**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D. C. 20549**

**FORM 10-Q**

**x****           ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period endedSeptember 30, 2006**

**o****              ****TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from             to             **

**COMMISSION FILE NUMBER  1-13889**

**MacDermid, Incorporated**(Exact name ofregistrant as specified in its charter)

 

| **Connecticut**                                                 | ** ** | **06-0435750**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **1401  Blake St. Denver, Colorado**                            | ** ** | **80202**                             |
| (Address of  principal executive offices)                       |       | (Zip Code)                            |

 

Registrant’stelephone number, including area code  **(720) 479-3062**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  x    No  o.

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

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

 

Indicate by check mark whether the registrant is a shell company (asdefined by Rule 12b-2 of the Exchange Act).  Yes  o    No  x.

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

| **Class**                   | ** ** | **Outstanding  at November 3, 2006** |
|-----------------------------|------------|--------------------------------------|
| Common Stock, no  par value |       | 30,861,165  shares                   |

 

 

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MACDERMID, INCORPORATEDTABLE OF CONTENTS
| *** ***                   | *** ***                                                                                         |
|--------------------------------|------------------------------------------------------------------------------------------------------|
| *** ***                   | *** ***                                                                                         |
| PART I: Financial  Information |                                                                                                 |
|                           |                                                                                                 |   |
| Item  1:                       | Financial  Statements (Unaudited):                                                                   |   |
|                           |                                                                                                 |   |
|                           | Consolidated Statements of Earnings for the three and  nine months ended September 30, 2006 and 2005 |   |
|                           |                                                                                                 |   |
|                           | Consolidated Balance Sheets as of September 30, 2006  and December 31, 2005                          |   |
|                           |                                                                                                 |   |
|                           | Consolidated Statements of Cash Flows for the nine  months ended September 30, 2006 and 2005         |   |
|                           |                                                                                                 |   |
|                           | Notes to Consolidated Financial Statements                                                           |   |
|                           |                                                                                                 |   |
| Item 2:                        | Management’s Discussion and Analysis of Financial  Condition and Results of Operations          |   |
|                           |                                                                                                 |   |
| Item 3:                        | Quantitative and Qualitative Disclosures About Market  Risk                                          |   |
|                           |                                                                                                 |   |
| Item 4:                        | Controls and Procedures                                                                              |   |
|                           |                                                                                                 |   |
| PART  II: Other Information    |                                                                                                 |
|                           |                                                                                                 |   |
| Item 1:                        | Legal Proceedings                                                                                    |   |
|                           |                                                                                                 |   |
| Item 1A:                       | Risk Factors                                                                                         |   |
|                           |                                                                                                 |   |
| Item 2:                        | Unregistered Sales of Equity Securities and Use of  Proceeds                                         |   |
|                           |                                                                                                 |   |
| Item 3:                        | Defaults Upon Senior Securities                                                                      |   |
|                           |                                                                                                 |   |
| Item 4:                        | Submission of Matters to a Vote of Security Holders                                                  |   |
|                           |                                                                                                 |   |
| Item 5:                        | Other Information                                                                                    |   |
|                           |                                                                                                 |   |
| Item 6:                        | Exhibits                                                                                             |   |
|                           |                                                                                                 |   |
|                           | Signatures                                                                                           |   |

 

 

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## ** **

## **PART I — FINANCIAL INFORMATION**

## **ITEM 1.Financial Statements**

## **MACDERMID, INCORPORATEDCONSOLIDATED STATEMENTS OF EARNINGS**(Amounts in thousands of dollars except per sharedata)(Unaudited)

