UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December31, 2004
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OR
[ ] TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-13889
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MacDermid, Incorporated
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(Exact name of registrant as specified in its charter)
Connecticut 06-0435750
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(State or other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
1401 Blake Street, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (720) 479-3060
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Securities registered pursuant to section 12(b) of the Act:
Title of each class: Name of each exchange
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on which registered:
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Common Stock without Par Value New York Stock Exchange
9.125% Senior Subordinated Notes due 2011 New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes X No .
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No .
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The aggregate market value of voting common stock held by non-affiliates of the
registrant at the close of business on June 30, 2004, was $1,025,578,059 based
upon the last sales price reported for such date on the New York Stock Exchange.
The number of shares of the Registrant's Common Stock outstanding as of March 1,
2005, was 30,313,697 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Corporation's 2004 Annual Report to Shareholders are
incorporated herein by reference into Parts I and II hereof and filed as Exhibit
13 to this Report. The definitive proxy statement to be filed and mailed to the
Corporation's stockholders on or before 30 days prior to the Corporation's
annual meeting scheduled for May 12, 2005, is incorporated herein be reference
into Part III hereof.
Introductory Note
This Form 10-K/A is being filed solely for the purpose of making revisions to
the following items previously included in our Form 10-K for the fiscal year
ended December 31, 2004:
- Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations, Liquidity and Capital Resources. The last table in this
section, meant to summarize our ability to fund both our required obligations
and our shareholder growth initiatives for 2005, contained a footing error when
filed on March 16, 2005. This error was corrected in the printing of our annual
report and has been corrected herein.
Our certifying officers have certified this filing via updated Section 302 and
906 certifications, attached hereto as exhibits 32.1, 32.2, and 99.1.
Except as described above, we have not amended or modified the financial
information or other disclosures contained in our Form10-K as originally filed.
This Form 10-K/A does not reflect events occurring after the filing of the
original Form 10-K, nor does it modify or update the disclosures therein in any
way other than as required to reflect the amendments described above and set
forth below. The following represents only the information required by Item 7
of Form 10-K, and does not include Item 7A or any other item.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note: This item was formerly incorporated by reference to Exhibit 13 in our Form
10-K for the year ended December 31, 2004.
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.SNew competitive products or pricing policies of our
competitors can materially affect demand for and pricing of our products, which
could have a significant impact on our financial results.
Our performance for the 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 (UNFAVORABLE) FAVORABLE (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%
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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%
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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) ** **
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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)%
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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 ** ** - ** **
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Net earnings. . . . . . . . $ 53,224 $ 56,426 (5.7%) (9.7%) $ 9,349 503.6% 379.4%
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Diluted earnings
per share . . . . . . . . . $ 1.72 $ 1.80 (4.4%) (8.5%) $ 0.29 520.7% 386.5%
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Comprehensive income. . . . $ 62,641 $ 74,587 (16.0%) ** $ 13,142 467.5% **
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* 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 (UNFAVORABLE) FAVORABLE (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% ** **
* 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
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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
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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)
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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. . . . . . . . . . . . . . . . . . . . . . . . $259,696
========
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MacDermid, Incorporated
------------------------
(Registrant)
Date: April 13, 2005 /s/ Daniel H. Leever
-----------------------
Daniel H. Leever
Chairman and
Chief Executive Officer
Date: April 13, 2005 /s/ Gregory M. Bolingbroke
-----------------------------
Gregory M. Bolingbroke
Senior Vice President, Finance
Daniel H. Leever, pursuant to powers of attorney, which are being filed with
this Annual Report on Form 10-K, has signed below on March 4, 2005 as
attorney-in-fact for the following directors of the Registrant:
Robert L. Ecklin
Donald G. Ogilvie
Joseph M. Silvestri
James C. Smith
T. Quinn Spitzer, Jr.
/s/ Daniel H. Leever
-----------------------
Daniel H. Leever
Chairman of the Board
and Chief Executive Officer