UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1998
COMMISSION FILE NUMBER 0-2413
MACDERMID, INCORPORATED
(Exact name of registrant as specified in its charter)
Connecticut 06-0435750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
245 Freight Street, Waterbury, Connecticut 06702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 575-5700
NONE
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, no par value - 25,136,349 shares as of November 1, 1998.
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MACDERMID, INCORPORATED
INDEX
PART I. Financial Information
Item 1. Financial Statements
Page No.
Consolidated Condensed Balance Sheets
September 30, 1998 and March 31, 1998 3-4
Consolidated Condensed Statements of Earnings
and Retained Earnings - Six Months and Three Months
Ended September 30, 1998 and 1997 5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Condensed Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II. Other Information 14
Signatures 15
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<TABLE>
PART I. - FINANCIAL INFORMATION
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands of dollars except share amounts)
<CAPTION>
September 30, March 31,
1998 1998
------------ ---------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 3,383 $ 3,549
Available-For-Sale Securities 15,387 4,729
Accounts and Notes Receivable
(Net of Allowance for Doubtful
Receivables of $4,392 and $3,598) 77,961 72,675
Inventories
Finished Goods 33,880 27,197
Raw Materials 17,609 22,442
-------- --------
51,489 49,639
Prepaid Expenses 2,219 2,255
Deferred Income Tax Asset 3,980 3,970
-------- --------
Total Current Assets 154,419 136,817
Property, Plant and Equipment (Net of Accumulated
Depreciation of $46,960 and $44,847) 40,787 42,946
Goodwill (Net of Accumulated Amortization of
$11,580 and $9,495) 86,185 87,856
Other Assets (Note 2) 52,028 32,641
-------- --------
Total Assets $333,419 $300,260
======== ========
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
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<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
----------- ---------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes Payable $ 5,328 $ 9,962
Current Installments of Long-term Obligations 22,345 12,442
Accounts and Dividends Payable 25,661 25,105
Accrued Expenses 26,577 32,784
Income Taxes 8,335 5,710
-------- --------
Total Current Liabilities 88,246 86,003
Long-term Obligations 121,373 103,983
Accrued Postretirement and Postemployment Benefits 4,358 4,291
Deferred Income Taxes 454 345
Minority Interest in Subsidiaries 82 93
Shareholders' Equity
Common Stock Stated Value $1 per Share 39,393 39,265
Additional Paid-In Capital 1,415 -
Retained Earnings 139,783 124,043
Comprehensive Income Equity Adjustments:(Note 3)
Cumulative Foreign Currency Translation (2,602) (3,160)
Available-for-Sale Securities Holding Loss (1,340) -
Less Cost of 14,256,410 and 14,169,582 Common
Shares in Treasury (Note 4) (57,743) (54,603)
-------- --------
Total Shareholders' Equity 118,906 105,545
-------- --------
$333,419 $300,260
======== ========
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
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<TABLE>
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Unaudited)
(Amounts in Thousands Except Share and Per Share Amounts)
<CAPTION>
Six Months Ended Three Months Ended
September 30, September 30,
---------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $166,928 $149,723 $ 85,859 $ 75,003
Cost and Expenses:
Cost of Sales 84,826 71,321 44,654 35,978
Selling, Technical and Administrative
Expenses/Amortization 52,548 51,165 25,947 25,331
Interest Income (389) (242) (206) (99)
Interest Expense 4,665 3,450 2,424 1,881
Other (Income) Expense - Net (406) 546 (169) 337
-------- ------- -------- --------
141,244 126,240 72,650 63,428
-------- -------- -------- --------
Earnings Before Income Taxes 25,684 23,483 13,209 11,575
Income Taxes 8,938 8,571 4,556 4,224
-------- -------- -------- --------
Net Earnings 16,746 14,912 8,653 7,351
Preferred Dividends - (309) - -