| ** **                                            | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Net sales                                             |       | $                                                        | 200,295    |                                                    | $          | 193,260 |   | $ | 607,910 |   | $ | 541,788 |   |
| Cost of sales                                         |       | 116,242                                                  |       | 109,978                                                 |       | 344,011 |   | 300,827 |   |
| Gross profit                                          |       | 84,053                                                   |       | 83,282                                                  |       | 263,899 |   | 240,961 |   |
|                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating expenses:                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Selling,  technical and administrative                |       | 52,514                                                   |       | 51,387                                                  |       | 160,259 |   | 147,581 |   |
| Research and  development                             |       | 7,489                                                    |       | 6,684                                                   |       | 22,788 |   | 19,725 |   |
| (Gain)/loss on  asset sales and business dispositions |       | (1,108                                                   | )          | —                                                  |       | 1,116 |   | — |   |
| Restructuring                                         |       | 1                                                        |       | 1,077                                                   |       | 2,108 |   | 1,462 |   |
|                                                  |       | 58,896                                                   |       | 59,148                                                  |       | 186,271 |   | 168,768 |   |
| Operating profit                                      |       | 25,157                                                   |       | 24,134                                                  |       | 77,628 |   | 72,193 |   |
|                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Other income (expense):                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest income                                       |       | 858                                                      |       | 534                                                     |       | 2,399 |   | 1,834 |   |
| Interest expense                                      |       | (7,354                                                   | )          | (7,635                                                  | )          | (21,354 | ) | (23,004 | ) |
| Other, net                                            |       | 230                                                      |       | 799                                                     |       | (148 | ) | 207 |   |
|                                                  |       | (6,266                                                   | )          | (6,302                                                  | )          | (19,103 | ) | (20,963 | ) |
|                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Earnings before income  taxes                         |       | 18,891                                                   |       | 17,832                                                  |       | 58,525 |   | 51,230 |   |
| Income taxes                                          |       | (5,801                                                   | )          | (4,915                                                  | )          | (16,621 | ) | (14,600 | ) |
| Net earnings                                          |       | $                                                        | 13,090     |                                                    | $          | 12,917 |   | $ | 41,904 |   | $ | 36,630 |   |
|                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Earnings per common  share:                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                 |       | $                                                        | 0.42       |                                                    | $          | 0.42 |   | $ | 1.36 |   | $ | 1.21 |   |
| Diluted                                               |       | $                                                        | 0.42       |                                                    | $          | 0.42 |   | $ | 1.34 |   | $ | 1.19 |   |
|                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average common  shares outstanding:          |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                 |       | 30,822,994                                               |       | 30,504,127                                              |       | 30,764,044 |   | 30,383,152 |   |
| Diluted                                               |       | 31,293,290                                               |       | 30,956,963                                              |       | 31,254,656 |   | 30,865,440 |   |
|                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Dividends declared per common share                   |       | $                                                        | 0.06       |                                                    | $          | 0.06 |   | $ | 0.18 |   | $ | 0.18 |   |

 

Seeaccompanying notes to consolidated financial statements.

