S-1/A 1 d327158ds1a.htm AMENDMENT NO. 8 TO FORM S-1 Amendment No. 8 to Form S-1
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As filed with the Securities and Exchange Commission on June 22, 2012.

Registration No. 333-175473

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 8

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

MacDermid Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware   2890   45-2568333

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

1401 Blake Street

Denver, Colorado 80202

(720) 479-3060

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Daniel H. Leever

Chairman and Chief Executive Officer

1401 Blake Street

Denver, Colorado 80202

(720) 479-3060

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Craig F. Arcella

Kris F. Heinzelman

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, New York 10019-7475

(212) 474-1000

Fax: (212) 474-3700

 

Peter M. Labonski

Keith L. Halverstam

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022-4834

(212) 906-1200

Fax: (212) 751-4864

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x      Smaller reporting company   ¨

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Amount
to be
registered
 

Proposed

maximum

offering price

per share

 

Proposed
maximum

aggregate

offering price(1)(2)

  Amount of
registration fees
(3)

Common Stock, $0.01 par value per share

          $200,000,000   $23,220

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Does not include shares that the underwriters have the option to purchase to cover over-allotments. See “Underwriting”.
(3) Previously paid.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

This Registration Statement on Form S-1 (this “Registration Statement”) is being filed by MacDermid Group, Inc., a newly formed Delaware corporation, in connection with a proposed registered public offering of shares of its common stock (the “Offering”). Prior to the completion of the Offering, MacDermid Group, Inc. is a direct, wholly owned subsidiary of MacDermid Holdings, LLC, which, prior to the completion of the Offering, is the holding company parent for MacDermid, Incorporated, the main U.S. operating entity for the MacDermid business and the direct or indirect parent entity of all the MacDermid operating companies.

In connection with, and immediately prior to the completion of, the Offering, MacDermid Holdings, LLC and the MacDermid, Incorporated Profit Sharing and Employee Savings Plan, which is the existing minority stockholder of MacDermid, Incorporated, will exchange the capital stock of MacDermid, Incorporated for the common stock of MacDermid Group, Inc., and MacDermid Holdings, LLC will liquidate and distribute the shares of MacDermid Group, Inc. then held by it to the holders of its membership interests. Immediately following completion of the Offering, the common stock of the registrant will be owned by (1) the entities and persons who purchase the common stock of the registrant pursuant to the Offering, (2) the MacDermid, Incorporated Profit Sharing and Employee Savings Plan and (3) the entities and persons that, immediately prior to the completion of the reorganization transactions described above, own membership units in MacDermid Holdings, LLC, which include certain affiliates and funds of Court Square Capital Partners and Weston Presidio, Daniel H. Leever, the chairman and chief executive officer of MacDermid, Incorporated, and certain other current and former members of the management of the MacDermid business.

See “The Corporate Reorganization” in the prospectus that forms a part of this Registration Statement for additional information regarding the corporate structure of the MacDermid entities.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JUNE 22, 2012

                 Shares

 

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MacDermid Group, Inc.

Common Stock

 

 

This is the initial public offering of our common stock. We are selling                      shares of common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $         and $         per share. We have applied to list our common stock on the New York Stock Exchange under the symbol “MRD”.

Prior to the completion of this offering, the existing stockholders of MacDermid, Incorporated will exchange the capital stock of that entity for our common stock, and our parent entity will liquidate and distribute the shares of our common stock it then holds to the holders of its membership interests. These transactions will result in our holding all of the outstanding capital stock of MacDermid, Incorporated, the main U.S. operating entity for the MacDermid business and the direct or indirect parent entity of all the MacDermid operating companies. See “The Corporate Reorganization” for further information.

The underwriters have a 30-day option to purchase a maximum of                      additional shares to cover over-allotments of shares.

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. Investing in our common stock involves risks. See “Risk Factors” beginning on page 18.

 

      

Price to

Public

    

Underwriting
Discounts and
Commissions

    

Proceeds, before
expenses, to
MacDermid Group, Inc.

Per Share

     $                  $                  $            

Total

     $                  $                  $            

Delivery of the shares of our common stock will be made on or about                     , 2012.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Credit Suisse   Morgan Stanley   Deutsche Bank Securities

 

 

Lazard Capital Markets

 

 

 

Stifel Nicolaus Weisel   Oppenheimer & Co.   RBC Capital Markets

 

 

The date of this prospectus is                     , 2012.


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TABLE OF CONTENTS

 

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     18   

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     37   

USE OF PROCEEDS

     39   

DIVIDEND POLICY

     40   

CAPITALIZATION

     41   

THE CORPORATE REORGANIZATION

     42   

DILUTION

     44   

SELECTED CONSOLIDATED FINANCIAL INFORMATION

     45   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     48   

BUSINESS

     90   

MANAGEMENT AND BOARD OF DIRECTORS

     104   

COMPENSATION TABLES AND NARRATIVE DISCLOSURES

     110   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     117   

PRINCIPAL STOCKHOLDERS

     121   

DESCRIPTION OF CAPITAL STOCK

     122   

DESCRIPTION OF CERTAIN INDEBTEDNESS OF MACDERMID , INCORPORATED

     126   

SHARES ELIGIBLE FOR FUTURE SALE

     130   

MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. STOCKHOLDERS

     132   

UNDERWRITING

     135   

LEGAL MATTERS

     139   

EXPERTS

     139   

WHERE YOU CAN FIND MORE INFORMATION

     139   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you.

Dealer Prospectus Delivery Obligation

Until                     , 2012 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

The principal executive offices of MacDermid Group, Inc. are located at 1401 Blake Street, Denver, Colorado 80202, and the telephone number at this address is (720) 479-3060. Our website address is www.macdermid.com. Information on, or accessible through, our website is not a part of, and will not be deemed to be incorporated into, this prospectus or the registration statement of which this prospectus forms a part. Investors should not rely on any such information in deciding whether to purchase our common stock.

 

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PROSPECTUS SUMMARY

The following summary highlights certain information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you in making an investment decision. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” and the financial data and related notes included elsewhere in this prospectus, before making a decision to invest in our common stock.

Our Company

We are a global producer of high technology specialty chemical products and provider of technical services with a proven track record of success and innovation spanning our 90-year history. Our business involves the manufacture of a broad range of specialty chemicals, which we create by blending raw materials, and the incorporation of these chemicals into multi-step technological processes. These specialty chemicals and processes together encompass the products we sell to our customers in the electronics, metal and plastic plating, graphic arts, and offshore oil production and drilling industries. We refer to our products as “dynamic chemistries” due to their delicate chemical compositions, which are frequently altered during customer use. Our dynamic chemistries are used in a wide variety of attractive niche markets, and based on 2011 net sales, we believe that the majority of our operations hold leading positions in the product markets they serve, including, with respect to Electronic Solutions and Industrial Solutions, the number one or number two market share positions in the product markets they serve.

We generate revenue through the manufacture and sale of our dynamic chemistries and by providing highly technical post-sale service to our customers through our extensive global network of specially trained service personnel. Our personnel work closely with our customers to ensure that the chemical composition and function of our dynamic chemistries are maintained as intended. Among the more than 3,500 customers that we served as of December 31, 2011 are some of the world’s preeminent companies, such as LG, Molex, Samsung, FIAT, Ford, GM, Stanley Black & Decker and major companies in the offshore oil and gas industries. We believe that we are able to service our customers and attract new customers successfully through our extensive global network of 14 manufacturing sites and 21 technical service facilities, including 8 research and development centers, in 24 countries.

For the 12 months ended December 31, 2011, we generated net sales, operating profit, net income attributable to MacDermid, Incorporated and Adjusted EBITDA of $728.8 million, $55.9 million, $1.0 million and $151.7 million, respectively, and for the three months ended March 31, 2012, we generated net sales, operating profit, net income attributable to MacDermid, Incorporated and Adjusted EBITDA of $182.2 million, $27.1 million, $4.9 million and $38.5 million, respectively. For a reconciliation of net income (loss) attributable to MacDermid, Incorporated to Adjusted EBITDA, see “—Summary Consolidated Financial Data” and the footnotes contained therein.

We dedicate extensive resources to research and development and highly technical, post-sale customer service, while limiting our investments in fixed assets and capital expenditures. We refer to this approach as our “asset-lite, high-touch” business model, which emphasizes the “bookends” of our operations—innovation and technical service. As of March 31, 2012, approximately 1,000 of the approximately 2,100 people we employed were research and development chemists and experienced technical sales and service personnel. We believe that our business model enables us to focus on high growth market opportunities, maintain high margins and a high return on invested capital, and generate stable and strong cash flows. Given that our annual capital expenditures have been consistently less than 2% of our annual net sales, we believe that our cash conversion rate (the proportion of our profits converted into cash flow) is higher than a majority of the companies in our sector.

Our businesses are benefiting from global growth trends in many of our end markets, including the increasing use of electronic devices such as mobile phones and computers, growth in worldwide automotive production and increasing oil production from offshore, sub-sea wells. In addition, over the last several years, we have increased

 

 

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our focus on growth in emerging markets. In 2011, approximately 37% of our net sales, approximately 37% of our gross profit and approximately 41% of our Adjusted EBITDA was generated in Asia (predominately in the greater China region) and Brazil as compared with approximately 36% of our net sales, approximately 36% of our gross profit and approximately 45% of our Adjusted EBITDA in 2009 in the same regions. We believe that we are also effectively expanding the existing market for our dynamic chemistries by developing new applications within our existing markets. These new applications include: surface coatings for solar panels, plated antennas for smart mobile devices, flexographic plates for printing consumer packaging materials, decorative components for automobile interiors and control system fluids used to prevent oil from seeping from ocean floor valves.

On April 12, 2007, MacDermid, Incorporated, the direct or indirect parent entity of all the MacDermid operating companies and a publicly traded company since 1966, was acquired by a group led by our chairman and chief executive officer, Daniel H. Leever and certain funds of Court Square Capital Partners and Weston Presidio. In connection with that acquisition, the common stock of MacDermid, Incorporated ceased to be listed on the New York Stock Exchange.

Our Businesses

We report our business in two operating segments: an Industrial segment and a Printing segment. In the fiscal year ended December 31, 2011, our Industrial and Printing segments generated net sales of $568.6 million and $160.2 million, respectively. For the three months ended March 31, 2012, our Industrial and Printing segments generated net sales of $140.5 million and $41.7 million, respectively.

Industrial—The Industrial segment supplies technological solutions and dynamic chemistries used for finishing metals and non-metallic surfaces for automotive and other industrial applications, electro-plating metal surfaces, manufacturing circuit boards and other electronic devices for the electronics industry, fluids for the offshore oil and gas markets and specialty coated industrial films. As the regional sales mix in this segment has shifted over the past several years from more industrialized nations towards emerging markets, such as Asia and South America, we have invested significantly in these regions, including developing state-of-the-art facilities in Suzhou, China, and São Paulo, Brazil, to better serve our customers there. We have over 600 personnel and three manufacturing facilities in Asia and remain focused on further increasing our presence in the region.

The Industrial segment is composed of the following three businesses:

Electronic Solutions. We believe we are one of the leading global suppliers of chemical compounds to the printed circuit board fabrication industry based on our 2011 net sales. In this business, we design and formulate a complete line of proprietary “wet” dynamic chemistries that our customers use to process the surface of the printed circuit boards and other electronic components they manufacture. Our product portfolio in this business is focused on niches such as final finishes, through hole metallization and circuit formation, in which we are a small cost to the overall finished product, but a critical component for maintaining the products’ performance. Growth in this business is driven by demand in telecommunication, wireless devices and computers, and the increasing use of electronics in automobiles.

Industrial Solutions. We believe that we have a leading position worldwide in industrial metal and plastic finishing chemistries based on 2011 net sales. In this business, our dynamic chemistries are used for finishing, cleaning and providing surface coatings for a broad range of metal and non-metal surfaces. These coatings may have functional uses, such as improving wear and tear or providing corrosion resistance for appliance parts, or decorative uses, such as providing gloss finishes to components used in automotive interiors. As of December 31, 2011, we manufactured more than 1,000 chemical compounds for these surface coating applications, including cleaning, activating, polishing, electro and electroless plating, phosphatizing, stripping and coating, anti-tarnishing and rust inhibiting for metal and plastic surfaces. Growth in this business is primarily driven by increased world-wide automobile production and demand for appliances, computers and general engineering hardware.

 

 

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Offshore Solutions. We produce water-based hydraulic control fluids for major oil companies and drilling contractors for offshore deep water production and drilling applications. Production fluids are used in the control systems that open and close critical valves for the deep water oil extraction and transportation process. Drilling fluids are used in control systems to operate valves on the ocean floor. We believe there is significant growth potential for this business as the oil and gas industry continues to grow, as evidenced by the $66.5 billion of capital that is forecasted to be spent globally by deep oil and gas producers from 2011 through 2016, a 109% increase over the prior five-year period, and as oil is produced from new sub-sea wells.

Printing—Through the Printing segment, we supply an extensive line of flexographic plates that are used in the commercial packaging and commercial printing industries. We manufacture photopolymers used to produce printing plates for transferring images onto commercial packaging, including packaging for consumer food products, pet food bags, corrugated boxes, labels and beverage containers. In addition, we also produce photopolymer printing plates for the flexographic and letterpress newspaper and publications markets. Our products are used to improve print quality and printing productivity. The growth in this segment is driven by consumer demand and advertising.

Our Competitive Strengths

We believe that the following are our key competitive strengths:

Leading Market Position in Attractive Niche Markets. We believe, based on our 2011 net sales, that a majority of our operations hold leading positions in the product markets they serve, including the number one or number two market share positions held by Electronic Solutions and Industrial Solutions in the product markets they serve. We also believe that the combination of our global presence, history of innovation, process know-how, strong commitment to research and development, dedication to customer service and broad range of proprietary products distinguishes us from our competitors, allowing us to maintain our leading market share positions. Furthermore, we believe the diversity of the niche markets we serve will enable us to continue our growth throughout economic cycles and mitigate the impact of a downturn in any single market.

Proprietary Technology and Service Oriented Business Model. Our commitment to technological innovation and our extensive intellectual property portfolio of over 750 issued patents enables us to develop our cutting-edge products. In order to continue to provide innovative products and highly technical service to our customers, we place a premium on maintaining a specialized and qualified employee base. Our global sales and service personnel possess extensive knowledge of and experience in our local markets. For instance, our technical management team serving our Asian markets has, on average, over 20 years of experience, including decades of joint product development with our key customers located in the greater China region. We believe that our proprietary technology, extensive industry experience and customer service-focused business model are difficult for our competitors to replicate. As a result, and in order to avoid the transition risks that go along with switching suppliers, customers elect not to switch from our products to those of our competitors. Switching suppliers generally does not make sense for our customers from a cost-benefit standpoint: the cost of our products is low relative to the potential cost savings, as switching expenses (including conducting expensive trials to ensure quality assurance and compliance with regulatory requirements, industry standards and internal protocols) can be significant.

The key role our products play in improving the efficacy of our customers’ manufacturing processes and reducing their total costs, combined with our extensive experience in local markets, our focus on highly technical customer service and the significant customer switching risks and costs inherent in our industry, have enabled us to establish and maintain our long-term customer relationships. We leverage these close relationships to identify opportunities for new products and position our portfolio of products within the ever-changing business environment.

 

 

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Track Record of Targeted Growth. We have a demonstrated history of achieving targeted growth by expanding into new, fast-growing geographic markets, generating growth in our higher margin businesses and enhancing our product offerings by drawing on our core competencies to extend our existing technologies into adjacent markets. We believe that the experience and knowledge gained through our history of innovation and track record of successfully entering new markets enables us to identify and capitalize on future growth opportunities.

 

   

We have, for example, grown our presence in emerging markets (specifically Asia (predominately in the greater China region) and Brazil), as demonstrated by the increase in net sales in these markets to 37% of total net sales in 2011 as compared to 36% of total net sales in 2009. We have updated facilities and increased headcount to expand our operations in the greater China region, which is now home to three state-of-the-art facilities and 600 employees. We are focused on continuing to increase our presence in emerging markets.

 

   

We generated 78% of our 2011 net sales from our higher growth, higher margin Industrial segment, compared to 61% of our net sales in 2005.

 

   

We have significantly expanded our Offshore Solutions business over the last six years, representing a 2005-2011 net sales compound annual growth rate of over 12%.

Strong Free Cash Flow Generation. Our high gross profit margins, combined with the low capital expenditure requirements and low fixed cost structure that result from our “asset-lite, high-touch” business model, allow us to generate strong free cash flow through all economic cycles. Our fixed asset base is modern and well-maintained and, accordingly, requires low, and often discretionary, capital expenditures. Our fixed manufacturing costs during 2011 were approximately 11% of our 2011 net sales, and our maintenance capital expenditures, which are capital expenditures made to upgrade our existing assets, during 2011 were approximately 0.6% of our 2011 net sales. Our business model has allowed us to generate free cash flow even during economic downturns, including the global economic downturn that began in 2008. For example, in the year ended December 31, 2009, we generated $49.0 million in net cash flows provided by operating activities, and we used $6.5 million for capital expenditures and received $2.6 million of proceeds from the disposition of fixed assets.

Our key proprietary technology, service oriented business model and the high costs our customers would incur to switch suppliers have allowed us to achieve stable, industry-leading margins throughout our history and have protected our market share. The following chart highlights the stability of our margins since 1995:

Stable Financial Performance Through Economic Cycles

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(1) Gross profit is defined as net sales minus cost of sales. The percentages represent gross profit margin, which is defined as gross profit divided by net sales. Gross profit for years 1995 to 2000 is for fiscal years ending March 31.
(2) Gross profit margins are net of discontinued operations.

 

 

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Customer, Product, Application, End-Market and Geographic Diversity. We offer a broad range of products and services to diverse end markets, ranging from electronics to printing to offshore oil drilling. As of December 31, 2011, we served more than 3,500 customers globally, with no single customer accounting for more than 3% of our 2011 net sales. We have a significant presence in the rapidly growing Asian and Brazilian markets, with approximately $269 million in 2011 net sales to customers in those regions. In addition, each of our product lines serves numerous and often unrelated end markets. Our customer, product and geographic diversity help to mitigate the effects of any adverse event affecting a specific industry, end market or region.

 

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Limited Raw Material Concentration and Low Exposure to Energy Prices. We use in excess of 1,000 chemicals as raw materials in the manufacture of our proprietary products, with no single raw material representing more than 3% of our cost of sales in 2011. Further, the raw materials that are of greatest importance to our global operations are, in most cases, obtainable from multiple sources worldwide. In addition, energy costs, which have historically been volatile, only represented approximately 2% of our cost of sales in 2011.

Experienced Management Team with Significant Equity Investment. Our senior management team is led by Daniel H. Leever, our chairman and chief executive officer, who has approximately 31 years of experience with the MacDermid business and has been our chief executive officer since 1990. Our senior management team comprised of our executive officers and our divisional business managers has, on average, 29 years of industry experience and 18 years of experience with our company. Our management has been responsible for successfully implementing a number of strategic initiatives designed to enhance growth, improve productivity, reduce costs and expand margins. We believe that our employee ownership, stemming from our history as an employee-owned company including through our profit sharing and employee savings plan, and use of a variable compensation structure has allowed us to maintain throughout our history an “owner mentality” among our workforce that has proven instrumental to our success.

Our Business Strategy

Our business strategy is focused on maximizing cash flow through our “asset-lite, high-touch” business model with continued emphasis on the “bookends” of our operations—innovation and technical service. Building on our competitive strengths, we intend to continue to grow our business, improve profitability and strengthen our balance sheet by pursuing the following integrated strategies:

Build Our Core Businesses. We believe that we can capitalize on our technical capabilities, sophisticated process know-how, strong customer relationships and deep industry knowledge to enhance growth and generate significant free cash flow.

 

   

Extend Product Breadth: We intend to extend many of our product offerings through the development of new applications for our existing products in our existing markets. For example, we are extending our

 

 

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capabilities for films used in in-mold decoration for high-end automotive interiors to exteriors and other applications. We are also leveraging our capabilities in plating technology in printed circuits and automotive applications to meet the emerging technological and environmental needs of our customers.

 

   

Continue to Grow Internationally with Our Customers: We intend to continue to grow internationally by expanding our product sales to our existing multinational customers as they penetrate emerging regions. We continue to make investments, especially in technical staff, in high-growth markets such as the greater China region and Brazil in order to better service our customers.

Leverage our Capabilities to Grow into New Markets and Applications. Building on our core competencies in product innovation, applications development and technical services, we intend to expand into new high-growth markets and extend our existing technologies to develop new products for new applications in markets that are adjacent to those we currently serve. Examples of our initiatives include:

 

   

Plating for Solar Cell Metallization: We are developing a chemistry solution using light-induced, electroless silver technology to enhance the conductivity and reduce the usage of screened silver paste on solar cells that will result in a higher manufacturing yield from such solar cells at a lower cost to our customers. In the longer term, we believe that we can extend our technology to create a new way of manufacturing crystalline silicon solar cells and eliminate the need for silver paste.

 

   

Plating for Molded Interconnect Devices: We are extending our “plating on plastics” technology into antenna manufacturing for smartphones. We believe that our technology results in a higher manufacturing yield and lower cost to our customers. We believe that we increased our market share in this product in 2011.

 

   

Light-Emitting Diode (LED) Lighting Market: We are developing products for thermal management systems and using silver as a wire-bondable and reflective finish option to enhance energy conversion into light.

 

   

High Value PET Recycling: As worldwide demand for recycled polyethylene terephthalate (PET) grows, we are leveraging our strong position in Europe for specialized cleaners and defoamers that are used in recycling plastic products made of PET to expand that business globally, especially in emerging markets such as the greater China region and South America. Our specialized cleaners and defoamers enable recycled PET to be used in higher value applications such as bottle resin.

 

   

Digital Flexographic Printing: We have developed an innovative LUX® process, which uses a flat top dot processing technology that significantly increases the quality and consistency of the printed image from a flexographic printing plate in a manner that is more efficient and cost effective for our customers.

 

   

Metals: We believe the metals industry presents an opportunity to introduce new products, and extend existing products, in an adjacent market. We define the metals industry as flat-rolled steel producers and processors, aluminum producers (including can making), and tube and pipe extruding. We have been successful at penetrating the steel market with our tin plating chemistries, including cleaners and passivates. We have hired specialists in rolling lubricants and metal pre-treatment with the expectation of rapid expansion of our business in this market. We believe the addressable market for metals is over $750 million.

Maintain Our Technology Leadership Position. Our continued success in product innovation and applications development is a result of our focused commitment to technology research and development. This commitment has historically allowed us to sustain and enhance growth and profitability and further penetrate our target markets, including our existing customer base. Because the highly technical service we provide to our customers is an integral part of their successful use of our products, our service personnel become well acquainted with our customers. These close customer relationships enable us to identify and forecast the needs of our customers and draw upon our intellectual property portfolio and technological expertise to create new products.

 

 

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Continue to Pursue Operational Efficiencies. We consistently focus on opportunities to reduce operating expenses through facility optimization, product and raw material rationalization and by maintaining a relatively low fixed cost structure that supports our growth strategy. In 2009, during the economic crisis, we permanently reduced costs by over $40 million annually by closing certain manufacturing facilities and executing a series of operational restructuring initiatives that streamlined our organizational structure and reduced our workforce in our manufacturing and general and administrative functions. These cost reductions resulted in an increase in our Adjusted EBITDA margin for 2011 by over 48.1% compared to 2009. Net income attributable to MacDermid, Incorporated was $1.0 million in 2011 compared to a net loss attributable to MacDermid, Incorporated of $82.8 million in 2009. For a reconciliation of net income (loss) attributable to MacDermid, Incorporated to Adjusted EBITDA, see “—Summary Consolidated Financial Data” and the footnotes contained therein. Our operational restructuring initiatives were primarily responsible for an increase in our gross profit margin percentage from 43.8% for the year ended December 31, 2009 to 46.7% for the year ended December 31, 2011, representing a 6.6% increase.

Maximize Cash Flow. Our ability to maintain strong cash flows results from our business model and growth strategies. Historically, we have been able to generate significant cash flow as a result of the low capital expenditure requirements and low fixed cost structure that result from our “asset-lite, high-touch” business model and by focusing on growing our higher margin businesses. We intend to continue to focus on maximizing our cash flow because it enables us to further invest in our business, reduce our debt and provide value to our stockholders.

Focus on Human Capital. The success of our business depends on our ability to continue to capitalize on our technical capabilities, unique process know-how, strong customer relationships and industry knowledge. Our technical expertise and history of innovation reflect the specialized and highly skilled nature of our research and development personnel. Our strong customer relationships and familiarity with our local markets result from the work of our highly talented and experienced sales and service personnel. As such, we intend to continue to focus on attracting, retaining and developing the best human talent across all levels of our organization, which is key to our ability to successfully operate and grow our business.

Risks Related to Our Business

Investing in our common stock involves substantial risk, and our ability to successfully operate our business is subject to numerous risks, including those that are generally associated with our industry. Any of the risks set forth in this prospectus under the heading “Risk Factors” may limit our ability to successfully execute our business strategy. Some of the principal challenges or risks facing the company include, among others:

 

   

Our products are sold in industries that are sensitive to general economic conditions. If there are delays or reductions in the purchasing of our customers’ products as a result of economic downturns, demand for our products and services would decline, and our net sales would be adversely affected.

 

   

Our business model is focused on limiting investments in fixed assets and capital expenditures. However, the markets for our proprietary technology and our customers’ needs are frequently changing, which makes it difficult for us to forecast the need for increases in capital expenditures and assets. If we do elect to increase capital expenditures, but such expenditures and any costs incurred as a result of a more capital-intensive asset base are not offset by increases in net sales, our business and financial condition may be harmed.

 

   

Our industry is intensely competitive, and some of our competitors may have greater financial, technical and marketing resources than we do and may devote greater resources to promoting and selling certain products. If we do not develop and deploy new cost effective products, processes and technologies on a timely basis and adapt to changes in our industry and the global economy, our reputation may be harmed, we may lose customers and our market share may decline.

 

 

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We have substantial international operations, and our operational success depends on our ability to adapt to and prevail in different legal, regulatory, economic, social and political conditions. Further, the success of our business in emerging markets requires us to respond effectively to rapid changes in conditions in these countries.

 

   

Our proprietary technology is critically important to our business, and the failure of our patents, applicable intellectual property law or our confidentiality agreements to protect our intellectual property and other proprietary information could significantly harm our ability to compete in our industry and could materially adversely affect our business and results of operations.

 

   

Our business is subject to various governmental regulations and laws, compliance with which may cause us to incur significant expenses, and if we fail to maintain satisfactory compliance with certain regulations, we could be subject to civil or criminal penalties.

 

   

We are focused on research and development and on highly technical customer service and, accordingly, we rely on our ability to attract and retain skilled employees. The departure of certain key personnel could have an adverse impact on our operations, including, for example, as a result of customers choosing to follow a regional manager to one of our competitors.

 

   

We have a substantial amount of indebtedness, which could adversely affect our financial position.

In addition to the foregoing, you should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific risks set forth in this prospectus under the heading “Risk Factors” in deciding whether to invest in our common stock.

 

 

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Corporate Information

MacDermid Group, Inc. was incorporated in Delaware on June 17, 2011. In connection with, and immediately prior to the completion of, this offering, the existing shareholders of MacDermid, Incorporated will exchange the capital stock of MacDermid, Incorporated for the common stock of MacDermid Group, Inc., and MacDermid Holdings, LLC will liquidate and distribute the shares of MacDermid Group, Inc. then held by it to the holders of its membership interests. Prior to the completion of this offering, MacDermid Group, Inc. is a direct, wholly owned subsidiary of MacDermid Holdings, LLC and has no material assets. The diagram below illustrates our corporate structure immediately prior to the consummation of this offering and reflects actual ownership as of March 31, 2012, giving effect to the cancellation of all treasury shares.

 

LOGO

 

 

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Following the completion of this offering, MacDermid Group, Inc. will be a holding company with no material assets other than its direct 100% ownership interest in MacDermid, Incorporated, which is the main U.S. operating entity for the MacDermid business and the direct or indirect parent entity of all the MacDermid operating companies. The diagram below illustrates our corporate structure immediately following completion of this offering (and assumes a public offering price of $             (the midpoint of the range set forth on the cover of this prospectus)):

 

LOGO

Please refer to “The Corporate Reorganization” for additional information about the corporate structure of the MacDermid entities.

Assuming a public offering price of $         (the midpoint of the range set forth on the cover of this prospectus), immediately following the completion of this offering, Court Square will own     % and Weston Presidio will own     % of our common stock, or     % and     % of our common stock, respectively, if the underwriters exercise their over-allotment option in full. Accordingly, we will be a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. As our largest stockholder, Court Square will exercise significant influence over all matters requiring stockholder approval, and Court Square and Weston Presidio collectively will control all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions.

MacDermid, Incorporated

MacDermid, Incorporated, the main U.S. operating entity for the MacDermid business and the direct or indirect parent entity of all the MacDermid operating companies, was established in Waterbury, Connecticut in 1922. On May 9, 1966, shares of MacDermid, Incorporated common stock were registered for trading. From June 22, 1966 to February 8, 1971, the shares traded on the over-the-counter system of trading and from February 8, 1971, when the NASDAQ stock exchange began trading, to February 25, 1998, the shares traded on

 

 

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the NASDAQ stock exchange. From February 26, 1998 to April 12, 2007, shares of MacDermid, Incorporated traded on the New York Stock Exchange under the symbol “MRD”. On April 12, 2007, MacDermid, Incorporated was acquired by MDI Holdings, LLC, an entity formed by Court Square, Weston Presidio and Daniel H. Leever, our chairman and chief executive officer. MDI Holdings, LLC was the predecessor entity to MacDermid Holdings, LLC.

