UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2006

OR

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

For the transition period from                   to                  

Commission file number 1-13889

MacDermid, Incorporated

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code (720) 479-3060

Securities registered pursuant to section 12(b) of the Act:

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

Yes x    No o.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o    No x.

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 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x    No o.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Large accelerated filer x Accelerated filer o Non-accelerated filer o.

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes o    No x.

The aggregate market value of voting common stock held by non-affiliates of the registrant at the close of business on June 30, 2006, was $603,159,840, based upon the last sales price reported for such date on the New York Stock Exchange. All executive officers, directors and holders of 5% or more of the outstanding common stock of the registrant have been deemed, solely for purposes of the foregoing calculation, to be “affiliates” of the registrant.

The number of shares of the Registrant’s Common Stock outstanding as of February 15, 2007, was 30,890,598 shares.

MACDERMID, INCORPORATED
2006 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

 

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SAFE HARBOR FOR FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K (“report”) and documents incorporated by reference include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that is based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to future prospects, developments and business strategies. The statements contained in this report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. We caution investors not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. We undertake no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.

The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases, including references to assumptions, have been used to identify forward-looking statements. These forward-looking statements are made based on management’s expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The following factors, including the risk factors described in Item 1A of this report, are among those that may cause actual results to differ materially from the forward-looking statements:

·       general economic, business and industry conditions in the markets in which we operate;

·       general political conditions, including tax rates or policies and inflation rates;

·       industry and market changes, including the impact of consolidations and changes in competition;

·       risks associated with conducting business in foreign countries, including foreign currency fluctuations;

·       changes in current advertising, promotional and pricing levels;

·       changes in sales mix and difficulty of forecasting sales at various times in various markets;

·       the impact of acquisitions and dispositions;

·       changes in or compliance with laws and regulations, particularly those relating to taxation and protection of the environment;

·       significant litigation adverse to the company, including product liability claims;

·       disruptions of established supply channels, including channel conflicts or the financial weakening of our channel partners;

·       degree of acceptance of new products;

·       our ability to access the debt and equity markets, which will depend on general market conditions and the credit ratings for our debt obligations;

New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for us to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement.

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Explanatory Note

In this Form 10-K, MacDermid, Incorporated (“MacDermid” or “the Company”) is restating its consolidated balance sheet as of December 31, 2005.

This Form 10-K also reflects the restatement of “Selected Consolidated Financial Data” in Item 6 for the consolidated balance sheet data as of December 31, 2005, 2004, 2003 and 2002.

In the first quarter of 2006, the Company reviewed its foreign currency conversion rates used to convert goodwill and intangible assets. Beginning in 2002, the Company held all goodwill and certain intangible assets related to the acquisition of Canning Ltd. (“Canning intangibles”) constant at historic currency conversion rates, effectively holding the value of goodwill and Canning intangibles constant at 2002 currency conversion rates. This resulted in an understatement of goodwill and Canning intangibles as of December 31, 2005. In connection with the Company adopting the provision of Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, in the first quarter of 2006, the Company restated the December 31, 2005 balances of Goodwill, Intangibles and Other Comprehensive (Loss) Income to correct an error related to foreign currency translation. As a result, the Company made certain restatement adjustments to the December 31, 2005, 2004, 2003 and 2002 Consolidated Balance Sheets to state these assets at the correct currency conversion rates.  The Company also restated Other Comprehensive Income for the years ended December 31, 2005, 2004, 2003 and 2002.

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

The restatement adjustments necessary to properly convert goodwill and intangible assets are offset with a corresponding restatement adjustment to the Accumulated Other Comprehensive (Loss) Income section of Shareholders’ Equity in the December 31, 2005, 2004, 2003 and 2002 Consolidated Balance Sheets.

These restatement adjustments have no impact on earnings for the years ended December 31, 2005, 2004, 2003 and 2002, or any of the tangible assets and liabilities accounts balances at December 31, 2005, 2004, 2003 and 2002.

Previous filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the restatement have not been amended.

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PART I

ITEM 1:     BUSINESS

We were established in Waterbury, Connecticut in 1922. We research, develop, acquire, manufacture, market and service a broad line of specialty chemicals for the metal and plastic finishing, electronics, graphic arts and offshore oil industries. Our products, which are used worldwide, are supplied to the metal and plastic finishing markets for automotive and other industrial applications, markets within the electronics industry to create electrical patterns on circuit boards, the offshore oil and gas markets as lubricants and cleaning agents for oil production and also to the commercial printing, newspaper and packaging industries for image transfer using offset or flexographic printing applications, photopolymer plates and digital printers.

Our principal executive offices are located at 1401 Blake Street, Denver, Colorado. Our telephone number is (720) 479-3060.

Our common shares have traded on the New York Stock Exchange under the symbol “MRD” since 1998. Prior to that, and since 1966, our common shares were traded on the NASDAQ stock exchange.

MacDermid Segment and Product Information

Segment Information

We provide our products to our customers via two distinct business segments, Advanced Surface Finishing and Printing Solutions.

The Advanced Surface Finishing (“ASF”) segment produces and sells proprietary chemical compounds that are primarily used for automotive, industrial, electronics and offshore oil production applications. In automotive and other industrial applications, our products are used for cleaning, activating, polishing, mechanical plating, mechanical galvanizing, electro-plating, phosphatizing, stripping and coating, filtering, anti-tarnishing and rust inhibiting for metal and plastic surfaces. In electronics applications, our products are used to etch copper and create electrical patterns on circuit boards. We also produce hard-coated films for the membrane switch and touch screen markets. In offshore oil production, our chemicals and fluids are used in hydraulic systems as lubricants and corrosion inhibitors to assist in drilling and production operations. Chemicals, supplies and equipment manufactured by others and resold by us consist of basic chemicals, automatic plating conveyors, barrel plating and pollution control equipment, rectifiers, pumps and filters.

The Printing Solutions (“MPS”) segment offers a complete line of offset printing blankets and photo-polymer plates that are used by commercial printing and packaging industries. These products allow for both image transfer in flexographic applications and in offset printing applications. Our products are used to improve print quality and productivity for commercial printing. We also manufacture and market a line of wide-format digital printers with color graphics and other features, as well as high quality stencil materials and digital pre-press products for screen printing.

A summary of our net revenue, earnings from operations and assets for our segments is found in the Notes to Consolidated Financial Statements Item 8 of this Form 10-K. A discussion of factors potentially affecting our operations is set forth in “Risk Factors” in Item 1A, which is incorporated herein by reference.

Product Information

We have two classes of principal products: (a) proprietary products, which are predominantly the result of our own and acquired research and development, include chemical compounds, printing plates and blankets; and (b) resale non-proprietary chemicals and supplies.

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Manufacturing

We use in excess of 1,100 chemicals as raw materials in the manufacture of our proprietary products. During fiscal year 2006, there were no significant difficulties in obtaining raw materials essential to our business.

We operate manufacturing facilities in the United States, Spain, United Kingdom, Italy, France, Taiwan, China and Australia. We also own and operate five manufacturing facilities and maintain chemical inventories at more than twelve leased or rented distribution points within the United States.

To meet the rapid delivery requirements of our customers, it is necessary to maintain finished goods inventory at locations throughout the United States and in the foreign countries in which we operate. This impacts working capital requirements by requiring a considerable investment in inventories to meet this demand. Since products are taken from inventory stock to ship against current orders, there is no backlog of orders for our proprietary chemical products. Customer payment terms, which vary by country, are generally in accordance with local industry practice.

Sales, Marketing and Distribution

The following table sets forth the classes of our products and the respective percentage of total consolidated revenue for fiscal years 2006, 2005 and 2004:

 

Proprietary sales are generated from manufactured chemical compounds produced from our own research and development laboratories and manufacturing facilities. In many cases, these products are protected with patents or trademarks. Proprietary products have higher gross margins than non-proprietary products, and are viewed by management as more critical to our overall performance.

Methods for selling and marketing our proprietary products vary slightly by geographic region. In total, we generate business through the efforts of sales and service personnel and regional distributors and manufacturing representatives. In the Americas, approximately 360 sales and service personnel market our entire line of proprietary products. In certain areas of the United States, distributors and manufacturing representatives also sell and service many of our products. We market certain of our products through wholly-owned subsidiaries in Canada, Mexico and Brazil. In Europe, approximately 350 sales and service representatives, who are employed by our wholly-owned subsidiaries located in France, Germany, Great Britain, Italy, Holland, Spain, Belgium and Sweden, market our proprietary products. In the Asia-Pacific region, our local subsidiaries employ approximately more than 390 sales and service representatives to market our proprietary products through either wholly-owned subsidiaries or branches in Australia, Japan, Korea, New Zealand, Singapore, Hong Kong, Taiwan and mainland China. In addition to the countries where we have wholly-owned subsidiaries, some of our proprietary chemicals are sold in other countries throughout South America, Europe and Asia through distributors. Resale items are marketed in conjunction with and as an aid to the sale of proprietary chemicals.

Revenue from product sales, including freight charged to customers, is recorded upon shipment to the customer if the collection of the resulting receivable is probable. Our stated shipping terms are customarily FOB shipping point and do not include customer inspection or acceptance provisions. Equipment sales

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arrangements may include right of inspection or acceptance provisions in which case revenue is deferred until these provisions have been satisfied. If circumstances arise where title has not passed, or revenue is not earned, we defer revenue recognition in accordance with criteria set forth in Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements and Staff Accounting Bulletin No. 104, Revenue Recognition.

There is no material portion of our business that is subject to seasonality. Likewise, there is no major portion of our business, or business segments, dependent upon a single customer or a few customers, the loss of which would have a materially adverse effect on our business.

Research and Development

Research in connection with proprietary products is performed principally in the United States, Great Britain, Spain, France and Japan. We spent approximately $30.8 million during fiscal year 2006, $27.2 million during fiscal year 2005 and $21.9 million during fiscal year 2004 on research and development activities. Substantially all research and development activities were performed internally.

Intellectual Property

We own approximately 300 non-expired U.S. Patents. Some of the foregoing patents are also patented in foreign countries. We also own 600 non-expired foreign patents. The patents we own are important to our business and have varying remaining lives. Although certain of these patents are increasingly more important to our business, we believe that our ability to provide technical and testing services to its customers and to meet the rapid delivery requirements of our customers is equally, if not, more important. In addition, we have many proprietary products which are not covered by patents and which make a large contribution to our total sales. Further, we own a number of domestic and foreign trade names and trademarks which we consider to be of value in identifying MacDermid and our products. We do not hold nor have we granted any franchises or concessions.

Government and Environmental Regulation

We are subject to numerous federal, state and local laws in the countries in which we operate, including tax, environmental and other laws that govern the way we conduct our business. However, no portion of our business is subject to re-negotiation of profits or termination of contracts or subcontracts at the election of the governments in the countries in which we operate.

In response to increased government attention to environmental matters worldwide, we continue to develop proprietary products designed to reduce the discharge of pollutant materials into the environment and eliminate the use of certain targeted raw materials while enhancing the efficiency of customer chemical processes.

