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 December 31, 1999
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COMMISSION FILE NUMBER 0-2413
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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 (I.R.S. Employer
incorporation or organization) Identification No.)
245 Freight Street, Waterbury, Connecticut 06702
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 575-5700
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None
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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.
Class Outstanding at February 1, 2000
---------------------- -----------------------------------
Common Stock, no par value 31,155,924 shares
1
<PAGE>
MACDERMID, INCORPORATED
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
December 31, 1999 and March 31, 1999 2
Consolidated Condensed Statements of Earnings
and Retained Earnings - Nine and Three Months
Ended December 31, 1999 and 1998 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended December 31, 1999 and 1998 4
Notes to Consolidated Condensed Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
Part II. Other Information 13 - 14
Signatures 15
2
<PAGE>
<TABLE>
<CAPTION>
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in Thousands of Dollars Except Share Amounts)
December 31, March 31,
1999 1999
----- -----
Assets (Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 29,370 $ 19,436
Available-for-Sale Securities - 968
Accounts and Notes Receivable (Net of
Allowance for Doubtful Receivables of
10,233 and $10,217) 183,972 159,998
Inventories
Finished Goods 53,787 54,477
Raw Materials 60,141 49,975
--------- ---------
113,928 104,452
Prepaid Expenses 6,363 10,560
Deferred Income Tax Asset 7,823 7,804
--------- ---------
Total Current Assets 341,456 303,218
Property, Plant & Equipment (Net of Accumulated
Depreciation of $99,768 and $97,357) 155,043 146,473
Goodwill (Net of Accumulated Amortization of
$22,820 and $15,796) (Note 2) 204,421 182,415
Intangibles, including Patents/Trademarks (Net of
Accumulated Amortization of $26,170 and $19,700) 57,523 62,011
Other Assets 41,297 43,172
--------- ---------
$799,740 $737,289
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Notes Payable $ 6,247 $ 3,700
Current Installments of Long-Term Obligations 42,403 38,279
Accounts & Dividends Payable 67,708 67,800
Accrued Expenses (Note 2) 79,852 55,583
Income Taxes 12,962 20,213
--------- ---------
Total Current Liabilities 209,172 185,575
Long-Term Obligations 373,194 368,102
Accrued Postretirement & Postemployment Benefits 8,348 9,093
Deferred Income Taxes 10,927 11,104
Minority Interest in Subsidiaries 65 65
Shareholders' Equity
Common Stock Stated Value $1 per Share 45,412 45,412
Additional Paid-In Capital 11,886 11,227
Retained Earnings 202,983 169,609
Comprehensive Income Equity Adjustments: (Note 4)
Cumulative Foreign Currency Translation (4,136) (4,613)
Available-for-Sale Securities Holding Loss - (174)
Less: Cost of 14,267,816 Common Shares
in Treasury (Note 3) (58,111) (58,111)
--------- ---------
Total Shareholders' Equity 198,034 163,350
--------- ---------
$799,740 $737,289
========= =========
<FN>
See accompanying notes to consolidated condensed financial statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
AND RETAINED EARNINGS
(Amounts in Thousands of Dollars Except Share and Per Share Amounts)
(Unaudited)
Nine Months Ended Three Months Ended
December 31, December 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 566,256 $ 431,830 $ 201,546 $ 151,408
Cost and Expenses:
Cost of Sales 296,979 225,278 106,590 79,227
Selling, Technical, Administrative
Expenses (Note 2) 172,884 121,581 64,273 43,377
Amortization 13,318 8,241 4,452 2,970
Interest Income (568) (797) (189) (474)
Interest Expense 24,483 18,555 7,999 6,958
Other (Income) Expense - net 1,228 (1,093) 865 (290)
------------ ------------ ------------ ------------
508,324 371,765 183,990 131,768
------------ ------------ ------------ ------------
Earnings before Taxes and Extraordinary Item 57,932 60,065 17,556 19,640
Income Taxes 21,546 21,668 7,367 6,869
------------ ------------ ------------ ------------
Net Earnings before Extraordinary Item 36,386 38,397 10,189 12,771
Extraordinary Charge for Early
Retirement of Debt, net of $2,305 Tax Benefit (3,762) - (3,762) -
------------ ------------ ------------ ------------
Net Earnings Available for Common Shareholders 32,624 38,397 6,427 12,771
Retained Earnings, Beginning of Period 169,609 117,534 197,059 142,155
Change in Subsidiary Fiscal Year 2,259 - - -
Cash Dividends Declared (1,509) (1,508) (503) (503)
------------ ------------ ------------ ------------
Retained Earnings, End of Period $ 202,983 $ 154,423 $ 202,983 $ 154,423
============ ============ ============ ============
Net Earnings Per Common Share (Note 5):
Basic
Earnings Per Share before Extraordinary Item $ 1.17 $ 1.23 $ 0.33 $ 0.41
