230			799			(148		)	207
		(6,266		)	(6,302		)	(19,103		)	(20,963		)
Earnings before income taxes		18,891			17,832			58,525			51,230
Income taxes		(5,801		)	(4,915		)	(16,621		)	(14,600		)
Net earnings		$	13,090		$	12,917		$	41,904		$	36,630
Earnings per common share:
Basic		$	0.42		$	0.42		$	1.36		$	1.21
Diluted		$	0.42		$	0.42		$	1.34		$	1.19
Weighted average common shares outstanding:
Basic		30,822,994			30,504,127			30,764,044			30,383,152
Diluted		31,293,290			30,956,963			31,254,656			30,865,440
Dividends declared per common share		$	0.06		$	0.06		$	0.18		$	0.18

 

See accompanying notes to consolidated financial statements.

1

---

 

MACDERMID, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars except share data)

		September 30,			December 31,
		2006			2005
		(Unaudited)			(Unaudited)
					(Restated)
Assets
Current assets:
Cash and cash equivalents		$	108,965		$	80,932
Accounts receivable, net of allowance for doubtful receivables of $11,144 and $10,966, respectively		166,470			155,718
Inventories, net		123,844			92,973
Prepaid expenses		15,133			14,108
Deferred income taxes		15,700			16,629
Total current assets		430,112			360,360
Property, plant and equipment, net of accumulated depreciation of $201,248 and $184,499, respectively		118,955			123,229
Goodwill		251,736			242,935
Intangibles, net of accumulated amortization of $19,507 and $14,793, respectively		41,324			40,916
Deferred income taxes		37,313			37,667
Other assets, net		15,805			14,820
Total assets		$	895,245		$	819,927
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable		$	66,141		$	60,202
Dividends payable		1,851			1,836
Accrued compensation		17,722			16,261
Accrued interest		5,869			12,784
Accrued income taxes payable		10,714			11,461
Short-term notes payable		459			498
Current installments of long-term obligations		61			232
Other current liabilities		44,772			38,565
Total current liabilities		147,589			141,839
Long-term debt and capital lease obligations		300,784			301,043
Retirement benefits, less current portion		22,232			22,343
Deferred income taxes		12,613			11,489
Long-term environmental		3,198			4,119
Other long-term liabilities		10,681			17
Total liabilities		497,097			480,850
Shareholders’ equity
Common stock, authorized 75,000,000 shares, issued 47,380,916 at September 30, 2006, and 47,131,950 shares at December 31, 2005, at stated value of $1.00 per share		47,381			47,132
Additional paid-in capital		47,965			42,869
Retained earnings		403,165			366,807
Accumulated other comprehensive (loss) income		14,291			(3,051		)
Less — cost of common shares held in treasury, 16,545,831 at September 30, 2006, 16,546,763 at December 31, 2005		(114,654		)	(114,680		)
Total shareholders’ equity		398,148			339,077
Total liabilities and shareholders’ equity		$	895,245		$	819,927

 

See accompanying notes to consolidated financial statements.

2

---

 

MACDERMID, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(Unaudited)

		Nine months ended September 30,
		2006			2005
Net cash flows from operating activities:
Net earnings		$	41,904		$	36,630
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		14,835			12,209
Amortization		4,256			2,796
Inventory reserve adjustment		(2,846		)	—
Provision for bad debts		917			1,580
Deferred income taxes		3,171			(995		)
Stock compensation expense		1,922			5,227
Net loss on asset sales and business dispositions		830			—
Restructuring		2,108			1,463
Changes in assets and liabilities
Increase in receivables		(6,304		)	(12,909		)
Increase in inventories		(27,790		)	(5,423		)
Increase in prepaid expenses		(533		)	(2,461		)
Increase (decrease) in accounts payable		3,185			(703		)
Decrease in accrued expenses		(5,436		)	(10,319		)
(Decrease)increase in income tax liabilities		(244		)	3,620
Increase (decrease) in L/T environmental Liabilities		(918		)	169
Other		4,318			308
Net cash flows provided by operating activities		33,375			31,192
Cash flows from investing activities:
Capital expenditures		(7,530		)	(10,810		)
Proceeds from disposition of fixed assets		2,270			1,245
Acquisition of business, net of cash acquired		—			(93,153		)
Proceeds from disposition of business		770			262
Other		(256		)	—
Net cash flows used in investing activities		(4,746		)	(102,456		)
Cash flows from financing activities:
Net short-term borrowings (repayments)		(250		)	2,965
Repayments of long-term borrowings		(379		)	(185		)
Issuance from treasury shares		26			33
Proceeds from exercise of stock options		3,422			2,717
Dividends paid		(5,532		)	(4,858		)
Net cash flows (used in) provided by financing activities		(2,713		)	672
Effect of exchange rate changes on cash and cash equivalents		2,117			(6,930		)
Net increase (decrease) in cash and cash equivalents		28,033			(77,522		)
Cash and cash equivalents at beginning of period		80,932			137,829
Cash and cash equivalents at end of period		$	108,965		$	60,307
Supplemental disclosures of Cash Flow Information:
Cash paid for interest		$	27,818		$	28,285
Cash paid for income taxes		$	15,627		$	12,657

 

See accompanying notes to consolidated financial statements.

 

3

 

MACDERMID, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of dollars, except share and per share amounts)

Note 1.                                  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim financial information has been prepared in accordance with the interim reporting rules and regulations of the U.S. Securities and Exchange Commission and therefore does not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted.  The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ from those estimates.  Certain amounts in the prior period have been restated to conform to current period presentation, including the December 31, 2005 balance sheet accounts of Goodwill, Intangibles, Total Assets, Accumulated Other Comprehensive (Loss) Income, Total Shareholders’ Equity and Total Liabilities and Shareholders’ Equity (See Notes 2 and 6 below) and the September 30, 2005 foreign currency translation adjustment (see Note 7 below).  Below are tables that present the balances that have been restated from previously reported amounts due to a correction of an error in accounting for the Company’s historical goodwill and intangible balances:

Balance Sheet Items		December 31, 2005 balance, as reported			Restatement Adjustments			December 31, 2005 balance, restated
Goodwill		$	236,532		$	6,403		$	242,935
Intangibles, net		40,128			788			40,916
Accumulated other comprehensive (loss) income		(10,242		)	7,191			(3,051		)
Total assets		812,736			7,191			819,927
Total shareholders’ equity		331,886			7,191			339,077
Total liabilities and shareholders’ equity		812,736			7,191			819,927