Principal Stockholders

Court Square Capital Partners

Court Square Capital Partners was formed in 2006 when the entire investment team of Citigroup Venture Capital spun out to form a new entity. Court Square Capital Partners manages investment funds with over $5 billion of assets, including Court Square Capital Partners I, LP and Court Square Capital Partners II, LP. Since 1969, Court Square Capital Partners and its predecessor, Citigroup Venture Capital, have closed over 250 transactions, including investments in Southern Graphics, Fairchild Semiconductor, Intersil, Euramax, Polyfibron Technologies, Triumph Group, Worldspan, Mohawk Carpet, Plantronics and York International. Court Square Capital Partners has a long standing relationship with the company. Joseph M. Silvestri, a managing partner of Court Square Capital Partners II, L.P., has been a director of MacDermid, Incorporated since 1999.

Assuming a public offering price of $         (the midpoint of the range set forth on the cover of this prospectus), immediately following the completion of this offering, Court Square will own approximately     %, or     % if the underwriters exercise their over-allotment option in full, of the aggregate outstanding common stock of MacDermid Group, Inc.

Weston Presidio

Weston Presidio, founded in 1991, is a private equity firm that has managed five investment funds aggregating over $3.3 billion of assets. The firm focuses its investment activities on growth companies in the consumer, business services and industrial growth sectors. With offices in Boston and San Francisco, Weston Presidio targets middle-market opportunities primarily in the United States. Assuming a public offering price of $         (the midpoint of the range set forth on the cover of this prospectus), immediately following the completion of this offering, Weston Presidio will own approximately     %, or     % if the underwriters exercise their over-allotment option in full, of the aggregate outstanding common stock of MacDermid Group, Inc.

Our Stockholder Philosophy

In addition to our long heritage of innovation and product leadership, we believe that certain principles dictate our relationship with our stockholders. Chief among these core business principles are the following:

 

   

We believe our relationship with our employees is fundamental to our ability to compete effectively. Much of our ability to compete revolves around our employees’ ability to invent new products and supply sales and service support to our customers. Approximately 50% of our employees are involved in these functions. As a result, we believe it is imperative that we continue policies that reward long tenure.

 

   

We develop new products and enter adjacent markets often involving multiyear horizons. We are committed to pursuing these opportunities even if short-term results are affected.

 

   

We focus on building intrinsic value. We place emphasis on strategic growth in targeted focus areas. We measure intrinsic value, the present value of future cash flows, on a per share basis. We believe important factors in our ability to maintain and increase intrinsic value are relatively high margins and a low cost structure.

 

   

We are dedicated to maintaining a conservative investment approach and our belief that the return of capital through stock repurchases and dividends can be the most attractive use of capital.

 

 

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We are committed to high standards of personal and corporate ethics and responsibility.

 

   

We hold a conviction that frequent, candid and reliable communications by our management are key to a successful relationship with our stockholders. We believe that, given the complex and unpredictable nature of the factors that drive demand for our products, it is not in the best interests of our stockholders for us to provide quarterly or annual “guidance” regarding future operating results.

We believe that the relationship between our company and our stockholders should be a partnership between like-minded parties, who are committed to these core principles while working toward a common goal. We hope that the individuals and entities purchasing our common stock in this offering will consider their investment in our common stock as a significant part of their long-term investment portfolio. Ideally, our stockholders will be individuals and entities that:

 

   

recognize that investing in our common stock is tantamount to acquiring a portion of our business and, accordingly, develop and maintain a comprehensive understanding of our company and the characteristics that differentiate us from our competitors; and

 

   

desire an active role in exercising their rights as stockholders, including by voting their shares of common stock at our stockholder meetings and by reaching out to our management team when questions about our company or its operations arise.

Terms Used in This Prospectus

Except where the context otherwise requires or where otherwise indicated, all references herein to (a) the “company”, “we”, “us” and “our” refer to, prior to the completion of this offering, MacDermid, Incorporated and its consolidated subsidiaries and, after the completion of this offering, MacDermid Group, Inc. and its consolidated subsidiaries (which will include MacDermid, Incorporated); (b) “Court Square” refer to the affiliates and funds of Court Square Capital Partners that, prior to the completion of this offering, hold membership interests in MacDermid Holdings, LLC and, following the completion of this offering, will own common stock of MacDermid Group, Inc.; and (c) “Weston Presidio” refer to Weston Presidio V, L.P. and its affiliates that, prior to the completion of this offering, hold membership interests in MacDermid Holdings, LLC, and, following the completion of this offering, will own common stock of MacDermid Group, Inc. References herein to “MacDermid Holdings, LLC”, “MacDermid Group, Inc.” and “MacDermid, Incorporated” refer only to each such entity and not to any of its subsidiaries.

Industry and Market Data

We obtained the industry, market and competitive position data described or referred to throughout this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties. Prismark Partners LLC is the primary source for our third-party data and forecasts relating to our Electronic Solutions business.

Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable. While we believe our internal company estimates and research are reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent source.

 

 

MacDermid®, LUX® and the MacDermid logo are our trademarks. Brand names, trademarks, service marks and trade names of other companies and organizations used in this prospectus are for informational purposes only and may be the property of their respective owners.

 

 

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THE OFFERING

 

Common stock offered by us

                shares

 

Common stock to be outstanding after this offering

                shares

 

Over-allotment option

The underwriters have an option to purchase a maximum of additional shares of common stock from us to cover over-allotments. The underwriters could exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We intend to use the net proceeds from this offering to repay, redeem or repurchase a portion of MacDermid, Incorporated’s outstanding indebtedness and to pay certain fees and expenses as set forth under “Use of Proceeds”.

 

Dividend policy

We intend to pay quarterly cash dividends in an amount equal to $         per share following completion of this offering. Whether we will do so, however, and the timing and amount of those dividends, will be subject to approval and declaration by our board of directors and will depend on a variety of factors, including the financial results, cash requirements and financial condition of the company, our ability to pay dividends under the agreement governing our senior secured credit facilities, the indenture governing our senior subordinated notes and any other applicable contracts, and other factors deemed relevant by our board of directors.

 

  Because MacDermid Group, Inc. is a holding company, its cash flow and ability to pay dividends are dependent upon the financial results and cash flows of MacDermid, Incorporated and its subsidiaries and the distribution or other payment of cash to MacDermid Group, Inc. in the form of dividends or otherwise.

 

Risk factors

Investing in our common stock involves a high degree if risk. See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed New York Stock Exchange symbol

“MRD”

Unless otherwise indicated, the number of shares of common stock that will be outstanding after this offering:

 

   

assumes the consummation of the Corporate Reorganization, which will be a condition to the consummation of this offering;

 

   

excludes approximately                 shares of our common stock that will be reserved for issuance under our compensation plans following the Corporate Reorganization;

 

   

assumes no exercise of the underwriters’ over-allotment option to purchase additional shares of our common stock; and

 

   

assumes the initial offering price will be $         per share (the midpoint of the range set forth on the cover of this prospectus).

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

MacDermid Group, Inc. was incorporated in Delaware on June 17, 2011. Prior to the completion of this offering, MacDermid Group, Inc. will have no material assets. Following the completion of this offering, MacDermid Group, Inc. will own all of the outstanding capital stock of MacDermid, Incorporated, which is the main U.S. operating entity for the MacDermid business and the direct or indirect parent entity of all the MacDermid operating companies, and the consolidated financial statements of MacDermid Group, Inc. will reflect the assets, liabilities and results of operations of MacDermid, Incorporated and its subsidiaries. Accordingly, the following table sets forth the summary consolidated financial data of MacDermid, Incorporated and its subsidiaries for the years ended December 31, 2011, 2010 and 2009 and as of December 31, 2011 and 2010, which have been derived from the audited financial statements included elsewhere in this prospectus. The following table also presents the summary consolidated financial data of MacDermid, Incorporated and its subsidiaries for the three months ended March 31, 2012 and 2011 and as of March 31, 2012, which have been derived from the unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments, including normal recurring adjustments, necessary for a fair presentation in all material respects of the information set forth therein. Results for any historical period are not necessarily indicative of results for any future period.

This summary consolidated financial data should be read in conjunction with, and is qualified by reference to, “Use of Proceeds”, “Capitalization”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus.

 

     Year ended December 31,     Three months ended
March 31,
 
     2011     2010     2009     2012     2011  
(amounts in thousands)                      (unaudited)  

Statement of Operations Data:

          

Net sales

   $ 728,773      $ 694,333      $ 594,153      $ 182,195      $ 178,521   

Cost of sales

     388,298        371,223        333,963        95,884        94,980   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     340,475        323,110        260,190        86,311        83,541   

Operating expenses:

          

Selling, technical and administrative

     185,649        179,786        156,508        45,746        45,629   

Research and development

     22,966        21,005        20,103        6,718        5,359   

Amortization

     28,578        29,694        29,868        6,655        7,362   

Restructuring(1)

     896        6,234        4,228        114        (181

Impairment charges(2)

     46,438        —          68,692        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     284,527        236,719        279,399        59,233        58,169   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     55,948        86,391        (19,209     27,078        25,372   

Other income (expense):

          

Interest income

     500        696        458        175        108   

Interest expense(3)

     (54,554     (56,196     (60,740     (13,556     (14,088

Miscellaneous income (expense)(4)

     9,412        15,106        (5,020     (4,353     (16,172
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes, non-controlling interest and accumulated payment-in-kind dividend on cumulative preferred shares

     11,306        45,997        (84,511     9,344        (4,780

Income tax (expense) benefit(3)

     (9,953     (21,723     6,427        (4,366     (1,145
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     1,353        24,274        (78,084     4,978        (5,925

(Loss) income from discontinued operations, net of tax(5)

     —          —          (4,448     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     1,353        24,274        (82,532     4,978        (5,925

Less net income attributable to the non-controlling interest

     (366     (343     (295     (91     (88
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to MacDermid, Incorporated

     987        23,931        (82,827     4,887        (6,013

Accrued payment-in-kind dividend on cumulative preferred shares

     (40,847     (37,361     (34,124     (10,788     (9,874
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) attributable to common shares

   $ (39,860   $ (13,430   $ (116,951  

$

(5,901

  $ (15,887
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     Year ended December 31,     Three months ended
March 31,
 
     2011     2010     2009         2012             2011      
(amounts in thousands, except share and per share amounts)                      (unaudited)  

Other Data:

          

EBITDA(6)(8) (unaudited)

   $ 112,239      $ 148,394      $ 19,291      $ 33,958      $ 20,675   

Adjusted EBITDA(7)(8) (unaudited)

   $ 151,723      $ 138,443      $ 102,463      $ 38,533      $ 37,165   

Net (loss) attributable to MacDermid, Incorporated per share(9)

          

Basic:

          

(Loss) from continuing operations

   $ (4.01   $ (1.35   $ (11.30   $ (0.59   $ (1.60

(Loss) from discontinued operations

   $ —        $ —        $ (0.45   $ —        $ —     

Net loss

   $ (4.01   $ (1.35   $ (11.75   $ (0.59   $ (1.60

Diluted:

          

(Loss) from continuing operations

   $ (4.01   $ (1.35   $ (11.30   $ (0.59   $ (1.60

(Loss) from discontinued operations

   $ —        $ —        $ (0.45   $ —        $ —     

Net loss

   $ (4.01   $ (1.35   $ (11.75   $ (0.59   $ (1.60

Weighted Average Shares Outstanding

          

Basic

     9,942,777        9,932,862        9,951,799        9,946,419        9,932,132   

Diluted

     9,942,777        9,932,862        9,951,799        9,946,419        9,932,132   

Pro forma net income per share(10) (unaudited)

          

Basic and diluted

   $ 0.03          $ 0.16     

Pro forma weighted average number of common shares outstanding (unaudited)

          

Basic

     31,387,359            31,387,539     

Diluted

     31,509,558            31,509,558     

 

     As of March 31, 2012  
     (unaudited)  
(amounts in thousands)       

Balance Sheet Data:

  

Cash and cash equivalents

   $ 109,311   

Total assets

   $ 1,232,981   

Current installments of long-term debt and capital lease obligations and short-term notes payable

   $ 11,024   

Long-term debt and capital lease obligations (excluding current portion)

   $ 719,412   

Total debt and capital lease obligations and short-term notes payable

   $ 730,436   

Total stockholders’ equity

   $ 252,865   

 

(1) Charges in the three months ended March 31, 2012 and 2011 and the years ended December 31, 2011, 2010 and 2009 relate to amounts recorded in connection with our operational restructuring initiatives. For a detailed description of these operational restructuring initiatives, see the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Note 20 to our audited financial statements and Note 14 to our unaudited financial statements included in this prospectus.
(2) In 2011, we recorded impairment charges of $46.4 million related to a write down of our customer list intangible assets to their estimated fair value as determined in accordance with ASC 360 “Property, Plant and Equipment” (“ASC 360”). In 2009, we recorded (i) impairment charges of $41.2 million related to a write down of our goodwill balance to its estimated fair value as determined in accordance with ASC 350 “Intangibles—Goodwill and Other” (“ASC 350”), (ii) an impairment charge of $26.1 million related to a write down of an indefinite-lived purchased intangible asset to its estimated fair value as determined in accordance with ASC 350, (iii) an impairment charge of $0.2 million related to a write down of a finite-lived purchased intangible asset to its estimated fair value as determined in accordance with ASC 360 and (iv) an impairment charge of $1.2 million related to a write down of equipment to its estimated fair value as determined in accordance with ASC 360. For a detailed description of these impairment charges, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 to our audited financial statements included in this prospectus.
(3) Primarily reflects interest expense associated with our long-term debt for periods after the acquisition of MacDermid, Incorporated by MDI Holdings, LLC in 2007. Giving pro forma effect to (i) the sale by us of                  shares of our common stock in this offering at an assumed initial offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus) after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the application of the net proceeds therefrom as described in “Use of Proceeds”, and assuming such proceeds had been so applied on January 1, 2011, interest expense for the year ended December 31, 2011 and the three months ended March 31, 2012 would have been $         million and $         million, respectively, and income tax (expense) benefit for the year ended December 31, 2011 and the three months ended March 31, 2012 would have been $         million and $         million, respectively. See “Use of Proceeds”.
(4) Represents remeasurement (gain) loss on foreign denominated debt as a result of changes in foreign exchange rates. For a detailed description of these remeasurement gains/losses, see the discussion of our miscellaneous (expense) income in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Note 17 to our audited financial statements and Note 13 to our unaudited financial statements included in this prospectus.
(5) Reflects loss (gain) from discontinued operations related to the sale of our Offset Printing Blankets business (“Offset”) in 2008. All operating results exclude amounts associated with discontinued operations.

 

 

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(6) EBITDA represents net (loss) income attributable to MacDermid, Incorporated before interest, taxes, depreciation and amortization. EBITDA is a non-U.S. GAAP measure. We present EBITDA because it is used by management to evaluate operating performance. We consider EBITDA an important supplemental measure of our performance because the calculation adjusts for items that we believe are not indicative of our core operating performance. Our management uses EBITDA to evaluate the operating performance of our business, to aid in period-to-period comparability, for planning and forecasting purposes and to measure results against forecasts. We believe EBITDA is also useful to investors because it is a measure frequently used by securities analysts, investors and others in the evaluation of companies.

We also use EBITDA because the 9.5% senior subordinated notes due 2017 of MacDermid, Incorporated (the “Senior Subordinated Notes”) and MacDermid, Incorporated’s senior secured credit facilities (the “Credit Facilities”) rely on EBITDA (with additional adjustments) to measure our ability to, among other things, incur additional indebtedness and to make payments, including dividends, that are subject to restrictions under our debt agreements.

EBITDA has limitations as an analytical tool, and it does not represent, and should not be considered an alternative to, net (loss) income or operating (loss) earnings as those terms are defined by U.S. GAAP. Some of these limitations are:

 

   

EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures;

 

   

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements.

We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. See the consolidated statements of cash flows included in the consolidated financial statements of MacDermid, Incorporated included elsewhere in this prospectus. Please see footnote (8) below for a reconciliation of net income (loss) attributable to MacDermid, Incorporated to EBITDA.

 

(7) We present Adjusted EBITDA as a further supplemental measure of our performance. We use Adjusted EBITDA to compare our operating performance over various reporting periods because we believe it provides the most meaningful view of our ongoing operations since it removes from our operating results the impact of items that do not reflect our core operating performance. We believe Adjusted EBITDA is helpful to investors and other interested parties because it provides such persons with the same information that our management uses internally for purposes of assessing our operating performance.

We prepare Adjusted EBITDA by adjusting EBITDA to eliminate the impact of a number of items. We explain how each adjustment is derived in the subsequent footnote. Potential investors are encouraged to evaluate each adjustment for supplemental analysis. As an analytical tool, Adjusted EBITDA is subject to all the limitations applicable to EBITDA. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. In evaluating Adjusted EBITDA, you should also be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual items.

 

(8) We reconcile net income (loss) attributable to MacDermid, Incorporated to EBITDA and Adjusted EBITDA as follows:

 

     Year ended December 31,      Three months ended
March 31,
 
     2011      2010      2009          2012              2011      
(amounts in thousands)                         (unaudited)  

Net income (loss) attributable to MacDermid, Incorporated

   $ 987       $ 23,931       $ (82,827    $ 4,887       $ (6,013

Provision (benefit) for income taxes

     9,953         21,723         (6,427      4,366         1,145   

Interest expense

     54,554         56,196         60,740         13,556         14,088   

Depreciation expense

     18,167         16,850         17,937         4,494         4,093   

Amortization expense

     28,578         29,694         29,868         6,655         7,362   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA (unaudited)

   $ 112,239       $ 148,394       $ 19,291       $ 33,958       $ 20,675   

Remeasurement adjustment on foreign denominated debt(a)

   $ (9,156    $ (17,395    $ 5,067       $ 4,316       $ 16,448   

Equity compensation expense(b)

     727         389         337         98         98   

Restructuring expense(c)

     896         6,234         4,228         114         (181

Impairment charges(d)

     46,438         —           68,692         —           —     

Inventory write-down(e)

     —           423         —           —           —     

(Loss) income from discontinued operations, net of tax(f)

     —           —           4,448         —           —     

Sponsor management fees(g)

     579         398         400         47         125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA (unaudited)

   $ 151,723       $ 138,443       $ 102,463       $ 38,533       $ 37,165   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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  (a) Represents remeasurement (gain) loss on foreign denominated debt as a result of changes in foreign exchange rates. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Note 17 to our audited financial statements and Note 13 to our unaudited financial statements included in this prospectus for an additional discussion of these gains/losses.
  (b) Reflects non-cash stock compensation expense per ASC 718 “Compensation—Stock Compensation”.
  (c) Reflects (i) for the three months ended March 31, 2012, charges related to headcount reductions in our Industrial segment and revisions to accruals related to restructuring, (ii) for the three months ended March 31, 2011, the reversal of charges related to accrued benefits no longer due to employees in our Industrial Europe operations and the reversal of estimated legal costs that were no longer required at our corporate business unit, (iii) in the year ended December 31, 2011, charges related to headcount reductions in our Industrial segment, the reversal of charges related to accrued benefits no longer due to employees in our Industrial Europe operations and the reversal of estimated legal costs that were no longer required at our corporate business unit, (iv) in the year ended December 31, 2010, charges related to headcount reductions in our Industrial segment, charges for lease termination cost and long-term asset write-down expense in our Industrial Europe operations and (v) in the year ended December 31, 2009, charges related to headcount reductions in our Industrial segment and charges related to the moving of certain manufacturing facilities. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Note 20 to our audited financial statements and Note 14 to our unaudited financial statements included in this prospectus for an additional discussion of such charges.
  (d) Reflects impairment charges of goodwill and intangible assets. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 to our audited financial statements included in this prospectus for an additional discussion of such charges.
  (e) Reflects inventory that was written off due to our exit from the dry film business in the first quarter of 2010. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for an additional discussion of such costs.
  (f) Reflects loss (gain) from discontinued operations related to the sale of Offset in 2008 and the sale of our ColorSpan printing business in 2007.
  (g) Reflects management fees paid to Court Square and Weston Presidio pursuant to certain advisory agreements. We will pay fees, as described in “Use of Proceeds”, to Court Square and Weston Presidio in connection with the termination of the advisory agreements and the consummation of this offering; however, following the consummation of this offering, we will no longer pay management fees to Court Square or Weston Presidio.
  (9) The net loss per share attributable to MacDermid, Incorporated does not give effect to the Exchange, the effect of which is to reflect (i) the effective conversion of MacDermid, Incorporated’s cumulative preferred stock, including the accumulated payment in kind dividend with respect to such preferred stock at the time of the offering, into common stock of MacDermid Group, Inc. and (ii) the effective payment of a stock preference, in the form of MacDermid Group, Inc. common stock, in respect of MacDermid, Incorporated’s common stock, in each case, in accordance with our applicable governing documents. For further information related to our earnings per share calculations, please refer to Notes 2 and 23 to our audited financial statements and Notes 2 and 17 to our unaudited financial statements included in this prospectus.
  (10) The pro forma net income per share gives effect to the Exchange, the effect of which is to reflect (i) the effective conversion of MacDermid, Incorporated’s cumulative preferred stock, including the accumulated payment in kind dividend with respect to such preferred stock at the time of the offering, into common stock of MacDermid Group, Inc. and (ii) the effective payment of a stock preference, in the form of MacDermid Group, Inc. common stock, in respect of MacDermid, Incorporated’s common stock, in each case, in accordance with our applicable governing documents. For further information related to our pro forma net income per share calculations, please refer to Notes 2 and 23 to our audited financial statements and Notes 2 and 17 to our unaudited financial statements included in this prospectus.
 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the financial statements and related notes included elsewhere in this prospectus, before making an investment decision. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business and Industry

Conditions in the global economy may directly adversely affect our net sales, gross profit and financial condition and may result in delays or reductions in our spending that could have a material adverse effect on our results of operations, prospects and stock price.

Our products are sold in industries that are sensitive to changes in general economic conditions, including the construction, automotive and electronic manufacturing industries. Accordingly, our net sales, gross profit and financial condition depend significantly on general economic conditions and the demand for our specialty chemical products and services in the markets in which we compete. Delays or reductions in our customers’ chemical products purchasing that result from economic downturns would reduce demand for our products and services and could, consequently, have a material adverse effect on our results of operations, prospects and stock price.

During the recent global economic downturn, decreased global automotive demand and production cuts in the automotive markets, as well as reduced demand in the industrial and commercial packaging market, negatively impacted our results of operations, leading to decreased net sales and declines in gross profit margins and growth rates as well as lower factory utilization compared to peak levels. In addition, our customers’ financial difficulties during the most recent recession resulted in additions to reserves in our receivables portfolio. Although the effects of the recent global downturn on our business appear to be easing, we cannot assure you that this trend will continue. If the global recession continues or worsens, or if the global economy experiences future downturns, our net sales, gross profit and financial condition could be materially adversely affected. Uncertainty about future economic conditions also makes it difficult for us to forecast operating results and, as a result, to make decisions about potential investments and to plan effectively for future periods.

Our net sales and gross profit have varied depending on our product, customer and geographic mix for any given period, which makes it difficult to forecast future operating results.

Our net sales and gross profit vary among our products and services, and customer groups and markets, and therefore may be different in future periods from historic or current periods. Overall gross profit margins in any given period are dependent in large part on the product, customer and geographic mix reflected in that period’s net sales. Market trends, competitive pressures, commoditization of products, increased component or shipping costs, regulatory conditions and other factors may result in reductions in revenue or pressure on the gross profit margins of certain segments in a given period. Given the nature of our business, the impact of these factors on our business and results of operations will likely vary from period to period and from product to product. For example, a change in market trends that results in a decline in demand for products or businesses that are then high margin will have a disproportionately greater adverse effect on our profits for that period. The varying nature of our product, customer and geographic mix between periods therefore has materially impacted our net sales and gross profit between periods during certain recessionary times, such as in 2001 and 2007, and may lead to difficulties in measuring the potential impact of market, regulatory and other factors on our business. As a result, we may be challenged in our ability to forecast our future operating results. Further, business acquisitions and divestitures can compound the difficulty in making comparisons between prior, current and future periods because acquisitions and divestitures, which are not ordinary course events, also affect our gross profit margins and our overall operating results.

 

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Our future business initiatives may require capital expenditures that exceed management estimates, which could adversely affect our business, financial condition and results of operations.

Our “asset-lite, high-touch” business model is focused on limiting our investments in fixed assets and capital expenditures. Although we are dedicated to our business model, the markets for our proprietary technology and the needs of our customers are frequently changing, which makes it difficult for us to forecast the need for increases in capital expenditures and assets. In the future, we may be required to expend significantly greater capital, and maintain a greater number of fixed assets, to meet our customers’ needs and capitalize on new opportunities for growth in our businesses. However, we cannot assure you that any decision to increase spending and diverge from our business model will be successful. Further, if increases in spending on capital expenditures or costs incurred as a result of a more capital-intensive asset base are not offset by increases in net sales, our business, financial condition and results of operations could be materially and adversely affected.

We face intense competition, and our failure to compete successfully may have an adverse effect on our net sales, gross profit and financial condition.

Our industry is highly competitive, and most of our product lines compete against product lines from at least two competitors. We encounter competition from numerous and varied competitors in all areas of our business; however, our most significant competitors are Atotech (a division of Total), DuPont, Enthone (a division of Cookson Group plc) and Rohm and Haas (a division of Dow Chemical). Further, in our Industrial segment, our products compete not only with similar products manufactured by our competitors, but also against a variety of chemical and non-chemical alternatives provided by our competitors. Industry consolidation may result in larger, more homogeneous and potentially stronger competitors in the markets in which we compete.

We compete primarily on the basis of quality, technology, performance, reliability, brand, reputation, range of products and services, and service and support. We expect our competitors to continue to develop and introduce new products and to enhance their existing products, which could cause a decline in market acceptance of our products. Our competitors may also improve their manufacturing processes or expand their manufacturing capacity, which could make it more difficult or expensive for us to compete successfully. In addition, our competitors could enter into exclusive arrangements with our existing or potential customers or suppliers, which could limit our ability, or make it significantly more expensive, to acquire necessary raw materials or to generate sales.

Some of our competitors may have greater financial, technical and marketing resources than we do and may be able to devote greater resources to promoting and selling certain products. Unlike many of our competitors who specialize in a single or limited number of product lines, we have a portfolio of businesses and must allocate resources across those businesses. As a result, we may invest less in certain of our businesses than our competitors in those businesses invest, and our competitors may therefore have greater financial, technical and marketing resources available to them with respect to those businesses.

Some of our competitors may also incur fewer expenses than we do in creating, marketing and selling certain products and may face fewer risks in introducing new products to the market. This circumstance results from the nature of our business model, which is based on providing innovative and high quality products and therefore may require that we 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 net sales, gross profit and our prospects. Further, because many of our competitors are small divisions of large, international businesses, these competitors may have access to greater resources then we do and may therefore be better able to withstand a change in conditions within our industry and throughout the economy as a whole.

If we do not compete successfully by developing and deploying new cost effective products, processes and technologies on a timely basis and by adapting to changes in our industry and the global economy, our net sales, gross profit and financial condition could be adversely affected.

 

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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.

Currently, we operate, or others operate on our behalf, facilities in 23 countries, in addition to our operations in the United States. We expect sales from international markets to represent an increasing portion of our net sales. Accordingly, our business is subject to risks related to the different legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in our international operations include the following:

 

   

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

 

   

foreign customers may have increased credit risk and different financial conditions, which may necessitate longer payment cycles or result in increased bad debt write-offs or additions to reserves related to our foreign receivables;

 

   

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;

 

   

foreign exchange controls may delay, restrict or prohibit the repatriation of funds, and any restrictions on the repatriation of funds may result in adverse tax consequences and tax inefficiencies;

 

   

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

 

   

there may be delays and interruptions in transportation of our products;

 

   

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 markets where payment for our products and services is made in currencies other than the U.S. Dollar;

 

   

general economic conditions in the countries in which we operate, including fluctuations in gross domestic product, interest rates, market demand, labor costs and other factors beyond our control, could have an adverse effect on our net sales in those countries;

 

   

our results of operations in a particular country could be affected by political or economic instability on a country-specific or global level from various causes, including the possibility of hyperinflationary conditions, natural disasters and terrorist activities and the response to such conditions and events;

 

   

we may experience difficulties in staffing and managing multi-national operations, including the possibility of labor disputes abroad;

 

   

unexpected adverse changes in foreign laws or regulatory requirements may occur, including environmental, health and safety laws and laws and regulations affecting export and import duties and quotas;

 

   

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

 

   

we may be subject to the risks of divergent business expectations resulting from cultural incompatibility; 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 different legal, regulatory, economic, social and political conditions. We cannot assure you that we will succeed in developing and implementing policies and strategies which will be effective in each location where we do business. Furthermore, any of the foregoing factors or any combination thereof could have a material adverse effect on our business, financial condition and results of operations.

 

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We are exposed to fluctuations in foreign exchange rates, which may adversely affect our operating results and may significantly affect the comparability of our results between financial periods.

The results of operations and financial condition of each foreign operating subsidiary of MacDermid, Incorporated are reported in the relevant local currency and then translated to U.S. Dollars for inclusion in our consolidated financial statements. Exchange rates between these currencies and the U.S. Dollar in recent years have fluctuated significantly and are likely to continue to do so in the future. For the year ended December 31, 2011, approximately 69% of our net sales were denominated in currencies other than the U.S. Dollar and, for the three months ended March 31, 2012, approximately 67% of our net sales were also so denominated. These foreign currencies included predominantly the Euro, British Pound Sterling, Hong Kong Dollar, Chinese Yuan, Japanese Yen and Brazilian Real. A depreciation of these currencies against the U.S. Dollar will decrease the U.S. Dollar equivalent of the amounts derived from operations reported in these foreign currencies and an appreciation of these currencies will result in a corresponding increase in such amounts. From time to time we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. For example, during 2009, 2010, 2011 and 2012, one of our subsidiaries in the United Kingdom entered into agreements with a financial institution to hedge against the risk of a stronger British Pound Sterling. We cannot, however, assure you that this arrangement or any other exchange rate hedging arrangements we may enter into from time to time will be effective. If our hedging activities are not effective or if additional hedging transactions are not available, changes in currency exchange rates may have a more significant impact on our results of operations.