Extraordinary Item Per Share $ (0.12) $ - $ (0.12) $ -
------------ ------------ ------------ ------------
Basic Earnings Per Common Share $ 1.05 $ 1.23 $ 0.21 $ 0.41
============ ============ ============ ============
Diluted
Earnings Per Share before Extraordinary Item $ 1.12 $ 1.18 $ 0.32 $ 0.39
Extraordinary Item Per Share $ (0.12) $ - $ (0.12) $ -
------------ ------------ ------------ ------------
Diluted Earnings Per Common Share $ 1.00 $ 1.18 $ 0.20 $ 0.39
============ ============ ============ ============
Cash Dividends Per Common Share $ 0.06 $ 0.06 $ 0.02 $ 0.02
============ ============ ============ ============
Weighted Average Common Shares Outstanding:
Basic 31,155,702 31,139,335 31,155,924 31,134,974
============ ============ ============ ============
Diluted 32,429,765 32,422,246 32,429,502 32,404,493
============ ============ ============ ============
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Amounts In Thousands of Dollars)
(Unaudited)
Nine Months Ended
December 31,
-------------
1999 1998
----- -----
<S> <C> <C>
Net Cash Flows from Operating Activities $ 49,053 $ 53,974
Cash Flows from Investing Activities:
Capital Expenditures (18,935) (10,294)
Proceeds from Disposition of Fixed Assets 1,186 60
Sale/(Purchase) of Available-for-Sale Securities 1,147 (262)
Acquisitions of Business (Note 2) (16,001) (169,534)
Proceeds from Sale of Business 9,089 -
--------- ----------
Net Cash Flows used in Investing Activities (23,514) (180,030)
Cash Flows from Financing Activities:
Short-Term (Repayments) / Borrowings (5,949) (13,612)
Long-Term Borrowings 17,350 317,175
Long-Term Repayments (22,845) (146,566)
Exercise of Stock Options - 162
Purchase of Treasury Shares - (3,140)
Dividends Paid (1,509) (1,508)
--------- ----------
Net Cash Flows (used in)/from Financing Activities (12,953) 152,511
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (844) 2,527
--------- ----------
Net Increase/(Decrease) in Cash and Cash Equivalents 11,742 28,982
Cash and Cash Equivalents at Beginning of Year (Note 2) 17,628 4,793
--------- ----------
Cash and Cash Equivalents at End of Period $ 29,370 $ 33,775
========= ==========
Cash Paid for Interest $ 22,391 $ 14,811
========= ==========
Cash Paid for Income Taxes $ 22,865 $ 15,692
========= ==========
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
5
<PAGE>
MACDERMID, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts In Thousands of Dollars)
Note 1. Summary of Significant Accounting Policies
The March 31, 1999 condensed consolidated balance sheet amounts have been
Derived from the previously audited consolidated balance sheets of MacDermid,
Incorporated (the Corporation) and PTI Inc. ("Polyfibron"). 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 nine and three month periods ended December
31, 1999 and 1998 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 the Corporation's
1999 Annual Report.
Note 2. Acquisitions and Investments
On December 29, 1999, the Corporation issued 6,999,977 shares and share
equivalents of its common stock in exchange for all outstanding shares of
Polyfibron, a specialty chemical manufacturer for the graphic arts industries.
This business combination has been accounted for as a pooling-of-interests
combination and, accordingly, the consolidated financial statements for the
periods prior to the combination have been restated to include the accounts and
results of operations of Polyfibron.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated condensed
financial statements are summarized below.
<TABLE>
<CAPTION>
Nine Months Ended Years Ended March 31,
December 31, 1999 1999 1998
------------------- ---- ----
(unaudited) (audited)
Net Sales:
<S> <C> <C> <C>
MacDermid $374,329 $382,648 $314,058
Polyfibron 191,927 227,956 214,509
--------- -------- ---------
Combined $566,256 $610,604 $528,567
Extraordinary Charge:
MacDermid $ - $ - $ -
Polyfibron (3,762) - (1,322)
--------- -------- ---------
Combined $ (3,762) $ - $ (1,322)
Net Income (Loss):
MacDermid $ 27,996 $ 36,283 $ 30,488
Polyfibron 4,628 19,343 (730)
--------- -------- ---------
Combined $ 32,624 $ 55,626 $ 29,758
</TABLE>
In addition to the extraordinary charge for early retirement of debt,
$3,762 as shown above, there was $7,116 included in selling, technical,
administrative expenses on the consolidated condensed statements of earnings and
retained earnings which had an after tax impact of $5,658 on the net income for
the nine months ended December 31, 1999. Prior to the combination, Polyfibron's
fiscal year ended December 31. In recording the pooling-of-interests
combination, MacDermid's financial statements for the nine months ended December
31, 1999 were combined with Polyfibron's financial statements for the same
period and MacDermid's financial statements for the years ended March 31, 1999
and 1998 were combined with Polyfibron's financial statements for the years
ended December 31, 1998 and 1997.