-------- -------- -------- --------
Earnings Available for
Common Shareholders 16,746 14,603 8,653 7,351
Retained Earnings, Beginning of
Period 124,043 113,632 131,633 120,470
Cash Dividends Declared (1,006) (832) (503) (418)
------- -------- -------- --------
Retained Earnings, End of Period $139,783 $127,403 $139,783 $127,403
======== ======== ======== ========
Net Earnings Per Common Share (Note 5)
Basic $0.67 $0.59 $0.34 $0.29
===== ===== ===== =====
Diluted $0.66 $0.58 $0.34 $0.29
===== ===== ===== =====
Cash Dividends Per Common Share $0.04 $0.0334 $0.02 $0.0167
===== ======= ===== =======
Weighted Average Common Shares
Outstanding :
Basic 25,142,902 24,858,961 25,136,723 25,041,757
========== ========== ========== ==========
Diluted 25,445,589 25,545,096 25,415,425 25,716,411
========== ========== ========== ==========
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
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<TABLE>
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
<CAPTION>
Six Months Ended
September 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Net Cash Flows from Operating Activities $14,660 $19,029
Cash Flows from Investing Activities:
Capital Expenditures (2,633) (1,939)
Proceeds from Disposition of Fixed Assets 39 588
Purchase of Available-for-Sale Securities (12,821) -
Acquisitions/Investments in Businesses(Note 2) (17,563) (22,000)
------- -------
Net Cash Flows Used in Investing Activities (32,978) (23,351)
------- -------
Cash Flows from Financing Activities:
Short-Term (Repayments)/Borrowings (4,267) 741
Long-Term Borrowings 42,140 47,940
Long-Term Repayments (15,815) (7,245)
Exercise of Stock Options 162 1,690
Purchase of Treasury Shares (3,140) (6,937)
Dividends Paid (1,006) (832)
Preferred Stock Redemption - (32,745)
------- -------
Net Cash Flows From/Used in
Financing Activities 18,074 2,612
Effect of Exchange Rate Changes on Cash 78 (132)
and Cash Equivalents ------- -------
Net Decrease in Cash and Cash Equivalents (166) (1,842)
Cash and Cash Equivalents at Beginning of Year 3,549 6,530
------- -------
Cash and Cash Equivalents at End of Period $ 3,383 $ 4,688
======= =======
Cash Paid for Interest $ 4,358 $ 3,340
======= =======
Cash Paid for Income Taxes $ 5,176 $ 7,031
======= =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
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MACDERMID, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The March 31, 1998 condensed consolidated balance sheet amounts
have been derived from the previously audited consolidated balance
sheets of MacDermid, Incorporated. The balance of the condensed
financial information reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the
financial position, results of operations and cash flows for the
interim periods presented and are of a normal recurring nature
unless otherwise disclosed in this report. The results of
operations for the six month and three month periods ended
September 30, 1998 and 1997 are not necessarily indicative of
trends or of the results to be expected for the full year. The
statements should be read in conjunction with the notes to the
consolidated financial statements included in MacDermid's (the
Corporation) 1998 Annual Report. Certain amounts on the
Consolidated Condensed Balance Sheets have been restated to conform
with the current fiscal year presentation.
Note 2. Acquisitions and Investments
On April 28, 1998 a subsidiary of the Corporation acquired a 30%
investment in an Italian specialty chemical company. Additionally,
there was investment made in a joint venture, results of which are
not expected to be material. These transactions will be recognized
under equity accounting. Also, two separate small industrial
products companies were acquired under purchase accounting.
Collectively, this activity is not currently material to the
financial position or results of operations of the Corporation.
Note 3. Comprehensive Income
As of April 1, 1998, the Corporation has adopted the Financial
Accounting Standards Board Statement of Financial Accounting
Standard No. 130, Reporting Comprehensive Income (SFAS130).