Competitive Environment

We provide a broad line of proprietary chemical compounds and supporting services. We have many competitors, estimated to be in excess of 100 in some proprietary product areas. Some large competitors operate globally, as we do, but most operate locally or regionally. To the best of our knowledge, no single competitor competes with all our proprietary products. We maintain extensive support, technical and testing services for our customers, and are continuously developing new products. We believe that our combined abilities to manufacture, sell, service and develop new products and applications, enable us to compete successfully both locally and worldwide.

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New Developments

On September 5, 2006, we received a proposal from investors led by Daniel H. Leever, our Chairman and Chief Executive Officer, and Court Square Capital Partners (“Court Square”), a related party, to acquire all of our outstanding common stock for $32.50 per share in cash. On December 15, 2006, our Board of Directors, on the unanimous recommendation of a Special Committee, comprised entirely of independent directors, approved a merger agreement under which Daniel H. Leever, our Chairman and Chief Executive Officer and investment funds managed by Court Square, a related party and Weston Presidio will acquire all of our outstanding common stock for $35.00 per share.

Employees

We employ people in more than 15 countries. We had approximately 2,900 employees as of December 31, 2006, with approximately 1,600 working in our ASF segment and 1,300 working in our MPS segment.

Financial Information by Geographic Area

Approximately 57% of our sales and net assets are outside the United States. See Note 11 to our Notes to our Consolidated Financial Statements in Item 8, for discussion of our sales, long-lived assets and other geographical information as it relates to our country of domicile and our foreign operations.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available on our website at http://www.macdermid.com/, as soon as reasonably practicable after we electronically file such reports with, or furnish those reports to, the Securities and Exchange Commission. Our Corporate Governance Guidelines and Board of Directors committee charters (including the charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee) also are available at the same location on our website. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and amendments to reports are available free of charge by writing to MacDermid Annual Reports, 1401 Blake Street, Denver, Colorado, 80202.

We have for several years maintained a code of ethics (formally named the MacDermid, Inc. Ethics Policy and Corporate Compliance Manual) (“the Code”) applicable to our Board of Directors, principal executive officer and principal accounting officer, as well as all our other employees. The code of ethics is filed by reference with this report as Exhibit 14. A copy of the Code may be found on our website at http:/ www.macdermid.com, under the Corporate Governance section. Shareholders may also obtain manual copies of the Code by submitting a written request to John Cordani, Corporate Secretary, 245 Freight Street, Waterbury, CT. 06702-0671.

ITEM 1A.   RISK FACTORS

The risks described below are not the only ones facing us. Additional risks not currently known to us or that we currently deem immaterial also may impair our business operations. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods because of the following factors, as well as other variables affecting our operating results.

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Consummation of a transaction to acquire all of our outstanding common stock that results in substantially more debt to us could have an adverse effect on us, such as a downgrade of the ratings of our debt securities, and that downgrade could be significant.

On September 5, 2006, we received a proposal from investors led by Daniel H. Leever, our Chairman and Chief Executive Officer, and Court Square Capital Partners (“Court Square”), a related party, to acquire all of our outstanding common stock for $32.50 per share in cash. On December 15, 2006, our Board of Directors, on the unanimous recommendation of a Special Committee, comprised entirely of independent directors, approved a merger agreement under which Daniel H. Leever, our Chairman and Chief Executive Officer and investment funds managed by Court Square, a related party and Weston Presidio will acquire all of our outstanding common stock for $35.00 per share. In response to the proposal, Moody’s Investor Services placed our long-term debt rating under review for possible downgrade. Standard & Poor’s put our long-term debt rating on credit watch with negative implications. The merger agreement contains certain closing conditions. There can be no assurance that the management proposal or any other transaction will be approved or consummated. Further, no assurance can be given that the consummation of any particular transaction will not result in substantially more debt to us and have an adverse effect on us, such as a downgrade in the ratings of our debt securities, which could be significant. Additionally, consummation of any transaction could have other adverse effects on us.

The absence of a proposal to acquire our common stock would likely have an adverse effect on the market price of our common stock. On the last trading day prior to the announcement of management’s revised proposal, our common stock closed at $32.82 per share. After the December 15, 2006, announcement, the stock price rose to trade closer to the $35.00 per share proposal price. If this proposal were rejected and withdrawn, or if no similar transaction presented itself, the stock price would likely retreat from its current trading range.

If we terminate the merger agreement, subject to certain circumstances, we will have to pay a termination fee of $33 million to Court Square. If Court Square terminates the merger agreement, subject to certain circumstances, Court Square would be required to pay us a termination fee of $33 million.

The competitive pressures we face could harm our sales and gross profit.

We encounter competition from numerous and varied competitors in all areas of our business, and our competitors may target our key market segments. We compete primarily on the basis of quality, technology, performance, price, reliability, brand, reputation, distribution, range of products and services, and service and support. If our products, services, support and cost structure do not enable us to compete successfully based on any of those criteria, our operations, financial results and prospects could be harmed. Unlike many of our competitors, we have a portfolio of businesses and must allocate resources across these businesses while competing with companies that specialize in one or more of these product lines. As a result, we may invest less in certain of our businesses than our competitors do, and these competitors may have greater financial, technical and marketing resources available to them than our businesses that compete against them. Because our business model is based on providing innovative and high quality products, we may spend a proportionately greater amount on research and development than some of our competitors. If our pricing and other factors are not sufficiently competitive, or if there is an adverse reaction to our product decisions, we may lose market share in certain areas, which could adversely affect our revenue and prospects. Even if we are able to maintain or increase market share for a particular product, revenue could decline because the product is in a maturing industry. Finally, industry consolidation may affect competition by creating larger, more homogeneous and potentially stronger competitors in the markets in which we compete, and our competitors also may affect our business by entering into exclusive arrangements with existing or potential customers or suppliers.

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Prolonged downturns of our customers’ industries and general economic uncertainty could adversely affect our sales and operating profit.

Our sales and operating profit depend significantly on general economic conditions and the demand for our specialty chemical products and services in the markets in which we compete. Economic weakness and constrained spending, as well as diminishing markets in many of our customers’ industries, has previously resulted, and may result in the future, in decreased sales, gross margin, earnings or growth rates and problems with our ability to collect customer receivables. In addition, customer financial difficulties have previously resulted, and could result in the future, in increases in bad debt write-offs and additions to reserves in our receivables portfolio. We also have experienced, and may experience in the future, gross margin declines in certain businesses, reflecting the effect of items such as competitive pricing pressures, inventory write-downs, and increases in pension and post-retirement benefit expenses. Economic downturns have resulted, and could result in the future, in restructuring actions and associated expenses. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. Delays or reductions in chemical products spending could have a material adverse effect on demand for our products and services, and consequently our results of operations, prospects and stock price.

Our indebtedness could adversely affect our financial health, limit our ability to grow and compete and prevent us from fulfilling our obligations under our indebtedness.

At December 31, 2006, we had approximately $302.2 million of total debt, as compared to shareholders’ equity of approximately $414.7 million. In addition, as of December 31, 2006, we had approximately $75 million of availability under our long-term credit agreement.

Our indebtedness could have important consequences to you. For example, it could:

·       require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, dividends, research and development efforts and other general corporate purposes;

·       increase the amount of our interest expense, because certain of our borrowings may be at variable rates of interest, which, if interest rates increase, could result in higher interest expense;

·       increase our vulnerability to general adverse economic and industry conditions;

·       limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

·       restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities;

·       place us at a competitive disadvantage compared to our competitors that have less indebtedness; and

·       limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds, dispose of assets or pay cash dividends.

Failing to comply with our debt covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. Additionally, the operating and financial restrictions and covenants in our debt instruments, such as the credit agreement relating to our senior credit facility and the indenture governing our notes, may limit our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest. These restrictions could place us at a disadvantage relative to competitors not subject to such limitations.

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The revenue and profitability of our operations have historically varied, which makes our future financial results less predictable.

Our revenue, gross margin and profit vary among our products and services, and customer groups and markets, and therefore will likely be different in future periods than our current results. Overall gross margins and profitability in any given period are dependent partially on the product, customer and geographic mix reflected in that period’s net revenue. In particular, our Advanced Surface Finishing segment in our Asia-Pacific region business has recently contributed significantly to our gross margin and profitability, while markets for our Printing Solutions segment in our European region have softened. Competition and other risks affecting these markets therefore may have a significant impact on our overall gross margin and profitability. Market trends, competitive pressures, commoditization of products, increased component or shipping costs, regulatory impacts and other factors may result in reductions in revenue or pressure on gross margins of certain segments in a given period, which may necessitate adjustments to our operations. Business acquisitions, including the June 2005 acquisition of Autotype International Ltd. and associated entities, also affect overall gross margins and profitability, and therefore may be of limited relevance in evaluating the historical financial performance of our combined company or predicting our future operating results.

We face competition from other chemical companies, which could adversely affect our revenues and financial condition.

Most of our product lines compete against product lines from two or more of our competitors. As a result, these competitors may be better able to withstand a change in conditions within our industry and throughout the economy as a whole. We expect our competitors to continue to develop and introduce new and enhanced products, which could cause a decline in market acceptance of our products. If we do not compete successfully, our business, financial condition and results of operations could be adversely affected.

Changes in our customers’ products can reduce the demand for our specialty chemicals.

Our specialty chemicals are used for a broad range of applications by our customers. Changes, including technological changes, in our customers’ products or processes may make our specialty chemicals unnecessary, which would reduce the demand for those chemicals. We have had, and may continue to have, customers that may find alternative materials or processes that no longer require our products.

Our profitability could be reduced by declines in the average selling prices in the specialty chemicals industry.

Decreases in the average selling prices of some of our products may have a material adverse effect on our profitability. Our ability to maintain or increase our profitability will continue to be dependent, in large part, upon our ability to offset decreases in average selling prices by improving production efficiency or by shifting to higher margin chemical products. If we are unable to do so, our business, financial condition and results of operations could be materially and adversely affected.

Environmental and health and safety liabilities and requirements could require us to incur material costs.

As manufacturers and distributors of specialty chemicals and systems, we are subject to extensive U.S. and foreign laws and regulations relating to environmental protection and worker health and safety, including those governing:

·       discharges of pollutants into the air and water;

·       the management and disposal of hazardous substances and wastes; and

·       the cleanup of contaminated properties.

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We have incurred, and will continue to incur, significant costs and capital expenditures in complying with these laws and regulations. We could incur significant additional costs, including cleanup costs, fines and sanctions and third-party claims, as a result of past or future violations of or liabilities under environmental laws.