6
<PAGE>
Polyfibron's unaudited results of operations for the three months ended
March 31, 1999 included sales of $57,086 and net income of $3,259 together with
$1,000 dividend paid on preferred shares which were previously outstanding under
Polyfibron. An adjustment has been made to shareholders' equity as of April 1,
1999 to provide for the effect of those results having been excluded from both
fiscal years 2000 and 1999. The consolidated condensed statement of cash flows
are presented for the nine month period ended December 31, 1999, exclusive of
the results of operations for the three months ended March 31, 1999. During
this period, net cash and cash equavilents of $4,800 and $13,172 was used for
operations and investing activities, respectively, and net cash and cash
equivalents of $16,164 was provided by financing activities. The resulting
$1,808 decrease in cash and cash equivalents during the period is reflected in
the cash and cash equivilents at the beginning of the year for purposes of the
consolidated condensed statement of cash flows for the nine month period ended
December 31, 1999.
On May 3, 1999 a subsidiary of the Corporation increased its interest
in Galvanevet S.P.A. ("Galvanevet") an Italian specialty chemical company, by an
additional 60%, to a total 90% investment. This transaction included a $7,936
cash payment and a further approximate $7,000 that is deferred for a year. The
Corporation has an option to purchase the remaining 10% interest within the next
year with a final payment of approximately $2,000 that will bring the total
purchase price to $24,200. The total purchase price includes inventory, fixed
assets and goodwill of approximately $14,500 which is being amortized over
fifteen years, using purchase accounting. The current year accounts include the
assets and liabilities of Galvanevet in the Condensed Consolidated Balance
Sheet. Operational activity from the foregoing acquisition was included in the
results of operations in the Condensed Consolidated Statement of Earnings since
May 3, 1999.
The Corporation established purchase liabilities (included in accrued
expenses) in fiscal year 1999 when recording its acquisition of W.Canning, plc.
("Canning"). The following table illustrates the activity to this account for
the nine month period ended December 31, 1999.
<TABLE>
<CAPTION>
Beginning of Year Additions Reductions End of Period
------------------- --------- ---------- ---------------
<S> <C> <C> <C> <C>
Facilities $4,200 200 637 $3,763
Redundancies 2,050 4,650 2,837 3,863
Environmental 2,000 0 118 1,882
Litigation 0 2,000 0 2,000
</TABLE>
The reorganization of employees and facilities is proceeding as planned,
however, the original estimated liability has been adjusted for factors which
have become evident only during the application of the reorganization plan.
These factors include most significantly employee separation and litigation
costs. As of the current reporting period there were 89 employees terminated of
the 140 planned. Five facilities have been closed with those activities
assimilated elsewhere. Negotiations are ongoing regarding the elimination of
leased facilities and sale of owned facilities, none of which have occurred at
present, however, the expectation remains that this reorganization will be
significantly complete prior to the end of the fiscal year.
Note 3. 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. On February 17, 1999, the
Board of Directors reduced this authorization to 200,000 shares. At December
31, 1999, there remained authorization to purchase approximately 184,000 shares.
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).
7
<PAGE>
Note 4. Comprehensive Income
The Corporation has adopted the Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 130, Reporting Comprehensive
Income (SFAS130) as of April 1, 1998. SFAS130 established standards for
reporting and display of comprehensive income and its components in the
financial statements. 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. Tax is provided for at
the effective rate of the jurisdiction under which any other comprehensive
income (loss) arises. No portion of the accrued income tax liability balance at
December 31, 1999 has been impacted due to recognition of comprehensive income.
The components of comprehensive income for the nine and three month periods
ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
December 31, December 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Earnings $32,624 $38,397 $6,427 $12,771
Other Comprehensive Income:
Cumulative Foreign Currency
Translation Adjustment 4,694 3,926 485 2,944
Available-for-Sale Securities
Unrealized Holding Gain/(Loss)
-net of tax 174 (249) - 1,091
------- -------- ------ -------
Comprehensive Income $37,492 $42,074 $6,912 $16,806
------- -------- ------ -------
</TABLE>
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). 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 potential common
shares that were outstanding during the period. Earnings per share is calculated
based upon net earnings available for common shareholders after deduction for
preferred dividends, if any.
