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, 2000
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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 November 1, 2000
---------------------- -----------------------------------
Common Stock, no par value 31,152,611 shares
MACDERMID, INCORPORATED
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 2000 and March 31, 2000 2
Consolidated Condensed Statements of Earnings
and Retained Earnings - Six and Three Months
Ended September 30, 2000 and 1999 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended September 30, 2000 and 1999 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
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Part II. Other Information 14
Signatures 15
<TABLE>
<CAPTION>
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in Thousands of Dollars Except Share Amounts)
September 30, March 31,
2000 2000
--------------- -----------
Assets (Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 16,036 $ 20,116
Accounts and Notes Receivable (Net of
Allowance for Doubtful Receivables of
11,183 and $10,541) 196,858 180,629
Inventories
Finished Goods 64,556 65,338
Raw Materials 65,760 50,264
--------------- -----------
130,316 115,602
Prepaid Expenses 8,592 6,976
Deferred Income Tax Asset 5,394 9,115
--------------- -----------
Total Current Assets 357,196 332,438
Property, Plant & Equipment (Net of Accumulated
Depreciation of $106,855 and $99,172) 167,400 154,149
Goodwill (Net of Accumulated Amortization of
$31,730 and $25,332) 225,773 206,848
Intangibles, including Patents/Trademarks (Net of
Accumulated Amortization of $32,146 and $28,109) 68,108 54,891
Other Assets 33,962 42,166
--------------- -----------
$ 852,439 $ 790,492
=============== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Notes Payable $ 6,685 $ 4,561
Current Installments of Long-Term Obligations 54,271 46,349
Accounts & Dividends Payable 72,272 63,545
Accrued Expenses 67,325 70,698
Income Taxes 14,639 13,967
--------------- -----------
Total Current Liabilities 215,192 199,120
Long-Term Obligations 393,970 360,348
Accrued Postretirement & Postemployment Benefits 7,162 7,239
Deferred Income Taxes 4,696 10,531
Shareholders' Equity
Common Stock Stated Value $1 per Share 45,409 45,412
Additional Paid-In Capital 13,889 13,866
Retained Earnings 239,063 217,149
Comprehensive Income Equity Adjustments: (Note 5)
Cumulative Foreign Currency Translation (8,635) (5,062)
Less: Cost of 14,277,610 and 14,267,816
Common Shares in Treasury (Note 3) (58,307) (58,111)
--------------- -----------
Total Shareholders' Equity 231,419 213,254
--------------- -----------
$ 852,439 $ 790,492
=============== ===========
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
AND RETAINED EARNINGS
(Amounts in Thousands of Dollars Except Share and Per Share Amounts)
(Unaudited)
Six Months Ended Three Months Ended
September 30, September 30,
------------------ --------------------
2000 1999 2000 1999
------------------ ------------ -------------------- ------------
<S> <C> <C> <C> <C>
Net Sales $ 384,383 $ 364,709 $ 197,878 $ 182,552
Cost and Expenses:
Cost of Sales 204,384 190,389 108,978 96,029
Selling, Technical, Administrative Expenses 114,769 108,611 59,325 55,101
Amortization 10,435 8,865 5,540 4,490
Interest Income (906) (1,632) (403) (1,152)
Interest Expense 16,995 17,736 9,312 8,826
Other Expense (Income) - net 2,060 364 290 1,024
------------------ ------------ -------------------- ------------
347,737 324,333 183,042 164,318
------------------ ------------ -------------------- ------------
Earnings Before Income Taxes 36,646 40,376 14,836 18,234
Income Taxes 13,486 14,179 5,460 6,295
------------------ ------------ -------------------- ------------
Net Earnings 23,160 26,197 9,376 11,939
Retained Earnings, Beginning of Period 217,149 171,740 230,310 185,495
Cash Dividends Declared (1,246) (1,006) (623) (503)
------------------ ------------ -------------------- ------------
Retained Earnings, End of Period $ 239,063 $ 196,931 $ 239,063 $ 196,931
================== ============ ==================== ============
Net Earnings Per Common Share (Note 4):
Basic $ 0.74 $ 0.84 $ 0.30 $ 0.38
================== ============ ==================== ============
Diluted $ 0.72 $ 0.81 $ 0.29 $ 0.37
================== ============ ==================== ============
Cash Dividends Per Common Share $ 0.04 $ 0.04 $ 0.02 $ 0.02