Because we do not manage our foreign currency exposure in a manner that would eliminate the effects of changes in foreign exchange rates on our net sales, cash flows and fair values of assets and liabilities, our financial performance can 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, Hong Kong Dollar or British Pound Sterling relative to the U.S. Dollar could also have an adverse effect on our ability to meet interest and principal payments on any Euro and Japanese Yen, denominated debt outstanding, including borrowings in Euros under our Credit Facilities, and U.S. Dollar-denominated debt, including the Senior Subordinated Notes and U.S. Dollar-based borrowings under the Credit Facilities. In addition, currency fluctuations may affect the comparability of our results of operations between financial periods.

Besides 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 records revenues. Given the volatility of exchange rates, we cannot assure you that we will be able to effectively manage our currency transaction 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.

Changes in our customers’ products and processes 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 find alternative materials or processes and therefore no longer require our products.

We generally do not have long-term contracts with the customers in our Industrial segment, and the loss of customers in that segment could adversely affect our overall sales and profitability.

With some exceptions, our relationships with the customers in our Industrial segment are based primarily upon individual sales orders. As such, our customers in the businesses that comprise our Industrial segment could cease buying our products from us at any time, for any reason, with little or no recourse. If multiple customers within those businesses elected not to purchase products from us, our business prospects, financial condition and results of operations could be adversely affected.

 

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Our net sales, gross profit and financial condition could be reduced by decreases in the average selling prices of products in the specialty chemicals industry.

Decreases in the average selling prices of our products may have a material adverse effect on our net sales, gross profit and financial condition. Our ability to maintain or increase our gross profit margin 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. We have also elected to discontinue selling certain products as a result of sustained material decreases in the selling price of our products and our inability to effectively offset such decrease through shifts in our operations. If we are unable to respond effectively to decreases in the average selling prices of our products in the future, our net sales, gross profit and financial condition could be materially and adversely affected. Further, while we may elect to discontinue businesses that are significantly affected by such price decreases, we cannot assure you that any such discontinuation will mitigate the related declines in our financial condition.

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

We use a variety of specialty and commodity chemicals in our manufacturing processes. Our manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. These raw materials are generally available from numerous independent suppliers, and 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, the financial stability of our suppliers, suppliers’ allocations to other purchasers, interruptions in production by suppliers, new laws or regulations, changes in exchange rates and worldwide price levels. Further, we cannot assure you that, as our supply contracts expire, we will be able to renew them or, or if they are terminated, that we will be able to obtain replacement supply agreements on terms favorable to us. Our results of operations could be adversely affected if we are unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increase 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, and there have been historical periods of rapid and significant upward and downward movements in the prices of these feedstocks. While we selectively pass on changes in the prices of raw materials to our customers from time to time, there has historically been a time delay between increased raw material prices and our ability to increase the prices of our products. Further, we cannot always pass on these price increases due to competitive pricing pressure. Any limitation on, or delay in, our ability to pass on any price increases could have an adverse effect on our results of operations.

We may incur material costs relating to environmental and health and safety requirements or liabilities.

As a manufacturer and distributor 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, the cleanup of contaminated properties and occupational safety and health matters. We could incur significant costs, including cleanup costs, fines and sanctions and third-party claims for property or natural resource damage or personal injuries as a result of past or future violations of, or liabilities under, such laws and regulations.

Liability under some environmental laws relating to contaminated sites can be imposed retroactively, regardless of fault or the legality of the activities that gave rise to the contamination. Some of our manufacturing facilities have an extended history of chemical manufacturing operations or other industrial activities, and contaminants have been detected at some of our sites, and at a small number of offsite disposal locations. Although we do not anticipate that we will be materially affected by environmental remediation costs, or any

 

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related claims, at any such sites, the ultimate costs are difficult to accurately predict and the discovery of additional contaminants or the imposition of additional cleanup obligations at these or other sites could result in significant additional costs.

In addition, we have incurred, and will continue to incur, significant costs and capital expenditures in complying with environmental, health and safety laws and regulations. Future events, such as changes in or more rigorous enforcement of environmental laws and regulations, could require us to make additional expenditures, modify or curtail our operations or install pollution control equipment.

Global climate change legislation could negatively impact our results of operations or limit our ability to operate our businesses.

We operate production facilities in several countries. In many of the countries in which we operate, legislation has been passed, or proposed legislation is being considered, to limit greenhouse gases through various means, including emissions credits. To date, the requirements of such legislation have not had a material adverse effect on our results of operations. New or additional greenhouse gas regulation in the jurisdictions in which we operate, however, could negatively impact our future results from operations through increased costs of production. We may be unable to pass such increased costs onto our customers, which may decrease our gross profit and results of operations. In addition, the potential impacts of climate change regulation on our customers is highly uncertain and may adversely affect our business.

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.

Our substantial indebtedness may adversely affect our cash flow and our ability to operate our business and fulfill our obligations under our indebtedness.

As of March 31, 2012, we had $350.0 million of Senior Subordinated Notes outstanding, $220.4 million of indebtedness outstanding under our $360.0 million tranche B term loan credit facility denominated in U.S. Dollars (the “Tranche B Facility”), $151.0 million of indebtedness outstanding under our $250.0 million tranche C term loan credit facility denominated in Euros (the “Tranche C Facility” and, together with the Tranche B Facility, the “Term Loan Facilities”) and $8.0 million of Japanese senior secured bank debt. We intend to use $         million and $         million of the net proceeds from this offering to prepay indebtedness outstanding under the Term Loan Facilities and to redeem $         million aggregate principal amount of outstanding Senior Subordinated Notes, respectively. Assuming that the amount of net proceeds that we receive from this offering is $         and after giving effect to our intended use of proceeds from this offering, as of March 31, 2012, we would have had approximately $         million of total indebtedness outstanding, including $         million of secured indebtedness outstanding under the Tranche B Facility and Tranche C Facility and $         million of outstanding Senior Subordinated Notes.

Our substantial 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, would result in higher interest expense;

 

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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;

 

   

limit our ability to make strategic acquisitions, introduce new technologies or exploit business opportunities; and

 

   

place us at a competitive disadvantage compared to our competitors that have less indebtedness.

If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be able to take any such actions on a timely basis, on terms satisfactory to us or at all. We are not dependent on the proceeds of this offering to meet any obligations under our indebtedness.

In addition, the credit agreement governing the Credit Facilities and the indenture governing the Senior Subordinated Notes contain covenants that restrict our operations. These covenants restrict, among other things, our ability to incur additional debt, grant liens, pay cash dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. These restrictions could limit our ability to plan for or react to market conditions, meet extraordinary capital needs or otherwise take actions that we believe are in the best interest of the company. Further, a failure by us to comply with any of these covenants and restrictions could result in an event of default that, if not waived or cured, could result in the acceleration of all or a substantial portion of the outstanding indebtedness thereunder.

Our ability to borrow under our revolving credit facility depends on our level of indebtedness and our financial performance, and any deterioration in our results of operations or increase in our indebtedness could therefore have a material adverse effect on our liquidity.

A deterioration in our results of operations or an increase in our indebtedness may limit our access to borrowings under the revolving credit facility that is part of our Credit Facilities (the “Revolving Credit Facility”). Under the terms of the credit agreement governing the Credit Facilities, we are subject to certain financial maintenance covenants if our borrowings under the Revolving Credit Facility exceed $10.0 million for ten or more days in any fiscal quarter.

Our ability to comply with these financial maintenance covenants depends, in part, on our financial performance and may be affected by events beyond our control. Any material deviations from our operating forecasts could require us to seek waivers or amendments of these covenants, alternative sources of financing or reductions in expenditures. We may not be able to obtain such waivers, amendments or alternative financings, or if we obtain them, they may not be on terms favorable to us.

Despite the restrictions set forth in the agreements governing our existing indebtedness, we may be able to incur substantial additional indebtedness in the future. Increases in the aggregate amount of our indebtedness may also result in our being unable to comply with the financial maintenance covenants, and our inability to borrow under our Revolving Credit Facility as a result of such non-compliance could have an adverse effect on our cash flow and liquidity.

Our business and results of operations could be adversely affected if we fail to protect our intellectual property rights.

Our success depends to a significant degree upon our ability to protect and preserve our intellectual property rights and the rights to our proprietary processes, methods, compounds and other technology. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or in our having to pay other companies for infringing on their intellectual property rights. We rely on confidentiality agreements and

 

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patent, trade secret, trademark and copyright law as well as judicial enforcement of all of the foregoing to protect such technologies and intellectual property rights. In addition, some of our technologies are not covered by any patent or patent application.

We may be unable to prevent third parties from using our intellectual property and other proprietary information without our authorization or from independently developing intellectual property and other proprietary information that is similar to ours, particularly in countries where the laws do not protect our proprietary rights to the same degree as in the United States. The use of our intellectual property and other proprietary information by others could reduce or eliminate any competitive advantages we have developed, cause us to lose sales or otherwise harm our business. If it becomes necessary for us to litigate to protect these rights, any proceedings could be burdensome and costly, and we may not prevail.

Our patents also may not provide us with any competitive advantage and may be challenged by third parties. Further, our competitors may attempt to design around our patents. Our competitors may also already hold or have applied for patents in the United States or abroad that, if enforced or issued, could prevail over our patent rights or otherwise limit our ability to manufacture or sell one or more of our products in the United States or abroad. With respect to our pending patent applications, we may not be successful in securing patents for these claims. Our failure to secure these patents may limit our ability to protect inventions that these applications were intended to cover. In addition, the expiration of a patent can result in increased competition with consequent erosion of profit margins.

Competitors or other parties may, from time to time, assert issued patents or other intellectual property rights against us. If we are legally determined to infringe or violate the intellectual property rights of another party, we may have to pay damages, stop the infringing use, or attempt to obtain a license agreement with the owner of such intellectual property. Further, even if we are successful in defending our rights, such litigation could be burdensome and costly.

In some cases, we 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, our confidentiality agreements could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. In addition, adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets or manufacturing expertise. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition.

In addition, we rely on both registered and unregistered trademarks to protect our name and brands. Failure by us to adequately maintain the quality of our products and services associated with our trademarks or any loss to the distinctiveness of our trademarks may cause us to lose certain trademark protection, which could result in the loss of goodwill and brand recognition in relation to our name and products. In addition, successful third-party challenges to the use of any of our trademarks may require us to rebrand our business or certain products or services associated therewith.

The failure of our patents, applicable intellectual property law or our confidentiality agreements to protect our intellectual property and other proprietary information, including our processes, apparatuses, technology, trade secrets, tradenames and proprietary manufacturing expertise, methods and compounds, could have a material adverse effect on our competitive advantages and could have a material adverse effect on our business, results of operations and stock price.

 

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We may experience claims that our products infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

We continually seek to improve our business processes and develop new products and applications. Many of our competitors have a substantial amount of intellectual property that we must continually monitor to avoid infringement. Although it is our policy and intention not to infringe third-party intellectual property, we cannot guarantee that we will not experience claims that our processes and products infringe issued patents (whether present or future) or other intellectual property rights belonging to others. For example, we are currently a defendant in a patent infringement claim, which has been vigorously opposed by us, relating to technology that is important to us, although we do not expect this claim to have a material adverse effect on our business, financial conditions, results of operations or reputation. From time to time, we oppose patent applications that we consider overbroad or otherwise invalid in order to maintain the ability to operate freely in our various business lines without the risk of being sued for patent infringement. If, however, patents are subsequently issued on any such applications by other parties, or if patents belonging to others already exist that cover our products, processes or technologies, we could experience claims for infringement or have to take other remedial or curative actions to continue our manufacturing and sales activities with respect to one or more products. Such actions could include payment of damages, stopping the use, obtaining licenses from these parties or substantially re-engineering our products or processes in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully. Moreover, if we are sued for infringement and lose, we could be required to pay substantial damages or be enjoined from using or selling the infringing products or technology. Further, intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert our management’s attention from operating our business.

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

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

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 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 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 financial condition or results of operations.

 

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Chemical manufacturing is inherently hazardous and could result in accidents that disrupt our operations or expose us to significant losses or liabilities.

The hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes are inherent in our operations. These hazards could lead to an interruption or suspension of operations and have an adverse effect on the productivity and profitability of a particular manufacturing facility or on our business as a whole. These potential risks include:

 

   

pipeline and storage tank leaks and ruptures;

 

   

explosions and fires;

 

   

inclement weather and natural disasters;

 

   

terrorist attacks;

 

   

mechanical failure;

 

   

unscheduled downtime;

 

   

labor difficulties;

 

   

transportation interruptions; and

 

   

chemical spills and other discharges or releases of toxic or hazardous substances or gases.

These hazards may result in personal injury and loss of life, damage to property and contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminal fines, penalties and other sanctions, cleanup costs and claims by governmental entities or third parties. We are dependent on the continued operation of our production facilities, and the loss or shutdown of operations over an extended period at our Morristown, Tennessee facility, which is our only Printing segment sheet production facility, or any of our other major operating facilities could have a material adverse effect on our financial condition and results of operations. We are not fully insured against all potential hazards incidental to our business.

Our Offshore Solutions business is subject to the hazards inherent in the offshore oil production and drilling industry, and we may incur substantial liabilities or losses as a result of these hazards.

In our Offshore Solutions business, we produce water-based hydraulic control fluids for major oil companies and drilling contractors to be used for potentially hazardous offshore deep water production and drilling applications. Offshore deep water oil production and drilling are subject to hazards that include blowouts, explosions, fires, collisions, capsizing, sinking and damage or loss to pipeline, subsea or other facilities from severe weather conditions. These hazards could result in personal injury and loss of life, severe damage to or destruction of property and equipment, pollution or environmental damage and suspension of operations. A catastrophic occurrence at a location where our products are used may expose us to substantial liability for personal injury, wrongful death, product liability or commercial claims. To the extent available, we maintain insurance coverage that we believe is customary in our industry. Such insurance does not, however, provide coverage for all liabilities, and we cannot assure you that our insurance coverage will be adequate to cover claims that may arise or that we will be able to maintain adequate insurance at rates we consider reasonable. The occurrence of a significant offshore deep water oil production or drilling event that results in liability to us that is not fully insured could materially and adversely affect our results of operations and financial condition.

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, our business, our products and our customers’ products are subject to regulation by many U.S. and non-U.S. supranational, national, federal, state and local governmental authorities. These regulations include

 

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customs and international trade laws, export control, antitrust laws, environmental requirements and zoning and occupancy laws that regulate manufacturers generally or govern the importation, promotion and sale of our products, the operation of our factories and warehouse facilities and our relationship with our customers, suppliers and competitors. Our products and manufacturing processes are also subject to ongoing reviews by certain governmental authorities.

New laws and regulations may be introduced, or existing laws and regulations may be changed or may become subject to new interpretations, that could result in additional compliance costs, seizures, confiscations, recalls, monetary fines or delays that could affect us or our customers. These effects could prevent or inhibit the development, distribution and sale of our products and may harm our reputation. In addition, changes in federal and state minimum wage laws and other laws relating to employee benefits could cause us to incur additional wage and benefit costs, which could negatively impact our profitability. Further, if any of the regulations to which we are subject were violated by our management, employees, suppliers, buying agents or trading companies, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our products, hurt our business and negatively impact our results of operations and stock price.

Further, in some circumstances, before we may sell some of our products, governmental authorities must approve these products, our manufacturing processes and facilities. 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 approval process can be costly, time consuming and subject to unanticipated and significant delays. We cannot assure you 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.

We are exposed to intangible asset risk.

We have recorded intangible assets, including goodwill in connection with business acquisitions. Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets of an acquired business. We do not amortize goodwill and other intangible assets that have indefinite useful lives; rather, goodwill and other intangible assets with indefinite useful lives are tested for impairment periodically. Indefinite-lived intangible assets are reviewed for potential impairment on an annual basis by comparing the estimated fair value of the indefinite-lived intangible assets to their carrying value. Goodwill is tested for impairment at the reporting unit level annually, or when events or changes in circumstances indicate that goodwill might be impaired. Our annual test for goodwill impairment is performed as of April 1st of each year.

As a result of our annual and other periodic evaluations, we may determine that our intangible asset values need to be written down to their fair values. For example, during 2011, we recorded impairment charges of $46.4 million related to the customer list intangible assets in our Industrial Asia operations. During 2009, we recorded an impairment charge of $41.2 million related to our goodwill balance. We also recorded impairment charges in 2009 of $26.1 million related to a corporate tradename, $1.2 million in our Printing segment to write down the value of certain equipment and $0.2 million for a customer list intangible asset in our Industrial Europe operations related to a strategic business decision to exit a certain market. If, as a result of our annual and other periodic evaluations, we determine that our intangible asset values need to be written down to their fair values, such write-downs could result in material charges that could be adverse to our operating results and financial position.

Our business may be adversely affected if we lose the services of key personnel or if we are unable to attract and retain additional key personnel.

Our business involves complex operations and therefore demands a management team and employee workforce that is knowledgeable and expert in many areas necessary for our operations. For example, Daniel H. Leever, our chairman and chief executive officer, joined the MacDermid business in 1982. In 1990, he

 

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was appointed president and chief executive officer and, in 1998, he became chairman of our board of directors (the “Board”). As a result of his extensive experience with our company and his high level of familiarity with our business, systems and processes, the loss of his service would cause disruptions in our business. Further, the process of attracting and retaining a suitable replacement for Mr. Leever or for other key personnel whose services we may lose would result in transition costs and would divert the attention of other members of our senior management from our existing operations. We do not maintain key person insurance on Mr. Leever.

Our relationship with our employees could deteriorate, and certain key employees could leave the company, which could adversely affect our business and our results of operations.

As a company focused on manufacturing and highly technical customer service, we rely on our ability to attract and retain skilled employees, including our specialized research and development and sales and service personnel, to maintain our efficient production processes, to drive innovation in our product offerings and to maintain our deep customer relationships. As of March 31, 2012, we employed approximately 2,100 full-time employees, approximately 1,000 of whom were members of our research and development and sales and service teams. The departure of a significant number of our highly skilled employees or of one or more employees who hold key regional management positions could have an adverse impact on our operations, including as a result of customers choosing to follow a regional manager to one of our competitors. Further, although we have historically maintained a good relationship with our employees, our U.S. employees could unionize or any of our employees could engage in a strike, work stoppage or other slowdown that would adversely affect our operations and could result in higher labor costs, which could adversely affect our business and results of operations.

In addition, many of our full-time employees are employed outside the United States. In certain jurisdictions where we operate, labor and employment laws are relatively stringent and, in many cases, grant significant job protection to certain employees, including rights on termination of employment. In addition, in certain countries where we operate, our employees are members of unions or are represented by a works council as required by law. We are often required to consult and seek the consent or advice of these unions and/or works councils. These laws, coupled with the requirement to consult with the relevant unions or works councils, could adversely affect our flexibility in managing costs and responding to market changes and could limit our ability to access the skilled employees on which our business depends.

Business disruptions could seriously harm our net sales and increase our costs and expenses.

Our worldwide operations could be subject to extraordinary events, including natural disasters, political disruptions, terrorist attacks, acts of war and other business disruptions, which could seriously harm our net sales 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 in the future experience, major power shortages and blackouts, significant floods and strong tornadoes and other storms. These blackouts, floods and storms could cause disruptions to our operations or the operations of our suppliers, distributors, resellers or customers. Similar losses and interruptions could also be caused by earthquakes, telecommunications failures, water shortages, tsunamis, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters for which we are predominantly self-insured.

Our productivity initiatives, including the operational restructuring transactions that we consummated during the recent global economic downturn, may not prove beneficial to us.

We have undertaken and may continue to undertake productivity initiatives, including organizational restructurings, to improve performance and generate cost savings. For example, as a result of the recent downturn in global economic conditions, beginning in 2008, we began executing a series of operational restructuring initiatives that streamlined our organizational structure. These actions have reduced our workforce in our manufacturing, research and development, selling and technical and general and administrative functions. As of March 31, 2012, with the exception of finalizing certain operational restructuring programs in our Industrial Europe operations, we had completed the majority of the operational restructuring actions we have planned. However, we cannot assure you that the assumptions underlying our decisions as to which reductions and

 

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eliminations to make as part of these operational restructuring initiatives will prove to be correct and, accordingly, we may determine that we have reduced or eliminated resources that are necessary to, or desirable for, our business. Any reduction or elimination of resources made in error could adversely affect our ability to operate or grow our business and may negatively impact our results of operations.

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

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. For example, we are currently a defendant in a patent infringement claim, which has been vigorously opposed by us, relating to technology that is important to us, although we do not expect this claim to have a material adverse effect on our business, financial conditions, results of operations or reputation. The ultimate resolution of such claims, proceedings, and lawsuits is inherently unpredictable and, as a result, our estimates of liability, if any, are subject to change and actual results may materially differ from our estimates. If there is an unfavorable resolution of a matter, our reputation may be harmed and there could be a material adverse effect on our business, financial condition or results of operations. Moreover, we cannot assure you that we will have any or adequate insurance coverage to protect us from any adverse resolution.

We may be liable for damages based on product liability claims brought against our customers in our end use markets, and any successful claim for damages could have a material adverse effect on our financial condition or results of operations.

Many of our products provide critical performance attributes to our customers’ products that are sold to consumers who could potentially bring product liability suits related to such products. Our sale of these products therefore involves the risk of product liability claims. If a person were to bring a product liability suit against one of our customers, this customer may attempt to seek contribution from us. A person may also bring a product liability claim directly against us. A successful product liability claim or series of claims against us in excess of our insurance coverage for payments, for which we are not otherwise indemnified, could have a material adverse effect on our financial condition or results of operations. While we endeavor to protect ourselves from such claims and exposures in our contractual negotiations, we cannot assure you that our efforts in this regard will ultimately protect us from any such claims.

Risks Related to this Offering and Ownership of Our Common Stock

After this offering, Court Square and Weston Presidio will maintain substantial control over us, which will limit your ability to influence corporate matters and may result in actions that you do not believe are in our interests or your interests.

Assuming a public offering price of $         (the midpoint of the range set forth on the cover of this prospectus), immediately following the completion of this offering, Court Square will own     % and Weston Presidio will own     % of our common stock, or     % and     % of our common stock, respectively, if the underwriters exercise their over-allotment option in full. As our largest stockholder, Court Square will exercise significant influence over all matters requiring stockholder approval, and Court Square and Weston Presidio collectively will control all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. In addition, pursuant to the amended and restated securityholders’ agreement (the “Securityholders’ Agreement”) we will enter into with Court Square, Weston Presidio, Daniel H. Leever and our other historical management investors in connection with this offering, until Court Square and Weston Presidio cease to own at least 7.5% of our outstanding common stock, each of Court Square and Weston Presidio will have the right to designate individuals for nomination to our Board. Pursuant to the Securityholders’ Agreement, the other securityholders party thereto are required to vote for the election of such designated nominees. The number of individuals each of Court Square and Weston Presidio is entitled to designate for nomination by our Board is dependent on the amount of our common stock then owned by such entity.

 

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Further, the Securityholders’ Agreement will provide that, so long as Court Square owns at least 25% of our issued and outstanding common shares, certain actions by us or our subsidiaries will require the approval of at least a majority of the Court Square director designees (in addition to any other vote by our Board or stockholders). The actions requiring Court Square approval include certain change of control transactions, the acquisition or sale of any assets or operations with a value in excess of $50.0 million, any appointment or dismissal of our chief executive officer, any changes in the size of the Board and any amendment to our certificate of incorporation or by-laws. Also, the Securityholders’ Agreement will provide that, so long as Court Square owns at least 7.5% of our issued and outstanding common shares, our Board shall not authorize the issuance of any preferred stock of the Company without the approval of Court Square. Subject to certain exceptions, so long as Court Square owns at least 25% of our issued and outstanding common shares, a quorum sufficient for action by our Board must include a majority of the Court Square director designees. For more information on the rights of Court Square and Weston Presidio under the Securityholders’ Agreement, see “Certain Relationships and Related Party Transactions—Relationship with Court Square and Weston Presidio—Securityholders’ Agreement”.

In addition, our certificate of incorporation and by-laws contain certain provisions that give Court Square and Weston Presidio the ability to exercise significant influence over corporate matters. For more information on the rights of Court Square and Weston Presidio contained in our governing documents, see “Description of Capital Stock”.

The rights and significant ownership of Court Square and Weston Presidio may delay, deter or prevent acts that may be favored by our other stockholders, including a change of control of us. The interests of Court Square and Weston Presidio may not always coincide with our interests or those of our other stockholders, and Court Square and Weston Presidio may seek to cause us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders, including investors in this offering.

Further, Court Square and Weston Presidio are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Neither Court Square nor Weston Presidio currently holds interests in any business that competes directly or indirectly with us. Court Square and Weston Presidio may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us.

So long as Court Square and Weston Presidio or their affiliates or associates have these contractual rights or continue to own a significant amount of our common stock, even if such amount is, in the aggregate, less than 50%, they will have significant influence over our business.

There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity.

Prior to this offering, there has been no public market for shares of our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the New York Stock Exchange (the “NYSE”) or otherwise, or how liquid that market might become. If an active market does not develop, you may have difficulty selling any shares of our common stock that you purchase in this offering. The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representatives of the underwriters, and may not be indicative of prices that will prevail in the open market following this offering. If our common stock price decreases after this offering, you could lose a significant part or all of your investment.

Our stock price may fluctuate significantly following this offering.

The market price of our common stock may be influenced by many factors, some of which are beyond our control, including those described under “—Risks Related to Our Business and Industry” and the following:

 

   

investors’ perceptions of our prospects;

 

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strategic actions by us or our competitors;

 

   

changes or trends in our industry;

 

   

announcements by us or our competitors of significant contracts, acquisitions, joint ventures or capital commitments;

 

   

additions or departures of key personnel;

 

   

the failure of securities analysts to cover our common stock after this offering or changes in financial estimates by analysts;

 

   

variations in our quarterly results of operations;

 

   

future sales of our common stock or other securities, including sales by Court Square and Weston Presidio; and

 

   

investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives.

As a result of these factors, investors in our common stock may not be able to resell their shares at or above the initial offering price. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the trading volume of our common stock is low.

We will face new challenges, increased costs and administrative responsibilities as an independent public company, particularly after we are no longer an “emerging growth company”.

As a public company with listed equity securities, we will need to comply with certain laws, regulations and requirements, including certain provisions of the Sarbanes-Oxley Act of 2002, certain regulations of the Securities and Exchange Commission (the “SEC”) and certain of the NYSE requirements applicable to public companies. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our Board and management and will significantly increase our costs and expenses.

We will need to:

 

   

institute a more comprehensive compliance framework;

 

   

update, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC;

 

   

prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

 

   

revise our existing internal policies, such as those relating to disclosure controls and procedures and insider trading;

 

   

comply with SEC rules and guidelines requiring registrants to provide their financial statements in interactive data format using eXtensible Business Reporting Language (“XBRL”);

 

   

involve and retain to a greater degree outside counsel and accountants in the above activities; and

 

   

enhance our investor relations function.

However, for as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic

 

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reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an “emerging growth company.”

We will remain an “emerging growth company” for up to five years, although we would cease to be an “emerging growth company” as of December 31 of a particular year if (1) we had gross revenue of $1 billion or more in such year, (2) the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 in such year or (3) at any point in such year, we would have issued more than $1 billion of non-convertible debt during the three-year period prior thereto.

In addition, we also expect that being a public company subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our Board, particularly to serve on our audit committee.

Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and stock price.

As a public company, we will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which will require, beginning with our Annual Report on Form 10-K for the year ending December 31, 2013, annual management assessments of the effectiveness of our internal control over financial reporting. Additionally, as of the later of the filing of such Annual Report and the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, Section 404 of the Sarbanes-Oxley Act of 2002 will require a report by our independent registered public accounting firm that addresses the effectiveness of our internal control over financial reporting. We will remain an “emerging growth company” for up to five years, although we would cease to be an “emerging growth company” as of December 31 of a particular year if (1) we had gross revenue of $1 billion or more in such year, (2) the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 in such year or (3) at any point in such year, we would have issued more than $1 billion of non-convertible debt during the three-year period prior thereto. During the course of our testing, we may identify deficiencies that we may not be able to remediate in time to meet our deadline for compliance with Section 404.

Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. We also expect the regulations to increase our legal and financial compliance costs, make it more difficult to attract and retain qualified executive officers and members of our Board, particularly to serve on our audit committee, and make some activities more difficult, time consuming and costly. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 and, when applicable to us, our independent registered public accounting firm may not be able or willing to issue an unqualified report on the effectiveness of our internal control over financial reporting. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations because there is presently no precedent available by which to measure compliance adequacy.

In connection with the audit of the financial statements of MacDermid, Incorporated for the year ended December 31, 2008, our independent registered public accountants identified three material weaknesses in our system of internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting, that results in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We took remedial measures related to these matters and we believe that the material weaknesses have been resolved. Since the 2008 fiscal year, we are not aware of any material weaknesses in our internal control over financial reporting.

 

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If additional material weaknesses or any significant deficiencies are identified in the future, our independent auditors are unable to provide us with an unqualified report upon being required to do so by Section 404 or we are required to restate our financial statements, we may fail to meet our public reporting obligations and investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

We are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure and governance requirements applicable to “emerging growth companies”, our common stock may be less attractive to investors.