Note 6. Segment Reporting
The Corporation has adopted the Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS131). The Corporation has two
reportable segments, for which operating incomes are evaluated by executive
management, Advanced Surface Finishing and Graphic Arts. They are managed
separately as each segment has differences in technology and marketing
strategies. The accounting policies of the business segments are the same as
those described in the summary of significant accounting policies, Note 1.
Graphic Arts was primarily established as a business unit as a result of the
Corporation's December 1999 merger with Polyfibron and the existing reporting
structure at the time of the merger was retained.
The segment results of operations which follow include certain operating costs
which are allocated based on the relative burden each segment bears on those
costs. The segment identifiable assets which follow are reconciled to total
consolidated assets using a corporate-wide line item, which consists primarily
of deferred tax assets, equity method investments and certain other long term
assets not associated with support of the operations.
8
<PAGE>
Segment Results of Operations:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
December 31, December 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Net Sales
<S> <C> <C> <C> <C>
Advanced Surface Finishing $344,944 $ 236,153 $ 123,599 $ 87,472
Graphic Arts 221,312 195,677 77,947 63,936
--------- ------------------- ---------------- ---------
Consolidated Net Sales $566,256 $ 431,830 $ 201,546 $151,408
--------- ------------------- ---------------- ---------
Operating income
Advanced Surface Finishing $ 59,504 $ 44,475 $ 20,401 $ 13,775
Graphic Arts 44,005 40,496 16,366 15,029
Amortization (13,318) (8,241) (4,452) (2,970)
Merger Costs (7,116) - (6,084) -
--------- ------------------- ---------------- ---------
Consoliated Operating Income $ 83,075 $ 76,730 $ 26,231 $ 25,834
Interest Income (568) (797) (189) (474)
Interest Expense 24,483 18,555 7,999 6,958
Other (Income) Expense - net 1,228 (1,093) 865 (290)
--------- ------------------- ---------------- ---------
Earnings before Taxes
and Extraordinary Item $ 57,932 $ 60,065 $ 17,556 $ 19,640
--------- ------------------- ---------------- ---------
</TABLE>
<TABLE>
<CAPTION>
Segment Identifiable Assets:
December 31, 1999 March 31, 1999
------------------- ----------------
<S> <C> <C>
Advanced Surface Finishing $457,450 $ 392,065
Graphic Arts 319,968 321,553
Corporate-wide 22,322 23,671
--------- -------------------
Consolidated Assets $799,740 $ 737,289
--------- -------------------
</TABLE>
Note 7. Contingencies
(a) Environmental
The Corporation has been named as a potentially responsible party (PRP) by the
Environmental Protection Agency in connection with two waste sites. There are
many other companies involved at each of these sites and the Corporation's
participation is minor. The Corporation has recorded its best estimate of
liabilities in connection with site clean-up based upon the extent of its
involvement, the number of PRPs and estimates of the total costs of the site
clean-up that reflect the results of phase I and II environmental investigations
and remediation estimates produced by remediation contractors. Though it is
difficult to predict the final costs of site remediation, management believes
that the recorded liabilities are reasonable estimates of probable liability and
that future cash outlays are unlikely to be material to its consolidated
financial position, results of operations or cash flows. In respect of the
foregoing two sites the Corporation has reserved $200 as its estimate of
liability taking the foregoing factors into consideration.
9
<PAGE>
The Corporation has established an environmental remediation reserve with
respect to its December 1998 acquisition of Canning. A substantial majority of
that reserve is attributable to several sites of Canning that are believed to
require environmental remediation activities. The reserves established by the
Corporation were based upon phase I and phase II environmental investigations of
those sites and remediation estimates produced by remediation contractors, which
estimates indicated that the reasonable range of the Corporation's gross
liability is $2,000 to $11,500. Based upon the Corporation's experience and the
facts known to it, as of the date of this filing the Corporation expects that
its gross liability for those Canning sites will not exceed $4,500. The
Corporation believes that its Canning subsidiary is entitled, under its
acquisition agreement relating to certain sites, to withhold an approximate
$2,300 deferred purchase price payment which will be applied to reduce its net
liability for those sites. To the extent the Corporation's liabilities exceed
$2,300 it may be entitled to additional indemnification payments. Such recovery
may be uncertain, however, and would likely involve significant litigation
expense. As a result, the Corporation has recorded a net liability of $2,000.