================== ============ ==================== ============
Weighted Average Common Shares Outstanding:
Basic 31,153,712 31,155,590 31,152,611 31,155,804
================== ============ ==================== ============
Diluted 32,404,722 32,429,896 32,404,015 32,429,598
================== ============ ==================== ============
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
MACDERMID, INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Amounts In Thousands of Dollars)
(Unaudited)
Six Months Ended September 30,
2000 1999
-------------------------------- ----------
<S> <C> <C>
Net Cash Flows from Operating Activities $ 31,672 $ 29,309
Cash Flows from Investing Activities:
Capital Expenditures (7,586) (9,723)
Proceeds from Disposition of Fixed Assets 2,029 439
Acquisitions of Business (Note 2) (57,280) ( 12,104)
-------------------------------- ----------
Net Cash Flows used in Investing Activities (62,837) (21,388)
Cash Flows from Financing Activities:
Short-Term (Repayments) / Borrowings (9,114) (2,702)
Long-Term Borrowings 62,650 10,000
Long-Term Repayments (23,938) (15,170)
Purchase of Treasury Shares (196) --
Dividends Paid (1,246) (1,006)
-------------------------------- ----------
Net Cash Flows from Financing Activities 28,156 (8,878)
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (1,071) (272)
-------------------------------- ----------
Net Decrease in Cash and Cash Equivalents (4,080) (1,229)
Cash and Cash Equivalents at Beginning of Year 20,116 17,628
-------------------------------- ----------
Cash and Cash Equivalents at End of Period $ 16,036 $ 16,399
================================ ==========
Cash Paid for Interest $ 16,068 $ 14,824
================================ ==========
Cash Paid for Income Taxes $ 9,938 $ 11,606
================================ ==========
<FN>
</TABLE>
MACDERMID, INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts In Thousands of Dollars)
Note 1. Summary of Significant Accounting Policies
The March 31, 2000 condensed consolidated balance sheet amounts have been
derived
from the previously audited consolidated balance sheets of MacDermid,
Incorporated (the Corporation). 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 and three month periods ended September 30, 2000 and 1999
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 2000 Annual
Report.
Note 2. Acquisitions
On June 13, 2000, the Corporation acquired the assets, subject to certain
liabilities, of the digital graphics business unit of VirtualFund.com, Inc. The
purchase price of $47,000 was paid at closing by borrowing on an existing credit
facility with Bank of America, N.A. A further $3,000 is contingently payable
before the end of the fiscal year in the event that certain cost reductions are
achieved within nine months. There is activity included in the Condensed
Consolidated Statement of Earnings and Retained Earnings for the acquired
business since the June 13, 2000 closing date. The related Condensed
Consolidated Balance Sheet at September 30, 2000 displays increased assets and
liabilities primarily due to this transaction. The amounts recorded for the
assets and liabilities acquired, using purchase accounting, include goodwill of
approximately $25,000 and other intangibles of approximately $17,000 which are
being amortized over fifteen years and are subject to adjustment whenever final
evaluations are completed. Any such adjustments are not expected to be
material.
The Corporation established purchase liabilities (included in accrued
expenses) in fiscal year 1999 when recording its acquisition of W.Canning, plc.
The following table summarizes the activity to this account for the six month
period ended September 30, 2000.
<TABLE>
<CAPTION>
Beginning of Year Payments End of Period
------------------ -------- --------------
<S> <C> <C> <C>
Facilities $ 2,383 75 $ 2,308
Redundancies 330 296 34
Environmental 1,880 0 1,880
------------------ -------- --------------
Total $ 4,593 371 $ 4,222
</TABLE>
The reorganization of employees and facilities is proceeding as planned.
As of the current reporting period there were 90 employees terminated. 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 closed at present.
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 September
30, 2000, 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).
Note 4. Earnings Per Common Share
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.