The nature of our operations and products, including raw materials we handle, exposes us to the risk of liabilities or claims with respect to environmental cleanup and other matters, including those in connection with the disposal of hazardous materials. Some of our manufacturing facilities have an extended history of chemical processes or other industrial activities, and contaminants have been detected at some of our sites, including contamination resulting from historical activities at certain sites acquired in the December 1998 acquisition of W. Canning plc. We also have been named as a potentially responsible party at two Superfund sites. Although we do not anticipate that we will be materially affected by environmental remediation costs, or any related claims, at any contaminated or Superfund sites, the discovery of additional contaminants at these or other sites or the imposition of additional cleanup obligations could result in significant additional costs. The ultimate costs and timing of environmental liabilities also are difficult to predict. Liability under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis, meaning that one liable party could be held responsible for all costs at a site, regardless of fault or the legality of the original disposal.

In addition, future events, such as changes in or more rigorous enforcement of environmental laws, could require us to make additional expenditures, modify or curtail our operations and/or install pollution control equipment.

Our substantial international operations subject us to risks not faced by domestic competitors, including unfavorable political, regulatory, labor, tax and economic conditions in other countries that could adversely affect our business, financial condition and results of operations.

Approximately 57% of our total sales for the year ended December 31, 2006 were derived from sales in foreign markets. We expect sales from international markets to represent an increasing portion of our total sales. Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in international operations include the following:

·       agreements may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system;

·       foreign customers may have longer payment cycles;

·       foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including currency exchange controls;

·       U.S. export licenses may be difficult to obtain;

·       intellectual property rights may be more difficult to enforce in foreign countries;

·       fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided by us in foreign markets where payment for our products and services is made in the local currency;

·       general economic conditions in the countries in which we operate could have an adverse effect on our earnings from operations in those countries;

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·       our business and profitability in a particular country could be affected by political or economic repercussions on a domestic, country specific or global level from terrorist activities and the response to such activities;

·       unexpected adverse changes in foreign laws or regulatory requirements may occur, including with respect to export duties and quotas;

·       compliance with a variety of foreign laws and regulations may be difficult; and

·       overlap of different tax structures may subject us to additional taxes.

Our business in emerging markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions. We cannot assure you that we will continue to succeed in developing and implementing policies and strategies which will be effective in each location where we do business. Furthermore, we cannot be sure that any of the foregoing factors will not have a material adverse effect on our business, financial condition and results of operations.

We are exposed to fluctuations in foreign exchange rates, which may adversely affect our operating results and net income.

The financial condition and results of operations of each foreign operating subsidiary are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements. Exchange rates between these currencies and U.S. dollars in recent years have fluctuated significantly and may do so in the future. For the year ended December 31, 2006, approximately 57% of our net sales and identifiable assets were denominated in currencies other than the U.S. Dollar. These foreign currencies included predominantly the Euro, British Pound Sterling, the Hong Kong Dollar, the Chinese Yuan and the Japanese Yen. We do not manage our foreign currency exposure in a manner that would eliminate the effects of changes in foreign exchange rates on our earnings, cash flows and fair values of assets and liabilities; therefore, our financial performance could be positively or negatively impacted by changes in foreign exchange rates in any given reporting period. Significant changes in the value of the Euro, Japanese Yen, Chinese Yuan, Hong Kong Dollar or the British Pound Sterling relative to the U.S. Dollar could also have an adverse effect on our financial condition and results of operations and our ability to meet interest and principal payments on any Euro, Japanese Yen, Hong Kong Dollar, Chinese Yuan and British Pound Sterling-denominated debt outstanding, including borrowings under our long-term credit agreement, and U.S. Dollar-denominated debt, including our notes and borrowings under our long-term credit agreement. In addition to currency translation risks, we incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it receives revenues. Given the volatility of exchange rates, we cannot give any assurance that we will be able to effectively manage our currency transaction and/or translation risks or that any volatility in currency exchange rates will not have an adverse effect on our financial condition or results of operations.

Unfavorable economic conditions outside of the United States could materially and adversely affect our financial performance.

For the year ended December 31, 2006, sales abroad accounted for approximately 57% of total sales. As a result, our business is affected by general economic conditions and other factors in Western Europe and most of East Asia, specifically China, Japan and Korea, including fluctuations in gross domestic product, interest rates, market demand, labor costs and other factors beyond our control. The demand for our products is directly affected by such fluctuations. We cannot assure you that events having an adverse effect on the specialty chemicals industry will not occur or continue, such as a downturn in the Western

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European, Asian or world economies, increases in interest rates, unfavorable currency fluctuations or a slowdown in the construction or electronics manufacturing industries.

We may be unable to respond effectively to technological changes in our industry, which could reduce the demand for our products and adversely affect our results of operations.

Our future business success will depend upon our ability to maintain and enhance our technological capabilities, develop and market products and applications that meet changing customer needs and successfully anticipate or respond to technological changes on a cost-effective and timely basis. Our inability to anticipate, respond to or utilize changing technologies could have an adverse effect on our business, financial condition or results of operations.

We rely on patents and confidentiality agreements to protect our intellectual property. Our future performance and growth could be adversely affected if we fail to protect our intellectual property rights.

Protection of our proprietary processes, methods and compounds and other technology is important to our business. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or having to pay other companies for infringing on their intellectual property rights. We rely on patent, trade secret, trademark and copyright law as well as judicial enforcement to protect such technologies. Some of our technologies are not covered by any patent or patent application, and we cannot assure you that any of our patents will not be challenged, invalidated, circumvented or rendered unenforceable. Furthermore, we cannot assure you that any pending patent application filed by us will result in an issued patent, or if patents are issued to us, that those patents will provide meaningful protection against competitors or against competitive technologies. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in some foreign countries.

We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality agreements with our employees and third parties to protect our intellectual property, we cannot assure you that our confidentiality agreements will not be breached, that they will provide meaningful protection for our trade secrets or proprietary manufacturing expertise or that adequate remedies will be available in the event of an unauthorized use or disclosure of our trade secrets or manufacturing expertise. In addition, others may obtain knowledge of our trade secrets through independent development or other access by legal means. The failure of our patents or confidentiality agreements to protect our processes, apparatuses, technology, trade secrets and proprietary manufacturing expertise, methods and compounds could have an adverse effect on our business, financial condition or results of operations.

We may not be able to consummate future acquisitions or successfully integrate acquisitions into our business, which could result in our Company incurring unanticipated expenses and losses.

We have made acquisitions of businesses in the past and may do so from time to time in the future. The expense incurred in consummating acquisitions of related businesses, or our failure to integrate such businesses successfully into our existing businesses, could result in our company incurring unanticipated expenses and losses. Furthermore, we may not be able to realize any of the anticipated benefits from acquisitions.

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In connection with potential future acquisitions, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with future acquisitions include:

·       unexpected losses of key employees or customers of the acquired company;

·       conforming the acquired company’s standards, processes, procedures and controls with our operations;

·       coordinating new product and process development;

·       hiring additional management and other critical personnel;

·       negotiating with labor unions; and

·       increasing the scope, geographic diversity and complexity of our operations.

In addition, we may encounter unforeseen obstacles or costs in the integration of other businesses we may acquire. Also, the presence of one or more material liabilities of an acquired company that are unknown to us at the time of acquisition may have a material adverse effect on our business, financial condition or results of operations.

Increases in costs or reductions in supplies of specialty and commodity chemicals we use in our manufacturing process could materially and adversely affect our operating results.

We use a variety of specialty and commodity chemicals in our manufacturing processes. Our manufacturing operations depend upon obtaining adequate supplies of these raw materials on a timely basis. These raw materials are generally available from numerous independent suppliers. We typically purchase our major raw materials on a contract or as-needed basis from outside sources. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and worldwide price levels. Our results of operations could be adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increased significantly. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. In addition, some of the raw materials that we use are derived from petrochemical-based feedstocks. There have been historical periods of rapid and significant movements in the prices of these feedstocks, both upward and downward. We selectively pass changes in the prices of raw materials to our customers from time to time. We cannot always do so, however, and any limitation on our ability to pass through any price increases could have an adverse effect on our business, financial condition or results of operations.

Any change in the supply of, or price for, these raw materials could materially affect our operating results.

Our production facilities are subject to operating hazards, the occurrence of which could have an adverse effect on our business, financial condition or results of operations.

We are dependent on the continued operation of our production facilities. These production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including pipeline leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, and environmental hazards, such as spills, discharges or releases of toxic or hazardous substances and gases, storage tank leaks and remediation complications. These hazards can cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental

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contamination and other environmental damage and could have an adverse effect on our business, financial condition or results of operations.

Our restructuring initiatives may not result in sufficient cost savings to justify their expense.

We have undertaken and may continue to undertake productivity initiatives, including organizational restructurings, to improve performance and generate cost savings. In the third quarter of fiscal year 2005, we implemented certain consolidation actions, which consisted primarily of facility consolidations and closures, including the movement of certain manufacturing operations, and employee terminations at both our Schaumburg, Illinois facility, and our Evreux, France facility. In the first quarter of 2006 we implemented restructuring initiatives related to our US MPS business. In the second quarter of 2006 we closed our Denmark facility and consolidated the Denmark manufacturing operations into an existing facility in Wantage, England. In 2006 we also completed the relocation of our Schuamburg, Illinois facility into an existing facility into Middletown, Delaware. In the fourth quarter of 2006 we initiated further restructuring plans related to our Evreux, France Facility. We can make no assurances that these restructuring initiatives will be completed or beneficial to us. Also, we cannot assure you that any estimated cost savings from such activities will be realized.

We are subject to litigation that could have an adverse effect upon our business, financial condition, results of operations or reputation.

We are a defendant in numerous lawsuits that result from, and are incidental to, the conduct of our business. These suits concern issues including product liability, contract disputes, labor-related matters, patent infringement, environmental proceedings, property damage and personal injury matters. While it is not feasible to predict the outcome of all pending suits and claims, the ultimate resolution of these matters could have an adverse effect upon our business, financial condition, results of operations or reputation.

Compliance with government regulations, or penalties for non-compliance, could prevent or increase the cost of the development, distribution and sale of our products.

We are subject to regulation by many U.S. and non-U.S. supranational, national, federal, state and local governmental authorities. In some circumstances, before we may sell some of our products these authorities must approve these products, our manufacturing processes and facilities. We are also subject to ongoing reviews of our products and manufacturing processes.

In order to obtain regulatory approval of certain new products, we must, among other things, demonstrate to the relevant authority that the product is safe and effective for its intended uses and that we are capable of manufacturing the product in accordance with current regulations. The process of seeking approvals can be costly, time consuming and subject to unanticipated and significant delays. There can be no assurance that approvals will be granted to us on a timely basis, or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate revenue from those products.

New laws and regulations may be introduced in the future that could result in additional compliance costs, seizures, confiscation, recall or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, any of which could have an adverse effect on our business, financial condition or results of operations.

Our credit rating is subject to change.

Our credit is rated by credit rating agencies. We are rated BB+ by Standard and Poor’s Rating Service, which is considered “stable”. Our issue ratings on our 91¤8% Senior Subordinated Notes are BB- by

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Standard and Poor’s Rating Service and Ba3 by Moody’s Investor Service, both of which are considered “non-investment grade” debt. If in the future our credit rating is downgraded, such a downgrade may increase our cost of capital if we borrow under our revolving credit facilities.