The foregoing estimates of potential gross and net liabilities and recoveries
have not been discounted to reflect the time value of money. The Corporation
expects that the liabilities pertaining to the Canning sites will be incurred
within the next five years; the Corporation will recognize the recovery from the
purchase price adjustment contemporaneously with its payment of the underlying
expense.
On January 30,1997, the Corporation was served with a subpoena from a federal
grand jury in Connecticut requesting certain documents. The Corporation was
subsequently informed that it is a subject of the grand jury's investigation.
The subpoena requested information relating to an accidental spill from the
Corporation's Huntingdon Avenue, Waterbury, Connecticut facility that occurred
in November of 1994, together with other information related to operations and
compliance at the Huntingdon Avenue facility. The Corporation has retained
outside law firms to assist in complying with the subpoena. The Corporation is
cooperating with the government's investigation. Since this matter is currently
in very early stages, it is impossible to determine what the ultimate outcome
will be and difficult to quantify the extent of an exposure to liability. As
such, no assurance can be given that the Corporation will not be found to have
liability. Accruals in this regard are determined in accordance with the
provisions of Statement of Financial Accounting Standards No. 5, Accounting for
Contingencies (SFAS5) which requires an accrual to be recorded when it is both
probable a liability has been incurred and the cost is reasonably estimable.
(b) Legal Proceedings
On July 26, 1999 the Corporation was named in a civil lawsuit commenced in the
Superior Court of the State of Connecticut. The action was initiated by the
Commissioner of Environmental Protection alleging various compliance violations
at the Corporation's Huntingdon Avenue and Freight Street locations between the
years 1992 through 1998. The complaint contains allegations of permit
violations and violations of procedural, notification and other requirements of
Connecticut's environmental regulations over the foregoing period of time. The
Corporation is vigorously defending this action. It is currently believed that
the outcome of the proceeding will not materially affect the Corporation's
business or financial position, however, the proceeding is in the very early
stages and therefore difficult to assess at this time.
A subsidiary of the Corporation, W. Canning L.P., is involved in a civil lawsuit
with one of its former customers. The action involves allegations by the
customer of product liability. Damages in the amount of approximately $2
million have been alleged. The Corporation is vigorously defending this action.
The insurance carrier of W. Canning L.P. has provided a defense.
(c) Other
The Corporation is a party to a number of lawsuits and claims in addition to
those discussed above arising out of the ordinary conduct of business. While
the ultimate results of the proceedings against the Corporation cannot be
predicted with certainty, management does not expect that resolution of these
matters will have a material adverse effect upon its consolidated financial
position, results of operations or cash flows. It is the Corporation's policy
to accrue probable liabilities to the extent that such liabilities can
reasonably be estimated.
The Corporation's business operations consist principally of manufacture and
sale of specialty chemicals, supplies and related equipment to customers
throughout much of the world. As is usual for this business, the Corporation
generally does not require collateral or other security as a condition of sale,
choosing, rather, to control credit risk of trade account financial instruments
by credit approval, balance limitation and monitoring procedures. Management
believes that reserves for losses, which are established based upon review of
account balances and historical experience, are adequate.
10
<PAGE>
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
nine month periods which ended December 31, 1999 to the same periods in 1998 and
provides information with respect to changes in financial condition during the
nine months then ended.
SALES
Total sales for the current quarter, $201.5 million, increased $50.1 million or
33% from $151.4 million in the same period last year. Acquisitions added $31.6
million (with Canning in for three months this year vs. one month last year
adding $20.3 million). Proprietary chemical sales, excluding the acquisitions,
increased 8% over the similar period last year. Proprietary sales as a percent
of total sales were 88% for the current quarter as compared to 89% for the
similar period in the prior year.
For the nine month period total sales, $566.3 million, increased $134.5 million
or 31% from $431.8 million in the same period last year. Proprietary sales were
89% of total sales for the nine month periods in both years and increased $121.8
million or 32% primarily from acquisitions which added $112.7 million of
proprietary sales. The Corporation continues to produce increased sales
worldwide in large part from businesses acquired. Foreign currency translation
reduced reported sales approximately $6.2 million or roughly 1% for the nine
month period
During both the three and nine month periods ended December 31, 1999 the
Corporation's markets have experienced growth, from modest in Europe and
improving in the Americas to vibrant in Asia. However, softening pricing has
somewhat offset the momentum particularly in the US markets.
COSTS AND EXPENSES
Gross profits are up 32% for the quarter and 30% for the nine months as compared
to the like periods last year. This growth was enhanced by the continued
advancement of proprietary chemical sales. Gross profit as a percentage of
sales has been steady at roughly 47.5% for both the three and nine month periods
in both the current and prior fiscal years. Cost awareness initiatives continue
to play an important role towards maintaining the Corporation's gross profits.