1

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**MACDERMID, INCORPORATEDCONSOLIDATED BALANCE SHEETS**(Amounts in thousands of dollars except share data) 
| ** **                                                                                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                            | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)**       | ** ** |
| ** **                                                                                                                                                            | ** ** | ** **             | ** ** | **(Restated)**        | ** ** |
| Assets                                                                                                                                                                |       |                   |       |                  |       |
| Current assets:                                                                                                                                                       |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                            |       | $                      | 108,965    |                  | $          | 80,932 |   |
| Accounts  receivable, net of allowance for doubtful receivables of $11,144 and $10,966,  respectively                                                                 |       | 166,470                |       | 155,718               |       |
| Inventories, net                                                                                                                                                      |       | 123,844                |       | 92,973                |       |
| Prepaid expenses                                                                                                                                                      |       | 15,133                 |       | 14,108                |       |
| Deferred income  taxes                                                                                                                                                |       | 15,700                 |       | 16,629                |       |
| Total current assets                                                                                                                                                  |       | 430,112                |       | 360,360               |       |
|                                                                                                                                                                  |       |                   |       |                  |       |
| Property, plant  and equipment, net of accumulated depreciation of $201,248 and $184,499,  respectively                                                               |       | 118,955                |       | 123,229               |       |
| Goodwill                                                                                                                                                              |       | 251,736                |       | 242,935               |       |
| Intangibles, net  of accumulated amortization of $19,507 and $14,793, respectively                                                                                    |       | 41,324                 |       | 40,916                |       |
| Deferred income  taxes                                                                                                                                                |       | 37,313                 |       | 37,667                |       |
| Other assets,  net                                                                                                                                                    |       | 15,805                 |       | 14,820                |       |
| Total assets                                                                                                                                                          |       | $                      | 895,245    |                  | $          | 819,927 |   |
| Liabilities and  shareholders’ equity                                                                                                                            |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                 |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                      |       | $                      | 66,141     |                  | $          | 60,202 |   |
| Dividends  payable                                                                                                                                                    |       | 1,851                  |       | 1,836                 |       |
| Accrued  compensation                                                                                                                                                 |       | 17,722                 |       | 16,261                |       |
| Accrued interest                                                                                                                                                      |       | 5,869                  |       | 12,784                |       |
| Accrued income  taxes payable                                                                                                                                         |       | 10,714                 |       | 11,461                |       |
| Short-term notes  payable                                                                                                                                             |       | 459                    |       | 498                   |       |
| Current  installments of long-term obligations                                                                                                                        |       | 61                     |       | 232                   |       |
| Other current  liabilities                                                                                                                                            |       | 44,772                 |       | 38,565                |       |
| Total current liabilities                                                                                                                                             |       | 147,589                |       | 141,839               |       |
|                                                                                                                                                                  |       |                   |       |                  |       |
| Long-term debt  and capital lease obligations                                                                                                                         |       | 300,784                |       | 301,043               |       |
| Retirement  benefits, less current portion                                                                                                                            |       | 22,232                 |       | 22,343                |       |
| Deferred income  taxes                                                                                                                                                |       | 12,613                 |       | 11,489                |       |
| Long-term  environmental                                                                                                                                              |       | 3,198                  |       | 4,119                 |       |
| Other long-term  liabilities                                                                                                                                          |       | 10,681                 |       | 17                    |       |
| Total liabilities                                                                                                                                                     |       | 497,097                |       | 480,850               |       |
| Shareholders’  equity                                                                                                                                            |       |                   |       |                  |       |
| Common stock,  authorized 75,000,000 shares, issued 47,380,916 at September 30, 2006, and  47,131,950 shares at December 31, 2005, at stated value of $1.00 per share |       | 47,381                 |       | 47,132                |       |
| Additional  paid-in capital                                                                                                                                           |       | 47,965                 |       | 42,869                |       |
| Retained  earnings                                                                                                                                                    |       | 403,165                |       | 366,807               |       |
| Accumulated  other comprehensive (loss) income                                                                                                                        |       | 14,291                 |       | (3,051                | )          |
| Less — cost of  common shares held in treasury, 16,545,831 at September 30, 2006, 16,546,763  at December 31, 2005                                               |       | (114,654               | )          | (114,680              | )          |
| Total shareholders’ equity                                                                                                                                       |       | 398,148                |       | 339,077               |       |
| Total liabilities and  shareholders’ equity                                                                                                                      |       | $                      | 895,245    |                  | $          | 819,927 |   |

 

See accompanying notes to consolidated financialstatements.

2

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## **MACDERMID, INCORPORATEDCONSOLIDATED STATEMENTS OF CASH FLOWS**(Amounts in thousands of dollars)(Unaudited)