We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the Jumpstart Our Business Startups Act of 2012 also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 (as amended, the “Securities Act”) for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may choose not to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies other than “emerging growth companies”. As a result of such election, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates of such new or revised accounting standards. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will be a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

Upon completion of this offering, Court Square and Weston Presidio collectively will control a majority of our voting common stock. As a result, we will be a “controlled company” within the meaning of NYSE corporate governance standards. Under NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including:

 

   

the requirement that a majority of our Board consists of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance committee and compensation committee.

Following this offering, we intend to utilize the “controlled company” exemptions from the NYSE corporate governance requirements. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance committee and compensation committee consist entirely of independent directors.

 

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Further, we will not be required to have an annual performance evaluation of the nominating and corporate governance committee and compensation committee. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE’s corporate governance requirements.

You will incur immediate and substantial dilution as a result of this offering.

The initial public offering price per share of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. As a result, you will pay a price per share that substantially exceeds the tangible book value per share, which is determined by dividing the total tangible assets of MacDermid, Incorporated and its consolidated subsidiaries less the total liabilities of MacDermid, Incorporated and its consolidated subsidiaries by the number of shares of our common stock outstanding. Based on the issuance and sale of                 million shares of common stock by us at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus), you will incur immediate dilution of approximately $         in the net tangible book value per share if you purchase shares in this offering. See “Dilution”.

Future sales, or the perception of future sales, of our common stock may depress the price of our common stock.

The market price of our common stock could decline significantly as a result of sales of a large number of shares of our common stock in the market after this offering, including shares that might be offered for sale by Court Square and Weston Presidio. These sales, or the perception that these sales might occur, could depress the market price of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon completion of this offering, we will have                 shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of common stock that may be held or acquired by our directors, executive officers or other affiliates, the sale of which will be restricted under the Securities Act.

After this offering, Court Square will have the right, subject to certain conditions, to require us to file registration statements registering additional sales of shares of common stock and Court Square, Weston Presidio and the other securityholders party to the Securityholders’ Agreement will have the right to require us to include sales of shares of common stock in registration statements that we may file for ourselves or Court Square. In order to exercise these registration rights, the holder must be permitted to sell shares of its common stock under applicable lock-up restrictions described below. Subject to compliance with applicable lock-up restrictions and restrictions under the Securityholders’ Agreement (both of which may be waived), shares of common stock sold under these registration statements can be freely sold in the public market. In the event such registration rights are exercised and a large number of shares of common stock are sold in the public market, such sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. See “Shares Eligible for Future Sale—Registration Rights”.

In connection with this offering, Court Square, Weston Presidio, Daniel H. Leever and certain of our other officers and directors have each agreed to lock-up restrictions, meaning that they and their permitted transferees will not be permitted to sell any shares of our common stock for 180 days after the date of this prospectus, subject to certain exceptions, without the prior consent of Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC and Deutsche Bank Securities Inc. Although we have been advised that there is no present intention to do so, Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. LLC and Deutsche Bank Securities Inc. may, in their sole discretion, release all or any portion of the shares of our common stock from the restrictions in any of the lock-up agreements described above. See “Underwriting”.

Also in the future, we may issue shares of our common stock in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding shares of our common stock.

 

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Anti-takeover provisions in our charter documents could discourage, delay or prevent a change of control of our company and may result in an entrenchment of management and diminish the value of our common stock.

Several provisions of our certificate of incorporation and by-laws could make it difficult for our stockholders to change the composition of our Board, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable. See “Description of Capital Stock”.

These provisions include:

 

   

authorizing our Board to issue “blank check” preferred stock without stockholder approval;

 

   

prohibiting cumulative voting in the election of directors;

 

   

limiting the persons who may call special meetings of stockholders;

 

   

prohibiting amendments (i) to certain specified provisions of our by-laws at any time when Court Square owns greater than 7.5% in voting power of our issued and outstanding capital stock and (ii) to any provision of our by-laws when Court Square owns greater than 25.0% in voting power of our issued and outstanding capital stock, in each case unless Court Square votes all shares held by it in favor of such amendment;

 

   

prohibiting stockholders from acting by written consent after Court Square and Weston Presidio cease to own more than 50% of the total voting power of our shares; and

 

   

establishing advance notice requirements for nominations for election to our Board or for proposing matters that can be acted on by stockholders at stockholder meetings.

These anti-takeover provisions could impede the ability of our common stockholders to benefit from a change of control and, as a result, could materially adversely affect the market price of our common stock and your ability to realize any potential change of control premium.

We cannot assure you that we will declare dividends or have the available cash to make dividend payments.

We intend to pay quarterly cash dividends in an amount equal to $         per share following the completion of this offering. Whether we will do so, however, and the timing and amount of those dividends, will be subject to approval and declaration by our Board and will depend upon on a variety of factors, including the financial results, cash requirements and financial condition of the company, our ability to pay dividends under the credit agreement governing the Credit Facilities, the indenture governing the Senior Subordinated Notes and any other applicable contracts, and other factors deemed relevant by our Board. Any dividends declared and paid will not be cumulative.

Because MacDermid Group, Inc. is a holding company with no material assets (other than, following completion of the Corporate Reorganization, the equity interests of MacDermid, Incorporated), its cash flow and ability to pay dividends will be dependent upon the financial results and cash flows of MacDermid, Incorporated and its subsidiaries and the distribution or other payment of cash to MacDermid Group, Inc. in the form of dividends or otherwise. MacDermid, Incorporated is a separate and distinct legal entity from us and has no obligation to make any funds available to us.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If no securities or industry analysts cover our company, the trading price for our common stock would be negatively impacted. If one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.

 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements within the meaning of the federal securities laws. These statements relate to, among other items, net sales, earnings, revenue, gross profit, profitability, financial conditions, results of operations, cash flows, capital expenditures and other financial matters. These statements also relate to our business strategy, goals and expectations concerning our market position and future operations. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are often characterized by the use of words such as “believe”, “expect”, “anticipate”, “estimate”, “intend”, “plan”, “target”, “likely”, “may”, “will”, “would”, “could”, “predict”, “project”, and similar expressions or phrases, or the negative of those expressions or phrases.

Although we believe that we have a reasonable basis for the assumptions underlying the forward-looking statements contained in this prospectus, we caution you that our assumptions could be incorrect and the forward-looking statements based on these assumptions could be inaccurate. Further, these forward-looking statements are based on our projections of the future and involve known and unknown risks and uncertainties and other factors that may cause our actual results of operations, level of activity, performance, achievements or industry results to differ materially from our historical results or from any future results, performance or achievements suggested or implied by the forward-looking statements in this prospectus. The sections in this prospectus entitled “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” discuss some of the factors that could contribute to these differences, including risks related to:

 

   

conditions in the global economy;

 

   

the variability of our operating results between periods and the resulting difficulty in forecasting future results;

 

   

the need for increased spending on capital expenditures to meet customer demand and pursue growth opportunities;

 

   

our ability to compete successfully within our industry;

 

   

our substantial international operations;

 

   

fluctuations in foreign currency exchange rates;

 

   

changes in our customers’ products and processes;

 

   

the fact that we do not enter into long-term contracts with certain of our customers and the potential loss of those customers;

 

   

decreases in the average selling prices of products in our industry;

 

   

increases in the cost, or reductions in the supply, of the specialty and commodity chemicals used in our manufacturing processes;

 

   

costs related to compliance with health, safety and environmental laws and regulations, including global climate change legislation;

 

   

our ability to maintain and enhance our technological capabilities and to respond effectively to technological changes in our industry;

 

   

our substantial level of indebtedness and the effect of restrictions on our operations set forth in the documents that govern such indebtedness;

 

   

our compliance with certain financial maintenance covenants in our revolving credit facility and the effect on our liquidity of any failure to comply with such covenants;

 

   

our ability to protect our intellectual property, on which our business is substantially dependent, and our success in avoiding infringing the intellectual property rights of others;

 

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acquisitions of other businesses and our ability to integrate acquired operations into our operations;

 

   

the inherently hazardous nature of chemical manufacturing and the offshore oil production and drilling industry;

 

   

the costs of complying with government regulations and obtaining regulatory approval of our products;

 

   

risks related to the evaluation of our intangible asset values and the possibility of write-downs;

 

   

the loss of the services of key personnel;

 

   

our relationship with our employees;

 

   

disruptions in our operations or the operations of our suppliers, distributors, resellers or customers as a result of extraordinary events;

 

   

our ability to realize a benefit from our productivity initiatives; and

 

   

our role as a defendant in litigation that results from our business, including costs related to any damages we may be required to pay as a result of product liability claims brought against our customers.

Because these and other unknown or unpredictable factors could adversely affect our results, our anticipated results or developments may not be realized or, even if substantially realized, they may not have the expected consequences to, or effects on, our business. Given these uncertainties, prospective investors are cautioned not to place undue reliance on any forward-looking statements in this prospectus. Forward-looking statements speak only as of the date they are made, and, except as required by law, we undertake no obligation to update or revise them publicly in light of new information or future events. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock in this offering will be approximately $         million, assuming an initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Our net proceeds will increase by approximately $         million if the underwriters’ over-allotment option is exercised in full. Each $1.00 increase (decrease) in the assumed initial public offering price per share would increase (decrease) the net proceeds to us from this offering by $         million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We expect to use the net proceeds from this offering to prepay $         million of indebtedness under the Term Loan Facilities, to use $         million to repurchase or redeem $         aggregate principal amount of our outstanding Senior Subordinated Notes and to make payments to Court Square and Weston Presidio in connection with the termination of the advisory agreements and the consummation of this offering as described under “Certain Relationships and Related Party Transactions—Relationship with Court Square and Weston Presidio—Advisory Agreement” in the amount of $         million and $         million, respectively. We expect that any increase (decrease) in the net proceeds to us from this offering resulting from an increase (decrease) in the assumed initial public offering price per share will be allocated 50% to the amounts used to prepay indebtedness under the Term Loan Facilities and 50% to the amounts used to repurchase or redeem our Senior Subordinated Notes.

After giving effect to the prepayment of $         million of indebtedness under the Term Loan Facilities, we will have $         million of senior secured indebtedness outstanding under the Term Loan Facilities and $         million of availability under the Revolving Credit Facility. After giving effect to the use of $         million to repurchase or redeem a portion of our outstanding Senior Subordinated Notes, we will have $         million aggregate principal amount of Senior Subordinated Notes outstanding.

As of March 31, 2012, the weighted average interest rate for the three months ended March 31, 2012, applicable to the Tranche B Facility and Tranche C Facility, both of which mature on April 12, 2014, was 2.33% and 3.07%, respectively. The Senior Subordinated Notes bear interest at a rate of 9.50% per annum and mature on April 15, 2017.

None of Court Square, Weston Presidio or our other affiliates holds indebtedness under the Credit Facilities or our Senior Subordinated Notes. Accordingly, other than as a result of the payments to Court Square and Weston Presidio in connection with the termination of the advisory agreements, as described above, none of Court Square, Weston Presidio or our other affiliates will receive any of the net proceeds from this offering.

Affiliates of Credit Suisse Securities (USA) LLC are lenders under our senior secured credit facilities, which include our Term Loan Facilities. Based on amounts outstanding as of March 31, 2012 and assuming the above repayments, such affiliates would receive approximately $         from this offering upon any repayment of a portion of the borrowings outstanding under our Term Loan Facilities. See “Underwriting”.

 

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DIVIDEND POLICY

We intend to pay quarterly cash dividends in an amount equal to $         per share following completion of this offering. Whether we will do so, however, and the timing and amount of those dividends, will be subject to approval and declaration by our Board and will depend on a variety of factors, including the financial results, cash requirements and financial condition of the company, our ability to pay dividends under the credit agreement governing the Credit Facilities, the indenture governing the Senior Subordinated Notes and any other applicable contracts, and other factors deemed relevant by our Board.

Since MacDermid Group, Inc. is a holding company, its cash flow and ability to pay dividends are dependent upon the financial results and cash flows of MacDermid, Incorporated and its subsidiaries and the distribution or other payment of cash to MacDermid Group, Inc. in the form of dividends or otherwise.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2012, on:

 

   

an actual basis, to reflect the cash and cash equivalents and capitalization of MacDermid, Incorporated and its consolidated subsidiaries as of March 31, 2012; and

 

   

an as adjusted basis, to reflect (1) the sale by us of                 shares of our common stock in this offering at an assumed initial offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus) after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, (2) the application of the net proceeds therefrom as described in “Use of Proceeds” and (3) the consummation of the Corporate Reorganization, which will be a condition to the consummation of this offering.

You should read this table in conjunction with “Use of Proceeds”, “Selected Consolidated Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited financial statements and related notes included elsewhere in this prospectus.

 

     As of March 31, 2012  
     Actual     As Adjusted(1)  
(in thousands, except share and per share data)    (unaudited)  

Cash and cash equivalents(1)

   $ 109,311      $                
  

 

 

   

 

 

 

Debt:

    

Credit Facilities(2)

   $ 371,346      $     

Senior Subordinated Notes

     350,000     

Other bank facilities(3)

     9,090     
  

 

 

   

 

 

 

Total debt(1)

     730,436     
  

 

 

   

 

 

 

Stockholders’ equity:

    

Cumulative preferred shares, 316,000 shares authorized and issued; 315,254 shares outstanding including cumulative dividends of $175,237 (Actual)

     491,237     

Common shares, $5.00 par value per share, 50,000,000 shares authorized, 9,946,140 shares issued and outstanding (Actual)

     50,000     

Common Stock, $0.01 par value per share,                 shares authorized,                 shares issued and outstanding (As adjusted)

    

Additional paid-in capital

     2,254     

Accumulated deficit

     (280,359  

Accumulated other comprehensive loss

     (9,261  

Common and preferred shares in treasury, 746 preferred and 53,860 common (Actual)

     (1,006  
  

 

 

   

 

 

 

Total stockholders’ equity(1)

     252,865     
  

 

 

   

 

 

 

Total capitalization

   $ 983,301      $     
  

 

 

   

 

 

 

 

(1) Assumes the net proceeds from this offering to us are $         million and reflects the use of the net proceeds to prepay $         million of indebtedness under the Term Loan Facilities, to use $         million to repurchase or redeem $         million aggregate principal amount of our outstanding Senior Subordinated Notes and to pay $         million to Court Square and $         million to Weston Presidio in connection with the termination of the advisory agreements and the consummation of this offering. A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) the net proceeds to us by $         million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and would increase (decrease) our total debt by $         million and decrease (increase) our total stockholders’ equity by $         million. See “Use of Proceeds”.
(2) As of March 31, 2012, $46.1 million was available to MacDermid, Incorporated under the Revolving Credit Facility.
(3) Includes $8.0 million of Japanese Yen denominated debt and $1.1 million of capital lease obligations.

 

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THE CORPORATE REORGANIZATION

MacDermid Group, Inc. was incorporated in Delaware on June 17, 2011, in anticipation of this offering. MacDermid Group, Inc. is a direct, wholly owned subsidiary of MacDermid Holdings, LLC.

In anticipation of this offering, MacDermid Holdings, LLC and its subsidiaries will engage in a reorganization (the “Corporate Reorganization”), pursuant to which (1) MacDermid, Incorporated will effect a reverse stock split of MacDermid, Incorporated’s common stock and junior stock, (2) MacDermid Holdings, LLC and the MacDermid, Incorporated Profit Sharing and Employee Savings Plan (the “Savings Plan”), who comprise the existing stockholders of MacDermid, Incorporated, will exchange their shares of preferred stock, common stock and junior stock of MacDermid, Incorporated for the common stock of MacDermid Group, Inc. (such exchange, the “Exchange”) and (3) MacDermid Holdings, LLC will liquidate and distribute the shares of MacDermid Group, Inc. then held by it to the holders of its membership interests (which include preferred, common and junior membership interests). The diagram below illustrates our corporate structure immediately prior to the consummation of this offering and reflects actual ownership as of March 31, 2012, giving effect to the cancellation of all treasury shares.

 

LOGO

The number of shares of the common stock of MacDermid Group, Inc. to be received by the existing holders of the membership interests of MacDermid Holdings, LLC and by the Savings Plan will be determined in accordance with the provisions of the limited liability company operating agreement of MacDermid Holdings, LLC and the governing documents of MacDermid, Incorporated. The effectiveness of the Corporate Reorganization is a condition to the consummation of this offering.

 

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Following the completion of the Corporate Reorganization, MacDermid Group, Inc. will own 100% of MacDermid, Incorporated. The MacDermid business will continue to be conducted through MacDermid, Incorporated and its domestic and foreign subsidiaries.

The diagram below illustrates our corporate structure immediately following consummation of this offering (and assumes a public offering price of $         (the midpoint of the range set forth on the cover of this prospectus)):

 

LOGO

Please refer to “Principal Stockholders” for additional information on the ownership of MacDermid Group, Inc. following the completion of this offering.

 

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DILUTION

If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price and the adjusted net tangible book value per share of the common stock of MacDermid Group, Inc. immediately after this offering. Net tangible book value per share is determined by dividing the total tangible assets of MacDermid Group, Inc. less its total liabilities by the number of shares of its common stock outstanding. The historical as adjusted net tangible book value, as of March 31, 2012, giving effect to the Corporate Reorganization and before giving effect to this offering, was $        , or $         per share.

After giving effect to (1) the sale of the shares of common stock of MacDermid Group, Inc. at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover of this prospectus) and (2) the application of the estimated net proceeds from this offering as described in “Use of Proceeds”, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by MacDermid Group, Inc., the as adjusted net tangible book value as of March 31, 2012, would have been $            , or $         per share. This estimate represents an immediate increase in net tangible book value of $         per share of common stock to Court Square, Weston Presidio and the other historical equity investors in MacDermid, Incorporated and the Savings Plan (collectively, the “Historical Equity Investors”) and an immediate dilution in net tangible book value of $         per share to investors purchasing shares of common stock of MacDermid Group, Inc. in this offering.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $                

Historical as adjusted net tangible book value per share as of March 31, 2012 before giving effect to this offering

   $                   

Increase in historical as adjusted net tangible book value per share attributable to this offering

   $        

As adjusted net tangible book value per share after giving effect to this offering

      $     

Dilution per share to new investors

      $     

A $1.00 increase (decrease) in the assumed initial public offering price per share would increase (decrease) the as adjusted net tangible book value after this offering by approximately $        , and the as adjusted net tangible book value per share after this offering by $         per share. It would also increase (decrease) the dilution per share to investors in this offering by $         per share, assuming the number of shares offered by MacDermid Group, Inc. under this prospectus remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

The following table sets forth, on the same as adjusted basis as of March 31, 2012, (1) the number of shares of common stock of MacDermid Group, Inc. purchased from MacDermid Group, Inc., (2) the average price per share paid by the Historical Equity Investors before this offering and (3) the average price paid by investors participating in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses.

 

     Shares Purchased     Total Consideration        
     Number    Percent of
Outstanding Shares
(after this offering
and consummation
of the Corporate
Reorganization)
    Amount      Percent     Average
Price per
Share
 

Historical Equity Investors

                   $                                 $                

Investors in this offering

                   $                      $     

Total

                   $                      $     

If the underwriters’ over-allotment option is exercised in full, (1) the as adjusted net tangible book value per share of common stock would be approximately $         and (2) dilution to new investors in as adjusted net tangible book value per share of common stock would be reduced to $        , or $         per share.

 

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following selected consolidated financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus.

We prepare our financial statements in accordance with U.S. GAAP. Our results for any historical period are not necessarily indicative of our results for any future period. You should read this selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

MacDermid Group, Inc. was incorporated in Delaware on June 17, 2011. Prior to the completion of this offering, MacDermid Group, Inc. will have no material assets. Following the completion of this offering, MacDermid Group, Inc. will own all of the outstanding capital stock of MacDermid, Incorporated, which is the main U.S. operating entity for the MacDermid business and the direct or indirect parent entity of all the MacDermid operating companies, and the consolidated financial statements of MacDermid Group, Inc. will reflect the assets, liabilities and results of operations of MacDermid, Incorporated and its subsidiaries. Accordingly, in the first table that follows, we present the selected balance sheet data for MacDermid Group, Inc. as of March 31, 2012 and December 31, 2011 and, in the second table set forth below, we present the selected consolidated financial data for MacDermid, Incorporated and its subsidiaries for the periods set forth in the table.

The following table sets forth the selected balance sheet data of MacDermid Group, Inc. as of March 31, 2012 and December 31, 2011, which have been derived from the audited balance sheet (December 31, 2011 amounts) and unaudited balance sheet (March 31, 2012 amounts) included elsewhere in this prospectus.

 

     As of
March 31, 2012

(unaudited)
     As of
December 31, 2011
 

MacDermid Group, Inc. Balance Sheet Data:

     

Cash and cash equivalents

   $ 100       $ 100   

Total assets

     100         100   

Total equity

     100         100   

In the table below, the selected consolidated statements of operations data for the years ended December 31, 2011, 2010 and 2009 and the selected consolidated balance sheet data as of December 31, 2011 and 2010 represent those of MacDermid, Incorporated as the successor entity following the acquisition of MacDermid, Incorporated by a group led by our chairman and chief executive officer, Daniel H. Leever, Court Square and Weston Presidio (the “Acquisition”) and have been derived from the audited financial statements of MacDermid, Incorporated included elsewhere in this prospectus.

 

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The selected consolidated historical financial data for the three months ended March 31, 2012 and 2011 and as of March 31, 2012 and 2011 have been derived from the unaudited condensed consolidated financial statements of MacDermid, Incorporated, which are included elsewhere in this prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments, including normal recurring adjustments, necessary for a fair presentation in all material respects of the information set forth therein. Results of operations for the interim periods are not necessarily indicative of the results that might be expected for any other interim period or for an entire year.

 

(amounts in thousands,
except share and per share data)
  Year ended December 31,    
Three months ended
March 31,
 
  2011     2010     2009     2012     2011  
                      (unaudited)  

Statement of Operations Data:

         

Net sales

  $ 728,773      $ 694,333      $ 594,153      $ 182,195      $ 178,521   

Cost of sales

    388,298        371,223        333,963        95,884        94,980   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    340,475        323,110        260,190        86,311        83,541   

Operating expenses:

         

Selling, technical and administrative

    185,649        179,786        156,508        45,746        45,629   

Research and development

    22,966        21,005        20,103        6,718        5,359   

Amortization

    28,578        29,694        29,868        6,655        7,362   

Restructuring(1)

    896        6,234        4,228        114        (181

Impairment charges(2)

    46,438        —          68,692        —          —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    284,527        236,719        279,399        59,233        58,169   

Operating profit (loss)

    55,948        86,391        (19,209     27,078        25,372   

Other income (expense):

         

Interest income

    500        696        458        175        108   

Interest expense(3)

    (54,554     (56,196     (60,740     (13,556     (14,088

Miscellaneous income (expense)(4)

    9,412        15,106        (5,020     (4,353     (16,172
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes, non-controlling interest and accumulated payment-in-kind dividend on cumulative preferred shares

    11,306        45,997        (84,511     9,344        (4,780

Income tax (expense) benefit

    (9,953     (21,723     6,427        (4,366     (1,145
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    1,353        24,274        (78,084     4,978        (5,925

(Loss) income from discontinued operations, net of tax(5)

    —         —          (4,448     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    1,353        24,274        (82,532     4,978        (5,925

Less net income attributable to the non-controlling interest

    (366     (343     (295     (91     (88
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to MacDermid, Incorporated

    987        23,931        (82,827     4,887        (6,013

Accrued payment-in-kind dividend on cumulative preferred shares

    (40,847     (37,361     (34,124     (10,788     (9,874
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) attributable to common shares

  $ (39,860   $ (13,430   $ (116,951   $ (5,901   $ (15,887
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Statement of Operations Data:

         

Net (loss) attributable to MacDermid, Incorporated per share(6)

         

Basic:

         

(Loss) from continuing operations

  $ (4.01   $ (1.35   $ (11.30   $ (0.59   $ (1.60

(Loss) from discontinued operations(5)

  $ —       $ —       $ (0.45   $ —       $ —    

Net loss

  $ (4.01   $ (1.35   $ (11.75   $ (0.59   $ (1.60

Diluted:

         

(Loss) from continuing operations

  $ (4.01   $ (1.35   $ (11.30   $ (0.59   $ (1.60

(Loss) from discontinued operations(5)

  $ —       $ —       $ (0.45   $ —       $ —    

Net loss

  $ (4.01   $ (1.35   $ (11.75   $ (0.59   $ (1.60

Weighted average shares Outstanding

         

Basic

    9,942,777        9,932,862        9,951,799        9,946,419        9,932,132   

Diluted

    9,942,777        9,932,862        9,951,799        9,946,419        9,932,132   

Pro forma income per share(7) (unaudited)

         

Basic and diluted

  $ 0.03          $ 0.16     

Pro forma weighted average number of common shares outstanding (unaudited)

         

Basic

    31,387,359            31,387,359     

Diluted

    31,509,558            31,509,558     

Balance Sheet Data (End of Period):

         

Cash and cash equivalents

  $ 113,452      $ 106,740      $ 85,496      $ 109,311      $ 88,454   

Total assets

  $ 1,221,418      $ 1,314,789      $ 1,307,206      $ 1,232,981      $  1,311,010   

Total debt and capital lease obligations

  $ 744,372      $ 784,612      $ 821,023      $ 730,436      $ 767,792   

Total equity

  $ 241,806      $ 259,209      $ 216,304      $ 252,934      $ 269,338   

 

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(1)   Charges in the three months ended March 31, 2012 and 2011 and the years ended December 31, 2011, 2010 and 2009 relate to amounts recorded in connection with our operational restructuring initiatives. For a detailed description of these operational restructuring initiatives, see the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Note 20 to our audited financial statements and Note 14 to our unaudited financial statements included in this prospectus.
(2)   In 2011, we recorded impairment charges of $46.4 million related to a write down of our customer list intangible assets to their estimated fair value as determined in accordance with ASC 360. In 2009, we recorded (i) impairment charges of $41.2 million related to a write down of our goodwill balance to its estimated fair value as determined in accordance with ASC 350, (ii) an impairment charge of $26.1 million related to a write down of an indefinite-lived purchased intangible asset to its estimated fair value as determined in accordance with ASC 350, (iii) an impairment charge of $0.2 million related to a write down of a finite-lived purchased intangible asset to its estimated fair value as determined in accordance with ASC 360 and (iv) an impairment charge of $1.2 million related to a write down of equipment to its estimated fair value as determined in accordance with ASC 360. For a detailed description of these impairment charges, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 to our audited financial statements included in this prospectus.
(3)   Primarily reflects interest expense associated with our long-term debt for periods after the Acquisition.
(4)   Represents remeasurement (gain) loss on foreign denominated debt as a result of changes in foreign exchange rates. For a detailed description of these remeasurement gains/losses charges, see the discussion of our miscellaneous (expense) income in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Note 17 to our audited financial statements and Note 13 to our unaudited financial statements included in this prospectus.
(5)   Reflects loss (gain) from discontinued operations related to the sale of Offset in 2008 and the sale of our ColorSpan printing business in 2007. All operating results exclude amounts associated with discontinued operations.
(6)   The net loss per share attributable to MacDermid, Incorporated does not give effect to the Exchange, the effect of which is to reflect (i) the effective conversion of MacDermid, Incorporated’s cumulative preferred stock, including the accumulated payment in kind dividend with respect to such preferred stock at the time of the offering, into common stock of MacDermid Group, Inc. and (ii) the effective payment of a stock preference, in the form of MacDermid Group, Inc. common stock, in respect of MacDermid, Incorporated’s common stock, in each case, in accordance with our applicable governing documents. For further information related to our earnings per share calculations, please refer to Notes 2 and 23 to our audited financial statements and Notes 2 and 17 to our unaudited financial statements included in this prospectus.
(7)   The pro forma net income per share gives effect to the Exchange, the effect of which is to reflect (i) the effective conversion of MacDermid, Incorporated’s cumulative preferred stock, including the accumulated payment in kind dividend with respect to such preferred stock at the time of the offering, into common stock of MacDermid Group, Inc. and (ii) the effective payment of a stock preference, in the form of MacDermid Group, Inc. common stock, in respect of MacDermid, Incorporated’s common stock, in each case, in accordance with our applicable governing documents. For further information related to our pro forma net income per share calculations, please refer to Notes 2 and 23 to our audited financial statements and Notes 2 and 17 to our unaudited financial statements included in this prospectus.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the financial position and results of operations for MacDermid, Incorporated and its consolidated subsidiaries for each of the three years ended December 31, 2011, 2010 and 2009, and the three months ended March 31, 2012 and 2011. You should read the following discussion of our results of operations and financial condition together with “Selected Consolidated Financial Information” and the audited consolidated financial statements and related notes of MacDermid, Incorporated and its consolidated subsidiaries included elsewhere in this prospectus. This discussion contains forward looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading “Risk Factors”. Actual results may differ materially from those contained in any forward-looking statements. In this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, references to the “company”, “we”, “us” and “our” refer to MacDermid, Incorporated and its consolidated subsidiaries.

Overview

Our Business and its Competitive Strengths

We are a global producer of high technology specialty chemical products and provider of technical services. Our business involves the manufacture of a broad range of specialty chemicals, which we create by blending raw materials, and the incorporation of these chemicals into multi-step technological processes. We refer to our products as “dynamic chemistries” due to their delicate chemical compositions, which are frequently altered during customer use.

We generate revenue through the manufacture and sale of our dynamic chemistries to customers in the electronics, metal and plastic plating, graphic arts, and offshore oil production and drilling industries, and by providing highly technical, post-sale service to our customers to ensure that the chemical composition and function of our dynamic chemistries are maintained as intended. We recognize the revenue from the sale of our products upon shipment to our customers. In the year ended December 31, 2011 and in the three months ended March 31, 2012, we generated net sales of $728.8 million and $182.2 million, respectively. We believe, based on our 2011 net sales, that a majority of our operations hold leading positions in the product markets they serve, including the number one or number two market share positions held by Electronic Solutions and Industrial Solutions in the product markets they serve.