 

Other Comprehensive Income		Three months ended September 30, 2005 balance, as reported			Restatement Adjustments			Three months ended September 30, 2005 balance, restated
Foreign currency translation adjustment		$	(1,926	)	$	(2,110	)	$	(4,036	)
Other		165			842			1,007
Comprehensive income		$	11,156		$	(1,268	)	$	9,888

 

Other Comprehensive Income		Nine months ended September 30, 2005 balance, as reported			Restatement Adjustments			Nine months ended September 30, 2005 balance, restated
Foreign currency translation adjustment		$	(18,991	)	$	(11,859	)	$	(30,850	)
Other		871			3,847			4,718
Comprehensive income		$	18,510		$	(8,012	)	$	10,498

 

In the opinion of MacDermid, Incorporated  and its subsidiaries (collectively “MacDermid” or the “Company”) management, the accompanying unaudited consolidated  financial statements of the interim periods presented contain all adjustments necessary to present fairly the financial position of MacDermid as of September 30, 2006 and the results of operations and cash flows for the periods presented.  All such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that may be achieved for a full year and cannot be used to indicate financial performance for the entire year.  These financial statements should be read in conjunction with the notes to the consolidated financial statements contained in MacDermid’s Annual Report for the year ended December 31, 2005.

4

---

 

Note 2.                                  Goodwill and Intangible Assets Currency Translation Restatement Adjustments

In the first quarter of 2006, the Company reviewed its foreign currency conversion rates used to convert goodwill and intangible assets. Beginning in 2002, the Company held all goodwill and certain intangible assets related to the acquisition of Canning Ltd. (“Canning intangibles”) constant at historic currency conversion rates, effectively holding the value of goodwill and Canning intangibles constant at 2002 currency conversion rates.  This resulted in an understatement of goodwill and Canning intangibles as of December 31, 2005.  In connection with the Company adopting the provision of Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, in the first quarter of 2006, the Company restated the December 31, 2005 balances of Goodwill, Intangibles and Other Comprehensive (Loss) Income to correct an error related to foreign currency translation.  As a result, the Company made certain restatement adjustments to the December 31, 2005 Consolidated Balance Sheet to state these assets at the correct currency conversion rates.   The Company also restated Other Comprehensive Income for the three and nine months ended September 30, 2005 to correct an error related to foreign currency translation (see note 7 below).

Upon further investigation the Company’s management determined that goodwill related to the 1998 acquisition of Canning Ltd. had been pushed-down into the books of the acquisition holding company instead of being pushed-down to the books of the geographic business segments, where it is tested for impairment.  The Company should have allocated the goodwill into the books of the regional business segments benefiting from the acquisition.  The goodwill, however, was pushed-down to, and denominated in British Pounds as opposed to being pushed-down to, and denominated in the currencies of the regions that benefit from the goodwill.

The restatement adjustments necessary to properly convert goodwill and intangible assets are offset with a corresponding restatement adjustment to the Accumulated Other Comprehensive (Loss) Income section of Shareholders’ Equity in the December 31, 2005 Consolidated Balance Sheet, as described in Notes 6 and 7 below.

These restatement adjustments have no impact on earnings as reported in the Company’s financial statements dated December 31, 2005, or any of the tangible assets and liabilities accounts stated therein.  For financial reporting purposes, the Company treated these restatement adjustments similar to a reclassification of the affected December 31, 2005 balances.

The restatement adjustments to the Company’s Goodwill, Intangible Assets, and Accumulated Other Comprehensive (Loss) Income are as follows:

Balance Sheet Item		December 31, 2005 balance, as reported			Restatement Adjustments			December 31, 2005 balance, restated
Goodwill		$	236,532		$	6,403		$	242,935
Intangibles, net		40,128			788			40,916
Accumulated Other Comprehensive (Loss) Income		(10,242		)	7,191			(3,051		)

 

As a result of the above restatement adjustments, the following balance sheet totals changed as follows:

Balance Sheet Totals		December 31, 2005 balance, as reported			Restatement Adjustments			December 31, 2005 balance, restated
Total Assets		$	812,736		$	7,191		$	819,927
Total Shareholders’ Equity		331,886			7,191			339,077
Total Liabilities and Shareholders’ Equity		812,736			7,191			819,927

 

As a result of these restatement adjustments, the Company re-performed its goodwill and intangible assets impairment tests for 2005.  The Company added the respective restatement adjustments and compared the adjusted net assets to the discounted cash flows, as calculated in the original impairment test.  The restatement adjustments noted above did not trigger an impairment, and as such, the Company concluded that there is no impairment to its goodwill or intangible assets (including the Canning intangibles) as a result of the above restatement adjustments.

5

---

 

On June 20, 2001, MacDermid issued 9 1/8% Senior Subordinated Notes (“Bond Offering”) due 2011.  Under the Bond Offering the Company is required to perform tests of certain metrics in order to demonstrate that the Company meets restrictive covenants embedded in the Bond Offering.  As a result of the restatement adjustments noted above, the Company restated its goodwill balances and re-performed the net worth, restricted payment, and indebtedness covenant tests as of December 31, 2005, as calculated in accordance with Bond Offering agreement.  The restatement adjustments noted above did not trigger a default, and as such, the Company concluded that the above restatement adjustments had no impact on its Bond Offering covenant tests as of December 31, 2005.