Additionally, a downgrade of our credit rating with one or more of the credit rating agencies may make it more expensive for us to raise additional capital in the future on terms that are acceptable to us or at all; may negatively impact the price of our common stock; and may have other negative implications on our business, many of which are beyond our control.

In response to the buyout proposal for our common stock, Moody’s Investor Services placed our long-term debt rating under review for possible downgrade. Standard & Poor’s put our long-term debt rating on credit watch with negative implications.

We are exposed to intangible asset risk.

We have recorded intangible assets, including goodwill, in connection with business acquisitions. We are required to perform goodwill impairment tests at least on an annual basis and whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result of our annual and other periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material charges that could be adverse to our operating results and financial position.

Recently enacted changes in the securities laws and regulations are likely to increase our costs.

The Sarbanes-Oxley Act of 2002, which became law in July 2002, required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of that Act, the Securities and Exchange Commission and the New York Stock Exchange have promulgated new rules on a variety of subjects. Compliance with these new rules has increased our legal and financial and accounting costs, and we expect these increased costs to continue indefinitely. We also expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be forced to accept reduced coverage or incur substantially higher costs to obtain coverage. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors or qualified executive officers.

Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors or fraud, or in informing management of all material information in timely manner.

Our management, including our CEO and principal financial officer, does not expect that our disclosure controls and internal controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system reflects that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur simply because of error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of

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changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with accounting principals generally accepted in the United States (“US GAAP”). Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial position and results of operations.

The consolidated and condensed consolidated financial statements included in the periodic reports we file with the Securities and Exchange Commission are prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our financial position and results of operations.

We may be adversely affected if we lose the services of Daniel H. Leever or any other member of our senior management team.

We are dependent on the services of Daniel H. Leever, our Chairman and Chief Executive Officer, and other members of our senior management team to remain competitive in our industry. The loss of Daniel H. Leever or any other member of our senior management team could have an adverse effect on us, depending on our ability to locate a suitable replacement either within or from outside MacDermid, in a timely and cost-effective manner.

The interests of our principal shareholders may conflict with your interests, and they could act in a manner detrimental to you.

As of December 31, 2006, our directors, officers, and retirement plans held approximately 18.3% of the shares of our common stock either directly or beneficially. By virtue of such stock ownership, such persons have the power to significantly influence our affairs and are able to influence the outcome of matters required to be submitted to stockholders for approval, including the election of our directors and amendment of our charter and bylaws. We cannot assure you that such persons will not exercise their influence over us in a manner detrimental to your interests.

Substantial sales of our common stock could cause our stock price to decline.

If our existing shareholders, including the selling stockholders, sell a large number of shares of our common stock in the market or if the public market perceives that such a sale might occur, the market price for our common stock could decline significantly.

Our stock price has been, and may continue to be, volatile, which could result in losses for investors purchasing shares of our common stock. Investors may not be able to resell their shares at or above their purchase price.

The trading price for our common stock has been, and may continue to be, volatile. The stock market in general and the market for companies with significant sales to customers in cyclical industries, such as the electronics and automotive industries, have experienced volatility. Many factors contribute to this volatility, including, but not limited to:

·       variations in our results of operations,

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·       perceptions about market conditions in the industries we serve, and

·       general market conditions.

This volatility may have a significant impact on the market price of our common stock. Moreover, the possibility exists that the stock market could experience extreme price and volume fluctuations unrelated to operating performance.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our worldwide operations could be subject to natural disasters and other business disruptions, which could seriously harm our revenue and financial condition and increase our costs and expenses. Some areas, including parts of the East Coast and Midwest of the United States, have previously experienced, and may experience in the future, major power shortages and blackouts. These blackouts could cause disruptions to our operations or the operations of our suppliers, distributors and resellers, or customers. Losses and interruptions could also be caused by earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters, for which we are predominantly self-insured.

ITEM 1B.       UNRESOLVED STAFF COMMENTS

None.

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ITEM 2:               PROPERTIES

We believe that our production facilities are suitable for their purpose and adequate to support our businesses. The extent of utilization of individual facilities varies, but they generally have sufficient capacity to meet our near-term growth expectations. The following table lists our principal facilities by segment and gives a brief description of the activities performed at each facility:

Location				Principal Use		Ownership status
Corporate & other support functions
Denver, Colorado				Executive offices		Owned
Waterbury, Connecticut				ASF and MPS segment administration offices, marketing offices, corporate service, customer support and research laboratories		Owned
Advanced Surface Finishing
Middletown, Delaware				Factory, warehouse and offices		Owned
Ferndale, Michigan				Factory, warehouse and offices		Owned
New Hudson, Michigan				Laboratories and offices		Owned
Pasadena, Texas				Factory, warehouse and offices		Owned
Hsin Chu, Taiwan				Factory, warehouse, laboratories and offices		Owned
Panyu, China				Factory, warehouse, laboratories and offices		Owned
Suzhou, China				Factory, laboratories and offices		Owned
Kawasaki, Japan				Laboratories and offices		Leased
Birmingham, United Kingdom				Factory, warehouse, laboratories and offices		Owned
Wigan, United Kingdom				Factory, warehouse and offices		Owned
Novara, Italy				Factory, warehouse, laboratory and offices		Owned
Eitten-Leur, Netherlands				Warehouse and offices		Leased
Barcelona, Spain				Factory, warehouse, laboratory and offices		Owned
Printing Solutions
Morristown, Tennessee				Factory, warehouse, laboratory and offices		Owned
Atlanta, Georgia				Offices and laboratories		Owned
San Marcos, California				Factory, warehouse, laboratory and offices		Owned
Eden Prairie, Minnesota				Factory, warehouse, laboratories and offices		Leased
Cernay, France				Factory, warehouse, laboratories and offices		Owned
Mirambeau, France				Factory and offices		Owned
Sydney, Australia				Factory, warehouse and offices		Leased
Hoofddorp, The Netherlands				Factory and warehouse		Leased
Pioltello, Italy				Warehouse and offices		Leased
Wantage, United Kingdom				Factory, warehouse, laboratory and offices		Leased

 

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We also own property in Waukeegan, Illinois; Adams, Massachusetts; and Vernon and Waterbury, Connecticut. These properties are vacant and could be used for manufacturing should the need arise, or could be leased or sold should an opportunity arise.

All owned and leased facilities, other than vacant facilities are in good condition and are of adequate size for their present business volume.

ITEM 3:               LEGAL PROCEEDINGS

Information with respect to environmental issues and legal proceedings may be found in Note 15 of the Notes to the Consolidated Financial Statements in Item 8, as well as in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.

ITEM 4:               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of MacDermid’s security holders during the fourth quarter of fiscal year 2006.

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PART II

ITEM 5:               MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is traded on the New York Stock Exchange under the symbol “MRD”.

The following table presents the price range of common stock during fiscal 2006 and 2005:

 

On February 15, 2007, the closing sales price of MacDermid’s common stock as reported on the New York stock exchange was $34.69. As of February 15, 2007, there were 721 holders of record of our common stock.

The following table presents dividends paid on our common stock during fiscal 2006 and 2005:

 

The determination of the amount of future cash dividends, if any, to be declared and paid will depend upon, among other things, the Company’s financial condition, results of operations, capital requirements, alternative uses of capital and other factors. MacDermid’s revolving credit facility and bond facilities also have restricted payment covenants which could limit the amount of dividends payable.

Under the December 15, 2006 merger agreement between the Company and Daniel H. Leever, our Chairman and Chief Executive Officer, and investment funds managed by Court Square Capital Partners, a related party and Weston Presidio the Company is prohibited from making any dividends except for normal quarterly dividends from operations.

The following graph and chart compare, during the five year period commencing December 31, 2001 (at the market close) and ending December 31, 2006, the annual change in the cumulative total return on our common stock with the Standard and Poor’s 500 (“S&P 500 Index”) and the Media General Specialty Chemicals Stock (“Specialty Chemical Index”) indices, assuming an investment of one hundred dollars on December 31, 2001 (at the market close) and the reinvestment of any dividends. This graph and chart are furnished with this Annual Report on Form 10-K and not filed with this Annual Report on Form 10-K.

Per share performance should not be viewed as necessarily indicative of future performance.

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COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG MACDERMID, INCORPORATED,
STANDARD & POOR’S 500 INDEX AND MEDIA GENERAL SPECIALTY CHEMICALS
STOCK INDEX

ASSUMES $100 INVESTED ON JANUARY 1, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2006

COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS

 

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ITEM 6:               SELECTED FINANCIAL DATA

The following table presents results of our operations for the twelve months ended December 31, 2006, 2005, 2004, 2003 and 2002, our financial position at December 31, 2006, 2005, 2004, 2003 and 2002, and dividends declared on our common stock for the twelve months ended December 31, 2006, 2005, 2004, 2003 and 2002.

The consolidated balance sheet data for December 31, 2005, 2004, 2003 and 2002 has been restated

(in thousands, except share and per share amounts)

 

(1)          See the explanatory note immediately preceding Part I, and Notes 1 and 2 in the Note to Consolidated Financial Statement in Item 8 of this Form 10-K.

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ITEM 7:               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

(in thousands of dollars, except shares and per share amounts)

References in this report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that is based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to future prospects, developments and business strategies. The statements contained in this report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. We caution investors not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. We undertake no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.

The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases, including references to assumptions, have been used to identify forward-looking statements. These forward-looking statements are made based on management’s expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The following factors, including the risk factors described in Item 1A, “Risk Factors”, found in our Annual Report on Form 10-K for the year ended December 31, 2006, are among those that may cause actual results to differ materially from the forward-looking statements:

·       general economic, business and industry conditions in the markets in which we operate;

·       general political conditions, including tax rates or policies and inflation rates;

·       industry and market changes, including the impact of consolidations and changes in competition;

·       risks associated with conducting business in foreign countries, including foreign currency fluctuations;

·       changes in current advertising, promotional and pricing levels;

·       changes in sales mix and difficulty of forecasting sales at various times in various markets;

·       the impact of acquisitions and dispositions;

·       changes in or compliance with laws and regulations, particularly those relating to taxation and protection of the environment;

·       significant litigation adverse to the company, including product liability claims;

·       disruptions of established supply channels, including channel conflicts or the financial weakening of our channel partners;

·       degree of acceptance of new products;

·       our ability to access the debt and equity markets, which will depend on general market conditions and the credit ratings for our debt obligations;

New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for us to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement.

Unless otherwise noted in this report, any description of us includes MacDermid, Inc. (“MacDermid”) as a consolidated entity, the Advanced Surface Finishing segment (“ASF”), the Printing Solutions segment (“MPS”), and our other corporate entities.