| ** **                                                                         | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Net cash flows  from operating activities:                                         |       |                                                |       |   |   |
| Net earnings                                                                       |       | $                                                   | 41,904     |   | $ | 36,630 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                |       |   |   |
| Depreciation                                                                       |       | 14,835                                              |       | 12,209 |   |
| Amortization                                                                       |       | 4,256                                               |       | 2,796 |   |
| Inventory reserve adjustment                                                       |       | (2,846                                              | )          | — |   |
| Provision for bad debts                                                            |       | 917                                                 |       | 1,580 |   |
| Deferred income taxes                                                              |       | 3,171                                               |       | (995 | ) |
| Stock compensation expense                                                         |       | 1,922                                               |       | 5,227 |   |
| Net loss on asset sales and business dispositions                                  |       | 830                                                 |       | — |   |
| Restructuring                                                                      |       | 2,108                                               |       | 1,463 |   |
| Changes in  assets and liabilities                                                 |       |                                                |       |   |   |
| Increase in receivables                                                            |       | (6,304                                              | )          | (12,909 | ) |
| Increase in inventories                                                            |       | (27,790                                             | )          | (5,423 | ) |
| Increase in prepaid expenses                                                       |       | (533                                                | )          | (2,461 | ) |
| Increase (decrease) in accounts payable                                            |       | 3,185                                               |       | (703 | ) |
| Decrease in accrued expenses                                                       |       | (5,436                                              | )          | (10,319 | ) |
| (Decrease)increase in income tax liabilities                                       |       | (244                                                | )          | 3,620 |   |
| Increase (decrease) in L/T environmental Liabilities                               |       | (918                                                | )          | 169 |   |
| Other                                                                              |       | 4,318                                               |       | 308 |   |
| Net cash flows provided by operating activities                                    |       | 33,375                                              |       | 31,192 |   |
|                                                                               |       |                                                |       |   |   |
| Cash flows from  investing activities:                                             |       |                                                |       |   |   |
| Capital expenditures                                                               |       | (7,530                                              | )          | (10,810 | ) |
| Proceeds from disposition of fixed assets                                          |       | 2,270                                               |       | 1,245 |   |
| Acquisition of business, net of cash acquired                                      |       | —                                              |       | (93,153 | ) |
| Proceeds from disposition of business                                              |       | 770                                                 |       | 262 |   |
| Other                                                                              |       | (256                                                | )          | — |   |
| Net cash flows used in investing activities                                        |       | (4,746                                              | )          | (102,456 | ) |
|                                                                               |       |                                                |       |   |   |
| Cash flows from  financing activities:                                             |       |                                                |       |   |   |
| Net short-term borrowings (repayments)                                             |       | (250                                                | )          | 2,965 |   |
| Repayments of long-term borrowings                                                 |       | (379                                                | )          | (185 | ) |
| Issuance from treasury shares                                                      |       | 26                                                  |       | 33 |   |
| Proceeds from exercise of stock options                                            |       | 3,422                                               |       | 2,717 |   |
| Dividends paid                                                                     |       | (5,532                                              | )          | (4,858 | ) |
| Net cash flows (used in) provided by financing  activities                         |       | (2,713                                              | )          | 672 |   |
|                                                                               |       |                                                |       |   |   |
| Effect of exchange  rate changes on cash and cash equivalents                      |       | 2,117                                               |       | (6,930 | ) |
| Net increase  (decrease) in cash and cash equivalents                              |       | 28,033                                              |       | (77,522 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 80,932                                              |       | 137,829 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                   | 108,965    |   | $ | 60,307 |   |
| Supplemental  disclosures of Cash Flow Information:                                |       |                                                |       |   |   |
| Cash paid for  interest                                                            |       | $                                                   | 27,818     |   | $ | 28,285 |   |
| Cash paid for income  taxes                                                        |       | $                                                   | 15,627     |   | $ | 12,657 |   |

 

See accompanying notes to consolidated financialstatements.

 

3

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**MACDERMID, INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)(In thousands of dollars, except share and per share amounts)

Note 1.                                  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim financial information has beenprepared in accordance with the interim reporting rules and regulations of theU.S. Securities and Exchange Commission and therefore does not include allinformation and footnotes necessary for a fair presentation of financial position,results of operations and cash flows in conformity with accounting principlesgenerally accepted in the United States (“GAAP”). Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with GAAP have been omitted. The preparation of financial statements, in conformity with GAAP,requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingencies at thedate of the financial statements as well as the reported amounts of revenuesand expenses during the reporting period. Estimates have been prepared on thebasis of the most current and best available information and actual resultscould differ from those estimates.  Certain amounts in the prior periodhave been restated to conform to current period presentation, including theDecember 31, 2005 balance sheet accounts of Goodwill, Intangibles, TotalAssets, Accumulated Other Comprehensive (Loss) Income, Total Shareholders’ Equityand Total Liabilities and Shareholders’ Equity (See Notes 2 and 6 below) andthe September 30, 2005 foreign currency translation adjustment (see Note 7below).  Below are tables that presentthe balances that have been restated from previously reported amounts due to acorrection of an error in accounting for the Company’s historical goodwill andintangible balances:
| **Balance Sheet Items**               | ** ** | **December 31, 2005  balance, as reported** | ** ** | **Restatement  Adjustments** | ** ** | **December 31, 2005  balance, restated** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------------------------|------------|
| Goodwill                                        |       | $                                                               | 236,532    |                         | $          | 6,403                                                   |       | $ | 242,935 |   |
| Intangibles, net                                |       | 40,128                                                          |       | 788                          |       | 40,916                                                  |       |
| Accumulated other comprehensive  (loss) income  |       | (10,242                                                         | )          | 7,191                        |       | (3,051                                                  | )          |
| Total assets                                    |       | 812,736                                                         |       | 7,191                        |       | 819,927                                                 |       |
| Total shareholders’ equity                 |       | 331,886                                                         |       | 7,191                        |       | 339,077                                                 |       |
| Total liabilities and shareholders’ equity |       | 812,736                                                         |       | 7,191                        |       | 819,927                                                 |       |
|                                                 |            |                                                                 |            |                              |            |                                                         |            |  |  |  |