Note 3.                                  New Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132R  (“SFAS 158”).   This statement requires recognition of the funded status of postretirement benefit plans in the statement of financial position.  An employer must recognize an asset or liability in its statement of financial position for the difference between the fair value of the plan assets and the projected benefit obligation (pension plans) or the accumulated postretirement benefit obligation (other postretirement plans).  Changes in the plans’ funded status must be recognized, in the year of change, in comprehensive income.  SFAS 158 will also require entities to measure the funded status of the plans as of the date of the year-end statement of financial position, with a few exceptions.  The recognition provision of SFAS 158 is effective beginning the fourth quarter of 2006.  The plan measurement date provision of SFAS 158 is effective beginning the first quarter of 2008.  The Company is currently in the process of evaluating the expected effect of SFAS 158 on its consolidated financial statements and is not yet in a position to determine such effects.  The unfunded status of the pension and postretirement benefit plans would have resulted in an additional long term liability of approximately  $25,000 to $35,000 as of December 31, 2005, with a corresponding offset to other comprehensive income in the stockholders’ equity section at December 31, 2005.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”) that will become effective beginning first quarter of 2008.   This statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  This statement does not require any new fair value measurements.  However, for some entities, the application of this statement will change current practice.  The Company is currently in the process of evaluating the expected effect of SFAS 157 on its consolidated financial statements and is not yet in a position to determine such effects.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB 108”) to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet.  SAB 108 will become effective beginning in the fourth quarter of 2006.  The Company is currently in the process of evaluating the expected effect of SAB 108 on its consolidated financial statements and is not yet in a position to determine such effects.

In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 clarifies the accounting and reporting for uncertainties in income tax law.  This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.  The Company will adopt this Interpretation in the first quarter of 2007.  The cumulative effects, if any, of applying this Interpretation will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption.  The Company is currently in the process of evaluating the expected effect of FIN 48 on its consolidated financial statements and is currently not yet in a position to determine such effects.

In April 2006, the FASB issued FASB Staff Position (FSP) FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (“FSP FIN 46(R)-6”), that  became effective beginning third quarter of 2006. FSP FIN No. 46(R)-6 clarifies that the variability to be considered in applying FASB Interpretation 46(R) shall be based on an analysis of the design of the variable interest entity.   The Company adopted the provisions of FSP FIN 46(R)-6 in the third quarter of 2006.  The adoption of FSP FIN 46(R)-6 did not have a material impact on the Company’s financial position, results of operations or cash flows.

6

---

 

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). This statement applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement where no specific transition provisions are included. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Retrospective application is limited to the direct effects of the change; the indirect effects should be recognized in the period of the change.  The Company adopted the provisions of SFAS 154 in the first quarter of 2006.  The adoption of SFAS 154 did not have a material impact on the Company’s financial position, results of operations or cash flows.

Note 4.                                  Earnings Per Common Share and Other Common Share Information

Earnings per share (“EPS”) is calculated based upon net earnings available for common shareholders. The computation of basic earnings per share is based upon the weighted average number of outstanding common shares.  The computation of diluted earnings per share is based upon the weighted average number of outstanding common shares plus the effect of all dilutive contingently issuable common shares from stock options, stock awards and warrants that were outstanding during the period, under the treasury stock method.  For the three months ended September 30, 2006 and 2005, 1,933,996 and 2,588,215, respectively, of options to purchase shares of common stock were outstanding but not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. For the nine months ended September 30, 2006 and 2005, 2,119,464 and 2,474,727, respectively, of options to purchase shares of common stock were outstanding but not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

The following table reconciles basic weighted-average common shares outstanding to diluted weighted-average common shares outstanding:

		Three Months Ended September 30,				Nine months ended September 30,
		2006		2005		2006		2005
Basic common shares		30,822,994		30,504,127		30,764,044		30,383,152
Dilutive effect of stock options		470,296		452,836		490,612		482,288
Diluted common shares		31,293,290		30,956,963		31,254,656		30,865,440

 

Note 5.                                  Stock-Based Plans

MacDermid grants stock options and stock awards to Board members and to employees.   Effective January 1, 2006, MacDermid adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”), which requires the use of the fair value method of accounting for all stock-based compensation, including stock options.  SFAS 123(R) was adopted using the modified prospective method of application.  Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized for those awards vesting in the current period based on the value that had been included in pro forma disclosures in prior periods.  Results from prior periods have not been restated.  Prior to the adoption of SFAS 123(R), MacDermid 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 was measured using the fair value at the date of grant for options granted after April 1, 2001.  The resulting expense is amortized over the period in which the options are earned.    During the three and nine months ended September 30, 2006, ($587) and $1,359, respectively, was charged to expense related to stock options.  During the three and nine months ended September 30, 2005, $1,177 and $5,092, respectively, was charged to expense related to stock options.

The following table presents the weighted-average assumptions used in the option pricing model for stock options granted during the three and nine months ended September 30, 2006 and 2005, respectively:

		Three months Ended September 30,						Nine months Ended September 30,
		2006			2005			2006			2005
Volatility		28.9		%	31.9		%	28.9		%	31.9		%
Risk-free interest rate		5.07		%	1.60		%	5.07		%	1.60		%
Dividend yield		0.70		%	0.49		%	0.70		%	0.49		%
Expected lives (years)		8.0			6.0			8.0			6.0
Fair value per option granted		$	15.75		$	11.07		$	15.75		$	11.07

 

7

---

 

For all of MacDermid’s stock options, the fair value of each grant was estimated at the date of grant using the Black-Scholes option pricing model.  The expected life of the stock options represents the period of time the stock options are expected to be outstanding and is based on historical trends.

MacDermid has five stock incentive plans under which there are outstanding stock options.  These plans have different terms and features as described below:

Equity Incentive Plan

In 1996, MacDermid adopted a non-qualified equity incentive plan, approved by the shareholders in July 1995 (the “1995 Plan”).  The 1995 Plan provides for the issuance of up to 900,000 shares.  In February 2006, the Compensation Committee of the Company proposed that the Company’s shareholders consider the following changes to the 1995 plan:

·                  increase the aggregate maximum number of shares that may be granted in any one year from 50,000 to 150,000;

·                  allow the Compensation Committee to place additional restrictions and/or vesting requirements on any award;

·                  shorten the vesting term from four to three years;

·                  increase the retirement age for accelerated vesting from 60 to 65, and

·                  change the pro-rata vesting to one-third per year over the three year vesting period in case of involuntary termination without cause.

The changes above were approved by the Company’s shareholders in May 2006.