Selling, technical and administrative (ST&A) expenses are 48% increased for the
quarter and 42% increased for the nine month period as compared to the similar
periods last year. Without additional expenses for one-time merger costs and
other acquired business, ST&A expenses would have been increased roughly 3% for
both the quarter and nine months ended December 31, 1999.
ST&A as a percentage of sales for the three and nine month periods is
approximately 29% (excluding one-time merger costs) this year as compared to
approximately 29% for the three months and 28% for the nine month periods last
year. ST&A as a percentage of sales was higher for the nine month period due to
expense in support of business growth and product development.
Total amortization charged to earnings was $13.3 million and $8.2 million for
the nine month periods ended December 31, 1999 and 1998, respectively. The
principle effect on this increase is the amortization of goodwill and other
intangibles from the Canning acquisition.
Operating profits for the three month period increased 2% (would have been
increased 25% absent the one-time merger costs). Operating profits for the nine
month period increased 8% (would have been increased 18% absent the one-time
merger costs). Operating profits increased 25% and 18% for the three and nine
month periods ended December 31, 1999, respectively, as a result of increased
proprietary sales coupled with ST&A that was relatively unchanged other than
increases with acquired business as well as additional amortization of
intangibles as a result of acquisition activity. These operating profit
increases were reduced to 2% and 8% for the three and nine month periods ended
December 31, 1999, respectively, as a result of the one-time merger costs
incurred.
11
<PAGE>
Earnings before interest, taxes, depreciation and amortization (EBITDA) is
$103.1 million for the nine months ended December 31, 1999. EBITDA is not
intended to represent cash flow from operations as defined by generally accepted
accounting principles. It should not be used as an alternative to net income as
an indicator of operating performance or to cash flows as a measure of
liquidity.
PROVISION FOR INCOME TAXES
The Corporation's effective income tax rate approximates 37% and 36% for the
nine month periods ended December 31, 1999 and 1998, respectively. The
difference is due to professional fees incurred as a result of the merger in
December 1999 of the Corporation with Polyfibron which are not deductible for
tax purposes. For the third quarter, these professional fees caused the
Corporation's effective income tax rate to approximate 42% as compared to 35%
for the same three month period last year.
NET EARNINGS
Net earnings available to common shareholders decreased 50% for the quarter and
15% for the nine month period as compared to the similar periods last year.
This was due to the non-recurring expenses associated with effecting the
Corporation's merger with Polyfibron. Excluding these costs, net earnings
available to common shareholders increased 19% and 9% for the three and nine
month periods ended December 31, 1999, respectively, as recent acquisitions have
been immediately accretive to earnings.
Borrowings increased over the three and nine month periods last year for the
Corporation's acquisition activities, of most significance was Canning in
December 1998. As a result, interest expense increased 15% for the three month
period and 32% for the nine month period ended December 31, 1999 on the
borrowings to effect those acquisitions.
FINANCIAL CONDITION
Operating activities during the nine months ending December 31, 1999 resulted in
a net cash inflow of $49.0 million. The cash generated was primarily used for
capital improvements, dividends to common shareholders, payment to acquire
increased interest in a subsidiary and $11.4 million net debt repayment.
Working Capital at December 31, 1999 was $132.3 million as compared to $117.6
million at March 31, 1999.
Capital expenditures were $18.9 million for the nine months ended December 31,
1999 and are in line with the original total planned expenditures of
approximately $25.0 million for the fiscal year.
MacDermid has a long-term credit arrangement which consists of a combined
revolving loan and three six-year term loans. Two of the term loans are
denominated in US Dollars and the other is Pound Sterling denominated. The
outstanding balance on the credit facilities increased $155.6 million to
extinguish all of the existing debt of Polyfibron at the consumation of the
merger with the Corporation in December 1999. In addition, the remaining
outstanding balance on the credit facilities decreased a net $2.5 million during
the year. The amounts outstanding on the long-term credit arrangement at
December 31, 1999, consists of $56.4 million for the revolving loan, $336.1
million on the US Dollar term loans and $65.4(Pound 40.5) million on the Pound
Sterling term loan.
The revolving loan facility permits borrowings of up to $125 million. The
Corporation's other credit facilities presently total approximately $55 million.
These, together with the Corporation's cash flows from operations are adequate
to fund working capital and expected capital expenditures.