 
| **Other Comprehensive Income** | ** ** | **Three months ended  September 30, 2005  balance, as reported** | ** ** | **Restatement  Adjustments** | ** ** | **Three months ended  September 30, 2005  balance, restated** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| Foreign currency  translation adjustment |       | $                                                                                              | (1,926     | )                            | $          | (2,110                                                                                 | )          | $ | (4,036 | ) |
| Other                                    |       | 165                                                                                            |       | 842                          |       | 1,007                                                                                  |       |
| Comprehensive income                     |       | $                                                                                              | 11,156     |                         | $          | (1,268                                                                                 | )          | $ | 9,888 |   |

 
| **Other Comprehensive Income** | ** ** | **Nine months ended  September 30, 2005  balance, as reported** | ** ** | **Restatement  Adjustments** | ** ** | **Nine months ended  September 30, 2005  balance, restated** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| Foreign currency  translation adjustment |       | $                                                                                             | (18,991    | )                            | $          | (11,859                                                                               | )          | $ | (30,850 | ) |
| Other                                    |       | 871                                                                                           |       | 3,847                        |       | 4,718                                                                                 |       |
| Comprehensive income                     |       | $                                                                                             | 18,510     |                         | $          | (8,012                                                                                | )          | $ | 10,498 |   |

 

In the opinion of MacDermid, Incorporated  and its subsidiaries (collectively “MacDermid”or the “Company”) management, the accompanying unaudited consolidated  financial statements of the interim periodspresented contain all adjustments necessary to present fairly the financialposition of MacDermid as of September 30, 2006 and the results of operationsand cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results ofoperations for the three and nine months ended September 30, 2006 are notnecessarily indicative of the results that may be achieved for a full year andcannot be used to indicate financial performance for the entire year.  These financial statements should be read inconjunction with the notes to the consolidated financial statements contained inMacDermid’s Annual Report for the year ended December 31, 2005.

4

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Note 2.                                  Goodwill and Intangible Assets CurrencyTranslation Restatement Adjustments

In the first quarter of 2006, the Companyreviewed its foreign currency conversion rates used to convert goodwill andintangible assets. Beginning in 2002, the Company held all goodwill and certainintangible assets related to the acquisition of Canning Ltd. (“Canningintangibles”) constant at historic currency conversion rates, effectivelyholding the value of goodwill and Canning intangibles constant at 2002 currencyconversion rates.  This resulted in anunderstatement of goodwill and Canning intangibles as of December 31,2005.  In connection with the Companyadopting the provision of Statement of Financial Accounting Standards No. 154,Accounting Changes and Error Corrections, in the first quarter of 2006, theCompany restated the December 31, 2005 balances of Goodwill, Intangibles andOther Comprehensive (Loss) Income to correct an error related to foreigncurrency translation.  As a result, theCompany made certain restatement adjustments to the December 31, 2005Consolidated Balance Sheet to state these assets at the correct currencyconversion rates.   The Company alsorestated Other Comprehensive Income for the three and nine months endedSeptember 30, 2005 to correct an error related to foreign currency translation(see note 7 below).

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

Therestatement adjustments necessary to properly convert goodwill and intangibleassets are offset with a corresponding restatement adjustment to theAccumulated Other Comprehensive (Loss) Income section of Shareholders’ Equityin the December 31, 2005 Consolidated Balance Sheet, as described in Notes 6and 7 below.

These restatement adjustments have no impacton earnings as reported in the Company’s financial statements dated December31, 2005, or any of the tangible assets and liabilities accounts stated therein.  For financial reporting purposes, the Companytreated these restatement adjustments similar to a reclassification of theaffected December 31, 2005 balances.

Therestatement adjustments to the Company’s Goodwill, Intangible Assets, and AccumulatedOther Comprehensive (Loss) Income are as follows:
| **Balance Sheet Item**               | ** ** | **December 31, 2005  balance, as reported** | ** ** | **Restatement  Adjustments** | ** ** | **December 31, 2005  balance, restated** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------------------------|------------|
| Goodwill                                       |       | $                                                               | 236,532    |                         | $          | 6,403                                                   |       | $ | 242,935 |   |
| Intangibles, net                               |       | 40,128                                                          |       | 788                          |       | 40,916                                                  |       |
| Accumulated Other  Comprehensive (Loss) Income |       | (10,242                                                         | )          | 7,191                        |       | (3,051                                                  | )          |
|                                                |            |                                                                 |            |                              |            |                                                         |            |  |  |  |