Note 5. Comprehensive Income
The components of comprehensive income for the six and three month periods ended
September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- ------------ -------- -------
<S> <C> <C> <C> <C>
Net Earnings $23,160 $ 26,197 $ 9,376 $11,939
Other Comprehensive Income:
Cumulative Foreign Currency
Translation Adjustment (3,573) 25 (3,467) 1,776
Available-for-Sale Securities
Unrealized Holding Gain(net of tax) - 174 - 78
-------- ------------ -------- -------
Comprehensive Income $19,587 $ 26,396 $ 5,909 $13,793
-------- ------------ -------- -------
</TABLE>
Note 6. Segment Reporting
The Corporation provides development, manufacture and technical service for a
large variety of specialty chemical processes and related equipment in two
reportable operating segments: Advanced Surface Finishes and Graphic Arts. These
two segments under which the Corporation operates on a worldwide basis are
managed separately as each segment has differences in technology and marketing
strategies. The business segments reported below are the segments of the
Corporation for which separate financial information is available and for which
operating results are reviewed by executive management to assess performance of
the Corporation. The accounting policies of the business segments are the same
as those described in the summary of significant accounting policies, Note 1.
Net sales for all of the Corporation's products fall into one of the two
business segments. The business segment results of operations include certain
operating costs which are allocated based on the relative burden each segment
bears on those costs. Operating income amounts are evaluated before
amortization of intangible assets and non-recurring charges. The business
segment identifiable assets exclude deferred tax assets, equity method
investments and certain other long term assets not associated with support of
the operations.
Note 6. Segment Reporting (continued)
Segment Results of Operations:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------ --------- -------------------- ---------
<S> <C> <C> <C> <C>
Net Sales
Advanced Surface Finishes $ 228,928 $221,343 $ 115,438 $112,071
Graphic Arts 155,455 143,366 82,440 70,481
------------------ --------- -------------------- ---------
Consolidated Net Sales $ 384,383 $364,709 $ 197,878 $182,552
------------------ --------- -------------------- ---------
Operating Income
Advanced Surface Finishes $ 40,110 $ 39,692 $ 16,925 $ 19,291
Graphic Arts 25,120 26,017 12,650 12,131
Amortization Expense (10,435) (8,865) (5,540) (4,490)
------------------ --------- -------------------- ---------
Consoliated Operating Income $ 54,795 $ 56,844 $ 24,035 $ 26,932
Interest Income 906 1,632 403 1,152
Interest Expense (16,995) (17,736) (9,312) (8,826)
Other (Expense) Income - net (2,060) (364) (290) (1,024)
------------------ --------- -------------------- ---------
Earnings before Income Taxes $ 36,646 $ 40,376 $ 14,836 $ 18,234
------------------ --------- -------------------- ---------
</TABLE>
<TABLE>
<CAPTION>
Segment Identifiable Assets:
September 30, 2000 March 31, 2000
------------------- ---------------
<S> <C> <C>
Advanced Surface Finishing $ 474,695 $ 453,714
Graphic Arts 357,193 314,215
Corporate-wide 20,551 22,563
------------------- ---------------
Consolidated Assets $ 852,439 $ 790,492
------------------- ---------------
</TABLE>
Note 7. Restructuring Charges
In the second quarter of fiscal 2001, the Corporation began a restructuring
program, in order to achieve a strategic repositioning, of its operations which
have grown rapidly through significant acquisitions over the past two fiscal
years. The Corporation took a $1,000 restructuring charge in the second quarter
ending September 30, 2000. In addition, the Corporation expects to take a
further restructuring charge of approximately $3,000 in the third quarter of
fiscal 2001. These charges represent, primarily, management and office support
redundancies of approximately 165 individuals. As of September 30, 2000, 23
employees have been terminated in accordance with the plan resulting in cash
payments of $974. It is expected that the restructuring program and related
charges will be completed by the fiscal year end.
Note 8. Market Risk and Contingencies
Market Risk
The Corporation is exposed to market risk in the normal course of its business
operations due to its operations in different foreign currencies and its ongoing
investing and financing activities. The risk of loss can be assessed from the
perspective of adverse changes in fair values, cash flows and future earnings.
The Corporation has established policies and procedures governing its management
of market risks and the use of financial instruments to manage exposure to such
risks.
The Corporation is exposed to interest rate risk primarily from its credit
facility which is based upon various floating rates. At September 30, 2000, the
Corporation had entered into interest rate swaps with an aggregate notional
amount that approximates one-third of its borrowings.
The resulting weighted-average fixed interest rate is approximately 7.5%. Based
upon expected levels of borrowing under this facility for the remainder of
fiscal year 2001, an increase in interest rates of 100 basis points would result
in an incremental $3.2 million annual interest expense and would not have a
material adverse affect on the Corporation's consolidated financial position,
results of operations or cash flows.