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The following discussion and analysis explains our general financial condition, changes in financial condition and results of operations as a whole and for each of our operating segments, including:

·       Factors affecting our business

·       Our revenues and profits

·       The source of our revenues and profits

·       Why our revenues and profits were different from year to year

·       Where our cash came from and how it was used

·       How the above factors affect our overall financial condition

CONSOLIDATED OVERVIEW

Executive Overview

We are a global specialty chemical company. We generate net revenue and earn our profits from the sale of products, solutions and services to businesses. Our portfolio is broad and includes products and services supplied for the metal and plastic finishing, electronics, graphic arts and offshore oil industries. We report for our business groups in the following financial segments: Advanced Surface Finishing and Printing Solutions.

The Advanced Surface Finishing (“ASF”) segment supplies chemicals used for finishing metals and non-metallic surfaces for automotive and other industrial applications, electro-plating metal surfaces, etching, and imaging to create electrical patterns on circuit boards for the electronics industry, and offshore lubricants and cleaners for the offshore oil and gas markets. Our 2005 acquisition of Autotype International Ltd. and associated entities (“Autotype”) further augmented this segment by adding the production of hard-coated films for the membrane switch and touch screen markets. Our ASF segment was our largest contributor to both revenue and earnings in 2006, 2005 and 2004.

The Printing Solutions (“MPS”) segment supplies an extensive line of offset printing blankets, photo-polymer plates and digital printers for use in the commercial printing and packaging industries for image transfer. Our 2005 acquisition of Autotype added high quality stencil materials and digital pre-press products for screen printing.

In both of our business segments, we continue to invest significant resources in research and development and intellectual properties such as patents, trademarks, copyrights and trade secrets, as our business depends on these activities for our financial stability and future growth.

We focus on growing revenues and the generation of cash from operations in order to build shareholder value. Specifically, we plan to improve top line sales growth over the longer term by focusing on:

·       utilizing our technical service and outstanding products to penetrate global markets for all products,

·       supporting working capital initiatives focused on maximizing cash flows,

·       emphasizing efficiency improvements throughout the organization,

·       adding new products through internal research and development, relying heavily on our internal knowledge base,

·       strengthening the common identity of our products through a new branding initiative called “Yes We Can!”, and

·       strategic acquisitions of companies, products, or technologies.

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Our products are sold in a competitive, global economy, which exposes us to certain currency, economic and regulatory risks and opportunities. Approximately 57% of our net sales and identifiable assets for the twelve month period ended and as of December 31, 2006, are denominated in currencies other than the U.S. dollar. These currencies include predominantly the Euro, British Pound Sterling, the Hong Kong dollar, the Chinese Yuan and the Japanese Yen. We do not manage our foreign currency exposure in a manner that would eliminate the effects of changes in foreign exchange rates on our earnings, cash flows and fair values of assets and liabilities; therefore, our financial performance could be positively or negatively impacted by changes in foreign exchange rates in any given reporting period. For most currencies, we are a net receiver of the foreign currency and therefore benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to the foreign currency. For the year ended December 31, 2006, net sales and net earnings were positively impacted as the United State dollar weakened against the Euro, the British Pound and the Chinese Yuan when compared to 2005. The absolute impact on earnings was immaterial.

Our competitors include many large multi-national chemical firms based in Europe, Asia and the United States. New competitive products or pricing policies of our competitors can materially affect demand for and pricing of our products, which could have a significant impact on our financial results.

We are influenced predominantly by two general industries: the specialty chemical and printing industries. In the specialty chemical industry, profit is generated by creating proprietary products and process technologies, and delivering high levels of customer service. Currently, a number of key characteristics and trends are impacting the industry, including market fragmentation, globalization, the need for financial resources to support research and development, a renewed focus on core businesses and the increasing importance of size and scale. The Asian market presents growth opportunities, and our ASF segment continued to see growth in Asia due to favorable market conditions. In 2005, we opened a second facility in China to support our expansion in this market. Our growth in the electronics market in Asia was partially offset by market weakness in Europe. We also experienced growth in our Offshore Fluids products in 2005, which continued in 2006, due to a worldwide increase in offshore oil production activities. In the printing industry, we continue to see challenging growth opportunities in an increasingly competitive environment. The industry is marked by globalization, market fragmentation, pricing pressures, and the growing digital printing technologies. Our business groups that supply offset printing blankets and photo-polymer plates continue to be affected by an overall soft market and changes in our distribution system, as we are increasingly selling directly to our customers in the United States. Our digital printer group, which manufactures wide-media printers, is currently benefiting from the market acceptance of our new product offerings.

We seek to enhance our profitability by investing in technology, design capabilities and new product initiatives that respond to the needs of our customers and consumers. We will continue to seek ways to expand our business in Asia, Europe and North America and South America (“the Americas”). We intend to selectively pursue strategic acquisitions, where appropriate, to expand or complement our existing business. We expect that any such acquisitions will be consistent with our core businesses, and will strengthen our relationships with our customers, enhance our existing products, processes and technological capabilities or lower our costs. Our ability to increase sales in the future will depend, in part, on our success in penetrating Asian markets and leveraging our existing customer base across all product lines in Europe and in the Americas. We continually evaluate alternatives to lower the operating costs of our company. This includes the realignment of our existing manufacturing capacity, facility closures or similar actions.

In June 2005, we acquired all of the outstanding capital stock of Autotype from Norcros (Holdings) Limited of the UK. The acquisition broadened our product offerings in both of our operating segments. Net assets acquired, including goodwill and intangibles, totaled $92,432. The net assets and results of

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operations are included in our financial statements since the acquisition date. For more information regarding this acquisition, see Note 19 to the Consolidated Financial Statements in Item 8.

During 2006 we completed our integration of the Autotype units by closing three Autotype plants and relocating production to existing facilities in order to maximize synergies from the acquisition. Production in Autotype’s Kvistgaard, Denmark facility was transferred to an existing facility in Wantage, England. The closure of the Autotype Denmark facility impacts twenty one employees in manufacturing, administrative and managerial roles see Note 20 to the Consolidated Financial Statements in Item 8 for further information related to the closure of the Denmark facility.

During the second half of 2005 and the first half of 2006, as part of our effort to lower the operating costs of our company, we began to implement certain consolidation actions. These actions are intended to better align our manufacturing capacity with the changing needs of our customers, eliminate excess capacity, lower our operating costs, and streamline our organizational structure for improved long-term profitability. The restructuring actions consist primarily of facility consolidations and closures, including the movement of certain manufacturing operations and employee terminations. In connection with the restructuring actions, we incurred charges of $2,322 during the year ended December 31, 2006. For more information regarding our consolidation actions, see Note 20 to the Consolidated Financial Statements

For the year ended December 31, 2006, our consolidated results reflected top line sales growth of $79,566, as compared to the same period last year. Our acquisition of Autotype contributed $91,586 and $49,517 in sales for the years ended December 31, 2006 and 2005 respectively. Sales in our existing business units, excluding Autotype, increased $37,497 for the year ended December 31, 2006, or 5.4% when compared to last year.

For the year ended December 31, 2006, sales in our ASF segment increased a total of $59,653, or 14.1% when compared to last year on strong sales in the Americas, Europe and Asia as industrial production recovers in the United States and continues to grow in Asia. Electronic sales were higher in both the Americas and Asia for the year ended December 31, 2006 when compared to 2005. Sales in our existing MPS units were slightly lower for the year ended December 31, 2006 when compared to 2005.

From a cash flow standpoint, our liquidity position remained sufficient during the year ended December 31, 2006, with working capital of $303,717 at December 31, 2006. Cash increased $44,529 during the year ended December 31, 2006, primarily due cash provided by operating activities of $52,316, effect of exchange rate changes on cash of $3,633, offset by cash used in investing activities of $10,476 and cash used in financing activities of $944.

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RESULTS OF OPERATIONS

Summary of the consolidated results for the years ended December 31, 2006, 2005 and 2004.

(amounts in thousands, except per share amounts)

**             Not a meaningful statistic.

Summary of key segmented results for the years ended December 31, 2006, 2005 and 2004.

**             Not a meaningful statistic.

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2006 vs. 2005

Net sales

We experienced an increase in sales of $79,566, or 10.8%, during the year ended December 31, 2006, when compared with the previous year. For the same periods on a currency-adjusted basis, net sales grew by $77,029, or 10.4%, increasing both in the ASF and MPS segments. Our acquisition of Autotype accounted for $42,069 of the increase in sales, which benefited both the ASF and MPS segments, and accounted for 52.9% of the increase. Our ASF segment, excluding Autotype, experienced sales increases of $39,772, or 10.0% during 2006 when compared to 2005. Our MPS segment, excluding Autotype, experienced sales decreases of $2,275, or 0.8% during 2006 when compared to 2005.

Our ASF segment benefited from volume growth in the industrial, electronics and offshore fluid product groups. Industrial products experienced higher sales in the Americas, Europe and strong sales in Asia, while electronic sales were higher in both the Americas and Asia and flat in Europe than the previous year. Revenues from the Autotype acquisition in 2005 added $44,354 to fiscal 2006 ASF segment sales.

Sales in our MPS segment were higher for the year ended December 31, 2006 when compared with the previous year due to the inclusion of Autotype sales for twelve months in 2006 compared to six and a half months in 2005 and higher sales from our Colorspan business unit.

Cost of sales and gross profit

Cost of sales for the year ended December 31, 2006, increased $57,022 or 13.8% when compared to the same period last year. On a currency-adjusted basis, cost of sales increased by 13.4%. Gross profit for the year ended December 31, 2006 was 42.5% compared with 44.0% for the same period last year. This is primarily attributable to Autotype, whose conversion costs run higher than our traditional product lines and higher raw material costs for the year ended December 31, 2006 compared to the same period last year.

Operating expenses

For the year ended December 31, 2006, operating expenses increased $18,590 or 8.0% during the twelve months ended December 31, 2006, compared to the same period in 2005, or 7.6% on a currency-adjusted basis. Autotype’s operating expenses increased by $ 11,900 or 64.0% of the total increase in operating expenses from 2005 to 2006. The increase is attributable primarily to the inclusion of Autotype’s operating expenses for the full twelve months ended December 31, 2006, whereas in the same period in 2005 we only incurred six and one half months of operating expenses related to Autotype. During the year ended December 31, 2006, we recorded $2,322 of restructuring expenses offset by $4,011 for net gains related to disposal of assets and sales of businesses. There were no similar business disposal charges in the same period of 2005. Operating expenses in our existing units increased by $6,690, or 3.1%, primarily due to a charge of $1,913 related to an unsuccessful acquisition, impairment charges of $2,580 recorded in 2006, sales tax expense of $1,376 recorded in 2006 and higher professional fees incurred in 2006 of $1,400 (primarily due to professional fees associated with the merger agreement).

During the fourth quarter we recorded impairment charges in three of our business units. We recorded an impairment charge of $1,474 related to equipment that we deemed to be no longer useful at our MPS Americas business unit. We recorded an impairment charge of $816 related to a note receivable at our ASF Spain business unit related to an agreement to settle the note receivable. We also recorded an impairment charge of $290 at our ASF-United Kingdom business unit for equipment that we deemed no longer useful. We did not record any impairment charges in 2005.