The Corporation established purchase liabilities last fiscal year upon the
acquisition of Canning. The reorganization of employees and facilities is
proceeding as planned, however, the original estimated liability has been
increased $6.8 million as a result of factors previously discussed in Note 2 to
the consolidated condensed financial statements. As of the current reporting
period there were 89 employees terminated of the 140 planned. Negotiations are
ongoing regarding the elimination of leased facilities and sale of owned
facilities, none of which have closed at present, however, the expectation
remains that this reorganization will be significantly complete prior to the end
of the fiscal year. As such, it is unlikely this reorganization plan would have
any material effects on the future operations or financial condition.
12
<PAGE>
The Corporation did not experience any adverse impact upon its business
operations with the arrival of the year 2000. However, the Corporation's
information systems group responsible for the worldwide compliance program, as
described in the Corporation's reports during 1999, will continue to monitor
this item for several months.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard No.133, "Accounting for Derivitive Instruments and Hedging
Activities" (SFAS 133). SFAS 133 replaces existing pronouncements and practices
with a single integrated accounting framework for derivitives and hedging
activities. FASB also issued Statement of Financial Accounting Standard No.
137, "Accounting for Derivitive Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133" (SFAS 137). SFAS 137 establishes
an effective date for SFAS 133 for fiscal years beginning after June 15, 2000.
The Corporation is currently evaluating the requirements of both SFAS 133 and
SFAS 137 and believes that the adoption of these statements, for its fiscal 2002
financial statements, will not have a material impact on previously reported
information.
CONTINGENCIES
(a) Environmental. The Corporation has been named as a potentially responsible
party (PRP) by the Environmental Protection Agency in connection with two waste
sites. There are many other companies involved at each of these sites and the
Corporation's participation is minor. The Corporation has recorded its best
estimate of liabilities in connection with site clean-up based upon the extent
of its involvement, the number of PRPs and estimates of the total costs of the
site clean-up that reflect the results of phase I and II environmental
investigations and remediation estimates produced by remediation contractors.
Though it is difficult to predict the final costs of site remediation,
management believes that the recorded liabilities are reasonable estimates of
probable liability and that future cash outlays are unlikely to be material to
its consolidated financial position, results of operations or cash flows.
The Corporation has established an environmental remediation reserve with
respect to its December 1998 acquisition of Canning. A substantial majority of
that reserve is attributable to several sites of Canning that are believed to
require environmental remediation activities. The reserves established by the
Corporation were based upon phase I and phase II environmental investigations of
those sites and remediation estimates produced by remediation contractors, which
estimates indicated that the reasonable range of the Corporation's gross
liability is $2 million to $11.5 million. Based upon the Corporation's
experience and the facts known to it, as of the date of this filing the
Corporation expects that its gross liability for those Canning sites will not
exceed $4.5 million. The Corporation believes that its Canning subsidiary is
entitled under its acquisition agreement relating certain sites to withhold a
deferred purchase price payment of approximately $2.3 million, which will be
applied to reduce its net liability for those sites. To the extent the
Corporation's liabilities exceed $2.3 million it may be entitled to additional
indemnification payments. Such recovery may be uncertain, however, and would
likely involve significant litigation expense. As a result, the Corporation has
recorded a net liability of $2 million. The foregoing estimates of potential
gross and net liabilities and recoveries have not been discounted to reflect the
time value of money. The Corporation expects that the liabilities pertaining to
the Canning sites will be incurred within the next five years; the Corporation
will recognize the recovery from the purchase price adjustment contemporaneously
with its payment of the underlying expense.
On January 30,1997, the Corporation was served with a subpoena from a federal
grand jury in Connecticut requesting certain documents. The Corporation was
subsequently informed that it is a subject of the grand jury's investigation.
The subpoena requested information relating to an accidental spill from the
Corporation's Huntingdon Avenue, Waterbury, Connecticut facility that occurred
in November of 1994, together with other information related to operations and
compliance at the Huntingdon Avenue facility. The Corporation has retained
outside law firms to assist in complying with the subpoena. The Corporation is
cooperating with the government's investigation. Since this matter is currently
in very early stages, it is impossible to determine what the ultimate outcome
will be and difficult to quantify the extent of an exposure to liability. As
such, no assurance can be given that the Corporation will not be found to have
liability.
13
<PAGE>
(b) Legal Proceedings / Other. On July 26, 1999 the Corporation was named in a
civil lawsuit commenced in the Superior Court of the State of Connecticut. The
action was initiated by the Commissioner of Environmental Protection alleging
various compliance violations at the Corporation's Huntingdon Avenue and Freight
Street locations between the years 1992 through 1998. The complaint contains
allegations of permit violations and violations of procedural, notification and
other requirements of Connecticut's environmental regulations over the foregoing
period of time. The Corporation is vigorously defending this action. It is
currently believed that the outcome of the proceeding will not materially affect
the Corporation's business or financial position, however, the proceeding is in
the very early stages and therefore difficult to assess at this time.