All shares of restricted stock issued under this plan must be held and cannot be sold or transferred, except to the Company, for a period of three or four years depending on the date the restricted shares were originally awarded.  The Company recognizes compensation expense for restricted shares issued under this plan equal to the market value of the restricted shares on the date of grant. For restricted stock awards granted prior to 2006, the restricted stock awards are granted at fair market value and the related expense is recognized at the date of grant.  For restricted stock awards granted after January 1, 2006, the restricted stock awards are granted at fair market value and the related expense is recognized over the vesting terms of the restricted stock awards.  The amount of expense recognized during the three and nine months ended September 30, 2006 was $240 and $400, respectively.  The amount of expense recognized during the three and nine months ended September 30, 2005 was $0 and $135, respectively.  The following table summarizes restricted stock award activity from December 31, 2005 through September 30, 2006 regarding the Company’s equity incentive plan:

 

Equity Incentive Plan:		Restricted Shares		Weighted Average Grant Date Fair Value
Nonvested balance at December 31, 2005		11,163		$	28.67
Changes during the period:
Shares granted		76,665		$	34.40
Nonvested balance at September 30, 2006		87,828		$	33.67

 

As of September 30, 2006, there was $2,239 of total unrecognized compensation cost related to restricted stock awards granted under the Equity Incentive Plan.  That cost is expected to be recognized over a weighted average period of 2.2 years.

Stock Option Plans

The 1992 Plan

In 1993, MacDermid adopted a non-qualified stock option plan, approved by shareholders in July 1992 (the “1992 Plan”).  The 1992 Plan provides for the issuance of up to 2,700,000 shares.  Options granted under the 1992 plan, which vest between four and six years, are generally exercisable 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 MacDermid at cost, during the four-year period commencing with the exercise date.  In February 2006, MacDermid’s Board of Directors voted to cancel all remaining unissued shares in the 1992 Plan.  As of September 30, 2006, there were 12,065 options outstanding under the 1992 plan.

 

8

 

The 1998 Plan

MacDermid adopted a non-qualified stock option plan, approved by shareholders in July 1999 (the “1998 Plan”).  The 1998 Plan provides for the issuance of up to 1,500,000 shares.  Options granted under the 1998 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.  In February 2006, MacDermid’s Board of Directors voted to cancel all remaining unissued shares in the 1998 Plan.  As of September 30, 2006, there were 793,400 options outstanding under the 1998 plan.

The 2001 Executive Plan

MacDermid adopted a non-qualified key executive stock option plan, approved by shareholders in July 2001 (the “2001 Executive Plan”).  The 2001 Executive Plan, as amended by MacDermid’s shareholders in 2004, provides for the issuance of up to 5,000,000 shares.  Options granted under the 2001 Executive Plan generally are exercisable during a six-year period beginning at the vesting date, which is four years after the grant date.  The options are exercisable into unrestricted shares of common stock, except as otherwise provided at the time of grant.  The options are also subject to an “Index Effect”, which involves two tiers of variability:

·                  The option price is variable, either up or down, based upon the market price at date of grant, adjusted for MacDermid’s stock price performance in comparison to the Standard and Poor’s 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 September 30, 2006, now range from $22.51 to $38.65 per share based on Company stock price performance.

·                  The number of options exercisable is variable, either up or down, based upon a multiple either (a) determined by the cumulative percentage of owner earnings growth (defined as cash flow from operations less net capital expenditures), or (b) determined using 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.

As of September 30, 2006, there were 3,038,902 options outstanding under the 2001 Executive plan.

The 2001 Employee Plan

In 2001, the Company adopted a non-qualified all employee stock option plan, approved by shareholders in July 2001 (the “2001 Employee Plan”).  The 2001 Employee Plan provides for the issuance of up to 1,000,000 shares.  Options granted under the 2001 Employee Plan generally are exercisable during a six-year period beginning at the vesting date, which is four years after the grant date, at a 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.  In February 2006, MacDermid’s Board of Directors voted to cancel all remaining unissued shares in the 2001 Employee Plan.  As of September 30, 2006, there were 160,035 options outstanding under the 2001 Employee plan.

The 2006 Plan

In February 2006, the Company’s board of directors, adopted a non-qualified all employee stock option plan approved by the Company’s shareholders in May 2006 (the “2006 Plan”).  The 2006 Plan provides for the issuance of up to 1,100,000 shares.  Options granted under the 2006 Plan generally are exercisable during a four-year period beginning at the vesting date, which is six years after the grant date, at a  price equal to the average of the Company’s closing common stock price for the previous five trading days preceding the stock option grant.  The options are exercisable into unrestricted shares of common stock, except as otherwise provided at the time of grant.  During the three and nine months ended September 30, 2006, 0 and 194,856, respectively, of stock options were granted to employees, executive officers and non-employee directors of the Company at a fair market price of $30.47.  As of September 30, 2006, there are 905,144 shares available for future grant under the 2006 plan.  Total compensation expense for the three and nine months ended September 30, 2006 related to stock options grants under the 2006 plans was $133 and $222, respectively.

9

---

 

The following table summarizes stock option activity from December 31, 2005 through September 30, 2006 regarding the Company’s fixed stock option plans:

Fixed Option Plans:		Outstanding Options		Aggregate Intrinsic Value			Weighted Average Exercise Price Per Share			Weighted Average Remaining Contractual Term
Outstanding, December 31, 2005		1,047,435					$	36.81		4.2
Granted		194,856					$	30.47
Exercised		(77,035	)				$	16.90
Forfeited		(4,900	)				$	22.90
Outstanding, September 30, 2006		1,160,356		$	—		$	37.13		4.4
Exercisable, September 30, 2006		930,625		$	—		$	38.83		3.2

 

The weighted-average grant date fair value of stock options granted under fixed option plans during the three and nine months ended September 30, 2006 was $0 and $15.75, respectively.  The weighted-average grant date fair value of stock options granted under fixed option plans during the three and nine months ended September 30, 2005 was $0 and $11.07, respectively.   The total intrinsic value of stock options exercised under fixed option plans during the three and nine months ended September 30, 2006 was $230 and $1,029, respectively.   The total intrinsic value of stock options exercised under fixed option plans during the three and nine months ended September 30, 2005 was $1,067 and $4,950, respectively.

As of September 30, 2006, there was $2,983 of unrecognized compensation costs related to non-vested stock options under the fixed option plans that is expected to be recognized over a weighted average period of 4.4 years.  The total fair value of stock options vested under the fixed option plans during the three and nine months ended September 30, 2006 was $21 and $75, respectively.  The total fair value of stock options vested under the fixed option plans during the three and nine months ended September 30, 2005 was $0 and $0, respectively.