We believe several key differentiating elements of our business have enabled us to focus on high growth opportunities, maintain high margins and a high return on invested capital, and generate stable and strong cash flows. Through our “asset-lite, high-touch” business model, we dedicate extensive resources to research and development and our highly technical, post-sale customer service, while limiting our investments in fixed assets and capital expenditures. Our capital expenditures for the year ended December 31, 2011 and the three months ended March 31, 2012 were $8.7 million and $1.5 million, respectively, accounting for 1.2% and 0.8% of our net sales during the corresponding period, respectively.

We believe our proprietary technology, extensive industry experience and customer service-focused business model are difficult for our competitors to replicate. In addition, we believe the expense to our customers of changing processes or suppliers is relatively high compared to the potential cost savings. As a result, our customers are disincentivized from switching to our competitors’ products. As of December 31, 2011, we served more than 3,500 customers worldwide through our global network of 14 manufacturing sites, 21 technical service facilities, including 8 research and development centers, in 24 countries. Our international reach, coupled with our local presence, enables us to meet the global and local needs of our customers. We leverage our close customer relationships to execute our growth strategies by working with our customers to identify opportunities for new products, which we develop by drawing upon our significant intellectual property portfolio and technical expertise.

 

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The products we create, which are manufactured from over 1,000 raw materials, are used by our customers in numerous and diverse end markets. The diversity of our materials and suppliers, our end markets, our products, our product applications, our customer base and the range of geographic regions in which we operate helps to mitigate the effects of any adverse event affecting a particular raw material or a specific end market or region. In many of the regions in which we operate, we are able to increase our prices in response to increases in our costs. For example, during the second half of 2010, we experienced increases in the prices of certain raw materials used in our products, most notably the prices of gold, silver and palladium. To partially offset these increases in raw material costs, we implemented product surcharges and selective price increases. Although our cost of sales increased by 11.2% to $371.2 million in the year ended December 31, 2010 as compared to $334.0 million in the same period in 2009, our gross profit from these sales increased by 24.2% from 2009 to 2010. The increase in our cost of sales was due to an increase in our costs of raw materials, an increase in variable compensation due to increased sales and the elimination of temporary cost reductions made in 2009 due to the economic downturn.

Our Operational Structure

We manage and report our business in two operating segments: an Industrial segment and a Printing segment. In the fiscal year ended December 31, 2011, our Industrial and Printing segments generated net sales of $568.6 million and $160.2 million, respectively. For the three months ended March 31, 2012, our Industrial and Printing segments generated net sales of $140.5 million and $41.7 million, respectively.

The Industrial segment is composed of three businesses that share manufacturing facilities and administrative resources. In our Electronic Solutions business, we design and formulate a complete line of proprietary “wet” dynamic chemistries that our customers use to coat or “plate” the surface of the printed circuit boards and other electronic components they manufacture. In our Industrial Solutions business, we provide dynamic chemistries for finishing, cleaning and providing surface coatings for a broad range of metal and non-metal surfaces. Through our Offshore Solutions business, we produce water-based hydraulic control fluids for major oil companies and drilling contractors for offshore deep water production and drilling applications.

We further divide each of these three businesses into three geographic regions: Asia, Europe and the Americas (which includes North America and South America). Our operations in Europe and the Americas are dominated by our Industrial Solutions business, and our operations in Asia are dominated by our Electronic Solutions business.

The Printing segment represents one business and is further subdivided into three geographic regions: Asia, Europe and the Americas. Our operations in the Printing segment are predominately in the Americas, although we intend to expand further into Europe and Asia. Through our Printing segment, we supply an extensive line of flexographic plates that are used in the commercial packaging and commercial printing industries. Over the last three years, we have shifted our business mix to refocus this segment on high innovation, higher cash flow businesses by divesting two capital intensive, lower growth businesses.

Because our businesses within the Industrial segment share facilities and resources and our business in the Printing segment is distinct from each of the businesses within the Industrial segment, we make decisions about how to manage our operations by reference to each segment and not with respect to the underlying businesses or geographic regions that comprise each segment.

The Acquisition

On April 12, 2007, MacDermid, Incorporated, which had been a publicly traded company since 1966, was acquired by a group led by our chairman and chief executive officer, Daniel H. Leever, Court Square and Weston Presidio. In connection with the Acquisition, MacDermid, Incorporated incurred significant indebtedness under our Credit Facilities and the Senior Subordinated Notes. The purchase price paid in connection with the Acquisition was allocated to the acquired assets and assumed liabilities at their fair value. The purchase accounting adjustments (1) increased the carrying value of our property, plant and equipment, (2) established

 

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intangible assets for our tradenames, customer lists and developed technology and (3) established goodwill related to the difference between the purchase price and the fair value of the assets and liabilities as of the Acquisition date. Subsequent to the Acquisition, interest expense and non-cash depreciation and amortization charges significantly increased. During 2009, we recorded impairment charges of $68.7 million to reduce the goodwill asset, customer lists, tradename and equipment assets established at the time of the Acquisition. During 2011, we recorded impairment charges of $46.4 million related to a write down of a portion of the customer list intangible assets of our Industrial Asia reporting unit established at the time of the Acquisition.

Outlook

In both of our segments, we continue to invest significant resources in research and development and in our intellectual property. We focus on growing revenues and generating cash from operations in order to build stockholder value. Specifically, we plan to improve revenue growth over the longer term by focusing on:

 

   

utilizing our technical capabilities, strong customer relationships, proprietary know how and knowledge of our industry to extend the breadth of our product offerings and to continue to grow internationally as our existing multinational customers penetrate into emerging regions;

 

   

capitalizing on our core competencies and developing new applications for our core processes to expand into high-growth markets that are adjacent to the markets we currently serve;

 

   

maintaining our focus on investing in technology and research and development;

 

   

leveraging our existing customer relationships to identify new product opportunities and develop new technologies;

 

   

reducing operating expenses through facility optimization, product and raw material rationalization and by maintaining a relatively fixed cost structure that supports increasing revenues as our strategies are successful;

 

   

maximizing cash flow to further invest in our business and reduce our indebtedness; and

 

   

attracting and retaining highly skilled employees who can serve our customers effectively.

As part of our efforts to expand our businesses globally, we also intend to selectively pursue strategic acquisitions, where and when appropriate, to expand or complement our existing operations. For example, in February 2012, we acquired 95% of the outstanding equity of a chemical business in Brazil for a total purchase price of $10.7 million. We believe this acquisition complements our existing service and product offerings in Brazil. We expect that any future acquisitions will be consistent with our core businesses, will strengthen our relationships with our customers, and will enhance our existing products and technological capabilities or lower our operating costs.

Our ability to increase revenues in the future will depend, in part, on our success in penetrating our competitors’ markets, developing new and improved products, managing our raw material costs and leveraging our existing customer base across all product lines. We also continually evaluate ways to lower our operating costs, including by realigning existing manufacturing capacities, closing facilities, discontinuing certain operations or taking other similar actions.

Certain Key Conditions that Affect our Operations

Our industry is complex, competitive and global, and our products are sold into diverse, international markets, which expose us to certain risks, including certain trends or conditions that may materially affect our business. The trends and conditions that have the most significant impact on our business include those related to the global economy and our industry, our competitive landscape and foreign currency exposure.

 

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Global Economic and Industry Conditions

Our products are sold in industries that are sensitive to changes in general economic conditions. Accordingly, our net sales, gross profit and financial condition depend significantly on general economic conditions and the impact of these conditions on demand for our dynamic chemistries and services in the markets in which we compete. Our business is particularly impacted by demand for chemistry products utilized in the automotive, printed circuit board, offshore oil production and commercial packaging industries. In 2009, decreased global automotive demand and production cuts in the automotive markets as well as reduced demand in the industrial and commercial packaging market negatively impacted our net sales and profitability. Beginning in 2010, we experienced increased demand for our Industrial products that continued in 2011.

Beginning in 2008, we began executing a series of operational restructuring initiatives that streamlined our organizational structure and reduced our workforce in our manufacturing, research and development, selling and technical and general and administrative functions. As of March 31, 2012, with the exception of finalizing certain operational restructuring programs in our Industrial Europe operations, we had completed the majority of these operational restructuring actions.

Our net sales of $694.3 million for the year ended December 31, 2010 were 16.9% greater than our net sales for the year ended December 31, 2009. As a result, in 2010 we selectively increased our headcount and our capital expenditures to meet the required increase in production. Our net sales of $728.8 million for the year ended December 31, 2011 were 5.0% greater than our net sales for the year ended December 31, 2010. We are currently experiencing more balance in our customer demand and inventory levels, and we expect that overall market conditions will continue to return to a more normalized level, although we cannot assure you that they will do so.

Our businesses are also significantly influenced by trends and characteristics in the specialty chemical industry and the printing industry. These industries are cyclical and subject to constant and rapid technological change, product obsolescence, price erosion, evolving standards, short product life-cycles, raw material price fluctuations and changes in product supply and demand.

The specialty chemical industry is currently being affected by globalization and a shift in our customers’ businesses out of traditional geographic markets and into high-growth, emerging markets. In 2010 and 2011, operations in our Industrial segment continued to experience growth. Our Industrial Asia operations experienced sales growth of 24.3% for the year ended December 31, 2010 compared to the same period in 2009. We also experienced sales growth of 16.6% in our Industrial Americas operations and 16.4% in our Industrial Europe operations for the year ended December 31, 2010 compared to the same period in 2009. We experienced sales growth of 6.6% in our Industrial Americas operations and 12.8% in our Industrial Europe operations for the year ended December 31, 2011 compared to the same period in 2010.

The printing industry is currently characterized by markets with more potential sellers than buyers, which reflects, in part, the newspaper closures and consolidations that have occurred during the past three years. We have experienced modest sales growth for our Printing segment during the year ended December 31, 2011 compared to the same period in 2010, driven by a shift to higher margin product offerings and the reduction or elimination of lower margin product offerings. Our sale of newspaper plates has been adversely impacted by recent newspaper closures and consolidations as well as a decrease in capital spending by the end market customer base.

Net sales in future periods will depend, among other factors, upon a continued general improvement in global economic conditions, our ability to meet unscheduled or temporary changes in demand, and our ability to penetrate new markets with strategic product initiatives in specific targeted markets.

 

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Our Competitive Landscape

Our industry is highly competitive, and most of our product lines compete against product lines from two or more competitors. In our Industrial segment, our products compete not only with similar products manufactured by our competitors, but also against a variety of chemical and non-chemical alternatives provided by our competitors.

New competitive products and processes or changes in the pricing policies of our competitors could materially affect demand for and pricing of our products, which could have a significant impact on our financial results. In addition, some of our competitors have greater financial, technical and marketing resources than we do and may be able to devote greater resources to promoting and selling certain products. Unlike many of our competitors who specialize in a single or limited number of product lines, we have a portfolio of businesses and must allocate resources across those businesses. Additionally, because many of our competitors are small divisions of large, international businesses, they may have access to greater resources than we do and may therefore be better able to withstand a change in conditions within our industry and throughout the economy as a whole. Although we face significant competition from specialty chemical companies and divisions of all shapes and sizes, we believe our business model enables us to retain the leading positions held by a majority of our operations in the product markets they serve, including the number one or number two market share positions held by Electronic Solutions and Industrial Solutions in the product markets they serve.

Foreign Currency Exposure

For the years ended December 31, 2011, 2010 and 2009, approximately 69%, 68% and 67% of our net sales were denominated in currencies other than the U.S. Dollar, respectively. For the three months ended March 31, 2012 and 2011, approximately 67% and 68% of our net sales were denominated in currencies other than the U.S. Dollar, respectively. These currencies are predominantly the Euro, British Pound Sterling, Hong Kong Dollar, Chinese Yuan, Japanese Yen and Brazilian Real. We do not manage our foreign currency exposure in a manner that eliminates the effects of changes in foreign exchange rates on our net sales, cash flows or the fair values of our assets and liabilities. Therefore, our financial performance is 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, 2011, net sales were positively impacted as the U.S. Dollar weakened against the Euro, British Pound Sterling, Chinese Yuan, Brazil Real and Japanese Yen when compared to 2010. However, the absolute impact on our 2011 net sales was not material.

Selected Statement of Operations Items

Net Sales

Revenue is generated from the sale of our specialty chemicals products and processes to our customers. Our net sales represent revenues generated by our total sales offset by the effect of any rebates and credits for products that are returned to us. We recognize revenue, including freight charged to customers, when our products are shipped to or received by our customers in accordance with the terms of the applicable sales agreement, when title and risk of loss have been transferred, collectability is probable and pricing is fixed or determinable. Sales arrangements may include right of inspection, acceptance provisions and transfer of title, in which case revenue is deferred until these provisions are satisfied.

 

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Cost of Sales

Cost of sales consists primarily of raw material costs and related purchasing and receiving costs used in the manufacturing process, direct salary and wages and related fringe benefits, packaging costs, shipping and handling costs, plant overhead and other costs associated with the manufacture and distribution of our products.

Gross Profit

Our gross profit is significantly influenced by our raw material prices and our absorption rate. Our absorption rate refers only to our manufacturing facilities and is based on the capacity of the manufacturing facilities. As absorption rates increase, there is more operating leverage because fixed manufacturing costs are spread over higher output. Our gross profit margins are also significantly influenced by our raw material costs. Our gross profit margins have improved by approximately 12.3% since the first quarter of 2009 to 47.4% in the first quarter of 2012 due in large part to our operational restructuring programs and improved inventory management.

Selling, Technical and Administrative Expenses

Selling, technical and administrative expenses consist primarily of personnel and travel costs, advertising and marketing expenses, administrative expenses associated with accounting, finance, legal, human resources and risk management and overhead associated with these functions. Selling expenses consist primarily of compensation and associated costs for sales and marketing personnel, costs of advertising, trade shows and corporate marketing. Technical expenses consist primarily of compensation and associated costs for technical support personnel who support our products. General and administrative expense consists primarily of compensation and associated costs for executive management, finance, legal and other administrative personnel, outside professional fees and other corporate expenses.

Research and Development Expenses

Research and development expenses are expensed as incurred and include the cost of activities attributable to development and pre-production efforts associated with designing, developing and testing new or significantly enhanced products or process and packaging technology. These costs consist primarily of compensation and associated costs for our engineers engaged in the design and development of our products and technologies.

Other Operating Expenses

Amortization expense reflects the charges incurred to amortize our finite-lived intangible assets, such as developed technology and customer lists, which are amortized on a straight-line basis over their estimated useful lives. The estimated useful lives of the assets are currently ten years for developed technology and range between three and 21 years for customer lists.

Our operational restructuring expenses are related to the series of operational restructuring initiatives described above that we undertook beginning in 2008 as a result of the downturn in global economic conditions. As of March 31, 2012, with the exception of finalizing some operational restructuring programs in our Industrial Europe operations, we had completed the majority of these operational restructuring actions.

We do not amortize goodwill or other intangible assets that have indefinite useful lives; rather, goodwill and other intangible assets with indefinite lives are tested for impairment. Expenses for impairment charges are related to the write down of our goodwill balances and to our intangible assets balances. See “—Significant Accounting Policies and Critical Estimates” below for additional information.

 

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Other Income (Expense)

Our interest income reflects the interest we receive on our investments, including those other than cash that are held on a short- and long-term maturity basis. Our interest expense reflects the interest we pay on our outstanding indebtedness. Our miscellaneous (expense) income results primarily from currency-related gains and losses that relate to our indebtedness that is denominated in currencies other than the U.S. Dollar, as discussed above.

Results of Operations

The following table summarizes certain information relating to our operating results that has been derived from our consolidated financial statements.

 

Statement of Operations Data:    Year ended December 31,     Three months ended
March 31,
 
(amounts in thousands)    2011     2010     2009     2012     2011  
                       (unaudited)  

Net sales

   $ 728,773      $ 694,333      $ 594,153      $ 182,195      $ 178,521   

Cost of sales

     388,298        371,223        333,963        95,884        94,980   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     340,475        323,110        260,190        86,311        83,541   

Operating expenses:

          

Selling, technical and administrative

     185,649        179,786        156,508        45,746        45,629   

Research and development

     22,966        21,005        20,103        6,718        5,359   

Amortization

     28,578        29,694        29,868        6,655        7,362   

Restructuring(1)

     896        6,234        4,228        114        (181

Impairment charges(2)

     46,438        —          68,692        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     284,527        236,719        279,399        59,233        58,169   

Operating profit (loss)

     55,948        86,391        (19,209     27,078        25,372   

Other income (expense):

          

Interest income

     500        696        458        175        108   

Interest expense(3)

     (54,554     (56,196     (60,740     (13,556 )       (14,088

Miscellaneous income (expense)(4)

     9,412        15,106        (5,020     (4,353 )       (16,172 )  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes, non-controlling interest and accumulated payment-in-kind dividend on cumulative preferred shares

     11,306        45,997        (84,511     9,344        (4,780

Income tax (expense) benefit

     (9,953     (21,723     6,427        (4,366     (1,145
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     1,353        24,274        (78,084     4,978        (5,925

(Loss) from discontinued operations, net of tax(5)

     —          —          (4,448     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     1,353        24,274        (82,532     4,978        (5,925

Less net income attributable to the non-controlling interest

     (366     (343     (295     (91     (88
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to MacDermid, Incorporated

   $ 987      $ 23,931      $ (82,827   $ 4,887      $ (6,013 )  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Charges in the three months ended March 31, 2012 and 2011 and the years ended December 31, 2011, 2010 and 2009 relate to amounts recorded in connection with our operational restructuring initiatives. For a detailed description of these operational restructuring initiatives, see the discussion below, under the headings “Operational Restructuring Expenses”, Note 20 to our audited financial statements and Note 14 to our unaudited financial statements included in this prospectus.

 

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(2) In 2011, we recorded impairment charges of $46.4 million related to a write down of our customer list intangible assets to their estimated fair value as determined in accordance with ASC 360. In 2009, we recorded (i) impairment charges of $41.2 million related to a write down of our goodwill balance to its estimated fair value as determined in accordance with ASC 350, (ii) an impairment charge of $26.1 million related to a write down of an indefinite-lived purchased intangible asset to its estimated fair value as determined in accordance with ASC 350, (iii) an impairment charge of $0.2 million related to a write down of a finite-lived purchased intangible asset to its estimated fair value as determined in accordance with ASC 360 and (iv) an impairment charge of $1.2 million related to a write down of equipment to its estimated fair value as determined in accordance with ASC 360. For a detailed description of these impairment charges, see the discussion under the headings Impairment Charges” below and Note 5 to our audited financial statements included in this prospectus.
(3) Primarily reflects interest expense associated with our long-term debt for periods after the Acquisition.
(4) Represents remeasurement (gain) loss on foreign denominated debt as a result of changes in foreign exchange rates. For a detailed description of these remeasurement gains/losses charges, see the discussion under the headings “Miscellaneous (Expense) Income” in this section below, Note 17 to our audited financial statements and Note 13 to our unaudited financial statements included in this prospectus.
(5) Reflects loss (gain) from discontinued operations related to the sale of Offset in 2008 and the sale of our ColorSpan printing business in 2007. All operating results exclude amounts associated with discontinued operations.

The following table summarizes certain information relating to our operating results as a percentage of total revenues and has been derived from the financial information presented above. We believe this presentation is useful to investors in comparing historical results. Certain amounts in the table may not sum due to the rounding of individual components.

 

     Year ended December 31,     Three months ended
March 31,
 
     2011     2010     2009         2012             2011      

Net sales

     100.0     100.0     100.0     100.0     100.0

Cost of sales

     53.3     53.5     56.2     52.6     53.2

Gross profit

     46.7     46.5     43.8     47.4     46.8

Operating expenses:

          

Selling, technical and administrative

     25.5     25.9     26.3     25.1     25.6

Research and development

     3.2     3.0     3.4     3.7     3.0

Amortization

     3.9     4.3     5.0     3.7     4.1

Restructuring

     0.1     0.9     0.7     0.1     -0.1

Impairment charges

     6.4     *        11.6     *        *   

Total operating expenses

     39.0     34.1     47.0     32.5     32.6

Operating profit (loss)

     7.7     12.4     -3.2     14.9     14.2

Other income (expense):

          

Interest income

     0.1     0.1     0.1     0.1     0.1

Interest expense

     -7.5     -8.1     -10.2     -7.4     -7.9

Miscellaneous (expense) income

     1.3     2.2     -0.8     -2.4     -9.1

Income (loss) from continuing operations before income taxes, non-controlling interest and accumulated payment-in-kind dividend on cumulative preferred shares

     1.6     6.6     -14.2     5.1     -2.7

Income tax (expense) benefit

     -1.4     -3.1     1.1     -2.4     -0.6

Income (loss) from continuing operations

     0.2     3.5     -13.1     2.7     -3.3

(Loss) from discontinued operations, net of tax

     *        *        -0.7     *        *   

Net income (loss)

     0.2     3.5     -13.9     2.7     -3.3

Less net income attributable to the non-controlling interest

     -0.1        *        *        *        *   

Net income (loss) attributable to MacDermid, Incorporated

     0.1     3.5     -13.9     2.7     -3.4

 

* Not meaningful.

 

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Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Net Sales

Our net sales of $182.2 million for the three months ended March 31, 2012 increased by $3.7 million, or 2.1%, compared to the same period in 2011. Our net sales for the three months ended March 31, 2012 were negatively impacted by $1.6 million due to the increase in value of the U.S. Dollar during the three months ended March 31, 2012 compared to the same period in 2011. We believe that net sales of products that we have identified as new products, which represent opportunities to enter markets adjacent to those we currently serve, was $13.9 million for the three months ended March 31, 2012, compared to $12.3 million for the same period in 2011. Our Industrial segment net sales for the three months ended March 31, 2012 were flat compared to the same period in 2011, primarily attributable to an increase of $6.3 million in our Offshore Solutions business offset by a decrease of $2.5 million in our Industrial Solutions business and a decrease of $3.8 million in our Electronic Solutions business. The 38.7% increase in net sales in our Offshore Solutions business was primarily due to increased customer demand. The 9.6% decrease in net sales in our Electronics Solutions business was primarily due to lower sales in Asia as we exited certain lower margin product markets in 2011. Our Printing segment had higher net sales for the three months ended March 31, 2012 of $3.6 million, or 9.6%, compared to the same period in 2011.

Our Industrial Americas operations had the largest increase in net sales among the operations in our Industrial segment for the three months ended March 31, 2012, of $5.3 million, or 13.4%, due to higher offshore product sales of $3.1 million as a result of increased customer demand, higher sales of $1.6 million in the Industrial Americas operations due to higher sales of our industrial products and $0.8 million of sales related to an acquisition of a company in Brazil which closed in February 2012. Our Industrial Europe operations had higher net sales of $0.4 million, or 0.7% for the three months ended March 31, 2012 compared to the same period in 2011. Our sales for the three months ended March 31, 2012 were adversely impacted by the U.S. Dollar increasing in value against both the Euro (4.2%) and the British Pound Sterling (1.9%) for the three months ended March 31, 2012 compared to the same period in 2011. The increase in value of the U.S. Dollar for the three months ended March 31, 2012 was offset by increased industrial product sales in Germany and Italy within our Industrial Europe operations, in each case compared to the same period in 2011. Our Industrial Asia operations had lower sales of $5.7 million, or 11.3%, for the three months ended March 31, 2012 compared to the same period in 2011 due to our exit of certain lower margin product markets in 2011.

Our Printing Asia operations had lower net sales for the three months ended March 31, 2012, of $0.1 million, or 1.4%, compared to the same period in 2011, due to decreased sales of lower margin analog plates relative to higher margin digital plates in Asia. Our Printing Americas operations reported higher net sales levels for the three months ended March 31, 2012 of $1.4 million, or 6.5%, compared to the same period in 2011 due to stronger customer demand for digital printing sheets and the introduction of new products. This increase primarily reflected a gain in market share as a result of customers switching to our LUX® process. Our Printing Europe operations had higher net sales for the three months ended March 31, 2012 of $2.3 million, or 19.2%, compared to the same period in 2011 primarily because of increased customer orders and new product sales, offset by a weaker Euro as compared to the U.S. Dollar for the three months ended March 31, 2012 compared to the same period in 2011.

Changes in our product mix and the average selling prices of our products did not have a material impact on our net sales for the three months ended March 31, 2012 compared to the same period in 2011.

Gross Profit

For the three months ended March 31, 2012, our gross profit increased $2.8 million, or 3.3%, compared to the same period in 2011. Our gross profit for the three months ended March 31, 2012 was negatively impacted by $0.9 million due to the increase in value of the U.S. Dollar during the three months ended March 31, 2012 compared to the same period in 2011. The increase was attributable to higher net sales, offset by increased raw material costs. As a percentage of net sales, gross profit for the three months ended March 31, 2012 was 47.4%,

 

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as compared to 46.8% for the same period in 2011. The increase in gross profit percentage was primarily due to higher sales for the three months ended March 31, 2012 as compared to the same period in 2011. Changes in our product mix and the average selling prices of our products did not have a material impact on our gross profit for the three months ended March 31, 2012 compared to the same period in 2011.

Selling, Technical and Administrative Expenses

Our selling, technical and administrative expenses increased $0.1 million, or 0.3%, for the three months ended March 31, 2012 compared to the same period in 2011. This increase was primarily the result of higher selling expenses associated with our higher sales for the three months ended March 31, 2012 as compared to the same period in 2011, an increase in salary expenses for the three months ended March 31, 2012 as compared to the same period in 2011 and higher corporate bonus expense of $0.5 million recorded for the three months ended March 31, 2012 compared to the same period in 2011, offset by a decrease in travel expense and lower selling, technical and administrative expenses in our Industrial Asia operations for the three months ended March 31, 2012 compared to the same period in 2011. As a percentage of our net sales, our selling, technical and administrative expenses were 25.1% for the three months ended March 31, 2012 compared to 25.6% for the same period in 2011. This decrease is primarily due to the increase in net sales for the three months ended March 31, 2012 compared to the same period in 2011.

Research and Development Expenses

Our research and development expenses for the three months ended March 31, 2012 increased $1.4 million, or 25.4%, from the same period in 2011. This increase was primarily due to increased research and development activity during the three months ended March 31, 2012 compared to the same period in 2011. As a percentage of our net sales, our research and development expenses were 3.7% for the three months ended March 31, 2012, as compared to 3.0% for the same period in 2011. The increase is due to higher product development costs for the three months ended March 31, 2012, as compared to the same period in 2011.

Amortization Expenses for Finite-Lived Purchased Intangible Assets

Amortization expenses for finite-lived purchased intangible assets related to developed technology and customer lists for the three months ended March 31, 2012 decreased by $0.7 million, or 9.6%, compared to the same period in 2011. This decrease is due to lower amortization expense recorded for the three months ended March 31, 2012 subsequent to the impairment charge recorded in 2011.

Operational Restructuring Expenses

During the three months ended March 31, 2012, we recorded $0.1 million of restructuring expense. We recorded $0.2 million related to the elimination of three positions in our Industrial Europe operations. Additionally, we reversed $(0.1) million related to accrued benefits and costs in our Industrial and Printing Europe operations as the amounts were no longer due to employees, and we reversed certain lease termination costs and estimated legal costs that were no longer required. As of March 31, 2012, we have accrued restructuring costs of $1.2 million for headcount reductions that are anticipated to be paid out by December 31, 2012. We anticipate that these headcount reductions will have annual cash cost savings of approximately $0.3 million going forward. Actual cash cost savings to be realized depend on the timing of payments and many other factors, some of which are beyond our control, and could differ materially from our estimates. We anticipate recognizing the estimated cash cost savings once all the payments have been finalized related to these restructuring initiatives.

During the three months ended March 31, 2011, we recorded $(0.2) million of restructuring expense. We reversed $(0.1) million related to accrued benefits in our Industrial Europe operations as the amounts were no longer due to employees and $(0.1) million related to accrued estimated legal costs that were no longer required.

 

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Interest Expense

Interest expense for the three months ended March 31, 2012 decreased by $0.5 million, or 3.8%, compared to the same period in 2011 due to lower debt balances outstanding during the three months ended March 31, 2012 compared to the same period in 2011.

Miscellaneous (Expense) Income

Miscellaneous expense for the three months ended March 31, 2012 was $4.4 million compared to $16.2 million of miscellaneous expense recorded during the same period in 2011. This difference was due primarily to a remeasurement charge on our Euro denominated debt. For the three months ended March 31, 2012, we recorded a remeasurement loss of $4.4 million on our Euro denominated debt due to the fluctuation of the Euro compared to the U.S. Dollar. The Euro increased in value against the U.S. Dollar by 3.0% from December 31, 2011 to March 31, 2012. For the three months ended March 31, 2011, we recorded a remeasurement loss of $10.1 million on our Euro denominated debt as the Euro increased in value by 6.0% against the U.S. Dollar from December 31, 2010 to March 31, 2011. For the three months ended March 31, 2012, we recorded a remeasurement gain of $0.1 million on our foreign denominated intercompany loans compared to a remeasurement loss of $6.3 million recorded for the same period in 2011. For the three months ended March 31, 2012, we recorded a loss on settlement of foreign currency derivative contracts of less than $0.1 million compared to a gain of $0.3 million for the three months ended March 31, 2011.

Income Tax Expense

For the three months ended March 31, 2012, our effective tax rate was 46.7% versus (24.0%) for the same period in 2011. Earnings before tax and discrete items increased by $4.2 million during the three months ended March 31, 2012 compared to the same period in 2011 whereas tax expense increased $3.2 million for the three months ended March 31, 2012 compared to the same period in 2011. This increase in income tax expense was a result of the earnings mix of our entities within taxing jurisdictions and foreign exchange gains and losses. Foreign exchange gains and losses are treated as discrete items in determining our estimated annual tax rate. Foreign exchange gains and losses are considered discrete items because of the difficulty in estimating their full-year impact on our estimated annual tax rate. Foreign exchange losses decreased by $10.0 million for the three months ended March 31, 2012 compared to the same period in 2011, resulting in an overall loss of $4.5 million for the three months ended March 31, 2012 with a corresponding increase in income tax expense of $1.3 million during the three months ended March 31, 2012 compared to the same period in 2011. Finally, the tax impact of other discrete items decreased $0.5 million for the three months ended March 31, 2012 compared to the same period in 2011. Foreign exchange gain/loss will occur in the future, although it is extremely difficult to estimate the amount of the future impact.