A subsidiary of the Corporation, W. Canning L.P., is involved in a civil lawsuit
with one of its former customers. The action involves allegations by the
customer of product liability. Damages in the amount of approximately $2
million have been alleged. The Corporation is vigorously defending this action.
The insurance carrier of W. Canning L.P. has provided a defense.
The Corporation is a party to a number of lawsuits and claims in addition to
those discussed above arising out of the ordinary conduct of business. While
the ultimate results of the proceedings against the Corporation cannot be
predicted with certainty, management does not expect that resolution of these
matters will have a material adverse effect upon its consolidated financial
position, results of operations or cash flows. It is the Corporation's policy
to accrue probable liabilities to the extent that such liabilities can
reasonably be estimated.
The Corporation's business operations, consist principally of manufacture and
sale of specialty chemicals, supplies and related equipment to customers
throughout much of the world. As is usual for this business, the Corporation
generally does not require collateral or other security as a condition of sale,
choosing, rather, to control credit risk of trade account financial instruments
by credit approval, balance limitation and monitoring procedures. Management
believes that reserves for losses, which are established based upon review of
account balances and historical experience, are adequate.
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.
PART II. OTHER INFORMATION
ITEM 1 : LEGAL PROCEEDINGS
None.
ITEM 2 : CHANGES IN THE RIGHTS OF SECURITY HOLDERS
None.
ITEM 3 : DEFAULTS BY THE CORPORATION ON ITS SENIOR SECURITIES
None.
ITEM 4 : RESULTS OF VOTES OF SECURITY HOLDERS
None.
14
<PAGE>
ITEM 5 : OTHER INFORMATION
The Corporation filed an amended Form S-4 effective November 12, 1999. This
filing supersedes the Form S-4 effective previously from August 30, 1999 and is
for the benefit of PTI Inc. shareholders who were required to re-approve the
merger as modified by the third amendment to the merger agreement. The Federal
Trade Commission granted regulatory approval for the merger and the closing of
the merger was consumated on December 29, 1999.
ITEM 6(A) : EXHIBITS
6(a).1 The Corporation filed an Amendment to the Restated Certificate of
Incorporation, MacDermid, Incorporated, amended as of December 1, 1997. Exhibit
19 to the June 30, 1999 Form 10Q quarterly report is incorporated by reference
herein.
6(a).2 On August 12, 1999, the Corporation filed its Form 10-K/A to provide
additional disclosure to certain portions of its annual report to shareholders
attached as exhibit 13. The Form 10-K/A is incorporated by reference herein.
ITEM 6(B) : REPORTS ON FORM 8-K
6(b).1 On June 9, 1999, the Corporation filed its Form 8-K/A to disclose the
impact that reconciliation from UK GAAP to US GAAP for pension accounting had on
the historical financial statements and pro forma financial information
previously filed. The Form 8-K/A is incorporated by reference herein.
6(b).2 On September 27, 1999, the Corporation filed its Form 8-K which announced
that a special shareholders' meeting was to be held for the purpose of approving
the merger agreement with PTI Inc. and to disclose that a second amendment to
the merger agreement had been agreed to which extended the closing deadline.
The Form 8-K is incorporated by reference herein.
6(b).3 On October 5, 1999, the Corporation filed its Form 8-K/A to announce
that shareholder approval for the merger had been obtained by both the
Corporation and PTI Inc. on September 30, 1999 and also included the second
amendment as exhibit 2. The Form 8-K/A is incorporated by reference herein.
6(b).4 On November 2, 1999, the Corporation filed its Form 8-K/A to disclose
that a third amendment to the merger agreement had been agreed to. This third
amendment, included as exhibit 2, further extended the closing deadline to
December 15, 1999 and provided for a reduction of the share consideration to be
paid by the Corporation. The Form 8-K/A is incorporated by reference herein.
6(b).5 On January 3, 2000, the Corporation filed its Form 8-K/A to announce the
merger between the Corporation and PTI Inc. received Federal Trade Commssion
approval and was then consumated on December 29, 1999. The Form 8-K/A is
incorporated by reference herein.
15
<PAGE>
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: February 11, 2000 /s/ Daniel H. Leever
- ------------------------ --------------------
Daniel H. Leever
Chairman and
Chief Executive Officer
Date: February 11, 2000 / s / Gregory M. Bolingbroke
- ------------------------ ----------------------------
Gregory M. Bolingbroke
Corporate Controller
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