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During 2006, we recognized a loss on disposal of assets of $2,224 related to the disposal of two dormant business units. The first disposal related to MacDermid Equipment (“MEI”), a small equipment manufacturing unit that supported our electronics sales. In 2001, we wrote off all the inventory on MEI’s balance sheet. Inventory was the only significant asset on MEI’s books, and the write off effectively impaired our investment in the subsidiary. In February 2006, we sold the subsidiary for one dollar and recorded a loss on disposal of assets of $1,664 which reduced our first quarter 2006 tax rate. By selling the subsidiary for one dollar, we saved costs that would have been associated with shutting down the business, including severance, asset disposal, and site clean up costs. The second disposal related to a dormant international business unit that was disposed in 2006. A loss on disposal of assets of $560 was recorded in 2006.

In 2006 we sold an idle manufacturing plant located in Franklin Park, Illinois for $1,588 and recorded a gain related to this sale of $589. Also in 2006, we sold our interest in a chemical distribution company in Hong Kong for 6,000 Hong Kong dollars, or $770. In connection with this sale the Company recognized a gain of $519 during 2006.

In the fourth quarter of 2006, we sold a property in Steinbach France and recognized a gain on the sale of $491. We also recorded a gain in the fourth quarter of 2006 of $4,636 related to our ASF-United Kingdom business unit’s agreement with the city council of Birmingham, England whereby we agreed to the variation and revocation of the Hazardous Substance Consent (“HSC”) for our Palmer Street facility that allowed us to store certain hazardous substances for the receipt of $5,617 (3,000 British Pounds) immediately and the receipt of an additional $1,873 (1,000 British Pounds) payable when we revoke our amended HSC for the Palmer Street site and cease all storage activity at the Palmer Street site (an expected three year period).

Operating profit

Operating profit increased $3,954, or 4.2% for the year ended December 31, 2006 compared to the same period last year excluding the corporate allocation. On a currency-adjusted basis operating profit increased 4.3%. For the year December 31, 2006 our ASF segment had increased operating profits of $10,336, or 16.8% compared to the same period last year due primarily to higher profits in all our ASF business units and the inclusion of Autotype operating profits for a full twelve months in 2006 compared to six and one half months in 2005. For the year ended December 31, 2006 our MPS segment had decreased operating profits of $6,382, or 19.9% due primarily to lower operating profit in our MPS North American business unit offset by the absence of a legal settlement of approximately $2,500 recorded in the year ended December 31, 2005.

Interest income (expense)

Interest income during the year ended  2006 increased $1,000 compared to the same period last year due to higher cash balances and higher interest rates earned in 2006.   Interest expense decreased $1,621 for the year ended December 31, 2006 compared with the same period last year. Short term borrowings were up during 2005 as we prepared for our acquisition of Autotype and we had expense of $537 related to an interest rate swap for the year ended December 31, 2005. There was no interest swap expense for the year ended December 31, 2006. We also had lower bank commitment fees in 2006 compared to 2005.

Income tax expense

Our effective rate for the year ended December 31, 2006 was 27.9 %, down from 28.3% in December 2005. The decrease in the tax rate occurred primarily as a result of a reclassification of tax reserves, offset by a decrease in the Spanish tax rate which reduced Spanish deferred tax assets, as well as different earnings mix in our foreign tax jurisdictions.

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Net earnings

Net earnings for the year ended December 31, 2006 increased by $4,807, or 10.2% compared to the same period in 2005.  For the same periods on a currency-adjusted basis, net income increased $4,730, or 10.1%, which represents a favorable impact from currency effect of $75. As discussed above, the fluctuation was due to primarily higher sales at our ASF segment, a net gain on asset sales and business dispositions, offset by higher operating expenses.

2005 vs. 2004

Net sales

We experienced an increase in sales of $77,258, or 11.7%, during the year ended December 31, 2005, when compared with the previous year. For the same periods on a currency-adjusted basis, net sales grew by $75,590, or 11.4%, increasing both in the ASF and MPS segments. The June 14, 2005 acquisition of Autotype added $49,500 to sales, which benefited both the ASF and MPS segments, and accounted for 64.1% of the increase.

Our ASF segment benefited from organic volume growth in both our electronics and Offshore Fluids groups. Our electronics group continued to see robust growth in Asia due to favorable market conditions; this increase was partially offset by market weakness for electronic products in Europe and the Americas. The Offshore Fluids group benefited in fiscal year 2005 from increased oil production activities throughout the world. Our industrial products sales declined overall due to decreased automotive production in Europe; this decline was partially offset by new sales growth in both the Americas and Asia. Revenues from the Autotype acquisition on June 14, 2005 added $24,472 to fiscal 2005 ASF segment sales.

Our MPS segment benefited from growth in our digital printer group due to market acceptance of new wide-format ink printer product offerings. This increase was partially offset by soft market conditions which led to a $8,242 decline in overall sales volume in groups that supply the commercial, packaging and publication printing industries. Revenues from the Autotype acquisition on June 14, 2005 added $25,045 to fiscal 2005 MPS segment sales.

Cost of sales and gross profit

We experienced an increase in cost of sales of $ 65,767, or 18.9%, during the year ended December 31, 2005, in comparison to the previous year. Excluding the effects of foreign currency, our cost of sales increased 19.3% during 2005, when compared to the prior year. This increase was greater than our currency-adjusted sales increase of 11.4% for the year ended December 31, 2005, resulting in a 3.4% decrease in gross profit percentage. The acquisition of Autotype contributed $27,149 or 41.3% of the total increase to cost of sales. Autotype’s fixed manufacturing costs, which affect both the ASF and MPS segments, are inherently higher than manufacturing costs of our traditional products. Excluding the impact of Autotype and currency effects, cost of sales increased 11.1% due largely to higher raw materials and fixed manufacturing costs, which affected both the ASF and MPS segments. Raw materials costs rose, in part, due to higher demand for raw materials. We incurred manufacturing inefficiency costs at operating locations impacted by restructuring actions as described in Note 20 in our Notes to the Consolidated Financial Statements. Specifically, there was lowered absorption of fixed manufacturing costs in connection with the relocation of production lines from our MPS facility in Evreux, France to a separate existing facility in Cernay, France. Manufacturing inefficiencies were also experienced due to equipment upgrades at our ASF facility in Middletown, Delaware.

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Operating expenses

Operating expenses increased 11.1% during the year ended December 31, 2005, when compared to the prior year, or 9.5%, on a currency-adjusted basis. Most of this increase, in both the ASF and MPS segments, resulted from our newly acquired Autotype group, which added operating expenses of $13,210, or 5.7% of total expense. There was also increased research and development costs of $5,284, and restructuring charges of $3,263, associated with facility closures in Schaumburg, Illinois, and Evreux, France, as well as other employee terminations in Europe. For additional discussion regarding restructuring actions, refer to Note 20 in our Notes to the Consolidated Financial Statements. Our MPS segment also incurred additional selling and technical costs associated with new product launches, as well as a charge of $2,500 to settle certain litigation, as described in Note 15 in our Notes to the Consolidated Financial Statements.

Operating profit

Operating profit during 2005 decreased approximately 11.1% when compared to 2004, or 11.4%, on a currency-adjusted basis. As a percent of sales, operating profit was 12.7% for the current year, as compared to 16.0%, for the prior year. Our operating profit decrease was the result of decreased gross profit percentages, higher operating expenses and restructuring charges as noted above. The overall impact the Autotype acquisition was $3,773 to operating profit before purchase accounting and restructuring charges of $1,298.

Interest income (expense)

Interest income increased in fiscal 2005 as compared to the prior year because we had more funds to invest at a higher blended rate prior to our acquisition of Autotype. Interest expense decreased as we had less short-term borrowings in fiscal 2005 as compared to the prior year. These two factors combined resulted in a net positive impact of $1,533 in fiscal 2005 as compared to the prior year.

Income tax expense

Our effective tax rate for the year ended December 31, 2005 was 28.3%, down from 31.5% in 2004. The decrease in the rate was due primarily to a reduction in foreign repatriations to the United State as a result of the using our available cash balances to fund the acquisition of the Autotype group of companies in June 2005.

Net earnings

Net earnings during the year ended December 31, 2005 decreased by approximately $6,181 or 11.6%, compared to the same period in 2004.  For the same periods on a currency-adjusted basis, net income decreased $6,411 or 12.0%, which represents a favorable impact from currency effect of $230. As discussed above, the fluctuation was due primarily to higher cost of sales and operating expenses, acquisition and restructuring charges and certain litigation settlements (as described in Note 15 in our Notes to the Consolidated Financial Statements in Item 8).

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our primary source of liquidity during 2006 was cash generated from operations of $52,316. We expect that our future working capital, capital expenditures and dividend requirements will be satisfied primarily from existing cash balances, cash generated from operations and available credit facilities.

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Information about our financial position for the years ended December 31, 2006 and 2005 is presented in the following table:

*                    Non-monetary items are inventories, prepaid expenses and deferred income taxes.

 

Cash Flow Activities

The table below summarizes our cash flows for the years ended December 31, 2006, 2005 and 2004:

 

The table below summarizes our key performance metrics as of December 31, 2006, 2005 and 2004:

 

Days of sales outstanding in accounts receivable (“DSO”) measures the average number of days our receivables are outstanding. DSO is calculated by dividing accounts receivable, net of allowance for doubtful accounts, by a 90-day average net revenue.

Days of supply in inventory (“DII”) measures the average number of days from procurement to sale of our product. DII is calculated by dividing net inventory by a 90-day average cost of goods sold.

Days of purchases outstanding in accounts payable (“DPO”) measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing accounts payable by a 90-day average cost of goods sold.

Our working capital requirements depend upon our effective management of the cash conversion cycle, which represents effectively the number of days that elapse from the day we pay for the purchase of

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raw materials to the collection of cash from our customers. The cash conversion cycle is the sum of DSO and DOS less DPO.

2006 Compared to 2005

Cash flow from operating activities decreased during the year ended December 31, 2006, compared to the same period in 2005 primarily as a result of higher income offset by the timing of tax payments and changes in our inventory, accounts receivable and accrued expenses. Increases in accounts receivable and inventories are a result of our current focus on driving growth in sales.  For the year ended December 31, 2006 we paid taxes totaling $21,182 compared to tax payments of $18,459 in 2005.

Net cash used in investing activities decreased by $95,083 the year ended December 31, 2006, compared to 2005. This change is due primarily the 2005 purchase of Autotype offset by a slight increase in capital spending during 2006 compared to 2005. Capital expenditures for 2006 were spread across all of our business units. The majority of capital spending during 2005 was related to a new plant in China for our ASF segment.

Net cash used in financing activities decreased by $2,681 during the year ended December 31, 2006, when compared to 2005. This decrease was primarily the result of higher proceeds from the exercise of stock options and the related tax benefit from the exercise of stock options in 2006 compared to 2005, offset by an increase in dividends paid during 2006 compared to 2005.