The following table summarizes stock option activity from December 31, 2005 through September 30, 2006 regarding the Company’s indexed stock option plans:

Indexed Option Plan:		Shares Available for Grant		Outstanding Options		Aggregate Intrinsic Value			Weighted Average Exercise Price Per Share			Weighted Average Remaining Contractual Term
Outstanding, December 31, 2005		1,409,111		3,525,889					$	25.41		6.8
Granted		—		—
Exercised		—		(97,500	)				$	22.54
Forfeited		70,500		(84,500	)				$	32.05
Index effect		304,987		(304,987	)				$	9.92
Outstanding, September 30, 2006		1,784,598		3,038,902		$	9,866		$	26.88		6.1
Exercisable, September 30, 2006		—		1,403,777		$	9,638		$	23.26		4.9

 

The weighted-average grant date fair value of stock options granted under the indexed option plan during the three and nine months ended September 30, 2006 was $0 and $0, respectively.  The weighted-average grant date fair value of stock options granted under the indexed option plan during the three and nine months ended September 30, 2005 was $0 and $11.07, respectively. The total intrinsic value of stock options exercised under indexed option plan during the three and nine months ended September 30, 2006 was $0 and $715, respectively.   The total intrinsic value of stock options exercised under indexed option plan during the three and nine months ended September 30, 2005 was $436 and $436, respectively.

As of September 30, 2006, there was $4,919 unrecognized compensation costs related to non-vested stock options under the indexed option plan that is expected to be recognized over a weighted average period of 4.9 years.  The total fair value of stock options vested under the indexed option plan during the three and nine months ended September 30, 2006 was $47 and $3,756, respectively.  The total fair value of stock options vested under the indexed option plan during the three and nine months ended September 30, 2005 was $0 and $0, respectively.

10

---

 

Note 6.                                  Goodwill and Other Intangible Assets

In the first quarter of 2006, the Company reviewed its foreign currency conversion rates used to convert goodwill and intangible assets. Beginning in 2002, the Company held all goodwill and certain intangible assets related to the acquisition of Canning Ltd. (“Canning intangibles”) constant at historic currency conversion rates, effectively holding the value of goodwill and Canning intangibles constant at 2002 currency conversion rates.  This resulted in an understatement of goodwill and Canning intangibles as of December 31, 2005.  As a result, the Company has determined that certain restatement adjustments are necessary as described below to state these assets at the current currency conversion rates.

Upon further investigation the Company’s management determined that goodwill related to the 1998 acquisition of Canning Ltd. had been pushed-down into the books of the acquisition holding company instead of being pushed down to the books of the geographic business segments, where it is tested for impairment.  The Company should have allocated the goodwill into the books of the regional business segments benefiting from the acquisition.  The goodwill, however, was “pushed down” to, and denominated in British Pounds as opposed to being pushed-down to, and denominated in the currencies of the regions to which the goodwill benefits.

Acquired intangible assets as of September 30, 2006 and December 31, 2005, are as follows:

 

 

In February 2006, the Company re-evaluated the value assigned to Autotype’s intangible assets and the revised valuation increased the value of the technology know-how intangible asset by $2,145.  This amount was deducted from Goodwill and charged to the intangible asset account.  In March 2006, the Company notified employees in Autotype’s Kvistgaard, Denmark facility that the plant would be relocated to Wantage, England, and added $369 to goodwill pursuant to Emerging Issues Task Force No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination (“EITF 95-3”) related to employee severance benefits.  In March 2006, Goodwill was reduced by an adjustment of $135 to true-up severance costs related to Autotype’s Schaumberg, Illinois plant.  In June 2006, the Company recorded an additional amount of $890 to goodwill related to the closure of Autotype’s Kvistgaard, Denmark facility in accordance with EITF 95-3 related to the facility closure.  The Company also recorded in June 2006 an amount of $180 to goodwill related to closure of Autotype’s Schaumberg, Illinois plant in accordance with EITF 95-3.

Amortization expense related to amortization of intangible assets for the three and nine months ended September 30, 2006, was $1,361 and $4,256, respectively.  Amortization expense related to amortization of intangible assets for the three and nine months ended September 30, 2005, was $650 and $1,486, respectively.  Amortization expense for intangible assets is expected to range from $3,862 to $4,476 over the next five years.

Useful lives for amortizable patents are approximately fifteen years.  Other intangible assets have useful lives of five to fifteen years.

11

---

 

The following table presents the changes in goodwill allocated to the reportable segments for the nine months September 30, 2006:

Reportable Segment		As reported balance at December 31, 2005			Restatement Allocation and Foreign Currency Adjustments			Restated Balance at December 31, 2005			Acquisitions and Purchase Accounting Adjustments			Nine months ended September 30, 2006 Currency Translation Adjustments			Balance at September 30, 2006
Advanced Surface Finishing		$	155,953		$	(3,457	)	$	152,496		$	(856	)	$	7,501		$	159,141
Printing Solutions		80,579			9,860			90,439			866			1,290			92,595
Total		$	236,532		$	6,403		$	242,935		$	10		$	8,791		$	251,736

 

Included in the September 30, 2006 amounts above is the allocation of goodwill from the June 2005 Autotype acquisition, which is based on the purchase price allocation and totals $32,776 and $9,453, respectively, for the Advanced Surface Finishing and the Printing Solutions segments.   Included in the December 31, 2005 amounts above is the allocation of goodwill from the June 2005 Autotype acquisition, which is based on the purchase price allocation and totals $33,796 and $8,449, respectively, for the Advanced Surface Finishing and the Printing Solutions segments.

Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), stipulates that MacDermid is required to perform goodwill and other intangible asset impairment tests on at least an annual basis and more frequently in certain circumstances.  MacDermid will perform the annual impairment testing for 2006 during the fourth fiscal quarter.  Currently, MacDermid is not aware of any event that occurred since the last impairment testing date that would have caused the Company’s goodwill or intangible assets to become impaired.

Note 7.                                  Other Comprehensive Income

The restatement adjustments necessary to properly convert goodwill and intangible assets are offset with a corresponding restatement adjustment to the Accumulated Other Comprehensive (Loss) Income section of Shareholders’ Equity as described in Notes 2 and 6 above.  These restatement adjustments have no impact on earnings as reported in the Company’s financial statements dated December 31, 2005, or any of the tangible assets or liabilities.