SFAS130 established standards for reporting and display of
comprehensive income and its components in the finical
statements. Tax is provided for at the effective rate of
the jurisdiction under which the other comprehensive
income (loss) arises. A tax benefit in the amount
of $822 was provided for the period ended
September 30, 1998. The Corporation does not provide
for U.S. income taxes on foreign currency translation
adjustments since it does not provide for such
taxes on undistributed earnings of foreign subsidiaries. The
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components of comprehensive income for the six month and three month
periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
Six Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Earnings $16,746 $14,603 $8,653 $7,351
Other Comprehensive Income:
Cumulative Foreign Currency
Translation Adjustment 558 (979) 1,190 (845)
Available-for-Sale Securities
Holding Loss, net of tax (1,340) - (1,340) -
------- ------- ------ ------
Comprehensive Income $15,964 $13,624 $8,503 $6,506
------- ------- ------ ------
</TABLE>
Note 4. Stock Repurchase Authorization
On July 22, 1998 the Board of Directors authorized the Corporation
to purchase up to 1,000,000 shares of its common stock. Such
additional shares may be acquired through privately negotiated
transactions or on the open market from time to time. Any future
repurchases by MacDermid will depend on various factors, including
the market price of the shares, the Corporation's business and
financial position and general economic and market conditions.
Additional shares acquired pursuant to such authorization will be
held in the Corporation's treasury and will be available for the
Corporation to issue for various corporate purposes without further
shareholder action (except as required by applicable law or the
rules of any securities exchange on which the shares are then
listed).
Note 5. Earnings Per Common Share
The Corporation has adopted the Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 128, Earnings per
Share (SFAS128), as of December 31, 1997. Comparative references to
earnings per common share (EPS) and weighted average common shares
outstanding have been restated to conform with the accounting
change. The computation of basic EPS is based upon the weighted
average number of outstanding common shares. The computation of
diluted EPS is based upon the weighted average number of outstanding
common shares plus the effect of all dilutive potential common
shares that were outstanding during the period. EPS is calculated
based upon net earnings available for common shareholders after
deduction for preferred dividends. In addition, all prior year per
share amounts (as well as number of common shares and dividends per
common share) have been restated to give retroactive effect to a
stock split as of March 16, 1998.
<PAGE>
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion compares the results of operations for the three and
six month periods which ended September 30, 1998 to the same periods in 1997
and provides information with respect to changes in financial condition during
the six months then ended.
SALES
Total sales for the current (second) quarter, $85.9 million, increased 14%
from $75.0 million for the same period last year. For the current fiscal
year, the second quarter sales were a 6% improvement over the first quarter.
Proprietary chemical sales, 6% increased over the same period last year,
strengthened in all geographic regions worldwide and were complimented by
increased equipment sales to electronics customers, particularly in North
America. Foreign currency translation had a relatively minimal effect,
reducing reported sales by $2.3 million, or 3%, for the quarter as compared to
the same period last year.
For the six month period net proprietary chemical sales increased 5% while
overall sales, $166.9 million, are up 12% from $149.7 million for the same
period last year. Foreign currency translation had the effect of reducing
reported sales $5.0 million, or 3%, for the six month period.
COSTS AND EXPENSES
Gross profits are up 6% for the quarter and 5% for the six months as compared
to the like periods last year. Growth was achieved by the continued
advancement of proprietary chemical sales enhanced by increased equipment
sales. Gross profit as a percentage of sales is somewhat less than the three
and six month periods last year due to the incremental equipment business for
which margins are typically much lower than proprietary business.
Selling, technical and administrative (ST&A) expenses are 2% increased for
both the quarter and six month period as compared to the similar periods last
year. Foreign currency translation had the effect of reducing the reported
increase by approximately 3% in both periods. Additional ST&A was incurred in
support of business growth and, to a lesser extent, to establish market
presence for new technologies. ST&A as a percentage of sales this year
approximated 31% as compared to 34% last year for both the three and six month
periods. Operating profits for the three and six month periods increased 11%
and 9%, respectively, over the corresponding periods last year. The increased
operating profit results from increased sales coupled with a lesser increase
in costs and expenses supporting new business and investment in growth
strategies, in both the three and six month periods.
As a result, earnings before interest, taxes, depreciation and amortization
(EBITDA) is $35.3 million for the six months ended September 30, 1998 as
compared to $32.6 million for the same period last year.
<PAGE>
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PROVISION FOR INCOME TAXES
Ongoing tax minimization strategies and, to a lesser degree, equity earnings
recorded this year have brought down the effective income tax rate to
approximately 34.8% for the six months ended September 30, 1998, from
approximately 36.5% for the same period in 1997.