 

Asa result of the above restatement adjustments, the following balance sheettotals changed as follows:
| **Balance Sheet Totals**               | ** ** | **December 31, 2005  balance, as reported** | ** ** | **Restatement  Adjustments** | ** ** | **December 31, 2005  balance, restated** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------------------------|------------|
| Total Assets                                     |       | $                                                               | 812,736    |                         | $          | 7,191                                                   |       | $ | 819,927 |   |
| Total  Shareholders’ Equity                 |       | 331,886                                                         |       | 7,191                        |       | 339,077                                                 |       |
| Total Liabilities and  Shareholders’ Equity |       | 812,736                                                         |       | 7,191                        |       | 819,927                                                 |       |
|                                                  |            |                                                                 |            |                              |            |                                                         |            |  |  |  |

 

Asa result of these restatement adjustments, the Company re-performed itsgoodwill and intangible assets impairment tests for 2005.  The Company added the respective restatementadjustments and compared the adjusted net assets to the discounted cash flows,as calculated in the original impairment test. The restatement adjustments noted above did not trigger an impairment,and as such, the Company concluded that there is no impairment to its goodwillor intangible assets (including the Canning intangibles) as a result of theabove restatement adjustments.

5

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OnJune 20, 2001, MacDermid issued 9 1/8% Senior Subordinated Notes (“BondOffering”) due 2011.  Under the BondOffering the Company is required to perform tests of certain metrics in orderto demonstrate that the Company meets restrictive covenants embedded in theBond Offering.  As a result of therestatement adjustments noted above, the Company restated its goodwill balancesand re-performed the net worth, restricted payment, and indebtedness covenanttests as of December 31, 2005, as calculated in accordance with Bond Offeringagreement.  The restatement adjustmentsnoted above did not trigger a default, and as such, the Company concluded thatthe above restatement adjustments had no impact on its Bond Offering covenanttests as of December 31, 2005.

Note 3.                                  New Accounting Standards

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 158, Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans: an amendment of FASB Statements No. 87,88, 106, and 132R  (“SFAS 158”).   This statement requires recognition of thefunded status of postretirement benefit plans in the statement of financialposition.  An employer must recognize anasset or liability in its statement of financial position for the differencebetween the fair value of the plan assets and the projected benefit obligation(pension plans) or the accumulated postretirement benefit obligation (otherpostretirement plans).  Changes in theplans’ funded status must be recognized, in the year of change, incomprehensive income.  SFAS 158 will alsorequire entities to measure the funded status of the plans as of the date ofthe year-end statement of financial position, with a few exceptions.  The recognition provision of SFAS 158 iseffective beginning the fourth quarter of 2006. The plan measurement date provision of SFAS 158 is effective beginningthe first quarter of 2008.  The Companyis currently in the process of evaluating the expected effect of SFAS 158 onits consolidated financial statements and is not yet in a position to determinesuch effects.  The unfunded status of thepension and postretirement benefit plans would have resulted in an additionallong term liability of approximately $25,000 to $35,000 as of December 31, 2005, with a corresponding offsetto other comprehensive income in the stockholders’ equity section at December31, 2005.

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, FairValue Measurements (“SFAS 157”) that will become effective beginning firstquarter of 2008.   This statement definesfair value, establishes a framework for measuring fair value in GAAP, andexpands disclosures about fair value measurements.  This statement does not require any new fairvalue measurements.  However, for someentities, the application of this statement will change current practice.  The Company is currently in the process ofevaluating the expected effect of SFAS 157 on its consolidated financialstatements and is not yet in a position to determine such effects.

In September 2006, theSEC issued Staff Accounting Bulletin No. 108, Considering the Effects of PriorYear Misstatements When Quantifying Misstatements in Current Year Financial Statements(“SAB 108”) to address diversity in practice in quantifying financialstatement misstatements and the potential under current practice for the buildup of improper amounts on the balance sheet. SAB 108 will become effective beginning in the fourth quarter of2006.  The Company is currently in theprocess of evaluating the expected effect of SAB 108 on its consolidatedfinancial statements and is not yet in a position to determine such effects.