The components of comprehensive income for the three and nine months ended September 30, 2006 and 2005, are as follows:

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
					(restated)						(restated)
Net earnings		$	13,090		$	12,917		$	41,904		$	36,630
Other comprehensive income:
Other		(957		)	1,007			(173		)	4,718
Foreign currency translation adustment		1,470			(4,036		)	17,515			(30,850		)
Comprehensive income		$	13,603		$	9,888		$	59,246		$	10,498

 

Note 8.                                  Segment Reporting

MacDermid operates 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 the Company’s products fall into one of these two business segments.

12

---

 

The results of operations for each business segment include certain corporate operating costs which are allocated based on the relative burden each segment bears on those costs.  Identifiable assets for each business segment are reconciled to total consolidated assets including unallocated corporate assets.  Unallocated corporate assets consist primarily of deferred tax assets, deferred bond financing fees and certain other long term assets not directly associated with the support of the individual segments.  Intersegment loans and accounts receivable are included in the calculation of identifiable assets and are eliminated separately.

		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Results of operations by segment:
Net sales:
Advanced Surface Finishing
Total segment net sales		$	123,288		$	113,179		$	366,421		$	320,231
Intersegment sales		(1,918		)	(2,176		)	(5,796		)	(6,755		)
Net external sales for the segment		121,370			111,003			360,625			313,476
Printing Solutions		78,925			82,257			247,285			228,312
Consolidated net sales		$	200,295		$	193,260		$	607,910		$	541,788
Operating profit:
Advanced Surface Finishing		$	19,001		$	16,925		$	55,052		$	47,764
Printing Solutions		6,156			7,209			22,576			24,429
Consolidated operating profit		$	25,157		$	24,134		$	77,628		$	72,193

 

 

Note 9.                                  Inventory

The major components of inventory as of September 30, 2006 and December 31, 2005, were as follows:

 

 

13

 

Note 10.                            Pension and Postretirement Benefit Plans

The following table shows the components of the net periodic pension benefit costs the Company incurred in the three and nine months ended September 30, 2006 and 2005:

		Three Months Ended September 30,
		2006						2005
		Domestic			Foreign			Domestic			Foreign
Net periodic benefit cost:
Service cost		$	1,043		$	—		$	939		$	144
Interest cost		1,069			801			895			815
Expected return on plan assets		(964		)	(919		)	(798		)	(807		)
Amortization of prior service cost		7			—			6			—
Recognized actuarial loss		196			267			83			57
Net periodic benefit cost		$	1,351		$	149		$	1,125		$	209

 

		Nine Months Ended September 30,
		2006						2005
		Domestic			Foreign			Domestic			Foreign
Net periodic benefit cost:
Service cost		$	3,128		$	—		$	2,814		$	432
Interest cost		3,206			2,331			2,688			2,445
Expected return on plan assets		(2,891		)	(2,675		)	(2,394		)	(2,421		)
Amortization of prior service cost		21			—			18			—
Recognized actuarial loss		587			777			249			398
Net periodic benefit cost		$	4,051		$	433		$	3,375		$	854

 

The estimated net periodic benefit cost for other postretirement benefits was $126 and  $378, respectively, for the three and nine months ended September 30, 2006.  The estimated net periodic benefit cost for other postretirement benefits was $160 and $480, respectively, for the three and nine months ended September 30, 2005.

MacDermid previously disclosed in its financial statements for the year ended December 31, 2005, that the Company expects to contribute $9,000 to MacDermid’s pension plans in 2006.  During the first quarter of 2006, the Company increased the 2006 expected contribution amount to $12,000.  As of September 30, 2006, $8,800 of contributions have been made.  The current portion of pension and postretirement benefit plans is included in other current liabilities in the Company’s balance sheet at September 30, 2006 and December 31, 2005.

Note 11.                            Going Private Transaction

On September 5, 2006, Daniel H. Leever, MacDermid’s Chairman and Chief Executive Officer, together with Court Square Capital Partners, a related party, submitted a proposal to MacDermid’s Board of Directors to acquire all of the Company’s outstanding common stock at a price of $32.50 per share in cash.  MacDermid’s board of directors formed a special committee of independent directors to consider the proposal and review and evaluate alternative proposals that may be developed or received from other parties. The committee has retained a financial advisor and a legal advisor to assist it in its work. There can be no assurance that any agreement on financial and other terms satisfactory to the special committee will result from the committee’s evaluation of the proposal by the group of investors led by Mr. Leever or any other proposals, or that any extraordinary transaction will be approved or completed.

14

---

 

Note 12.                            Contingencies, Environmental and Legal Matters

Environmental Issues:

MacDermid is a manufacturer and distributor of specialty chemical products, and is therefore exposed 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.  The Company is subject to extensive domestic and foreign laws and regulations relating to environmental protection and worker health and safety, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated properties.  The Company has incurred, and will continue to incur, significant costs and capital expenditures in complying with these laws and regulations.  Significant additional costs could be incurred, including cleanup costs, fines, sanctions, and third-party claims, as a result of violations of or liabilities under environmental laws.  To ensure compliance with applicable environmental, health and safety laws and regulations, the Company maintains a disciplined environmental and occupational safety and health compliance program, which includes conducting regular internal and external audits at Company plants to identify and categorize potential environmental exposure.

Asset Retirement Obligations:

In accordance with Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”,   as interpreted by FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”, the Company has recognized asset retirement obligations for properties where the Company can make a reasonable estimate of the future cost, including those obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company.  In identifying asset retirement obligations, the Company considers identification of legally enforceable obligations, changes in existing laws, estimate of potential settlement dates and the calculation of an appropriate discount rate to be used in calculating the fair value of the obligations.   At September 30, 2006 and December 31, 2005 the Company has accrued $1,512 and $1,404, respectively, for its asset retirement obligation for remediation activities at manufacturing and administrative sites in the United States, Europe and Australia.  The Asset Retirement Obligation balances are included in the long-term environmental liabilities in the Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005.