NET EARNINGS
Net earnings available to common shareholders increased 18% for the three
month period and 15% for the six month period as compared to the similar
periods last year despite increased interest expense, up 24% and 33% for the
three and six month periods, respectively, on borrowings for acquisitions and
equity investments made during the present year.
FINANCIAL CONDITION
Operating activities during the six months ending September 30, 1998 resulted
in a net cash inflow of $14.7 million. The cash generated, together with cash
balances on hand, was primarily used for debt repayments of $15.8 million.
Additionally, cash generated from operations was used for dividends to common
shareholders and capital improvements. There were purchases of 86,828 shares
of the Corporation's common shares for a total of $3.1 million. Working
Capital at September 30, 1998 was $66.2 million as compared to $50.8 million
at March 31, 1998.
Capital expenditures were $2.6 million for the six months ended September 30,
1998 and are in line with the full year total planned expenditures of
approximately $8.0 million for the fiscal year.
MacDermid has a long-term credit arrangement which consists of a seven-year
term loan which has a balance of $63.1 million outstanding at September 30,
1998, a five-year revolving credit facility which permits borrowings of up to
$65 million and an additional $100 million acquisition credit facility, of
which $80.3 million is outstanding at September 30, 1998. The outstanding
balance on the credit facilities increased a net $30.4 million during the
year, the borrowings were made for acquisition and investment opportunities.
MacDermid's other credit facilities, which presently total approximately $33
million, together with the revolving credit facilities and the Corporation's
cash flows from operations are adequate to fund expected working capital and
capital expenditures.
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<PAGE>
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard No.131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS131). SFAS131 establishes standards for the way
public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
segment information in interim financial reports. SFAS131 is effective for
fiscal years beginning after December 15, 1997. FASB also issued Statement of
Financial Accounting Statement No.133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS133). SFAS133 replaces existing pronouncements
and practices with a single, integrated accounting framework for derivatives
and hedging activities. SFAS133 is effective for fiscal years beginning after
June 15, 1999. The Corporation is currently evaluating the requirements of
both SFAS131 and SFAS133 and believes that the adoption of these statements
will not have a material impact on previously reported information.
Year 2000 Conversion
Computer programs which recognize only two digits, rather than four digits,
to define the applicable year will be at risk for possible miscalculations,
classification errors or system failures. The Corporation has implemented a
plan for evaluating and minimizing the risks and costs associated with the
Year 2000. Costs associated with the Year 2000 compliance are immaterial and
have been expensed to the ongoing information systems operations as incurred.
The cost of Year 2000 remediation continues to be absorbed within the total
costs for the general operation of the information systems which are expected
to continue at the historical levels of approximately $2 million annually.
Based on present assessment of the systems of the Corporation and its
suppliers and customers, the cost of addressing the Year 2000 issues is not
currently expected to have a material adverse impact on the financial
position, results of operations or cash flows, in future periods, of the
Corporation. However, if the Corporation or its suppliers and customers are
unable to resolve such issues in a timely manner the Corporations' financial
condition and results of operations could be adversely affected. Accordingly,
the Corporation is seriously attempting to reach millennium compliance,
particularly, in the areas of: Information Systems, Suppliers and Customers,
Manufacturing and Facilities and Contingency Planning. The present status of
MacDermid's millennium compliance is explained below.
Information Systems
All worldwide computer systems have been inventoried. The US network systems
and personal computer systems are currently being tested and are expected to
be in compliance by the end of 1998. The software package that controls the
supply chain (purchasing, manufacturing, order processing, billing and
shipping) has been verified by the ITAA*2000 Certification Program to be
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<PAGE>
presently compliant. Certifications have been received from the suppliers of
the human resource and payroll systems and those assurances are in the process
of being tested. In addition, all systems worldwide have been similarly
reviewed and compliant systems are expected to be in place at each location by
the end of 1998, as well.
Suppliers and Customers
The Corporation has identified substantially all its key suppliers and asked
them for assurance of compliance through direct interviews and survey
mailings. A follow-up effort to those which have not communicated a readiness
at this time is in process, while, alternate suppliers are identified should
the Year 2000 prove to be an obstacle for any present supplier. The design of
company manufactured equipment that is operating at some customer locations
has been reviewed for date controls. It is believed that there are no such
controls which could be adversely affected by the Year 2000. No major portion
of the Corporation's business is dependent upon a single customer or a few
customers, the loss of which would have a materially adverse effect on its
business.