Segment Reporting

The following discussion breaks down our net sales and operating profit by operating segment for the three months ended March 31, 2012 compared to the same period in 2011.

Industrial—Net sales were flat for the three months ended March 31, 2012 as compared to the same period in 2011. Net sales for the three months ended March 31, 2012 were negatively impacted by $1.2 million due to the increase in value of the U.S. Dollar during the three months ended March 31, 2012 compared to the same period in 2011. Our Industrial Americas operations experienced the highest net sales growth among the operations in our Industrial segment for the three months ended March 31, 2012 of $5.3 million, or 13.4%, due to higher offshore product sales of $3.1 million as the result of increased customer demand, $1.6 million of higher sales of our industrial products and $0.8 million of sales attributable to an acquisition of a company in Brazil that was completed in the three months ended March 31, 2012. Our Industrial Europe operations had higher net sales of $0.4 million, or 0.7%, for the three months ended March 31, 2012 compared to the same period in 2011. Our sales for the three months ended March 31, 2012 were adversely impacted by the U.S. Dollar increasing in value

 

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against both the Euro (4.2%) and the British Pound Sterling (1.9%) for the three months ended March 31, 2012 compared to the same period in 2011. The increase in value of the U.S. Dollar for the three months ended March 31, 2012 was offset by increased industrial product sales in Germany and Italy within our Industrial Europe operations, in each case compared to the same period in 2011. Our Industrial Asia operations had lower sales of $5.7 million, or 11.3%, for the three months ended March 31, 2012 compared to the same period in 2011 due to our exit of certain lower margin product markets in 2011.

Operating profit for our Industrial segment for the three months ended March 31, 2012 increased by $1.0 million, or 5.0%, as compared to the same period in 2011. This increase is primarily attributable to higher sales levels for the three months ended March 31, 2012 compared to the same period in 2011. Our Industrial operating profit for was negatively impacted by $0.7 million for the three months ended March 31, 2012 due to the decrease in value of the U.S. Dollar during the three months ended March 31, 2012 compared to the same period in 2011.

 

     Three months ended
March 31,
     2012
to 2011
% Change
 
(amounts in thousands)    2012      2011     
                   Favorable
(Unfavorable)
 

Industrial

        

Net sales

   $ 140,466       $ 140,435         0.0

Operating profit

   $ 20,744       $ 19,747         5.0

Printing—Net sales increased by $3.6 million, or 9.6%, for the three months ended March 31, 2012 as compared to the same period in 2011. Net sales for the three months ended March 31, 2011 were negatively impacted by $0.4 million due to the increase in value of the U.S. Dollar during the three months ended March 31, 2012 compared to the same period in 2011. Our Printing Europe operations had higher sales for the three months ended March 31, 2012 of $2.3 million, or 19.2%, compared to the same period in 2011 primarily because of increased customer orders and new product sales, offset by a weaker Euro as compared to the U.S. Dollar. Our Printing Americas operations reported higher net sales levels for the three months ended March 31, 2012 of $1.4 million, or 6.5%, compared to the same period in 2011 due to stronger customer demand for digital printing sheets and the introduction of new products. This increase primarily reflects a gain in market share as a result of customers switching to our LUX® process. Our Printing Asia operations had lower net sales for the three months ended March 31, 2012 of $0.1 million, or 1.4%, compared to the same period in 2011 because of lower sales of non-proprietary products in the three months ended March 31, 2012 compared to the same period in 2011.

Operating profit for our Printing segment for the three months ended March 31, 2012 was $0.7 million, or 12.6%, higher than the same period in 2011. Operating profit increased primarily because of the increase in net sales in our Printing Americas and Europe operations, as discussed above, and the introduction of higher margin products in 2011 in those operations, and was offset by the decrease in net sales in our Printing Asia operations, for the reasons discussed above. Our Printing segment operating profit for the three months ended March 31, 2012 was negatively impacted by $0.2 million due to the increase in value of the U.S. Dollar during the three months ended March 31, 2012 compared to the same period in 2011.

 

     Three months ended
March 31,
     2012
to 2011
% Change
 
(amounts in thousands)    2012      2011     
                   Favorable
(Unfavorable)
 

Printing

        

Net sales

   $ 41,729       $ 38,086         9.6

Operating profit

   $ 6,334       $ 5,625         12.6

 

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Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Net Sales

Our net sales of $728.8 million for the year ended December 31, 2011 increased by $34.4 million, or 5.0%, compared to the same period in 2010. Our net sales for the year ended December 31, 2011 were positively impacted by $25.4 million due to the decrease in value of the U.S. Dollar during the year ended December 31, 2011 compared to the same period in 2010. We believe that net sales of products that we have identified as new products, which represent opportunities to enter markets adjacent to those we currently serve, was $56.0 million for the year ended December 31, 2011, compared to $35.6 million for the same period in 2010. Our Industrial segment had higher net sales for the year ended December 31, 2011 of $32.6 million, or 6.1%, compared to the same period in 2010, primarily attributable to an increase of $20.3 million in our Industrial Solutions business and an increase of $5.3 million in our Electronic Solutions business. The 6.3% increase in net sales in our Industrial Solutions business was due primarily to increased product sales in Europe as a result of the impact on our customers of increased demand in the automotive industry, and the 3.4% increase in net sales in our Electronic Solutions business was primarily due to increased customer demand for electronic products. Our Printing segment had higher net sales for the year ended December 31, 2011 of $1.8 million, or 1.1%, compared to the same period in 2010.

Our Industrial Europe operations had the largest increase in net sales among the operations in our Industrial segment for the year ended December 31, 2011, of $23.1 million, or 12.8%, due to an increase in our industrial product sales and both a stronger British Pound Sterling and Euro as compared to the U.S. Dollar for the majority of the year ended December 31, 2011 compared to the same period in 2010. Approximately 59% of the increase in net sales was attributable to the increase in industrial product sales, and the remaining approximately 41% of the increase in net sales was due to the stronger British Pound Sterling and Euro. Within our Industrial Europe operations, the increase in industrial product sales resulted primarily from increased volume within our existing customer base in the United Kingdom, Germany, Benelux and Central Europe, primarily due to the impact on our customers of increased demand in the automotive industry. In Italy, France and the United Kingdom, we gained new market share with respect to various products within our Industrial Solutions business. Net sales also increased in our Industrial Americas operations for the year ended December 31, 2011, compared to the same period in 2010, because of increased customer demand for industrial and electronic products. This increased demand resulted primarily from increased production in the automobile industry. While net sales in our Industrial Americas operations reflected increased sales to existing customers, we also gained market share in our Industrial Americas operations as a result of new customers in Brazil.

Our Printing Asia operations had lower net sales for the year ended December 31, 2011, of $3.7 million, or 17.7%, compared to the same period in 2010, due to the expiration of a consignment distribution sales agreement of Offset products in 2010, pursuant to which we had agreed to provide transition services to the buyer of Offset, and decreased sales of lower margin analog plates relative to higher margin digital plates in Asia. Our Printing Americas operations reported higher net sales levels for the year ended December 31, 2011 of $1.7 million, or 2.0%, compared to the same period in 2010 due to stronger customer demand for digital printing sheets and the introduction of new products. This increase primarily reflects a gain in market share as a result of customers switching to our LUX® process. Our Printing Europe operations had higher net sales for the year ended December 31, 2011 of $3.8 million, or 7.3%, compared to the same period in 2010 primarily because of increased customer orders, new product sales and a stronger Euro as compared to the U.S. Dollar for the majority of the year ended December 31, 2011 compared to the same period in 2010.

Changes in our product mix and the average selling prices of our products did not have a material impact on our net sales for the year ended December 31, 2011 compared to the same period in 2010.

 

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Gross Profit

For the year ended December 31, 2011, our gross profit increased $17.4 million, or 5.4%, compared to the same period in 2010. Our gross profit for the year ended December 31, 2011 was positively impacted by $11.5 million due to the decrease in value of the U.S. Dollar during the year ended December 31, 2011 compared to the same period in 2010. The remainder of the increase was attributable to higher net sales, offset by increased raw material costs. As a percentage of net sales, gross profit for the year ended December 31, 2011 was 46.7%, as compared to 46.5% for the same period in 2010. The increase in gross profit percentage was primarily due to slightly higher product sales prices offset by higher raw material costs for the year ended December 31, 2011 as compared to the same period in 2010. Changes in our product mix and the average selling prices of our products did not have a material impact on our gross profit for the year ended December 31, 2011 compared to the same period in 2010.

Selling, Technical and Administrative Expenses

Our selling, technical and administrative expenses increased $5.9 million, or 3.3%, for the year ended December 31, 2011 compared to the same period in 2010. This increase was primarily the result of higher selling expenses associated with our higher sales for the year ended December 31, 2011 as compared to the same period in 2010 and an increase in salary expenses for the year ended December 31, 2011 as compared to the same period in 2010, offset by lower corporate bonus expense of $2.9 million recorded for the year ended December 31, 2011 compared to the same period in 2010. As a percentage of our net sales, our selling, technical and administrative expenses were 25.5% for the year ended December 31, 2011, compared to 25.9% for the same period in 2010. This decrease is primarily due to the increase in net sales for the year ended December 31, 2011 compared to the same period in 2010.

Research and Development Expenses

Our research and development expenses for the year ended December 31, 2011 increased $2.0 million, or 9.3%, from the same period in 2010. This increase was primarily due to additional investments made to support certain strategic projects during the year ended December 31, 2011, as compared to the same period in 2010. As a percentage of our net sales, our research and development expenses were 3.2% for the year ended December 31, 2011, as compared to 3.0% for the same period in 2010. The increase is due to higher salary expense for the year ended December 31, 2011, as compared to the same period in 2010.

Amortization Expenses for Finite-Lived Purchased Intangible Assets

Amortization expenses for finite-lived purchased intangible assets related to developed technology and customer lists for the year ended December 31, 2011 decreased by $1.1 million, or 3.8%, compared to the same period in 2010. This decrease is due to the $46.1 million impairment charge related to a portion of our customer list intangible assets in our Industrial Asia reporting unit recorded in 2011 and a portion of our customer list intangible assets being fully amortized in 2011.

Operational Restructuring Expenses

During the year ended December 31, 2011, we recorded $0.9 million of operational restructuring expenses. We recorded $0.9 million related to the elimination of four positions in our Industrial Europe operations and $0.2 million related to the elimination of seven positions in our Industrial Asia operations. We also reversed $(0.2) million of operational restructuring charges related to accrued benefits in our Industrial Europe operations as the amounts were no longer due to employees and for estimated legal costs that were no longer required. As of December 31, 2011, we have accrued operational restructuring costs of $1.2 million that are anticipated to be paid out by December 31, 2012. We anticipate that these headcount reductions will have annual cash cost savings of approximately $0.5 million going forward. Actual cash cost savings to be realized depend on the timing of

 

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payments and many other factors, some of which are beyond our control, and could differ materially from our estimates. We anticipate recognizing the estimated cash cost savings once all the payments have been finalized related to these restructuring initiatives in our results of operations and cash flows.

During the year ended December 31, 2010, we recorded $6.2 million of operational restructuring expenses. We recorded $3.3 million related to the elimination of 39 positions in our Industrial segment operations. We also recorded operational restructuring expenses of $0.4 million related to lease termination cost, and long term asset write down expense of $2.4 million, equipment disposal expense of $0.2 million and other miscellaneous costs of $0.1 million in our Industrial segment operations. We also reversed $(0.2) million of operational restructuring charges related to accrued benefits in our Industrial segment operations as the amounts were no longer due to employees. We believe we have recognized $5.0 million, the full amount of the anticipated annual cost savings related to our 2010 headcount reductions, in our results of operations for the year ended December 31, 2011. We have recognized the cash cost savings from these restructuring initiatives subsequent to December 31, 2010 in our results of operations and cash flows, and we anticipate that we will continue to recognize approximately $5.0 million of annual cash cost savings going forward.

Impairment Charges

During the year ended December 31, 2011, we recorded $46.4 million of impairment charges related to a write down of the customer list intangible assets in our Industrial Asia reporting unit. The main factors causing the impairment charges of $46.4 million were the reluctance of our customers to accept price increases on such products, our reluctance to continue selling such products, which require technical support, at low margin levels and increased pricing pressure from competitors.

During the year ended December 31, 2010, there were no impairment charges recorded.

Interest Expense

Interest expense for the year ended December 31, 2011 decreased by $1.6 million, or 2.9%, compared to the same period in 2010 due to lower debt balances outstanding during the year ended December 31, 2011 compared to the same period in 2010.

Miscellaneous Income

Miscellaneous income for the year ended December 31, 2011 was $9.4 million compared to the $15.1 million of miscellaneous income recorded during the same period in 2010. This difference was due primarily to a remeasurement charge on our Euro denominated debt. For the year ended December 31, 2011, we recorded a remeasurement gain of $4.1 million on our Euro denominated debt, due to the fluctuation of the Euro compared to the U.S. Dollar. Although the change in the value of the Euro to the U.S. Dollar from December 31, 2010 to December 31, 2011 was a decrease of 3.1%, the Euro was stronger against the U.S. Dollar for the first half of 2011. Specifically, the Euro appreciated in value by 8.5% against the U.S. Dollar during the period from December 31, 2010 to June 30, 2011 and declined in value by 10.6% against the U.S. Dollar during the period from June 30, 2011 to December 31, 2011. For the year ended December 31, 2010, we recorded a remeasurement gain of $11.0 million on our Euro denominated debt as the Euro decreased in value by 6.6% against the U.S. Dollar from December 31, 2009 to December 31, 2010. For the year ended December 31, 2011, we recorded a remeasurement gain of $5.1 million on our foreign denominated intercompany loans compared to a remeasurement gain of $6.4 million recorded for the same period in 2010. For the year ended December 31, 2011, we recorded a gain on settled foreign currency hedges of $0.6 million compared to a loss of $1.3 million for the same period in 2010. For the year ended December 31, 2011, we recorded $0.2 million of foreign exchange losses compared to $1.0 million of foreign exchange losses for the same period in 2010.

 

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Income Tax Expense

For the year ended December 31, 2011, our effective tax rate was 88.0%. We are a U.S. based company with a statutory income tax rate of 35%. However, we operate in 23 foreign countries, which have tax rates that are different from the U.S. statutory tax rate. Our 2011 annual effective tax rate differed from the U.S. statutory rate of 35% in 2011 due to: (1) the imposition of taxes in different tax jurisdictions combined with the earnings mix in these taxing jurisdictions, (2) the impact of tax rate changes in certain taxing jurisdictions during 2011 which resulted in a change to accumulated deferred tax balances and a tax benefit to the 2011 tax rate, (3) the recognition of taxes on certain foreign earnings because management anticipates that such earnings will be repatriated in the future and (4) the effect of valuation allowances. The foreign tax rate differential is a benefit of $1.5 million. This item is a result of different tax rates applied to foreign pre-tax income as well as the impact of repatriating income from overseas locations, net of allowed foreign tax credits. There were several tax rate changes instituted in 2011 which resulted in a tax benefit of $0.9 million. We also recognized a deferred tax charge of $1.2 million for foreign earnings that may be repatriated in the future. For the year ended December 31, 2011, we had a charge of $6.7 million for increases to our valuation allowances. Each one of these factors impacting our 2011 effective tax rate will likely also impact the tax rate in the future, although it is extremely difficult to estimate the amount of their future impact.

In 2010, our effective tax rate was 47.2%. Our annual effective tax rate differed from the U.S. statutory rate of 35% in 2010 due to: (1) the imposition of taxes in different tax jurisdictions combined with the earnings mix in these taxing jurisdictions, (2) the recognition of taxes on certain foreign earnings because management anticipates that such earnings will be repatriated in the future, (3) the effect of uncertain tax positions and (4) the effect of valuation allowances. The foreign tax rate differential is a benefit of $0.7 million. This item is a result of different tax rates applied to foreign pre-tax income as well as the impact of repatriating income from overseas locations, net of allowed foreign tax credits. Our 2010 income tax expense also includes a reserve of approximately $5.6 million for uncertain tax benefits which significantly increased the 2010 effective tax rate. We also recognized a deferred tax charge of $0.9 million for foreign earnings that may be repatriated in the future. For the year ended December 31, 2010, we had a charge of $1.7 million for increases to our valuation allowances. Each one of these factors impacting our 2010 effective tax rate will likely also impact the tax rate in the future, although it is extremely difficult to estimate the amount of their future impact.

Segment Reporting

The following discussion breaks down our net sales and operating profit by operating segment for the year ended December 31, 2011 compared to the same period in 2010.

Industrial—Net sales increased by $32.6 million, or 6.1%, for the year ended December 31, 2011 as compared to the same period in 2010. Net sales for the year ended December 31, 2011 were positively impacted by $21.5 million due to the decrease in value of the U.S. Dollar during the year ended December 31, 2011 compared to the same period in 2010. Our Industrial Europe operations experienced the highest net sales growth among the operations in our Industrial segment for the year ended December 31, 2011 of $23.1 million, or 12.8%, due to an increase in our industrial product sales and both a stronger British Pound Sterling and Euro against the U.S. Dollar for the majority of the year ended December 31, 2011 compared to the same period in 2010. Approximately 59% of the increase in net sales was attributable to the increase in industrial product sales, and the remaining approximately 41% of the increase was due to the stronger British Pound Sterling and Euro. Within our Industrial Europe operations, the increase in industrial product sales resulted primarily from increased volume within our existing customer base in the United Kingdom, Germany, Benelux and Central Europe, primarily due to the impact on our customers of increased demand in the automotive industry. In Italy, France and the United Kingdom, we gained new market share with respect to various products within our Industrial Solutions business. Net sales also increased in our Industrial Americas operations for the year ended December 31, 2011, compared to the same period in 2010, because of increased customer demand for industrial and electronic products. This increased demand resulted primarily from increased production in the automobile

 

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industry. While net sales in our Industrial Americas operations reflected increased sales to existing customers, we also gained market share in our Industrial Americas operations as a result of new customers in Brazil.

Operating profit for our Industrial segment for the year ended December 31, 2011 decreased by $34.7 million, or 53.4%, as compared to the same period in 2010. This decrease is primarily attributable to the $46.4 million of impairment charges related to a write down of the customer list intangible assets in our Industrial Asia reporting unit recorded during the year ended December 31, 2011 and also reflects increased raw material costs. Offsetting these impairment charges are an increase in net sales in our Industrial Americas and Europe operations for the reasons discussed above and lower operating costs as a result of previous restructuring programs. Our Industrial operating profit was positively impacted by $3.4 million for the year ended December 31, 2011 due to the decrease in value of the U.S. Dollar during the year ended December 31, 2011 compared to the same period in 2010.

 

     Year ended
December 31,
     2011
to 2010
% Change
 

(amounts in thousands)

   2011      2010     
                  

Favorable
Unfavorable)

 

Industrial

        

Net sales

   $ 568,578       $ 535,945         6.1

Operating profit

   $ 30,331       $ 65,053         -53.4

Printing—Net sales increased by $1.8 million, or 1.1%, for the year ended December 31, 2011 as compared to the same period in 2010. Net sales for the year ended December 31, 2011 were positively impacted by $3.9 million due to the decrease in value of the U.S. Dollar during the year ended December 31, 2011 compared to the same period in 2010. Our Printing Europe operations had higher sales for the year ended December 31, 2011 of $3.8 million, or 7.3%, compared to the same period in 2010 primarily because of increased customer orders, new product sales and a stronger Euro as compared to the U.S. Dollar for the majority of the year ended December 31, 2011 compared to the same period in 2010. Our Printing Americas operations reported higher net sales levels for the year ended December 31, 2011 of $1.7 million, or 2.0%, compared to the same period in 2010 due to stronger customer demand for digital printing sheets and the introduction of new products. This increase primarily reflects a gain in market share as a result of customers switching to our LUX® process. Our Printing Asia operations had lower net sales for the year ended December 31, 2011 of $3.7 million, or 17.7%, compared to the same period in 2010 because of the expiration of a consignment distribution sales agreement of Offset products in 2010, pursuant to which we had agreed to provide transition services to the buyer of Offset, and decreased sales of lower margin analog plates relative to higher margin digital plates in Asia.

Operating profit for our Printing segment for the year ended December 31, 2011 was $4.3 million, or 20.1%, higher than the same period in 2010. Our Printing segment operating profit for the year ended December 31, 2011 was positively impacted by $1.0 million due to the decrease in value of the U.S. Dollar during the year ended December 31, 2011 compared to the same period in 2010. Operating profit increased primarily because of the increase in net sales in our Printing Americas and Europe operations, as discussed above, and the introduction of higher margin products in 2011 in those operations and was offset by the decrease in net sales in our Printing Asia operations, for the reasons discussed above.

 

     Year ended
December 31,
     2011
to 2010
% Change
 
(amounts in thousands)    2011      2010     
                   Favorable
(Unfavorable)
 

Printing

        

Net sales

   $ 160,195       $ 158,388         1.1

Operating profit

   $ 25,617       $ 21,338         20.1

 

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Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Net Sales

Our net sales of $694.3 million for the year ended December 31, 2010 increased by $100.2 million, or 16.9%, compared to the same period in 2009. Our net sales for the year ended December 31, 2010, were positively impacted by $3.4 million due to the decrease in value of the U.S. Dollar during the year ended December 31, 2010 compared to the same period in 2009. We believe that net sales of products that we have identified as new products, which represent opportunities to enter markets adjacent to those we currently serve, was $35.6 million for the year ended December 31, 2010, compared to $12.2 million for the same period in 2009.

Our Industrial segment had higher net sales for the year ended December 31, 2010 of $86.9 million, or 19.3%, compared to the same period in 2009, primarily attributable to an increase of $58.5 million in our Industrial Solutions business and an increase of $20.3 million in our Electronic Solutions business. The 22.3% increase in net sales in our Industrial Solutions business was due primarily to improved economic conditions, resulting in increased demand for our products used in the automotive sector, and the 15.2% increase in net sales in our Electronic Solutions business was primarily due to increased customer demand for our products used in the consumer and industrial electronic sectors. Our Printing segment had higher net sales for the year ended December 31, 2010 of $13.3 million, or 9.2%. Our 2010 net sales were positively impacted as economic conditions improved during the year, and we experienced higher demand for our industrial products used in the automotive sector and our electronic products used in consumer and industrial electronic products. Our Industrial Asia operations experienced the highest net sales growth among the operations in our Industrial segment for the year ended December 31, 2010 of $39.6 million, or 24.3%, due to an increase in both electronic and industrial product sales and a weaker U.S. Dollar against Asian currencies. Approximately 89% of the growth in net sales was attributable to the increase in product sales, with the remaining 11% due to the weaker U.S. Dollar. Net sales also increased in our Industrial Americas and Europe operations for the year ended December 31, 2010 compared to the same period in 2009 because of increased customer demand for industrial and electronic products. Increased customer demand for these products resulted primarily from improvements in the global economy and the resulting impact on demand for our customers’ end products. Our Printing Americas operations had higher net sales for the year ended December 31, 2010 of $9.8 million, or 13.1%, compared to the same period in 2009, due to higher demand for our digital printing sheets utilized in commercial printing. Our Printing Asia and Europe operations also had higher net sales levels for the year ended December 31, 2010 compared to 2009 due to stronger customer demand for digital printing sheets. Increased customer demand for digital printing sheets corresponded to our conversion from an analog to a digital model in connection with our LUX® process in the third quarter of 2010.

Changes in our product mix and the average selling prices of our products did not have a material impact on our net sales for the year ended December 31, 2010 compared to the same period in 2009.

Gross Profit

For the year ended December 31, 2010, our gross profit increased $62.9 million, or 24.2%, compared to the same period in 2009. Our gross profit for the year ended December 31, 2010 was positively impacted by $1.9 million due to the decrease in value of the U.S. Dollar during the year ended December 31, 2010 compared to the same period in 2009. As a percentage of net sales, gross profit for the year ended December 31, 2010 was 46.5% compared to 43.8% in 2009. The overall increase was attributable to higher net sales, which was offset by increased raw material costs. The increase in gross profit as a percentage of sales from 2009 to 2010 was also positively impacted by the operational restructuring programs discussed above, which significantly decreased our manufacturing costs in 2009 and were effective for a full year in 2010. As discussed above, we have experienced higher raw material costs used in the manufacturing process in certain products, which adversely impacted our gross profit percentage. Changes in our product mix and the average selling prices of our products did not have a material impact on our gross profit for the year ended December 31, 2010 compared to the same period in 2009.

 

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Selling, Technical and Administrative Expenses

Our selling, technical and administrative expenses increased $23.3 million, or 14.9%, for the year ended December 31, 2010, compared to the same period in 2009. This increase was primarily the result of higher selling expenses associated with our higher 2010 sales compared to 2009 and increased bonus expense of $8.1 million recorded in 2010 compared to 2009. As a percentage of our net sales, our selling, technical and administrative expenses were 25.9% for the year ended December 31, 2010, which was lower than the 2009 percentage of 26.3%. The decrease of 0.4% was primarily attributable to the higher net sales in 2010 compared to 2009.

Research and Development Expenses

Our research and development expenses increased $0.9 million, or 4.5%, for the year ended December 31, 2010, compared to the same period in 2009. This increase was primarily due to an increase in salary expenses in the third quarter of 2010 that resulted from the termination of the salary reduction measures that we implemented in 2008 and a slight increase in the headcount of personnel from 2009 to 2010. As a percentage of our net sales, our research and development expenses were 3.0% for the year ended December 31, 2010, which was lower than the 2009 percentage of 3.4%. The decrease of 0.4% was primarily attributable to the higher net sales in 2010 compared to 2009.

Amortization Expenses for Finite-Lived Purchased Intangible Assets

Amortization expenses for finite-lived purchased intangible assets related to developed technology and customer lists for the year ended December 31, 2010 decreased by $0.2 million, or 0.6%, compared to the same period in 2009. This decrease is associated with a portion of our customer lists being fully amortized during 2010.

Operational Restructuring Expenses

During the year ended December 31, 2010, we recorded $6.2 million of operational restructuring expenses. We recorded $3.3 million related to the elimination of 39 positions in our Industrial segment operations. We also recorded operational restructuring expenses of $0.4 million related to lease termination cost, and long term asset write down expense of $2.4 million, equipment disposal expense of $0.2 million and other miscellaneous costs of $0.1 million in our Industrial segment operations. We also reversed $(0.2) million of operational restructuring charges related to accrued benefits in our Industrial segment operations as the amounts were no longer due to employees. We have recognized the cash cost savings from these restructuring initiatives subsequent to December 31, 2010 in our results of operations and cash flows, and we anticipate that we will continue to recognize approximately $5.0 million of annual cash cost savings going forward.

During the year ended December 31, 2009, we recorded $3.0 million of operational restructuring expense in our Industrial segment operations related to the elimination of 134 positions and $0.6 million in our Printing segment operations related to the elimination of 41 positions. During this same period, we recorded a $0.1 million charge to operational restructuring related to other miscellaneous costs associated with the operational restructuring program in our Industrial segment operations and $0.8 million of facility costs in our Industrial segment operations related to moving a manufacturing facility in the United Kingdom. During the year ended December 31, 2009, we reversed operational restructuring expenses of $0.3 million for 2008 operational restructuring programs in our Printing segment operations. We believe we have recognized $5.3 million, the full amount of the anticipated annual cost savings related to our 2009 headcount reductions, in our results of operations for the year ended December 31, 2010. We have recognized the cash cost savings from these restructuring initiatives subsequent to December 31, 2009 in our results of operations and cash flows, and we anticipate that we will continue to recognize approximately $5.3 million of annual cash cost savings going forward.

 

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Impairment Charges

We did not record any impairment charges during the year ended December 31, 2010 compared to impairment charges of $68.7 million recorded during the year ended December 31, 2009. The impairment charges recorded during the year ended December 31, 2009, were primarily related to goodwill and intangible assets established in connection with the Acquisition. During the year ended December 31, 2009, we recorded an impairment charge of $41.2 million related to our goodwill balance. The main factor causing the impairment charge of $41.2 million was lower sales and profits generated by our Industrial segment due to the worldwide economic recession in both 2008 and 2009. This impairment charge was recorded in our Industrial segment to write down the goodwill balances in those operations to their estimated fair values in connection with our annual impairment testing of goodwill and intangible assets. Our estimated sales and profits utilized in our 2009 goodwill impairment testing, which are based on actual results for the twelve month period preceding the goodwill impairment testing date of April 1, 2009, were lower than the estimated sales and profits utilized in our 2008 impairment testing because our sales as of April 1, 2008, the date of our 2008 goodwill impairment testing, did not suggest that an economic recession was forthcoming. The worldwide economic recession, which impacted our business in the twelve month period following our April 1, 2008 goodwill impairment testing, significantly impacted the estimated sales and profits utilized in our April 1, 2009 goodwill impairment testing. We also recorded an impairment charge during the year ended December 31, 2009 of $26.1 million related to a corporate tradename to record the tradename intangible asset at its estimated fair value. The primary driver of the impairment charge recorded in 2009 related to our indefinite-lived purchased intangible assets was lower net sales levels because of the global economic recession and therefore lower profitability. The global economic recession resulted in weakening conditions in the industrial and electronic end markets the company served, which resulted in lower profitability on a consolidated basis resulting in the $26.1 million impairment charge recorded in 2009. The corporate tradename is not allocated to either of our reportable segments and is presented in the corporate assets in our total assets table in our segment reporting footnote to our consolidated financial statements. We also recorded a $0.2 million impairment charge during the year ended December 31, 2009 for a customer list intangible asset in our Industrial segment related to a strategic business decision to exit a certain market. Finally, we recorded an impairment charge of $1.2 million during the year ended December 31, 2009 in our Printing segment to write down the value of certain equipment to its estimated fair value.