2005 Compared to 2004

Our cash flow provided by operating activities was $59,168 during 2005, which was a $26,109 decrease from cash provided in the prior year. The decrease was primarily a result of lower income, changes in accounts receivable and deferred income taxes. The changes in deferred income taxes were largely a result of the Autotype acquisition in June 2005. For more information regarding this acquisition, see Note 19 in our Notes to the Consolidated Financial Statements. Our cash conversion cycle improved from 99 days in 2004 to 97 days in 2005.

Net cash used in investing activities increased significantly during the year ended December 31, 2005, compared to the same period in 2004. Business acquisitions totaled $93,182, of which $92,432 was attributable to the acquisition of Autotype, as described in Note 19 in our Notes to the Consolidated Financial Statements. Capital spending also increased in 2005, due primarily to the completion of a new plant in China for our ASF segment.

Net cash used by financing activities was $3,625 in fiscal year 2005, which was a slight decrease compared to net cash used by financing activities in the prior year. The change was due principally to the timing of our quarterly dividend payments and the exercise of employee stock options. Dividends paid as of the twelve months ended December 31, 2005 includes the fourth quarter 2004 dividend payment, which was funded in January 2005. Dividends paid as of the twelve months ended December 31, 2004 do not include the fourth quarter 2003 dividend payment, because it was funded in December 2003. Please see further discussion regarding dividends below. Cash used to pay dividends was offset partially by proceeds received from the exercise of employee stock options in fiscal year 2005, as well as increased net short-term borrowings, which were used to fund working capital requirements in Europe in conjunction with the Autotype acquisition in that region.

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Contractual Obligations

The impact that our contractual obligations as of December 31, 2006 are expected to have on our liquidity and cash flow in future periods is as follows:

 

The Company has 9 1/8% Senior Subordinated Notes (“Bond Offering” or “Bonds”), due 2011, for the face amount of $301,500. Interest on this Bond Offering is due semi-annually on January 15th and July 15th. Pursuant to the Bond Offering, the Company is subject to covenants requiring certain qualitative and quantitative thresholds, including a requirement to maintain a defined fixed charge ratio greater than or equal to 2.25 to 1.0. The incurrence of additional debt (excluding the Bond Offering) is also limited, as are certain defined restricted payments. The Company was in compliance with all of these covenants as of December 31, 2006. If these covenants are violated, and we are unable to negotiate a waiver or amendment thereof, the Bonds may be called for payment.

Short-Term Liquidity

The majority of our liquidity is derived from cash on hand and cash produced from operations. We have a long-term credit arrangement, which consists of a committed revolving loan facility that permits borrowings, denominated in U.S. dollars and foreign currencies, of up to $75,000. There has been no balance outstanding, or activity on this revolving loan facility for any of the periods presented. This long-term credit facility was established in March 2006 to replace a $50,000 long-term credit facility which was to expire in April 2006. We have other uncommitted credit facilities which presently total approximately $50,860. These facilities expire and may be renewed on a yearly basis.

The revolving credit facility above includes the following financial covenants:

·       a ratio of bank-defined earnings before income taxes (“EBIT”) to interest expense greater than 2.75 to 1.0 through December 31, 2006, and 3.0 to 1.0 for any fiscal quarter ending on or after March 31, 2007.

·       a ratio of bank-defined total outstanding debt to earnings before tax, depreciation and amortization (“EBITDA”) to be less than 3.5 to 1.0 through December 31, 2006, and 3.25 to 1.0 for any fiscal quarter ending on or after March 31, 2007.

·       A ratio of bank-defined total outstanding senior debt to earnings before tax, depreciation and amortization (“EBITDA”) to be less than 2.0 to 1.0.

We were in compliance with all of these covenants as of December 31, 2006. If these covenants are violated, and we are unable to negotiate a waiver or amendment thereof, the lender would have the right to declare an event of default, terminate the remaining commitment and accelerate all principal and interest outstanding. There has been no balance outstanding or activity on this committed revolving loan facility for any of the periods presented.

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The following table reflects our ability to fund both our required obligations and our shareholder growth initiatives for 2007, using our current financial resources:

 

Our liquidity position remained sufficient in 2006. Our increase in liquidity is reflected in our higher levels of cash on hand. Our cash levels at the end of 2006 were $125,461.

Our ability to obtain additional financing, if necessary, will depend upon a number of factors, including our future performance and financial results and capital market conditions. We cannot assure you that we will be able to raise additional capital on reasonable terms or at all.

As discussed in Note 21 of the Notes to Consolidated Financial Statements in Item 8, on December 15, 2006, the Company signed a definitive merger agreement under which Daniel H. Leever, Chairman and Chief Executive Officer, and investment funds managed by Court Square Capital Partners and Weston Presidio will acquire MacDermid in a transaction valued at over $1.3 billion, including the assumption or repayment of approximately $301 million of debt. Joseph Silvestri, managing partner of Court Square Capital Partners, is a director of MacDermid and is involved in the merger. Under terms of the merger agreement MacDermid stockholders will receive $35.00 in cash for each share of MacDermid common stock they hold. The transaction is expected to be completed in the first half of 2007, subject to receipt of MacDermid stockholder approval and regulatory approvals. The transaction will be financed through a combination of equity contributed by Mr. Leever and investment funds managed by Court Square Capital Partners and Weston Presidio, and debt financing provided by Credit Suisse Securities (USA) LLC. There is no financing condition to the obligations of the group of investors led by Mr. Leever to consummate the transaction.

Capital and Other Funding Activities

Our primary capital and other funding activities for the three years ended December 31, 2006, 2005 and 2004, respectively, were as follows:

 

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Capital additions

Our capital additions for the three years ended December 31, 2006, 2005 and 2004, respectively, were $14,890, $14,059 and $12,447. The capital expenditures in 2006, 2005 and 2004 were primarily for maintenance capital and building our plant in Suzhou, China in 2005 and 2004. Capital expenditures in 2004 also included additions to our plant in Wigan, United Kingdom. Future yearly capital requirements are not expected to exceed $15,000.

Acquisition of business

In June 2005, we acquired all of the outstanding capital stock of Autotype International Ltd. and associated entities from Norcros (Holdings) Limited of the UK (“Autotype”). Net assets acquired, including goodwill and intangibles, totaled $92,432. The net assets and results of operations are included in our financial statements since the acquisition date. In June 2005, we also acquired a marketing distribution channel for our North American printing blankets business for $995. Of this amount, $245 was accrued in related costs as of December 31, 2005.

Dividends

Dividends paid on our common stock for the three years ended December 31, 2006, 2005 and 2004, totaled $7,383, $6,693 and $3,635, respectively, or $0.24, $0.24 and $0.16 per share, respectively. All dividends were paid out of current earnings.

Under the December 15, 2006 merger agreement between us and Daniel H. Leever, our Chairman and Chief Executive Officer, and investment funds managed by Court Square Capital Partners, a related party and Weston Presidio we are prohibited from making any dividends except for normal quarterly dividends from operations. We expect to pay quarterly cash dividends in the future, although such payment is dependent upon our financial condition, results of operations, capital requirements, alternative uses of capital and other factors. Our revolving credit facility and bond facilities also have restricted payment covenants which could limit the amount the amount of dividends payable. Dividends for fiscal year 2007 are expected to approximate $7,384.

Common Stock Repurchases

The Board of Directors from time-to-time authorizes the purchase of issued and outstanding shares of MacDermid, Inc.’s common stock. Future repurchases of additional shares may be acquired through privately negotiated transactions or on the open market, and will depend on various factors, including the market price of the shares, our business and financial position, borrowing covenants, as well as general economic and market conditions. Additional shares acquired pursuant to such authorizations will be held in our treasury and will be available for us to issue 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). On May 12, 2005, the Board of Directors authorized the repurchase of up to an aggregate of 5,000,000 shares of the Company’s common stock, replacing all previous authorizations. At December 31, 2006, a repurchase of 4,700,633 of such shares would cost approximately $160,292.

Adequacy of Liquidity Sources

We believe that cash flows from operations and availability under our revolving credit facility will be sufficient to meet our long-term debt maturities, projected capital expenditures and anticipated working capital requirements for the foreseeable future; however, our cash flows from operations, borrowing availability and overall liquidity are subject to risks and uncertainties, as described in Item 1A, “Risk Factors,” and our statement regarding “Safe Harbor for Forward-Looking Information”.

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Off-Balance Sheet Arrangements

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”) or variable interest entities (“VIEs”). SPEs and VIEs can be established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2006, we are not involved in any material unconsolidated SPEs or VIEs.

CUSTOMER CONCENTRATIONS

There is no major portion of our business that is dependent upon a single customer or a few customers.

LEGAL AND ENVIRONMENTAL MATTERS

Environmental Issues:

The nature of our operations, as manufacturers and distributors of specialty chemical products, expose us to the risk of liability or claims with respect to environmental cleanup or other matters, including those in connection with the disposal of hazardous materials. As such, we are subject to extensive U.S. and foreign laws and regulations relating to environmental protection and worker health and safety, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated properties. We have incurred, and will continue to incur, significant costs and capital expenditures in complying with these laws and regulations. We could incur significant additional costs, including cleanup costs, fines, sanctions, and third-party claims, as a result of violations of or liabilities under environmental laws. In order to ensure compliance with applicable environmental, health and safety laws and regulations, we maintain a disciplined environmental and occupational safety and health compliance program, which includes conducting regular internal and external audits at our plants to identify and categorize potential environmental exposure.

Asset Retirement Obligations:

Asset retirement obligations are based principally on legal and regulatory requirements. At December 31, 2006, we have accrued $1,285 for our asset retirement obligation for properties where we can make a reasonable estimate of the future cost. On an ongoing basis, our management evaluates their estimates and assumptions; however, actual amounts could differ from those based on such estimates and assumptions. Changes in the estimate during the three years ended December 31, 2006 have not been significant.

Environmental Remediation:

As of December 31, 2006, we reserved $6,434 for various environmental matters. Ultimate costs may vary from current estimates and reserves, and the discovery of additional contaminants at these or other sites, or the imposition of additional cleanup obligations, or third-party claims relating thereto, could result in significant additional costs.

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

·       We are named as a potentially responsible party (“PRP”) at two Superfund sites (Fike-Artel in Nitro, West Virginia, and Solvents Recovery in Southington, Connecticut), in which many other PRPs are also involved. With respect to both of these sites, we have entered into cost sharing agreements that result in costs of less than $10 per year for funding the Company’s share of the ongoing cleanup costs at each site. No reserve has been established, given the deminimus nature of the costs. Our cost sharing percentage at each site is 0.2%. On October 31, 2005, the Environmental

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Protection Agency (“EPA”) notified the Company of alleged deminimus responsibility for certain contamination at the Mercury Refining Site in New York. MacDermid entered into a settlement agreement with the EPA to resolve this deminimus liability for a payment of $1.