On an ongoing basis, management evaluates its estimates and assumptions; however, actual amounts could differ from those based on such estimates and assumptions. Changes in the estimate during three and nine months ended September 30, 2006 and 2005, were not significant.  The following table shows changes in the carrying amount of the Company’s asset retirement obligation for the nine months ended September 30, 2006:

 

Environmental Remediation:

As of September 30, 2006 and December 31, 2005, $3,198 and $4,119, respectively, was reserved for various environmental matters. 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.

The following summary provides some details regarding the Company’s environmental liabilities:

·                  MacDermid is named as a potentially responsible party (“PRP”) at two Superfund sites (Fike-Artel in Nitro, West Virginia, and Solvents Recovery in Southington, Connecticut), in which many other PRPs are also involved.  With respect to both of these sites, the Company has entered into cost sharing agreements that result in costs of less than $10 per year for funding MacDermid’s share of the ongoing cleanup costs at each site. No reserve has been established, given the deminimus nature of the costs. The Company’s cost sharing percentage at each site is 0.2%.  On October 31, 2005, the Environmental Protection Agency (“EPA”) notified the Company of alleged deminimus responsibility for certain contamination at the Mercury Refining Site in New York.  MacDermid entered into a settlement agreement with the EPA to resolve this deminimus liability for a payment of $1.

·                  Some of the Company’s facilities have an extended history of chemical and industrial activity. The Company is directly involved in the remediation of sites that have environmental contamination arising from its operations. These sites

15

---

 

include certain sites such as the Kearny, New Jersey and Waukegan, Illinois sites, which were acquired in the December 1998 acquisition of W. Canning plc.  With respect to the Kearny, New Jersey site, the Canning subsidiary withheld, under the Acquisition Agreement, a deferred purchase price payment of approximately $1,600. Clean-up costs at these sites are estimated to be between $2,000 and $5,000. The owners of the Kearny, New Jersey site have primary responsibility for clean-up costs.  Investigations into the extent of contamination at these sites are, however, ongoing.

·                  MacDermid is in the process of characterizing contamination at the 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; however, the Company does not anticipate that it will be materially affected by the environmental remediation costs.

·                  During the third quarter of 2006, MacDermid entered into an agreement with the city council of Birmingham, England whereby MacDermid  agreed to the variation and revocation of the Hazardous Substance Consent (“HSC”) for the MacDermid Palmer Street facility that allowed MacDermid to store certain hazardous substances for the receipt of $5,617 (3,000 British Pounds) immediately and the receipt of an additional $1,873 (1,000 British Pounds) payable when MacDermid revokes its’ amended HSC for the Palmer Street site and ceases all storage activity at the Palmer Street site (an expected three year period).  The total amount of $7,490 will be adjusted in the fourth quarter of 2006 upon completion of an environmental study at the Palmer Street site.  As of September 30, 2006, the $7,490 is included in other long-term liabilities in the Consolidated Balance Sheet.

·                  Legal Proceedings:

From time to time there are various legal proceedings pending against the Company.  MacDermid considers all such proceedings to be ordinary litigation incident to the nature of our business.  Certain claims are covered by liability insurance.  MacDermid believes that the resolution of these claims, to the extent not covered by insurance, will not individually or in the aggregate, have a material adverse effect on its financial position or results of operations.  To the extent reasonably estimable, reserves have been established regarding pending legal proceedings.

Note 13.                            Restructuring Activities

During the three and nine months ended September 30, 2006, MacDermid recognized restructuring charges in the amount of $1 and $2,108, respectively, related to employee severance and other charges.  During the three and nine months ended September 30, 2005, MacDermid recognized restructuring charge in the amount of $1,077 and $1,462, respectively, related to employee severance and other charges.

During the first quarter 2006, MacDermid’s implemented restructuring plans related to the operations of the US MPS business unit.  In the first quarter of 2006, MacDermid recorded restructuring charges of $601 against earnings which consists entirely of employee severance costs related to the reduction of thirteen management, sales and administrative position reductions in the US MPS business unit.  Of the initial restructuring amount of $601, the Company paid $349 as of September 30, 2006, and reversed $252 of the initial $601 in the third quarter of 2006.  No more payments are expected related to this initiative.

During the first quarter ended March 31, 2006, the Company continued its efforts to maximize synergies related to the Autotype acquisition by announcing the relocation of the Autotype’s Kvistgaard, Denmark facility to an existing facility in Wantage, England.  The closure of the Autotype Denmark facility impacted twenty one employees in manufacturing, administrative, and managerial roles.  Total severance benefits of $369 were charged to goodwill during the first quarter 2006 under Emerging Issues Task Force No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination (“EITF 95-3”).  An additional $583 in costs related to the Autotype acquisition not qualifying for purchase accounting treatment was charged to the income statement during the first quarter of 2006.  During the second quarter of 2006, the Company completed the relocation of Autotype’s Kvistgaard, Denmark facility.  The plant in Kvistgaard, Denmark was closed and production was transferred to Autotype’s existing facility in Wantage, England.  During the three months ended June 30, 2006, $890 was charged to goodwill, in accordance with EITF 95-3, in connection with the closure of Autotype’s Denmark facility, these costs included lease restoration costs, severance payments and asset write-offs.  During the three months ended June 30, 2006 $401 charged to restructuring expense for stay bonus payments and moving costs for manufacturing equipment relocated to Autotype’s Wantage, England facility.

During the second quarter of 2006, the Company completed the relocation of Autotype’s Schaumburg, Illinois facility to the Company’s existing facility in Middletown, Delaware.  In connection with this relocation $180 of lease restoration costs were charged to goodwill in the second quarter of 2006 in accordance with EITF 95-3.  During the third quarter of 2006, the

16

---

 

Company expensed $212 related to relocation costs in connection with moving the Autotype Schaumburg, Illinois facility to the Middletown, Delaware facility.

During the first quarter of 2006 the Company proceeded with plans to merge Autotype’s Singapore plant into an existing ASF facility in Singapore.  The amalgamation of these facilities will not include employee severance, and as such most costs associated with the merger do not qualify as purchase accounting costs and were expensed.  During the first quarter of 2006, a charge of $195 was recorded to the income statement related to equipment relocation related to this consolidation initiative.  During the second quarter of 2006, a charge of $98 was recorded to the income statement related to equipment relocation related to this consolidation initiative.