Interest Expense

Interest expense for the year ended December 31, 2010 decreased by $4.5 million, or 7.5%, compared to the same period in 2009 due to lower debt balances outstanding during 2010 compared to 2009, and lower interest rates in 2010 compared to 2009 on our floating rate debt.

Miscellaneous (Expense) Income

Miscellaneous income for the year ended December 31, 2010 was $15.1 million compared to $5.0 million of miscellaneous expense recorded during the same period in 2009. This difference was due primarily to the remeasurement charge on our Euro denominated debt. For the year ended December 31, 2010, we recorded a remeasurement gain of $11.0 million on our Euro denominated debt, due to the 7.3% decrease in the value of the Euro compared to the U.S. Dollar from December 31, 2009 to December 31, 2010. For the year ended December 31, 2009, we recorded a remeasurement loss of $4.2 million on our Euro denominated debt, due to the 2.5% increase in the value of the Euro compared to the U.S. Dollar from December 31, 2008 to December 31, 2009. For the year ended December 31, 2010, we recorded a remeasurement gain of $6.4 million on our foreign denominated intercompany loans compared to a remeasurement loss of $0.9 million recorded for the same period in 2010. For the year ended December 31, 2010, we recorded a loss of $1.3 million on settled foreign currency hedges compared to a gain of $1.4 million for the same period in 2009. For the year ended December 31, 2010, we recorded $1.0 million of foreign exchange losses compared to $1.9 million of foreign exchange losses for the same period in 2009.

 

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Income Tax Expense

For the year ended December 31, 2010, our effective tax rate was 47.2%. We are a U.S. based company with a statutory income tax rate of 35%. However, we operate in 23 foreign countries, which have tax rates that are different from the U.S. statutory tax rate. Our 2010 annual effective tax rate differed from the U.S. statutory rate of 35% in 2010 due to: (1) the imposition of taxes in different tax jurisdictions combined with the earnings mix in these taxing jurisdictions, (2) the recognition of taxes on certain foreign earnings because management anticipates that such earnings will be repatriated in the future, (3) the effect of uncertain tax positions and (4) the effect of valuation allowances. The foreign tax rate differential is a benefit of $0.7 million. This item is a result of different tax rates applied to foreign pre-tax income as well as the impact of repatriating income from overseas locations, net of allowed foreign tax credits. Our 2010 income tax expense also includes a reserve of approximately $5.6 million for uncertain tax benefits which significantly increased the 2010 effective tax rate. We also recognized a deferred tax charge of $0.9 million for foreign earnings that may be repatriated in the future. For the year ended December 31, 2010 we had a charge of $1.7 million for increases to our valuation allowances. Each one of these factors impacting our 2010 effective tax rate will likely also impact the tax rate in the future, although it is extremely difficult to estimate the amount of their future impact.

In 2009, our effective tax rate was a benefit of 7.6%. Our annual effective tax rate differed from the U.S. statutory tax rate of 35% in 2009 due to (1) the imposition of taxes at different tax jurisdictions combined with the earnings mix in these taxing jurisdictions, (2) the impact of tax rate changes in certain taxing jurisdictions during 2009 which resulted in a change to accumulated deferred tax balances and a tax benefit to the 2009 tax rate, (3) the impact of reconciliations from prior years tax returns which resulted in a benefit to the 2009 tax rate, (4) the effect of goodwill impairment charges, (5) the effect of valuation allowances and (6) the effect of uncertain tax positions. The foreign tax rate differential is an expense of $9.6 million. This item is a result of different tax rates applied to foreign pre-tax income as well as the impact of repatriating income from overseas locations, net of allowed foreign tax credits. There were several tax rate changes instituted in 2009 which resulted in a tax benefit of $2.3 million as well as a return to provision reconciliation which produced a $2.6 million tax benefit. In 2009, we incurred significant charges for goodwill and intangible assets impairments which were not tax deductible and resulted in a reduction of the tax benefit by approximately $11.1 million. We also incurred a benefit of $8.4 million for the reversal of valuation allowances. Finally, during the year ended December 31, 2009, we also incurred a tax charge of approximately $12.6 million for uncertain tax positions. We cannot predict the likelihood of further changes to the statutory tax rates, return to provision reconciliation benefit and further impairment charges. All the other items impacting our 2009 tax rate will also occur in the future, although it is extremely difficult to estimate the amount of their future impact.

Segment Reporting

The following discussion breaks down our net sales and operating profit by operating segments for the year ended December 31, 2010 compared to the same period in 2009.

Industrial—Net sales increased by $86.9 million, or 19.3%, for the year ended December 31, 2010 as compared to the same period in 2009. Net sales for the year ended December 31, 2010, were positively impacted by $3.0 million due to the decrease in value of the U.S. Dollar during the year ended December 31, 2010 compared to the same period in 2009. Our 2010 Industrial net sales were also positively impacted as economic conditions improved during the year, and we experienced higher demand for our industrial products used in the automotive sector and our electronic products used in the consumer and industrial electronic sectors. Our Industrial Asia operations experienced the largest net sales increase among the operations in our Industrial segment for 2010 of $39.6 million, or 24.3%, due to an increase in both electronic and industrial product sales and a weaker U.S. Dollar against Asian currencies. Approximately 89% of the growth in net sales was attributable to the increase in product sales, with the remaining 11% due to the weaker U.S. Dollar. Net sales also increased in our Industrial Americas and Europe operations for 2010 compared to 2009, because of increased customer demand for industrial and electronic products. Increased customer demand for these products resulted primarily from improvements in the global economy and the resulting impacts on demand for our customers’ end products.

 

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Operating profit for the year ended December 31, 2010 for the Industrial segment increased by $98.0 million, or 297.5%, as compared to the same period in 2009. The increase in operating profit was due to the increase in net sales in all of our Industrial operations for the reasons discussed above as well as the $67.5 million of impairment charges for goodwill, customer lists and tradenames recorded during the year ended December 31, 2009. Our Industrial operating profit for the year ended December 31, 2010 compared to the same period in 2009 was positively impacted by $0.1 million due to the decrease in value of the U.S. Dollar during the year ended December 31, 2010 compared to the same period in 2009. Depreciation and amortization in our Industrial segment decreased by $1.1 million, or 2.7%, for the year ended December 31, 2010 compared to the same period in 2009. The decrease was primarily attributable to a lower base of depreciable assets in our Industrial Europe operations due to equipment write-downs recorded in 2010.

 

     Year ended
December 31,
    2009
to 2010
% Change
 
(amounts in thousands)    2010      2009    
                  Favorable
(Unfavorable)
 

Industrial

       

Net sales

   $ 535,945       $ 449,059        19.3

Operating profit (loss)

   $ 65,053       $ (32,930     297.5

Printing—Net sales increased by $13.3 million, or 9.2%, for the year ended December 31, 2010 as compared to the same period in 2009. Net sales for the year ended December 31, 2010, were positively impacted by $0.3 million due to the decrease in value of the U.S. Dollar during the year ended December 31, 2010 compared to the same period in 2009. Our Printing Americas operations had higher net sales for 2010 of $9.8 million, or 13.1%, compared to 2009, due to higher demand for our digital printing sheets utilized in commercial printing. Our Printing Asia and Europe operations also reported higher sales levels for 2010 compared to 2009 due to stronger customer demand for digital printing sheets. These increases in net sales relating to customer demand for digital printing sheets resulted primarily from our conversion from an analog to a digital model in connection with our LUX® process in the third quarter of 2010.

Operating profit for the year ended December 31, 2010 increased by $7.6 million, or 55.5%, compared to 2009. The increase in operating profit was due to the increase in net sales in all of our Printing operations for the reasons discussed above as well as lower operating costs as a result of previous restructuring programs and a $1.2 million equipment impairment charge recorded in 2009 not present in 2010. Our Printing segment operating profit for the year ended December 31, 2010 compared to the same period in 2009 was not materially impacted by the decrease in value of the U.S. Dollar during the ended December 31, 2010 compared to the same period in 2009.

 

     Year ended
December 31,
     2009
to 2010
% Change
 
(amounts in thousands)    2010      2009     
                   Favorable
(Unfavorable)
 

Printing

        

Net sales

   $ 158,388       $ 145,094         9.2

Operating profit

   $ 21,338       $ 13,721         55.5

Operational Restructuring

We have executed a series of operational restructuring initiatives since the Acquisition to streamline our cost structure and consolidate our global manufacturing activities. These actions have reduced our workforce in our manufacturing, research and development and sales, technical and administrative functions.

At each reporting date, we evaluate our accruals for operational restructuring activities, which consist primarily of termination benefits (principally severance payments), to ensure that our accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out our initiative or because employees previously identified for separation resigned unexpectedly and did not receive

 

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severance or were redeployed due to circumstances not foreseen when the original plans were initiated. We reverse accruals to operational restructuring expense when it is determined they are no longer required.

The following table displays the activity from December 31, 2011 to March 31, 2012 of our costs related to our operational restructuring initiatives:

 

            Three months ended March 31,
2012
     As of March 31, 2012  
     Balance,
December 31,
2011
     Charges
to
Expense
    Cash
Payments
    Non-Cash
adjustments
     Total costs
and
adjustments
    Total
expected
costs &
adjustments
 
(amounts in thousands)
(unaudited)
                                      

Printing Segment

              

Severance and other benefits

   $ 12       $ (12   $ —        $ —         $ (12   $ —     

Site clean-up costs

     8         (8     —          —           (8     —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal Printing Segment

     20         (20     —          —           (20     —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Industrial Segment

              

Severance and other benefits

     1,012         179        (190     29         18        1,030   

Other

     215         (45     (10     5         (50     165   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal Industrial Segment

     1,227         134        (200     34         (32     1,195   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,247       $ 114      $ (200   $ 34       $ (52   $ 1,195   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The $0.2 million of cash payments set forth above reflects cash payments made to employees separated as part of our operational restructuring programs from 2011. As of March 31, 2012, we had accrued operational restructuring costs of $1.2 million that are anticipated to be paid out within the succeeding nine months.

Liquidity and Capital Resources

Our primary source of liquidity is cash generated from operations. Our primary uses of cash are raw material purchases, salary expense, capital expenditures and debt service obligations. We believe that our cash and cash equivalent balance and cash generated from operations will be sufficient to meet our working capital needs, capital expenditures and other business requirements for at least the next twelve months. From time to time there are various legal proceedings pending against us; however, 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 liquidity. At March 31, 2012, we had $109.3 million in cash and cash equivalents.

Although we have not historically done so, if appropriate, we may borrow cash under our Revolving Credit Facility. At March 31, 2012, we had approximately $46.1 million of availability under our Revolving Credit Facility. While we believe we have sufficient liquidity and capital resources to meet our current operating requirements, if our cash flows from operations are less than we expect or if we require funds to pursue additional expansion activities that we may elect to pursue, we may need to incur additional debt, issue additional equity securities or sell or monetize existing assets. We cannot, however, assure you that future funding will be available on terms favorable to us or at all. The restrictions in our existing debt instruments may also limit our ability to incur additional debt or sell assets; however, we are currently able to borrow up to the entire amount of our availability under our Revolving Credit Facility despite these restrictions.

Of the $109.3 million of cash and cash equivalents at March 31, 2012, $36.3 million was held by our foreign subsidiaries. The majority of the cash held by our foreign subsidiaries is generally available for the ongoing needs of our operations. The laws of certain countries may limit our ability to utilize cash resources held in those countries for operations in other countries. However, these laws are not likely to impact our liquidity in any material way. The operations of each foreign subsidiary generally fund such subsidiary’s capital requirements. In the event that other foreign operations or operations within the United States require additional cash, we may

 

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transfer cash between and among subsidiaries as needed so long as such transfers are in accordance with law. As of March 31, 2012, we had the ability to repatriate $16.1 million of cash at our discretion from the foreign subsidiaries and branches while the remaining balance of $20.2 million was held at subsidiaries in which earnings are considered permanently reinvested. Repatriation of some of these funds could be subject to delay and could have potential tax consequences, principally with respect to withholding taxes paid in foreign jurisdictions. If cash is repatriated from jurisdictions in which earnings are considered permanently reinvested we will be required to accrue and pay U.S income taxes on such repatriations.

As market conditions warrant, we may from time to time repurchase debt securities issued by us in privately negotiated or open-market transactions, by tender offer or otherwise, or issue new debt in order to refinance or prepay amounts outstanding under the Credit Facilities or the Senior Subordinated Notes or for other permitted purposes.

Operating Activities

We generated cash flows from operating activities of $19.9 million for the three months ended March 31, 2012, compared to $9.9 million for the same period in 2011. The increase in cash flow provided by operations for the three months ended March 31, 2012 was primarily attributable to an increase in earnings of $10.9 million, a $(12.1) million decrease in remeasurement charges on foreign denominated debt, an increase of deferred income taxes of $1.9 million, a decrease of accounts receivable of $(1.8) million, an increase in inventories of $5.7 million, a decrease in accounts payable of $(5.1) million, an increase in accrued expenses of $8.4 million and an increase in income tax balances of $2.0 million. The $(12.1) million decrease in remeasurement charges on foreign debt related to the remeasurement charges we record on our foreign denominated debt based upon the exchange rate of the U.S. Dollar to the Euro. The increase of $1.9 million in deferred tax balances was due to change in the deferred tax balances associated with the Euro denominated debt. The decrease of $(1.8) million in accounts receivable is due to higher sales levels for the three months ended March 31, 2012 compared to the same period in 2011, offset by improved receivable collections in the three months ended March 31, 2012 compared to the same period in 2011. The increase in inventories of $5.7 million is due to improved inventory management for the three months ended March 31, 2012 compared to the same period in 2011. The decrease in accounts payable of $(5.1) million is due to lower inventory purchases made in the three months ended March 31, 2012 compared to the same period in 2011. The increase in accrued expenses of $8.4 million is due primarily to higher bonus payments made in the three months ended March 31, 2011 compared to the same period in 2012. The increase in income tax balances of $2.0 million is due to recording higher income taxes payable in the three months ended March 31, 2012 compared to the same period in 2011 based upon earnings offset by higher income tax payments in the three months ended March 31, 2012 compared to 2011.

We generated cash flows from operating activities of $49.7 million for the year ended December 31, 2011, compared to $56.1 million for the same period in 2010. The decrease in cash flow provided by operations, for the year ended December 31, 2011 was primarily attributable to a decrease in earnings of $(22.9) million, a $46.4 million increase in impairment charges, a $8.2 million increase in remeasurement charges on foreign denominated debt, a decrease of deferred income taxes of $(9.8) million, a decrease in accounts payable of $(8.7) million, a decrease in accrued expenses of $(7.5) million and a decrease in income tax balances of $(9.4) million. The $8.2 million increase in remeasurement charges on foreign debt related to the remeasurement charges we record on our foreign denominated debt based upon the exchange rate of the U.S. Dollar to the Euro. The decrease of $(9.8) million in deferred tax balances was primarily due to change in the deferred tax balances associated with the Euro denominated debt and the $46.4 million of impairment charges related to a write down of the customer list intangible assets in our Industrial Asia reporting unit recorded in the year ended December 31, 2011. The $(8.7) million decrease in accounts payable was attributable to inventory build up in the third quarter of 2010 to meet customer orders. The $(7.5) million decrease in accrued expenses is due to higher bonus payments made in the year ended December 31, 2011 compared to the same period in 2010. The decrease in income tax balances of $(9.4) million is due to recording higher income taxes payable in 2010 based upon earnings and higher income tax payments in 2011 compared to 2010.

 

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We generated cash flows from continuing operating activities of $56.1 million for the year ended December 31, 2010 compared to $48.4 million for the same period in 2009. The increase in cash flow provided by operations for the year ended December 31, 2010 as compared to the same period in 2009 was primarily attributable to a $106.8 million increase in net income from 2010 compared to 2009, a $29.4 million increase in deferred income tax balances, a $68.7 million decrease to impairment charges recorded in 2009 and a $22.5 million decrease in remeasurement charges on foreign denominated debt.

We review accounts receivable on a consolidated basis on a business-by-business level. These quarterly reviews focus primarily on the seasonality and collectability of our accounts receivable. As a result of these reviews, we determined that the composition of our accounts receivable did not change in any material respect during (1) the three months ended March 31, 2012, compared to the same period in 2011, (2) the year ended December 31, 2011 compared to the year ended December 31, 2010 or (3) the year ended December 31, 2010 compared to the year ended December 31, 2009. Our management uses days sales outstanding (“DSO”) to measure how efficiently we manage the billing and collection of our accounts receivable. We calculate DSO by dividing the product of 360 and our accounts receivable balance by our annualized net sales. At March 31, 2012 and December 31, 2011, DSO was 72 days and 66 days, respectively.

The primary components of our inventory are finished goods, raw materials and supplies and equipment. We review our inventories quarterly on a consolidated basis on a business-by-business level for obsolescence and to evaluate the appropriateness of the composition of our inventory at any given time. Our management uses days in inventory (“DII”) to calculate our efficiency at realizing inventories. We calculate DII by dividing the product of 360 and our inventory balance, net of reserves, by our annualized cost of sales, excluding any intercompany sales. At March 31, 2012 and December 31, 2011, DII was 73 days and 70 days, respectively. Our products generally have shelf lives that exceed one year.

Investing Activities

Our net cash flows (used in) investing activities for the three months ended March 31, 2012 was $(6.5) million compared to $(1.5) million for the same period in 2011. The increase was attributable to the acquisition of a company in Brazil that closed in the three months ended March 31, 2012 for approximately $5.1 million.

Our net cash flows (used in) investing activities for the year ended December 31, 2011 was $(3.5) million compared to $(8.9) million for the same period in 2010. The decrease of $5.5 million was attributable to $3.3 million of proceeds from the sale of business units, $0.3 million of proceeds from the sale of assets, capital expenditures of $(8.7) million, the purchase of equity securities of $(0.8) million and the redemption of a certificate of deposit of $2.5 million during the year ended December 31, 2011, compared to capital expenditures of $(7.5) million, $1.1 million of proceeds from the sale of assets and the purchase of a certificate of deposit of $(2.5) million during the year ended December 31, 2010.

Our net cash flows (used in) investing activities for the year ended December 31, 2010 was $(8.9) million compared to $(3.9) million for the same period in 2009. The increase of $5.0 million was attributable to higher capital expenditures of $1.0 million for the year ended December 31, 2010 compared to the same period in 2009, lower proceeds received from assets sales of $1.5 million for the year ended December 31, 2010 compared to the same period in 2009 and a certificate of deposit purchase of $2.5 million during the year ended December 31, 2010.

Financing Activities

Our net cash flows (used in) financing activities for the three months ended March 31, 2012 was $(17.9) million compared to $(26.9) million for the same period in 2011. The increase in net cash flows (used in) financing activities of $9.0 million was due to lower payments of long-term debt during the three months ended March 31, 2012 of $9.5 million compared to the same period in 2011. The decrease in long-term debt payments was due to a $24.2 million mandatory excess cash flow payment based upon our 2010 operating results made

 

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during the first quarter 2011, compared to a $14.6 million mandatory excess cash flow payment based upon our 2011 operating results made during the same time period in 2012. The credit agreement governing our Credit Facilities requires an excess cash flow payment equal to 50% of our “excess cash flow” (as defined in the credit agreement) following each fiscal year less the aggregate amount of all voluntary prepayments during such fiscal year (but only 25% thereof if, on the date of the prepayment, our consolidated leverage ratio is less than 5.00 to 1.00 but greater than or equal to 4.00 to 1.00, and, alternatively, zero percent thereof if, on such date, the consolidated leverage ratio is less than 4.00 to 1.00). To the extent that we have excess cash flow in the future requiring a mandatory excess cash flow payment to the lenders under our Credit Facilities, we intend to make such payments in compliance with the credit agreement. We also had a decrease in short term borrowings of $0.5 million for the three months ended March 31, 2012 compared to the same period in 2011.

Our net cash flows (used in) financing activities for the year ended December 31, 2011 was $(37.8) million compared to $(26.6) million for the same period in 2010. The increase in net cash flows (used in) financing activities of $(11.2) million was due to higher payments of long-term debt during the year ended December 31, 2011 of $(10.4) million compared to the same period in 2010. The increase in long-term debt payments was due to a $24.2 million mandatory excess cash flow payment based upon our 2010 operating results made during the first quarter of 2011, compared to a $15.7 million mandatory excess cash flow payment based upon our 2009 operating results made during the same time period in 2010. We also had a decrease in short term borrowings of $(1.9) million and proceeds from capital leases of $1.3 million for the year ended December 31, 2011 compared to the same period in 2010.

Our net cash flows (used in) financing activities for the year ended December 31, 2010 was $(26.6) million compared to $(54.4) million for the same period in 2009. The decrease in net cash flows (used in) financing activities of $27.8 million was due to higher payments of long-term debt during the year ended December 31, 2009, of $34.1 million compared to the same period in 2010. Our payments of long-term debt for the year ended December 31, 2010 included a $15.7 million mandatory excess cash flow payment based upon our 2009 operating results, compared to a $8.6 million mandatory excess cash flow payment made during the year ended December 31, 2009, based upon our 2008 operating results. During the year ended December 31, 2009, we also made a debt payment on our long-term debt of $33.0 million related to the sale of our Offset business which was finalized in May 2009. During the year ended December 31, 2010 our payments of our Japanese Yen denominated debt was $5.7 million compared to $12.6 million for the same period in 2009. During the year ended December 31, 2009, one of our Japanese business units borrowed $5.6 million of long-term debt denominated in Japanese Yen. There were not any similar long-term borrowings for the year ended December 31, 2010.

Credit Facilities, Japanese Debt and Senior Subordinated Notes

As of March 31, 2012, the Credit Facilities consist of (1) our $360.0 million Tranche B Facility (denominated in U.S. Dollars), (2) our $250.0 million Tranche C Facility (denominated in Euros), and (3) our $50.0 million Revolving Credit Facility denominated in U.S. Dollars. A portion of the Revolving Credit Facility not in excess of $15.0 million is available for the issuance of letters of credit. Separate and apart from the Credit Facilities, we also had Japanese senior secured bank debt denominated in Japanese Yen.

As of March 31, 2012, we had $350.0 million of Senior Subordinated Notes outstanding, $220.4 million of indebtedness outstanding under the Tranche B Facility, $151.0 million of indebtedness outstanding under the Tranche C Facility and $8.0 million of Japanese debt. During the years ended December 31, 2011, 2010 and 2009 and the three months ended March 31, 2012, there were no borrowings under our $50.0 million Revolving Credit Facility. We had letters of credit outstanding of $3.9 million at March 31, 2012. The letters of credit reduce the borrowings available under the Revolving Credit Facility. Assuming that the amount of net proceeds that we receive from this offering is $         million and after giving effect to our intended use of proceeds as described in “Use of Proceeds”, as of March 31, 2012, we would have had approximately $         million of total indebtedness

 

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outstanding, including $             million aggregate principal amount of Senior Subordinated Notes outstanding, $         million of indebtedness outstanding under the Tranche B Facility, $         million of indebtedness outstanding under the Tranche C Facility and $8.0 million of Japanese debt.

The borrower under the Credit Facilities and the issuer of the Senior Subordinated Notes is MacDermid, Incorporated. Upon consummation of this offering, MacDermid Group, Inc. and its wholly owned domestic subsidiaries will unconditionally guarantee all obligations under the Credit Facilities. The wholly owned domestic subsidiaries of MacDermid, Incorporated unconditionally guarantee all obligations under the Senior Subordinated Notes. Each of the notes representing our Japanese debt is secured by the assets of MacDermid Japan.

The Credit Facilities and the Senior Subordinated Notes contain various covenants including limitations on additional indebtedness, dividends and other distributions, entry into new lines of business, use of loan proceeds, capital expenditures, restricted payments, restrictions on liens, transactions with affiliates, amendments to organizational documents, accounting changes, sale and leaseback transactions and dispositions. In addition, the Revolving Credit Facility requires us to comply with certain financial covenants, including consolidated leverage and interest coverage ratios and limitations on capital expenditures if our funding under the Revolving Credit Facility exceeds $10.0 million for ten or more consecutive days in any fiscal quarter. As of March 31, 2012 and December 31, 2011, we were in compliance with the debt covenants contained in the Credit Facilities and the Senior Subordinated Notes.

For additional information about our Credit Facilities, Senior Subordinated Notes and Japanese debt, please see “Description of Certain Indebtedness of MacDermid, Incorporated”.

Other Debt Facilities

We carry various short-term debt facilities worldwide which are used to fund short-term cash needs as the need arises. As of March 31, 2012 and December 31, 2011, there was $0 outstanding under these other debt facilities. We also have various overdraft facilities available. At March 31, 2012 and December 31, 2011, the capacity under these overdraft facilities was $23.4 million and $22.8 million, respectively. As of March 31, 2012, these overdraft lines bore interest rates ranging from 1.0% to 6.3%.

Hedging Transactions

In June 2007, we entered into an interest rate swap agreement (the “swap”) to hedge interest rate fluctuations under the Tranche B Facility. The swap helped mitigate interest rate fluctuations on our floating rate U.S. Dollar denominated debt. The swap was at a fixed rate of 5.40%, a notional amount of $170.0 million and matured on June 30, 2010. We also entered into an interest rate collar agreement (the “collar”) in June 2007. The collar helps protect our floating rate U.S. Dollar denominated debt. The collar has a floor of 5.20% and a ceiling of 6.25%, a notional amount of $100.0 million and covers the period from June 30, 2010 through June 30, 2012.

We conduct a significant portion of our business in currencies other than the U.S. Dollar, the currency in which the consolidated financial statements are reported. Correspondingly, our operating results could be affected by foreign currency exchange rate volatility relative to the U.S. Dollar. One of our business units in the United Kingdom uses the British Pound Sterling as its functional currency for paying labor and other operating costs, while approximately 25% of its revenues are denominated in U.S. Dollars. To hedge against the risk of a stronger British Pound Sterling, we contracted in 2012, 2011, 2010 and 2009, on behalf of our foreign business unit, with a financial institution to deliver U.S. Dollars at a fixed British Pound Sterling rate and to receive British Pound Sterling in exchange for the U.S. Dollar. We did not pay up-front premiums to obtain the hedge.

 

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The following table summarizes derivative instrument amounts as of March 31, 2012, by currency and the portion of the asset that settles within the next twelve months related to foreign currency derivatives.

 

     Local
Currency
Amount
     U.S.
Dollar
Amount
     Percentage
Settled
Within
One Year
   

Settlement Date

Derivative Assets

(amounts in thousands)

                        

British Pound Sterling

     £3,105       $ 5,000         100   June 29, 2012

British Pound Sterling

     £3,148       $ 5,000         100   September 27, 2012

British Pound Sterling

     £2,572       $ 4,000         100   December 19, 2012
     

 

 

      
      $ 14,000        
     

 

 

      

Fair Value

The following table presents the carrying value and estimated fair value of our Tranche B Facility, Tranche C Facility and the Senior Subordinated Notes:

 

     March 31, 2012      December 31, 2011  
(amounts in thousands)    Carrying Value      Fair Value      Carrying Value      Fair Value  

Tranche B Facility, Tranche C Facility and Senior Subordinated Notes debt including current portion

   $ 721,346       $ 732,909       $ 733,097       $ 727,883   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value was determined based upon quoted market prices. Since considerable judgment is required in interpreting market information, the fair value of the Tranche B Facility, Tranche C Facility and the Senior Subordinated Notes indebtedness is not necessarily the amount which could be realized in a current market exchange.

Contractual Obligations

We own most of our major manufacturing facilities, but we do lease certain office, manufacturing factories and warehouse space and land, as well as other equipment primarily under non-cancelable operating leases.

Summarized in the table below are our obligations and commitments to make future payments in connection with our debt and minimum lease payment obligations (net of minimum sublease income) as of December 31, 2011. Actual amounts are as of December 31, 2011 without giving effect to the use of proceeds from this offering. As adjusted amounts are as of December 31, 2011 after giving effect to our intended use of proceeds as described in “Use of Proceeds”.

 

(amounts in thousands)   Payment Due by Period              
  2012     2013     2014     2015     2016     2017 and
Thereafter
    Total  
   

(Actual)

   

(As
adjusted)

   

(Actual)

   

(As
adjusted)

   

(Actual)

   

(As
adjusted)

   

(Actual)

   

(As
adjusted)

   

(Actual)

   

(As
adjusted)

   

(Actual)

   

(As
adjusted)

   

(Actual)

   

(As
adjusted)

 

Debt obligations (including short-term debt)(1)

  $ 25,601      $               $ 9,702      $               $ 357,902      $               $ —        $               $ —        $               $ 350,000      $               $ 743,205      $            

Capital lease obligations(2)

    540          317          218          90          2          —            1,167     

Operating leases(3)

    9,851          5,774          3,932          2,820          2,593          20,595          45,565     

Interest payments(4)

    45,829          43,124          34,613          33,252          33,250          9,292          199,360     

Expected pension funding payments(5)

    8,051          7,663          7,663          7,663          7,663          —            38,703     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash contractual obligations

  $ 89,872      $        $ 66,580      $        $ 404,328      $        $ 43,825      $        $ 43,508      $        $ 379,887      $        $ 1,028,000      $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)   Reflects the principal payments on the Credit Facilities and the Senior Subordinated Notes and Japanese debt. December 31, 2011 exchange rates were utilized to estimate U.S. Dollar payments for Tranche C Facility debt and Japanese debt interest payments. 2012 amounts include excess cash flow payments made in March 2012 on debt under the Tranche B Facility and the Tranche C Facility.
(2)   Excludes interest on capital lease obligations of $1.2 million at December 31, 2011.
(3)   Amounts are net of sublease income on operating leases of approximately $0.1 million in 2012, $0.1 million in 2013 and $0.1 million in 2014.
(4)   Amounts are based on currently applicable interest rates in the case of variable interest rate debt. December 31, 2011 exchange rates were utilized to estimate U.S. Dollar payments for Tranche C Facility debt and Japanese debt interest payments. The amounts also include estimated payments required under an interest rate collar agreement, which expires in 2012.
(5)   Amounts are based upon our expected future pension funding payments in the U.S. and the United Kingdom for 2012 through 2016. As the funded status of our pension plans in the U.S. and the United Kingdom will vary, obligations for expected pension funding payments after 2016 cannot be reasonably estimated and are not included in the table.