The Corporation operates manufacturing facilities in eight countries and sells
products in over 25 countries. Approximately 45% of the Corporation's sales are
denominated in currencies other than the US Dollar. Historically, the
Corporation returns slightly less than 10% on sales and foreign exchange
fluctuations have not had any significantly measurable effect on earnings.
Furthermore, those earnings are generally reinvested locally and the impact on
operating cash flows has been less than $3.5 million annually. Management
continually reviews the balance between foreign currency denominated assets and
liabilities in order to minimize the exposure to foreign exchange fluctuations.
The Corporation does not enter into any derivative financial instruments for
trading purposes, nor does it enter into any foreign currency hedging. The
Corporation has certain supply agreements for quantities but has chosen not to
enter into any price hedging with its suppliers for commodities.
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. Though it is difficult to predict the final costs of site
remediation, management believes that the recorded liabilities of $200 at
September 30, 2000 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 two U.S. sites of a Canning U.S. subsidiary 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 two Canning
sites will not exceed $4,500. The Corporation believes that its Canning
subsidiary clearly is entitled under Canning's acquisition agreement relating to
those sites to withhold a deferred purchase price payment of approximately
$2,300, 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 from the previous two largest shareholders
of the prior owner of the two sites. Such recovery is substantially 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 two Canning sites will be incurred within the next five years;
the Corporation will recognize the recovery from the deferred purchase price
payment contemporaneously with its payment of the underlying expense.
(b) Legal Proceedings. 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 and the underlying investigation. The Corporation has from
the outset cooperated with the investigation and is currently involved in
informal negotiations, with the government, with a view towards settling any and
all charges in this matter without resort to trial. Since these negotiations
have only recently begun, at this time it is too speculative to quantify the
precise financial implications to the Corporation.
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 record accruals
in these regards are determined in accordance with the provisions of Statement
of Financial Accounting Standards No. 5, Accounting for Contingencies (SFAS 5)
which requires an accrual to be recorded when it is both probable a liability
has been incurred and the cost is reasonably estimable.
(c) Other. 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. Approximately 40% of the business is
concentrated in the printing industry where our products are used for a wide
variety of applications, including offset blankets, printing plates, textile
blankets and rubber based covers for industrial rollers, while 25% of the
business is concentrated with manufacturers of printed circuit boards which are
used in a wide variety of end-use applications, including computers,
communications and control equipment, appliances, automobiles and entertainment
products. 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.
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, 2000 to the same periods in 1999 and
provides information with respect to changes in financial condition during the
six months then ended.
SALES
Total sales for the current quarter, $197.9 million, increased $15.3 million or
8% from $182.6 million in the same period last year. Proprietary sales, roughly
93% of total sales, increased $18.6 million or 11%. Acquisitions (net of
divestitures) added $13.1 million to proprietary sales, while foreign currency
translation reduced reported proprietary sales approximately $6.7 million or
roughly 4%. Proprietary sales excluding the effects of acquisitions and foreign
currency translation would have increased 7%.
For the six month period, total sales of $384.4 million increased $19.7 million
or 5% from $364.7 million in the same period last year. Proprietary sales,
roughly 93% of total sales, increased $29.2 million or 9%. Acquisitions (net of
divestitures) added $24.4 million, while foreign currency translation reduced
reported proprietary sales approximately $11.9 million or roughly 4%.
Proprietary sales excluding the effects of acquisitions and foreign currency
translation would have increased 5%.
The Corporation's underlying (excluding the effects of acquisitions and foreign
currency translation) sales growth, for both Graphic Arts ("GA") and Advanced
Surface Finishes ("ASF"), was fueled by Asia and to a lesser extent, further
enhanced by Europe. The underlying sales in North America were somewhat less
than the same periods last year, primarily for ASF. Worldwide GA proprietary
sales were 7% and 2% higher for the three and six month periods, respectively.
Worldwide ASF proprietary sales were 7% and 8% higher for the three and six
month periods, respectively.
COSTS AND EXPENSES
Gross profits are up 3%, for both the three and six month periods, as compared
to the same periods last year. The advancement of proprietary chemical sales,
in part from newer technologies, has been leading this growth. Gross profit, as
a percentage of sales for the three month period is 44.9% as compared to 47.4%
for the same period last year. Gross profit, as a percentage of sales for the
six month period is 46.8% as compared to 47.8% for the same period last year.