Manufacturing and Facilities
The core manufacturing process is not automated. Certain non-material support
processes have computer systems that are presently being evaluated and tested
and are expected to be updated and in compliance by the end of 1998. None of
the support systems are expected to be able to cause a disruption to the
business should an undetected issue arise. All facilities have been reviewed
and inventoried. Some facilities have certain systems which use date
functions for which upgrades have been made available through present
suppliers. Phones and voice mail systems have been made compliant. Security,
fire, heating, cooling and related systems are expected to be made compliant
by the end of 1998. Should utility providers not sufficiently resolve their
own Year 2000 issues the uninterrupted operation of the Corporation may be
adversely affected.
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<PAGE>
Contingency Planning
As the Corporation continues to address the Year 2000 issues, primarily using
internal resources, other areas for concern may arise. It is understood those
with which the Corporation conducts business face those same issues and
uncertainties. To handle the most reasonably likely worst case scenarios the
Corporation has subscribed to national disaster recovery programs for
potential computer systems or utilities service interruptions. Further, all
computerized processes for the supply chain are backed by manual procedures.
These procedures are in place at the present time and paper forms are readily
available on hand and can be used for a reasonable period of time. It is
estimated there would be approximately between 200 to 300 key suppliers and
the similar number of key customers should this course prove necessary.
Alternate suppliers have been identified should the Corporation be faced with
the need to source differently from the arrangements presently in place.
Ongoing planning and testing is being conducted in order to prevent these
scenarios and additional cost that would be associated with them.
Outlook: Issues and Risks
This report and other Corporation reports and statements describe many of the
positive factors affecting the Corporation's future business prospects.
Investors should also be aware of factors which could have a negative impact
on those prospects. These include political, economic or other conditions
such as currency exchange rates, inflation rates, recessionary or expansive
trends, taxes and regulations and laws affecting the business; competitive
products, advertising, promotional and pricing activity; the degree of
acceptance of new product introductions in the marketplace; and the difficulty
of forecasting sales at certain times in certain markets.
<PAGE>
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PART II. OTHER INFORMATION
ITEM 2 : Changes in the Rights of Security Holders
None.
ITEM 5 : Other Information
5.1 The Corporation issued a press release on October 26, 1998 to announce a
cash tender offer for the acquisition of the whole of the ordinary share
capital, not already owned by MacDermid, of W. Canning Plc. The offer, if
fully subscribed, is valued at approximately $150 million at present currency
exchange rates and is expected to close before the end of 1998. There is
committed financing provided by NationsBank N.A., a subsidiary of BankAmerica
Corporation.
ITEM 6 : Exhibits and Reports on Form 8-K
None.
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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: November 12, 1998 Daniel H. Leever
Daniel H. Leever
Chairman and Chief Executive
Officer
Date: November 12, 1998 Gregory M. Bolingbroke
Gregory M. Bolingbroke
Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-START> Apr-01-1998
<PERIOD-END> Sep-30-1998
<PERIOD-TYPE> 6-MOS
<CASH> 3383
<SECURITIES> 15387
<RECEIVABLES> 77961
<ALLOWANCES> 4392
<INVENTORY> 51489
<CURRENT-ASSETS> 154419
<PP&E> 87747
<DEPRECIATION> 46960
<TOTAL-ASSETS> 333419
<CURRENT-LIABILITIES> 88246
<BONDS> 121373
0
0
<COMMON> 39393
<OTHER-SE> 79513
<TOTAL-LIABILITY-AND-EQUITY> 333419
<SALES> 166928
<TOTAL-REVENUES> 166928
<CGS> 84826
<TOTAL-COSTS> 141244
<OTHER-EXPENSES> 56418
<LOSS-PROVISION> 633
<INTEREST-EXPENSE> 4665
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<INCOME-TAX> 8938
<INCOME-CONTINUING> 16746
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<NET-INCOME> 16746
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