The activity in the accrued restructuring balances related to all of the plans described above was as follows for the nine months ended September 30, 2006, by segment:

					For the nine months ended September 30, 2006												As of September 30, 2006
																	Total
																	costs and
		Balance,															adjustments nine months ended			Total expected
		December 31,			Restructuring			Goodwill			Cash			Non-cash			September 30,			costs and
		2005			Charges			adjustments			payments			Adjustments			2006			adjustments
Printing Solutions:
Equipment relocation		$	134		$	117		$	—		$	(140	)	$	1		$	(22	)	$	112
Asset disposals		18			—			723			—			—			723			741
Site clean-up costs		45			—			164			—			—			164			209
Severance and other benefits		1,739			1,246			426			(1,661		)	17			28			1,767
Legal and other		5			74			18			(36		)	—			56			61
Total Printing Solutions		$	1,941		$	1,437		$	1,331		$	(1,837	)	$	18		$	949		$	2,890
Advanced Surface Finishing:
Equipment relocation		$	36		$	175		$	—		$	(175	)	$	(74	)	$	(74	)	$	(38	)
Asset disposals		12			—			—			—			—			—			12
Site clean-up costs		30			—			108			—			—			108			138
Severance and other benefits		791			496			(135		)	(863		)	(274		)	(776		)	15
Total Advanced Surface Finishing		$	869		$	671		$	(27	)	$	(1,038	)	$	(348	)	$	(742	)	$	127
Total restructuring charges		$	2,810		$	2,108		$	1,304		$	(2,875	)	$	(330	)	$	207		$	3,017
Other acquisition charges		$	385		$	—		$	—		$	—		$	—		$	—		$	385
Total		$	3,195		$	2,108		$	1,304		$	(2,875	)	$	(330	)	$	207		$	3,402

 

17

---

 

Note 14.                            Loss on Disposal

During the three and nine months ended September 30, 2006, MacDermid recorded a loss on disposal of $0 and $2,224, respectively, related to two separate dispositions.  The first disposal related to MacDermid Equipment (“MEI”), a small equipment manufacturing unit that supported the Company’s electronics sales.  In 2001, the Company wrote off all the inventory on MEI’s balance sheet.  Inventory was the only significant asset on MEI’s books, and the write off effectively impaired the Company’s investment in the subsidiary.  In February 2006, the Company sold the subsidiary for one dollar and recorded a loss on disposal of assets of $1,664, which reduced the Company’s first quarter 2006 tax rate.  The second disposal related to a dormant international business unit that was disposed in the first quarter of 2006.  A loss on disposal of assets of $560 was recorded in the first quarter 2006 related to this dormant business unit.

Note 15.                            Miscellaneous Gains

In July 2006, the Company sold an idle manufacturing plant located in Franklin Park, Illinois for $1,588 and recognized a gain related to this sale of  $589 in the third quarter of 2006.

In September 2006, the Company sold its interest in a chemical distribution company in Hong Kong for 6,000 Hong Kong dollars, or $770.  In connection with this sale the Company recognized a gain of  $519 during the third quarter of 2006.

Note 16.                            Subsequent Event

On November 4, 2006, the Company’s Chairman and Chief Executive Officer had restrictions lift on 180,000 shares of MacDermid common stock.  In accordance with the terms of 1995 Plan, the Company’s Chairman and Chief Executive Officer returned 65,759 shares of MacDermid common stock to the Company at a price of $32.83 per share.  Total proceeds from this transaction were $2,159 which was used for payment of his tax withholding liability that resulted from the lapse of restrictions on the 180,000 shares of common stock.  The Company will account for this purchase of common stock under the treasury method.

Note 17.                            Guarantor Financial Statements

MacDermid, Inc. (“Issuer”) issued 9 1/8% Senior Subordinated Notes (“Bond Offering”) effective June 20, 2001, for the face amount of $301,500, which pay interest semiannually on January 15th and July 15th and mature in 2011.  The proceeds were used to pay down existing long-term debt.  This Bond Offering is guaranteed by substantially all existing and future directly or indirectly 100% owned domestic restricted subsidiaries of MacDermid, Inc. (“Guarantors”).  The Guarantors, fully, jointly and severally, irrevocably and unconditionally guarantee the performance and payment when due of all the obligations under the Bond Offering.  MacDermid’s foreign subsidiaries (“Non-Guarantors”) are not guarantors of the indebtedness under the Bond Offering.

Under MacDermid’s Bond Offering, the Company has several covenants that relate to the Company’s fixed charge ratio (as defined in the Bond Offering agreement), asset sales, incurrence of additional indebtedness, and restricted payments. The restricted payment covenant is used to measure the amount of dividends, share repurchases, and extraordinary repayments of debt that MacDermid may undertake. The covenant provides for a basket, with respect to, the above mentioned items. The basket is created by taking the aggregate of 50% of net income (or 100% of any net loss, adjusted for non-cash charges) since June 2001 to present. When dividend payments are made, they are charged against the basket.  As of September 30, 2006 and December 31, 2005, MacDermid had $99,223 and $81,972, respectively, available for future restricted payments.  The net assets of the Guarantors are restricted and may not be transferred to anyone other than the Issuer or another Guarantor without the consent of the Trustee of the Bond Offering, subject to specified baskets.  Thus the net assets of the Guarantors can be transferred to the Issuer or other Guarantors within the group freely, but cannot be transferred outside the group of Guarantors and the Issuer without the consent of the Trustee of the Bond Offering, subject to certain baskets.

In connection with the restatement adjustments made to goodwill, intangibles and accumulated other comprehensive (loss) income as described in Notes 2, 6 and 7 above, the Company recalculated certain ratios whose components changed as a result of these restatement adjustments.  The Company restated its goodwill balances and re-performed the net worth, restricted payment, and indebtedness covenant tests as of December 31, 2005, as calculated in accordance with Bond Offering agreement.  The restatement adjustments noted above did not trigger a default, and as such, the Company concluded that the above restatement adjustments had no impact on its Bond Offering covenant tests as of December 31, 2005.

Certain amounts in the Condensed Consolidating Balance Sheet as of December 31, 2005 were restated.  The restatement adjustments necessary to properly convert goodwill and intangible assets are offset with a corresponding restatement adjustment to the Accumulated Other Comprehensive (Loss) Income section of Shareholders’ Equity in the Condensed

 

18