Overhead recoveries have been temporarily, negatively, impacted by early ViaTek
production costs which is the primary reason for these differences.
Selling, technical and administrative (ST&A) expenses increased 8% and 6% for
the three and six month periods, respectively, as compared to the same periods
last year. Included in the three and six month periods are merger related costs
of $1.5 million and restructuring charges of $1.0 million. Excluding these
charges, ST&A expenses would be 3% increased for both the three and six month
periods. The increase is from additional expenses from acquisition, while ST&A
expenses increased modestly in support of business growth and product
development and cost awareness initiatives have held administrative expenses
down. As a result, ST&A excluding the merger related and restructuring charges,
as a percentage of sales, is 28.7% and 29.2% for the three and six month periods
this year, respectively, as compared to 30.2% and 29.8% for the same periods
last year.
The Corporation recorded special charges of $1 million in the second quarter of
fiscal 2001 which relates to the restructuring program undertaken during the
period. A further restructuring charge of approximately $3 million is expected
to be taken in the third quarter of fiscal 2001. The restructuring is intended
to reposition operations in a more strategic manner and consists primarily of
the planned reduction of 165 individuals from the Corporation's North American
and European workforces. These reductions are mainly duplicate management and
office support positions with roughly two-thirds relating to the GA operations.
The Corporation expects to save approximately $12 million or $0.24 per share,
per annum. As of September 30, 2000, 23 employees have been terminated in
accordance with the plan resulting in cash payments of $1.0 million. It is
expected that the restructuring program and related charges will be completed by
the fiscal year end.
Total amortization charged to earnings was $5.5 million and $10.4 million for
the three and six month periods ended September 30, 2000, respectively. The
amortization of goodwill and other intangibles has increased approximately $1.0
million and $1.5 million for the three and six month periods, respectively, over
the same periods last year due to recent acquisitions by the GA business.
Operating profits, excluding the effects of the merger related and restructuring
charges, for the three month period decreased 2% and for the six month period
increased 1% as compared to the same periods last year. Operating profits,
including the merger related and restructuring charges decreased 11% and 4% for
the three and six month periods, respectively, from the same periods last year.
For the three month period, GA operating profits increased 4% and ASF operating
profits decreased 12%. For the six month period, GA operating profits decreased
3% and ASF operating profits increased 1%.
PROVISION FOR INCOME TAXES
The Corporation's effective income tax rate approximates 37% and 35% for the
three and six month periods ended September 30, 2000 and 1999, respectively.
The difference is due to a limitation on the utilization of foreign tax credits
for the period ended September 30, 2000.
NET EARNINGS
Net earnings available to common shareholders decreased 13% for the three month
period and 12% for the six month period as compared to the similar periods last
year. Foreign currency translation had the effect of reducing the reported
earnings by approximately 3% for both the three and six month periods. The
current period earnings continued to be suppressed by increased costs supporting
the newest Viatek facility program.
Financial Condition
Operating activities during the six months ending September 30, 2000 resulted in
a net cash inflow of $31.7 million. The cash generated was used for capital
improvements, dividends to common shareholders and long-term debt repayments.
Working Capital at September 30, 2000 was $142.0 million as compared to $133.3
million at March 31, 2000.
Capital expenditures were $7.6 million for the six months ended September 30,
2000 and are in line with the total planned expenditures of approximately $22.0
million for the fiscal year.
The following table contains other data for the six months ended September 30,
2000 and 1999. EBITDA is earnings before interest, taxes, depreciation and
amortization. Owners Earnings is cash flow from operations less net capital
spending. Neither EBITDA, nor Owners Earnings are intended to represent cash
flow from operations as defined by generally accepted accounting principles.
These measures should not be used as an alternative to net income as an
indicator of operating performance or to cash flows as a measure of liquidity.
<TABLE>
<CAPTION>
($ millions) 2000 1999
----- -----
<S> <C> <C>
Cash provided by operations $ 31.7 $ 29.3
Cash used in investing activities <$62.8> <$12.4>
Cash provided by/(used in) financing activities $ 28.2 $ 8.9
EBITDA $ 72.8 $ 74.7
Cash provided by operations $ 31.7 $ 29.3
Less net capital spending <$5.6> <$9.3>
-------- --------
Owners earnings $ 26.1 $ 20.0
</TABLE>
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 $47.0 million to effect
the acquisition of the digital graphics business unit of VirtualFund.com, Inc.