As of December 31, 2011, we had reserves of $18.8 million recorded for uncertain tax positions, including interest and penalties. We do not include this amount in our long-term contractual obligations table because of the difficulty in making reasonably reliable estimates of the timing of cash settlements, if any, with the respective taxing authorities.

Capital Expenditures

We expect to spend approximately $10.0 million over the course of 2012 for capital expenditures, and $8.5 million from March 31, 2012 through the remainder of 2012 related to our expected capital expenditures. We expect to use cash generated from our operations and cash on hand to fund our capital expenditures. The general purposes of our capital expenditures are to support our investment and expansion plans relating to product development and sales and to ensure compliance with environmental health and safety laws and initiatives. We estimate that we spend approximately $1.0 million annually on environmental, health and safety capital expenditures. We do not expect this amount to increase materially in the future.

Off-Balance Sheet Arrangements

We use customary off-balance sheet arrangements, such as operating leases and letters of credit, to finance our business. None of these arrangements has or is reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Significant Accounting Policies and Critical Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of net sales and expenses during the reporting period.

Our management must undertake decisions that impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and also assumptions upon which accounting estimates are based. The company applies judgment based on its understanding and analysis of the relevant circumstances to reach these decisions. By their nature, these judgments are subject to an inherent degree of uncertainty. Accordingly, actual results could differ significantly from the estimates applied. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; allowances for doubtful accounts and sales returns, deferred tax assets, inventory, inventory valuation, share-based compensation, reserves for employee benefit obligations, environmental liabilities, income tax uncertainties and other contingencies.

Our management believes the following accounting policies to be those most important to the portrayal of our financial condition and those that require the most subjective judgment:

 

   

valuation of long-lived assets;

 

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operational restructuring activities;

 

   

accounting for income taxes;

 

   

inventory valuation methodology;

 

   

product sales and revenue recognition;

 

   

purchase accounting, goodwill and intangible assets; and

 

   

employee benefits and pension obligations.

If actual results differ significantly from management’s estimates and projections, there could be a material negative impact on our financial statements.

Valuation of Long-Lived Assets

The net book values of our tangible and intangible long-lived assets at March 31, 2012, December 31, 2011 and December 31, 2010 were as follows:

 

     As of  
(amounts in thousands)    March 31, 2012      December 31, 2011      December 31, 2010  

Property, plant and equipment

   $ 97,410       $ 96,916       $ 105,371   

Goodwill

     480,988         474,581         477,483   

Intangibles

     268,977         274,105         349,569   
  

 

 

    

 

 

    

 

 

 

Total Net Book Value

   $ 847,375       $ 845,602       $ 932,423   
  

 

 

    

 

 

    

 

 

 

We assess the impairment of long-lived assets, which include goodwill, indefinite-lived purchased intangible assets, finite-lived purchased intangible assets and property, plant and equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. During the year ended December 31, 2009, we concluded that indicators of impairment existed related to our goodwill, indefinite-lived purchased intangible assets and property, plant and equipment. During the year ended December 31, 2011, we concluded that indicators of impairment existed related to our identifiable intangible assets. The impairment charges we took related to these indicators of impairment are discussed below.

Identifiable Intangible Assets

Indefinite-lived intangible assets are reviewed for potential impairment on an annual basis by comparing the estimated fair value of the indefinite-lived purchased intangible assets to the carrying value. Our annual test for intangible asset impairment is performed as of April 1st of each year. In addition to our annual test for impairment, we also test for impairment when events or circumstances indicate that these identifiable intangible assets may be impaired. We test our corporate tradename for impairment at the consolidated level because it is operated as a single asset and relies upon our consolidated financial results and cash flows. Our other tradenames are not combined for impairment testing because they generate cash flows independently and are reviewed at the level each such tradename is recorded. The estimated fair value of these intangible assets is determined using the “relief from royalty” method, which is described below. An impairment charge is recognized when the estimated fair value of an indefinite-lived intangible asset is less than the carrying value.

Finite-lived intangible assets such as developed technology and customer lists are amortized on a straight-line basis over their estimated useful lives, which are currently ten years for developed technology and range between three and 21 years for customer lists. If circumstances require a long-lived asset group to be tested for possible impairment, we first determine whether the estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the

 

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carrying value of the asset. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, based on comparable market values.

When applying the “relief from royalty” method, the cash flows expected to be generated by the intangible asset are discounted to their present value equivalent using an appropriate weighted average cost of capital (“WACC”) for the respective asset being valued. The WACC we utilize is prepared by an outside valuation expert based upon our industry average.

The valuations of our customer lists and developed technology intangible assets are based on estimated undiscounted cash flows, which incorporate our long-term net sales projections as a key assumption. The long-term net sales projections utilized in the valuation of our customer lists and developed technology intangible assets are based upon current customers, new strategic products and potential sales growth based on historical experience and current expectations. The undiscounted net cash flows expected to be generated by the customer lists and developed technology intangible assets are then compared to their respective carry values to determine if impairment exists.

We use the “relief from royalty” method to value the tradename intangible asset. Our net sales projection is a key assumption. We apply a royalty rate to the projected net sales. The royalty rate is based on market royalty rates and royalties we pay to outside parties. The resulting royalty savings are reduced by income taxes resulting from the annual royalty savings at a market participant corporate income tax rate to arrive at the after-tax royalty savings associated with owning the tradenames. Finally, the present value of the estimated annual after-tax royalty savings for each year is used to estimate the fair value of the tradenames.

During 2009, we recorded an impairment charge related to our indefinite-lived purchased intangible assets based upon our annual impairment review. We hired an independent valuation firm to assist management with determining the fair value of the indefinite-lived purchased intangible assets. Our management concluded that the estimated direct cash flows associated with the applicable intangible assets using a “relief from royalty” methodology associated with revenues projected to be generated from these intangible assets were less than the carrying value of the intangible assets. Because of lower net sales, primarily from our industrial and electronic products, due to the global economic recession, we experienced lower estimated cash flows utilized in the “relief from royalty” methodology on a consolidated basis. Our impairment analysis of our indefinite-lived purchased intangible assets indicated that our corporate tradename (“MacDermid”) was therefore impaired by $26.1 million, and we accordingly recorded an impairment charge of $26.1 million related to this tradename during 2009. After recording the impairment charge of $26.1 million in 2009, the value of the corporate tradename was $50.2 million.

The primary driver of the impairment charge recorded in 2009 related to our indefinite-lived purchased intangible assets was lower net sales levels because of the global economic recession and therefore lower profitability. The global economic recession resulted in weakening conditions in the industrial and electronic end markets we serve, which resulted in lower profitability on a consolidated basis. The corporate tradename is not allocated to either of our reportable segments and is presented in the corporate assets in our total assets table in our segment reporting footnote to our consolidated financial statements. As of April 1, 2010, the corporate tradename had a headroom cushion of approximately $27.2 million. As of April 1, 2011, the corporate tradename had a headroom cushion of approximately $34.7 million. As of April 1, 2012, the corporate tradename had a headroom cushion of approximately $38.6 million.

For our annual impairment testing related to our indefinite-lived purchased intangible assets performed as of April 1, 2010, 2011 and 2012 we utilized the “relief from royalty” methodology. We apply a royalty rate to the projected net sales. The royalty rate is based on product profitability, industry and markets served, tradename protection factors, and perceived licensing value. The resulting royalty savings are reduced by income taxes resulting from the annual royalty savings at a market participant corporate income tax rate to arrive at the after-tax royalty savings associated with owning the tradenames. Finally, the present values of the estimated

 

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annual after-tax royalty savings for each year in the projection period are utilized to estimate the fair value of the tradenames. The estimates utilized in the April 1, 2010, 2011 and 2012 impairment testing of our indefinite-lived purchased intangible assets were not materially different from our historical results for the base periods in either impairment testing year as of April 1, 2010, 2011 and 2012.

The primary assumptions in each of these calculations are net sales, growth rates and the WACC utilized to discount the resulting cash flows. Our assumptions concerning net sales are impacted by global and local economic conditions in the various markets we serve. Our assumptions related to net sales, growth rates and WACC contain certain uncertainties related to sales growth, economic growth, future product development and cost estimates that could differ from historical results and materially impact our estimates utilized in the impairment testing of our indefinite-lived purchased intangible assets and the results of our impairment testing of our indefinite-lived purchased intangible assets.

During 2009, we also recorded an impairment charge of $0.2 million related to customer list intangible assets in our Industrial segment because of the loss of sales to outside customers.

During 2011, we recorded $46.4 million of impairment charges related to a write down of the customer list intangible assets in our Industrial Asia reporting unit to their estimated fair values. We concluded that certain indicators were present suggesting a potential impairment of the customer list intangible assets of our Industrial Asia reporting unit. The indicators of this potential impairment included:

 

   

Recent reductions in gross profit margins of certain products;

 

   

Increases in raw material prices used in our manufacturing process that were difficult to pass along to customers;

 

   

Increased pricing pressure for certain of our products from competitors; and

 

   

Customers reluctance to accept product price increases and our reluctance to continue selling certain products, which require technical support, at low margin levels.

Based upon the above indicators we evaluated our customer list intangible assets for potential impairment. In accordance with ASC 360, a long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that a long-lived asset (asset group) may not be recoverable. Under ASC 360, impairment is defined as the condition that exists when the carrying amounts of a long-lived asset (asset group) exceeds its fair value. We utilized an “income approach” method to test our Industrial Asia customer list intangible assets for impairment. In step one of our testing, we compared the carrying amounts of our Industrial Asia customer list intangible assets to the undiscounted cash flows expected to be generated from the use and eventual disposition of the customer list intangible assets over their remaining useful lives. Four of our businesses in our Industrial Asia reporting unit passed the first step of our testing procedures, with significant headroom. Two of our businesses in our Industrial Asia reporting unit failed the first step of our testing procedures; therefore, we performed the second step of impairment testing. In the second step of our testing procedures, the estimated fair value of the Industrial Asia customer list intangible assets was determined by estimating the after-tax cash flows attributable to the assets and then discounting these cash flows to a present value using a risk-adjusted discount rate. The cash flow model utilized in the customer list intangible asset impairment test involves significant judgments related to future growth rates, discount rates and tax rates, among other considerations. Our step-two testing procedures indicated that the customer list intangible assets of two of our businesses in our Industrial Asia reporting unit were impaired because the carrying value of these assets exceeded their estimated fair value by $46.4 million.

During the year ended December 31, 2010 and the three months ended March 31, 2012 and 2011, we did not record any impairment charges related to indefinite-lived purchased intangible assets or any identifiable intangible assets.

 

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We determine the fair value of our intangible assets in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures. Our impairment evaluation of identifiable intangible assets and property, plant and equipment includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their remaining estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the assets over the remaining estimated useful lives, we record an impairment charge in the amount by which the carrying value of the assets exceeds the fair value. We determine fair value based on either market quotes, if available, or estimated discounted cash flows using a discount rate commensurate with the risk inherent in our current business model for the specific asset being valued.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets of an acquired business. Goodwill is tested for impairment at the reporting unit level annually, or when events or changes in circumstances indicate that goodwill might be impaired. For goodwill, a two-step impairment test is performed at the reporting unit level. In the first step of impairment testing, the fair value of each reporting unit is compared to its carrying value. The fair value of each reporting unit is determined based on the present value of estimated discounted future cash flows. The estimated discounted cash flows are prepared based upon our estimated cash flows at the reporting unit level for the twelve months ended preceding the date of our impairment testing. The estimated cash flows utilized in our goodwill impairment testing differ from our actual consolidated cash flows due to exclusion of non-recurring charges and differences in U.S. income tax expense items and U.S. deferred tax balances which are estimated at the reporting unit level. The cash flow model utilized in the goodwill impairment test involves significant judgments related to future growth rates, discount rates and tax rates, among other considerations. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to that reporting unit exceeds the fair value of that reporting unit, then the second step of the impairment test must be performed to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recorded equal to the difference. Our annual test for goodwill impairment is performed as of April 1st of each year.

During 2009, we recorded an impairment charge related to goodwill based upon our annual impairment review. The first step of the impairment testing indicated that the carrying values of the Industrial Americas and Asia reporting units exceeded their fair values as of the testing date. Because the first step indicated a potential impairment, we performed the second step by comparing the implied value of the goodwill as calculated in a hypothetical purchase transaction to the book value of the goodwill as of the testing date. The second step of the impairment testing indicated that the book values of the Industrial Americas and Asia reporting units’ goodwill exceeded the implied fair values of that goodwill. The implied fair values were determined by reviewing the current assets and liabilities; property, plant and equipment; and other identifiable intangible assets (both those recorded and not recorded) to determine the appropriate fair values of the reporting units’ assets and liabilities in a hypothetical purchase transaction. We utilized a report prepared by an independent valuation expert to assist management in determining the fair values of the Industrial segment land, building and intangible assets balances to utilize in step two of the goodwill impairment test. The fair values of the Industrial segment’s assets and liabilities were then compared to the book values of the Industrial segment’s assets and liabilities to determine an implied value of the reporting units’ goodwill.

The primary driver of the goodwill impairment charge recorded in 2009 was lower estimated discounted cash flows utilized in our April 1, 2009 goodwill impairment testing procedures. Our business was significantly impacted by the global economic recession of 2008 and 2009, and our financial performance was adversely impacted. We experienced lower sales and therefore lower profitability, which caused our estimated discounted cash flows to be significantly lower. The WACC we utilized in our April 1, 2009 impairment testing procedures also significantly increased over the previous year because of increased market risk due to worsening conditions

 

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in the global economy, which has a direct impact on reducing our estimated discounted cash flows. The combination of these items utilized in our April 1, 2009 goodwill impairment testing procedures significantly lowered the implied fair value of our Industrial Americas and Asia reporting units’ goodwill balances.

As a result of these lower implied fair values, impairment charges of approximately $14.6 million (Industrial Americas reporting unit) and $26.6 million (Industrial Asia reporting unit) were recorded during 2009. The $14.6 million goodwill impairment charge recorded in our Industrial Americas reporting unit was due primarily to lower sales levels associated with our industrial products in the automotive market. The $26.6 million goodwill impairment charge recorded in our Industrial Asia reporting unit was due primarily to lower sales levels associated with our electronic products. The carrying value of the Industrial Americas’ goodwill was $112.0 million before the 2009 goodwill impairment charge and was $97.4 million subsequent to the 2009 goodwill impairment charge. The carrying value of the Industrial Asia reporting unit’s goodwill was $241.6 million before the 2009 goodwill impairment charge and was $215.0 million subsequent to the 2009 goodwill impairment charge. As of April 1, 2009, we had four reporting units that have been allocated goodwill.

As of April 1, 2010, we had four reporting units that have been allocated goodwill. As of April 1, 2010, no reporting units had lower estimated fair values than carrying values in the first step of our goodwill impairment evaluation; therefore no further testing was performed and no goodwill impairment charges were recorded. As of April 1, 2010, the estimated fair value of all of our reporting units substantially exceeded their carrying value due to the economic recovery that we experienced in 2009 and 2010, due to higher sales levels, lower costs levels incurred as a result of our operational restructuring programs and increased profitability when comparing the estimated discounted cash flow used in our April 1, 2010 goodwill impairment testing procedures to the estimated discounted cash flows used in our April 1, 2009 goodwill impairment testing procedures. The estimated discounted cash flows utilized in our April 1, 2010 goodwill impairment testing procedures were prepared based upon our estimated cash flows at the reporting unit level for the 12 months preceding the date of our impairment testing. The estimated cash flows utilized in our goodwill impairment testing differ from our actual consolidated cash flows due to exclusion of non-recurring charges utilized in our estimated cash flows, differences in U.S. income tax expense items and U.S. deferred tax balances which are estimated at the reporting unit level and are not materially different from our actual cash flows.

As of April 1, 2011, we had four reporting units that have been allocated goodwill. As of April 1, 2011, no reporting units had lower estimated fair values than carrying values in the first step of our goodwill impairment evaluation; therefore no further testing was performed and no goodwill impairment charges were recorded. As of April 1, 2011, the estimated fair value of all of our reporting units substantially exceed their carrying value due to the continuation of the economic recovery that we experienced in 2010 and 2011, the lower costs we incurred as a result of our operational restructuring programs and the introduction of new products in 2010 and 2011. The estimated discounted cash flows utilized in our April 1, 2011 goodwill impairment testing procedures were prepared based upon our estimated cash flows at the reporting unit level for the 12 months preceding the date of our impairment testing. The estimated cash flows utilized in our goodwill impairment testing differ from our actual consolidated cash flows due to exclusion of non-recurring charges utilized in our estimated cash flows, differences in U.S. income tax expense items and U.S. deferred tax balances which are estimated at the reporting unit level and are not materially different from our actual cash flows.

As of April 1, 2012, we had four reporting units that have been allocated goodwill. As of April 1, 2012, no reporting units had lower estimated fair values than carrying values in the first step of our goodwill impairment evaluation; therefore no further testing was performed and no goodwill impairment charges were recorded. As of April 1, 2012, the estimated fair value of all of our reporting units substantially exceed their carrying value due to the continuation of the economic recovery that we experienced in 2010 and 2011, the lower costs we incurred as a result of our operational restructuring programs and the introduction of new products in 2010 and 2011. The estimated discounted cash flows utilized in our April 1, 2012 goodwill impairment testing procedures were prepared based upon our estimated cash flows at the reporting unit level for the 12 months preceding the date of our impairment testing. The estimated cash flows utilized in our goodwill impairment testing differ from our

 

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actual consolidated cash flows due to exclusion of non-recurring charges utilized in our estimated cash flows, differences in U.S. income tax expense items and U.S. deferred tax balances which are estimated at the reporting unit level and are not materially different from our actual cash flows.

During the years ended December 31, 2011 and 2010 and the three months ended March 31, 2012 and 2011, we did not record any goodwill impairment charges.

Property, Plant and Equipment

We evaluate property, plant and equipment (“PP&E”) for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If circumstances require a long-lived asset group to be tested for possible impairment, we first determine whether the estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, based on comparable market values. Major factors that influence our cash flow analysis are our estimates for future net sales and expenses associated with the use of the asset. Different estimates could have a significant impact on the results of our evaluation. If, as a result of our analysis, we determine that our PP&E has been impaired, we will recognize an impairment charge in the period in which the impairment is determined. Any such impairment charge could be significant and could have a material negative effect on our results of operations.

During 2009, the carrying value of equipment at a certain business unit in our Printing Americas operations was evaluated due to softening business conditions. This evaluation indicated that the carrying values of certain equipment were not recoverable, as the expected undiscounted future cash flows to be generated by them were less than their carrying values. The related impairment charge was measured based on the amount by which the asset carrying values exceeded fair value. The asset fair value was based on estimates of prices for similar assets. As a result of the above evaluation, we recorded a $1.2 million asset impairment charge in 2009. During the years ended December 31, 2011 and 2010 and the three months ended March 31, 2012 and 2011, we did not record any PP&E impairment charges, other than amounts recorded in connection with operational restructuring, which are discussed below. During the years ended December 31, 2011, 2010 and 2009, we recorded various non-cash asset impairment charges for PP&E of $0, $2.4 million and $1.2 million, respectively, in impairment and operational restructuring expense. During the three months ended March 31, 2012, we did not record any impairment charges related to our PP&E. During the years ended December 31, 2011, 2010 and 2009, we recorded repairs and maintenance expense related to our PP&E of $6.8 million, $6.6 million and $5.0 million, respectively. During the three months ended March 31, 2012 and 2011, we recorded repairs and maintenance expense related to our PP&E of $1.7 million and $1.5 million, respectively.

Continued pressure on our forecasted product shipments in the future due to the current global macroeconomic environment, loss of one or more significant customers, loss of market share, rising raw material prices or lack of growth in the industries into which our products are sold or an inability to ensure our cost structure is aligned to associated decreases in net sales could result in further impairment charges. If, as a result of our analysis, we determine that our goodwill, indefinite-lived intangible assets, identifiable intangible assets or other long-lived assets have been impaired, we will recognize an impairment charge in the period in which the impairment is determined. As of April 1, 2012 (the date of our 2012 annual impairment test) and December 31, 2011, we determined that no further indicators of impairment existed with regard to our goodwill, intangible assets and PP&E balances.

Operational Restructuring Activities

We have executed a series of operational restructuring initiatives since the Acquisition to streamline our cost structure and consolidate our global manufacturing activities. These actions have reduced our workforce in our manufacturing, research and development and sales technical and administrative functions.

 

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At each reporting date, we evaluate our accruals for operational restructuring activities, which consist primarily of termination benefits (principally severance payments), to ensure that our accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out our initiative or because employees previously identified for separation resigned unexpectedly and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. We reverse accruals to operational restructuring expense when it is determined they are no longer required.

Accounting for Income Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement bases and the tax bases of assets, liabilities, net operating losses and tax credit carry-forwards. A valuation allowance is required to be recognized to reduce the recorded deferred tax asset to the amount that will more likely than not be realized. We consider the impact of deferred tax liabilities and also analyze estimated future taxable income by jurisdiction, including foreign source income for U.S. federal tax purposes and state taxable income, to determine potential utilization of state and foreign net operating losses, foreign tax credit, research and development credits and state tax credit carry forwards. We also include in our analysis a review of any tax reserves recorded, which if utilized under audit or review of the tax authorities, would allow for utilization of any net operating losses or credits.

The valuation allowance of $34.5 million recorded as of December 31, 2011 would reverse in whole or in part if significant taxable income was recognized in various states or foreign jurisdictions in which operating losses have been historically recorded or if we incurred significant foreign sourced U.S. taxable income which also had very low foreign tax associated with it. Finally, we could reverse a portion of the valuation allowance if we incurred a significant increase in U.S. domestic taxable income. Alternatively, if certain tax reserves recorded on the financial statements are no longer required then it is likely that we would need to adjust our valuation allowance by as much as $6.8 million. Some of our uncertain tax positions, if not sustained, would allow us to absorb tax credit carryovers that have a valuation allowance against them. Alternatively, realizing the tax benefits of some of our uncertain tax positions could further limit our ability to absorb tax credit carryovers for which a valuation allowance has not been established.

In assessing whether deferred tax assets will be realized, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and expiration dates of certain deferred tax assets in making this assessment.

Valuation allowances of $34.5 million have been recorded as of December 31, 2011. The valuation allowances reflect our assessment that it is more likely than not that certain deferred tax assets for state and foreign net operating losses, foreign tax credits, research and development credits and state tax credit carry-forwards will not be realized.

We have reserved for taxes, interest and penalties that may become due in future years as a result of audit assessments by the tax authorities. Although we believe that the positions reflected on the filed tax returns are supported, we still have established reserves recognizing that the tax authorities may challenge certain positions, which then may not be fully sustained. We review the tax positions on a quarterly basis and update and adjust the reserves taking into account lapses of statutes of limitations, proposed tax assessments from the tax authorities, settlement of tax audits with the tax authorities, identification of new issues as they arise and the issuance of any new tax regulations, laws or judicial settlements that may impact the tax reserves.

We consider many factors when estimating and evaluating tax positions and tax benefits. The first step in evaluating the tax position for recognition is to determine the amount of evidence that supports a favorable conclusion for the tax position upon audit. In order to recognize the tax position, we must determine whether it is more likely than not that the position is sustainable. The next requirement is to measure the tax benefit as the

 

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largest amount that has a more than 50% chance of being realized upon final settlement. The more likely than not recognition threshold is a matter of judgment based on the facts and circumstances of each individual issue. As of December 31, 2011, we had reserves of approximately $18.8 million for taxes, interest and penalties that may become due in later years as a result of future tax audits. These reserves are associated with potential transfer pricing issues, tax residency issues, deductibility of interest expense in various jurisdictions and certain foreign tax reporting income issues.

Inventory Valuation Methodology

Inventories are stated at the lower of average cost or market. We regularly review inventories for obsolescence and calculate a reserve based on historical write-offs, customer demand, product evolution, usage rates and quantities of stock on hand. Inventory in excess of estimated usage requirements is written down to its estimated net realizable value.

As of March 31, 2012 and December 31, 2011 and 2010, we had inventory reserve balances of $10.3 million, $9.6 million and $10.1 million, respectively, for obsolete, damaged and slow moving inventory. If actual future demand or market conditions are less favorable than those projected by our management, additional inventory reserves or inventory write-downs may be required.

Product Sales and Revenue Recognition

We recognize revenue, including freight charged to customers, when the earnings process is complete. This occurs when products are shipped to or received by the customer in accordance with the terms of the agreement, title and risk of loss have been transferred, collectability is probable and pricing is fixed or determinable. Shipping terms are customarily “FOB shipping point” and do not include right of inspection or acceptance provisions. Equipment sales arrangements may include right of inspection or acceptance provisions, in which case revenue is deferred until these provisions are satisfied.

We also occasionally sell equipment to some of our customers to use with our products. These equipment sales can also be linked with other purchase agreements and could represent multiple element arrangements under ASC Topic 605, “Revenue Recognition” or contain future performance provisions pursuant to SEC Staff Accounting Bulletin 104, “Revenue Recognition”. The process of determining the appropriate revenue recognition in such transactions is highly complex and requires significant judgments and estimates.

Purchase Accounting, Goodwill and Intangible Assets

In connection with the Acquisition, MacDermid, Incorporated incurred significant indebtedness under our Credit Facilities and the Senior Subordinated Notes. The purchase price paid in connection with the Acquisition was allocated to state the acquired assets and assumed liabilities at fair value. The purchase accounting adjustments (1) increased the carrying value of our property, plant and equipment, (2) established intangible assets for our tradenames, customer lists and developed technology and (3) established goodwill related to the difference between the purchase price and the fair value of the assets and liabilities as of the Acquisition date. Subsequent to the Acquisition, interest expense and non-cash depreciation and amortization charges significantly increased. During 2009, we incurred non-cash impairment charges of $68.7 million to reduce the goodwill assets, customer lists, tradename and equipment assets established at the time of the Acquisition. During 2011, we recorded impairment charges of $46.4 million related to a write down of our customer list intangible assets established at the time of the Acquisition.

The Acquisition resulted in us having an entirely new, and significantly different, capital structure. Subsequent to the Acquisition date of April 12, 2007, we recorded purchase adjustments related to our balances of land, buildings, equipment, goodwill and intangible assets. We retained an outside valuation firm to assist management with determining the fair value of certain of our tangible assets and liabilities and our intangible

 

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assets. The outside valuation firm finalized their review of these tangible assets and liabilities and intangible assets in 2007. We have recorded all assets acquired and liabilities assumed at their respective fair value as of April 13, 2007. We completed the accounting for the goodwill allocation in 2008.

The estimated fair values and useful lives of identified intangible assets are based on many factors, including estimates and assumptions of future operating performance and cash flows of the acquired business, estimates of cost avoidance, the nature of the business acquired, the specific characteristics of the identified intangible assets and our historical experience and that of the acquired business. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including product demand, market conditions, regulations affecting the business model of our operations, technological developments, economic conditions and competition. The carrying values and useful lives for amortization of identified intangible assets are reviewed on an ongoing basis, and any resulting changes in estimates could have a material negative impact on our financial results.

Employee Benefits and Pension Obligations

We sponsor a variety of employee benefit programs, some of which are non-contributory. The accounting policies used to account for these plans are as follows:

Retirement—We provide non-contributory defined benefit plans to domestic and certain foreign employees. The projected unit credit actuarial method is used for financial reporting purposes. We recognize the funded status; the difference between the fair value of the plan assets and the projected benefit obligation (pension plans) or the accumulated postretirement benefit obligation (other postretirement plan) in our consolidated balance sheet. Our funding policy for qualified plans is consistent with federal or other local regulations and customarily equals the amount deductible for federal and local income tax purposes. Foreign subsidiaries contribute to other plans, which may be administered privately or by government agencies in accordance with local regulations. We also provide the defined contribution Savings Plan (401(a), (k) and 501(a)) for substantially all domestic employees. We may make discretionary contributions to the Savings Plan, but there were no discretionary contributions made to the Savings Plan during the years ended December 31, 2011, 2010 and 2009.

Post-retirement—We currently accrue for post-retirement health care benefits for U.S. employees hired prior to April 1, 1997. The post-retirement health care plan is unfunded.

Post-employment—MacDermid, Incorporated currently accrues for post-employment disability benefits to United Kingdom employees meeting specified service requirements. The post-employment benefits plan is unfunded.

The actuarial determination of the projected benefit obligations and related benefit expense requires that certain assumptions be made regarding such variables as expected return on plan assets, discount rates, rates of future compensation increases, estimated future employee turnover rates and retirement dates, distribution election rates, mortality rates, retiree utilization rates for health care services and health care cost trend rates. The selection of assumptions requires considerable judgment concerning future events and has a significant impact on the amount of the obligations recorded in the consolidated balance sheets and on the amount of expense included in the consolidated statements of operations.

Jumpstart Our Business Startups Act of 2012

Section 107 of the Jumpstart Our Business Startups Act of 2012 provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may choose not to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. Additionally, we are in the process of evaluating the

 

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