·       Some of our facilities have an extended history of chemical and industrial activity. We are directly involved in the remediation of sites that have environmental contamination arising from its operations. These sites include certain sites such as the Kearny, New Jersey and Waukegan, Illinois sites, which were acquired in the December 1998 acquisition of W. Canning plc. With respect to the Kearny, New Jersey site, our Canning subsidiary withheld, under the Acquisition Agreement (“the Acquisition Agreement”), a deferred purchase price payment of approximately $1,600. We estimate the range of clean-up costs at these sites to be between $2,000 and $5,000. The owners of the Kearny, New Jersey site have primary responsibility for clean-up costs. Investigations into the extent of contamination at these sites are, however, ongoing.

·       We are in the process of characterizing contamination at our Huntingdon Avenue, Waterbury, Connecticut site, which was closed in the quarter ended September 30, 2003. The extent of required remediation activities at the Huntingdon Avenue site has not yet been determined; however, we do not anticipate that we will be materially affected by the environmental remediation costs.

·       During the third quarter of 2006, MacDermid entered into an agreement with the city council of Birmingham, England whereby MacDermid agreed to the variation and revocation of the Hazardous Substance Consent (“HSC”) for the MacDermid Palmer Street facility that allowed MacDermid to store certain hazardous substances for the receipt of $5,617 (3,000 British Pounds) immediately and the receipt of an additional $1,873 (1,000 British Pounds) payable when MacDermid revokes its’ amended HSC for the Palmer Street site and ceases all storage activity at the Palmer Street site (an expected three year period). During the fourth quarter of 2006, we received a study from an independent third party environmental firm that estimated the cost to remediate the Palmer Street Site to a residential status of 1,560 British pounds or $3,054. The total amount of $3,054 is included in the other long-term liabilities in the Consolidated Balance Sheet

Legal Proceedings:

From time to time, there are various legal proceedings pending against us. We consider all such proceedings to be ordinary litigation incident to the nature of our business. Certain claims are covered by liability insurance. We believe that the resolution of these claims, to the extent not covered by insurance, will not individually or in the aggregate, have a material adverse effect on our financial position or results of operations. To the extent reasonably estimable, reserves are established regarding pending legal proceedings. On July 25, 2005, the Company settled a litigation which had been brought against the Company by a supplier in exchange for a payment of $5,000. The litigation had arisen as a result of a contractual dispute. The underlying contract and the dispute had been inherited by a Company subsidiary as a result of the acquisition of PTI, Inc. in December 1999. The Company had previously reserved $2,500 as a contingency in this litigation. As a result of the July 2005 settlement, we charged an additional $2,500 against our second quarter results. We paid the full settlement amount during the third quarter of 2005.

CRITICAL ACCOUNTING ESTIMATES

General:   In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management must make estimates and assumptions that affect reported amounts in our consolidated financial statements. Management uses their best judgment based on their understanding and analysis of the relevant circumstances to reach these decisions. These judgments, by nature, are subject to an inherent degree of uncertainty. Accordingly, actual results

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could differ significantly from the estimates applied. Management has reviewed our critical accounting estimates with our Audit Committee and our Board of Directors.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.

Allowance for doubtful receivables:   We maintain an allowance for estimated credit losses based upon our historical collections experience and any specific customer collection issues that we have identified through continuous monitoring of customer collections and payments. Historically, our provisions for such bad debts based on historical experience have adequately matched actual experience, however, there is no guarantee that we will continue to experience the same credit loss rates as in the past. Further, we are not able to predict future changes in the financial condition of our customers. If circumstances related to our customers deteriorate or if credit loss rates change considerably from past experience, our estimates of the recoverability of our trade receivables could be materially affected, we may be required to record additional allowances. As of December 31, 2006, 2005 and 2004, our allowance for doubtful receivables was $10,798, $10,966 and $11,822, respectively.

Reserve for obsolete inventories:   We value inventory at lower of average cost or market and maintain a reserve for estimated inventory obsolescence, which is regularly reviewed by management. Our calculation of the reserve for obsolete inventories considers historical write-offs, customer demand, product evolution, usage rates and quantities of stock on hand. Based on this information, we reserve against obsolete and slow-moving inventory up to the inventory’s net realizable value. Significant changes in any of the factors used to estimate this allowance could materially affect our allowance and may require us to record additional reserves, which are expensed through the cost of sales line in our consolidated statement of earnings. Historically, our reserve has been adequate to cover actual expense. As of December 31, 2006, 2005 and 2004, we held reserves of $14,874, $16,254 and $15,274, respectively, related to our inventories.

Goodwill and intangible assets:   We evaluate the carrying value of our goodwill and indefinite-lived intangible assets annually, or more often if circumstances warrant, in accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Our evaluations require us to estimate future cash flows to be generated by our goodwill and indefinite-lived intangible assets in order to assess the recoverability of these assets. This process requires us to make significant judgments and assumptions about future business conditions, including future revenues and discount rates, based upon the best information available to us at the time of the assessment. Changes in any of the assumptions we use to perform our impairment testing could have a material effect on our assessment of the recoverability of these assets, and could thereby require us to write down these assets to our estimated net realizable value. If an asset is found to be impaired, the impairment would be recorded in the operating expense line on our consolidated statement of earnings.

As discussed in Notes 1, 2 and 6 to the Consolidated Financial Statements in Item 8 and the Explanatory Note above, during 2006 we reviewed our foreign currency conversion rates used to convert goodwill and intangible assets. Beginning in 2002, we held all goodwill and certain intangible assets related to the acquisition of Canning Ltd. (“Canning intangibles”) constant at historic currency conversion rates, effectively holding the value of goodwill and Canning intangibles constant at 2002 currency conversion rates. This resulted in an understatement of goodwill and Canning intangibles as of December 31, 2005. We made certain restatement adjustments to our December 31, 2005 Consolidated Balance Sheet to state

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these assets at the correct currency conversion rates. We also restated Other Comprehensive Income for the year ended December 31, 2005 to correct an error related to foreign currency translation.

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

The restatement adjustments necessary to properly convert goodwill and intangible assets are offset with a corresponding restatement adjustment to the Accumulated Other Comprehensive (Loss) Income section of Shareholders’ Equity in our December 31, 2005 Consolidated Balance Sheet. These restatement adjustments have no impact on earnings as reported in our financial statements dated December 31, 2005, or any of the tangible assets and liabilities accounts stated therein.

Income taxes:   As of December 31, 2006, 2005 and 2004, we recorded deferred tax assets related to income tax loss carry forwards, investment credits and other items of $102,872, $89,388 and $84,476, respectively. These assets were offset by valuation allowances of $12,156, $12,883 and $11,952, respectively, thereby resulting in net deferred tax asset of $90,716, $76,505 and $72,524, for each year. We determine our income tax valuation by considering multiple factors, including the tax jurisdiction, the carry forward period, and our income tax planning strategies. We record a valuation allowance when, based on available evidence, we conclude that it is more likely than not that a portion or all of a deferred tax asset will not be realized. This valuation allowance could change significantly if tax laws change in any of the jurisdictions where we do business or if any of our assumptions used in the calculation of the allowance change significantly. We cannot reasonably foresee any of these changes and base our valuations on best evidence at the time of the assessment. We are also subject to examination of our income tax returns for multiple years by the Internal Revenue Service (“IRS”) and other tax authorities. We periodically assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision and related accruals for income taxes.

Environmental and Other Legal Matters:   The nature of our business exposes us to the risk of liability of claims with respect to environmental cleanup or other matters, including those in connection with the disposal of hazardous materials. As such, from time to time, we are subject to costs associated with the cleanup of various contaminated sites (see Note 15 in our Notes to the Consolidated Financial Statements). Because there are often many parties that are held responsible for paying for cleanup, we must estimate our reserve based on the best information we have at the time of assessment. It is our policy to review environmental issues in light of both historical experience and current information and reserve accordingly. We are unable to predict what our actual costs will be for environmental cleanup with complete accuracy. Significant changes in third party cleanup estimates or departures from past experience could have a material impact on our reserves for environmental issues.

We are also subject to litigation in the ordinary course of business (see Note 15 in our Notes to the Consolidated Financial Statements).

We reserve for legal and environmental contingencies when a liability for those contingencies has become probable and the cost is reasonably estimable, in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (“SFAS 5”). Any significant litigation or significant change in our estimates of cleanup costs could materially affect our financial results and cause us to increase our provision for related costs. Any provision made for these costs are expensed to selling, technical and administrative expenses. Historically, our legal and environmental provisions have adequately matched actual expense.

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Asset Retirement Obligations:   Effective January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal use of the asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.

Restructuring Charges:   We have recognized restructuring charges related to reductions in workforce, facility closures and facility consolidations. These charges were recorded pursuant to formal plans developed and approved by management. The recognition of restructuring charges in accordance with Statement of Financial Accounting Standard No. 146 Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”) requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with these plans. The estimates of future liabilities may change, requiring additional restructuring and impairment charges or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with the restructuring programs. For further discussion of our restructuring programs, refer to Note 20 in the Notes to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”

Employee Benefit Plans:   We sponsor a defined benefit pension plan and a retirement medical benefit plan for our domestic employees providing retirement benefits based upon years of service and compensation levels. We also sponsored a defined benefit pension plan for our United Kingdom-based employees employed at our Canning subsidiary that was frozen as of April 6, 1997, when the plan was converted from a defined benefit plan to a defined contribution plan. The projected benefit obligations and pension expenses from both of these plans is dependent upon various factors such as the discount rate, actual return on plan assets and the funding of the plan. Management can neither predict the future interest rate environment, which directly impacts the selection of future discount rates, nor predict future asset returns that the pension plan will experience. Changes in these assumptions will affect current year and future year pension expense and the projected benefit obligation. For the domestic defined benefit plan, the Company chose a discount rate which is used to state expected future cash flows at a present value on the measurement date. This rate represents the market rate for high-quality fixed income investments as depicted in a study that the company commissioned during 2005. A lower discount rate increases the present value of benefit obligations and increases pension expense. The discount rate was increased to 6.0% for the 2006 pension cost determination from 5.5% in 2005. The Company believes this increase better reflects the interest rate environment as of the September 30, 2006 measurement date. The 0.50% increase in the discount rate will cause annual pension expense to decrease by approximately $800 in fiscal year 2007. The rate of compensation increase assumption remained constant when compared to the prior fiscal year, at 4.5%. For the foreign defined benefit plan in the United Kingdom, the Company chose a discount rate which is comparable to the fifteen-year UK AA Bond Indices. A lower discount rate increases the present value of benefit obligations and increases pension expense. The discount rate for the foreign plan was unchanged at 5% for the 2006 pension cost determination when compared to 2005. The foreign defined benefit plan was frozen in 1997; therefore, there is no service-cost component recognized in conjunction with this plan going forward.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 in our Notes to the Consolidated Financial Statements in Item 8 for information on new accounting standards adopted in 2006 or pending adoption.

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