In addition, the remaining outstanding balance on the credit facilities
decreased a net $8.3 million during the year. The amounts outstanding on the
long-term credit arrangement at September 30, 2000, consists of $117.7 million
for the revolving loan, $261.6 million on the US Dollar term loans and $54.2
(Pound Sterling 36.7) million on the Pound Sterling term loan.
The revolving loan facility permits borrowings of up to $175 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, in fiscal year 1999, upon the
acquisition of Canning. The reorganization of employees and facilities is
proceeding as planned. As of the current reporting period there were 90
employees terminated. Negotiations are ongoing regarding the elimination of
leased facilities and sale of owned facilities, none of which have closed at
present. It is unlikely this reorganization plan would have any material
effects on the future operations or financial condition.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard No.133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 replaces existing pronouncements and practices
with a single integrated accounting framework for derivatives and hedging
activities. FASB later issued two other statements that amend SFAS133;
Statement of Financial Accounting Standard No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (SFAS 137), which establishes an effective date for SFAS 133
for fiscal years beginning after June 15, 2000 and Statement of Financial
Accounting Standard No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" (SFAS 138), which addresses a limited number of
issues that had been cause for implementation difficulties as established by
SFAS 133. The Corporation is currently evaluating the requirements of these
three statements and believes that the adoption of these statements, for its
fiscal 2002 financial statements, will not have a material impact on previously
reported information.
Euro Currency Conversion
On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency ("Euro"). The transition period for the introduction of
the Euro ends June 30, 2002. Issues that face the Corporation as a result of the
introduction of the Euro include converting information technology systems which
were largely upgraded under the year 2000 compliance review, reassessing
currency risk, negotiating and amending contracts, as well as processing
accounting and tax records. The Corporation is addressing these issues and does
not expect the Euro to have a material effect on its financial condition or
results of operations.
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 to those 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 represent our best estimates of the
fair value of these obligations. 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 deferred purchase price payment
contemporaneously with its payment of the underlying expense.
(b) Legal Proceedings. 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 and the underlying investigation. The Corporation has from
the outset cooperated with the investigation and is currently involved in
informal negotiations with the government with a view towards settling any and
all charges in this matter without resort to trial. Since these negotiations
have only recently begun, at this time it is too speculative to quantify the
precise financial implications to the Corporation.
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 complaint. The Corporation currently
believes that the outcome of this proceeding will not materially affect the
Corporation's business or financial position, however, the proceeding is in the
early stages. Therefore, at this time it is too speculative to quantify the
financial implications to the Corporation.
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
liabilities in these regards when it is both probable a liability has been
incurred and the cost is reasonably estimable in accordance with Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies."
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. Readers
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 various times in various markets.
The Corporation operates throughout the world in areas generally considered
stable. Sales are mainly to companies whose outputs become components in
consumer and industrial products having wide application and demand and no one
customer accounts for a material proportion of sales. Management believes that
inflation, generally, has had little overall impact upon the Corporation's
operations and reported earnings. While there may be temporary disruptions of
economic stability, management believes that their long-term effects will not be
significant to the Corporation.
ITEM 3:
Quantitative and Qualitative Disclosures
About Market Risk
Refer to the Notes to Consolidated Condensed Financial Statements, Note 8
"Market Risk and Contingencies".
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.
ITEM 5 : Other Information
The Corporation issued a press release on October 26, 2000 for its second
quarter earnings and to concurrently announce a restructuring program. This
restructuring will represent ongoing savings in excess of $12 million. The
program had been initiated during the second quarter and is expected to be
completed by the end of the fiscal year, with total charges to earnings of
approximately $4 million expected. The restructuring program recognizes the
redundancies in management and office support as a result of recent large
acquisitions, for which the decision was made to integrate these acquisitions
slowly in order to ensure the operations were first well integrated.
ITEM 6(a) : Exhibits
99. Press Release dated October 26, 2000.
ITEM 6(b) : Reports on Form 8-K
None.
<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: November 13, 2000 /s/ Daniel H. Leever
------------------- ------------------------
Daniel H. Leever
Chairman and
Chief Executive Officer
Date: November 13, 2000 / s / Gregory M. Bolingbroke
------------------- ---------------------------------
Gregory M. Bolingbroke
Corporate Controller and
Treasurer