In July 2006, the FASBreleased FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes, an interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48clarifies the accounting and reporting for uncertainties in income taxlaw.  This Interpretation prescribes a comprehensive model for the financialstatement recognition, measurement, presentation and disclosure of uncertaintax positions taken or expected to be taken in income tax returns.  TheCompany will adopt this Interpretation in the first quarter of 2007.  Thecumulative effects, if any, of applying this Interpretation will be recorded asan adjustment to retained earnings as of the beginning of the period ofadoption.  The Company is currently in the process of evaluating theexpected effect of FIN 48 on its consolidated financial statements and iscurrently not yet in a position to determine such effects.

In April 2006, the FASBissued FASB Staff Position (FSP) FIN 46(R)-6, “Determining the Variability toBe Considered in Applying FASB Interpretation No. 46(R)” (“FSP FIN 46(R)-6”),that  became effective beginning thirdquarter of 2006. FSP FIN No. 46(R)-6 clarifies that the variability to beconsidered in applying FASB Interpretation 46(R) shall be based on an analysisof the design of the variable interest entity.  The Company adopted the provisions of FSP FIN 46(R)-6 in the thirdquarter of 2006.  The adoption of FSP FIN46(R)-6 did not have amaterial impact on the Company’s financial position, results of operations orcash flows.

6

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InMay 2005, the FASB issued Statement of Financial Accounting StandardsNo. 154, Accounting Changes and Error Corrections — a replacement ofAPB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). Thisstatement applies to all voluntary changes in accounting principle and changesrequired by an accounting pronouncement where no specific transition provisionsare included. SFAS 154 requires retrospective application to prior periods’financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. Retrospective application is limited to the directeffects of the change; the indirect effects should be recognized in the periodof the change.  The Company adopted theprovisions of SFAS 154 in the first quarter of 2006.  The adoption of SFAS 154 did not have amaterial impact on the Company’s financial position, results of operations orcash flows.

Note 4.                                  Earnings Per Common Share and Other CommonShare Information

Earnings per share (“EPS”) is calculated based upon net earningsavailable for common shareholders. The computation of basic earnings per shareis based upon the weighted average number of outstanding common shares.  The computation of diluted earnings per shareis based upon the weighted average number of outstanding common shares plus theeffect of all dilutive contingently issuable common shares from stock options,stock awards and warrants that were outstanding during the period, under thetreasury stock method.  For the threemonths ended September 30, 2006 and 2005, 1,933,996 and 2,588,215,respectively, of options to purchase shares of common stock were outstandingbut not included in the computation of diluted earnings per share because theeffect would have been anti-dilutive. For the nine months endedSeptember 30, 2006 and 2005, 2,119,464 and 2,474,727, respectively, ofoptions to purchase shares of common stock were outstanding but not included inthe computation of diluted earnings per share because the effect would havebeen anti-dilutive.

The following table reconciles basic weighted-average common sharesoutstanding to diluted weighted-average common shares outstanding:
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Basic common shares               |       | 30,822,994                                           |       | 30,504,127                                          |       | 30,764,044 |   | 30,383,152 |   |
| Dilutive effect  of stock options |       | 470,296                                              |       | 452,836                                             |       | 490,612 |   | 482,288 |   |
| Diluted common shares             |       | 31,293,290                                           |       | 30,956,963                                          |       | 31,254,656 |   | 30,865,440 |   |

 

Note 5.                                  Stock-Based Plans

MacDermid grants stock options and stock awards to Boardmembers and to employees.   EffectiveJanuary 1, 2006, MacDermid adopted the provisions of Statement of FinancialAccounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”), whichrequires the use of the fair value method of accounting for all stock-basedcompensation, including stock options. SFAS 123(R) was adopted using the modified prospective method ofapplication.  Under this method, in additionto reflecting compensation expense for new share-based awards, expense is alsorecognized for those awards vesting in the current period based on the valuethat had been included in pro forma disclosures in prior periods.  Results from prior periods have not beenrestated.  Prior to the adoption of SFAS123(R), MacDermid adopted the fair value expense recognition provisions ofStatement of Financial Accounting Standards No. 123, Accounting for Stock BasedCompensation (“SFAS 123”), prospectively, to all stock options granted,modified or settled after April 1, 2001. Accordingly, compensation expense was measured using the fair value atthe date of grant for options granted after April 1, 2001.  The resulting expense is amortized over theperiod in which the options are earned.   During the three and nine months ended September 30, 2006, ($587) and$1,359, respectively, was charged to expense related to stock options.  During the three and nine months endedSeptember 30, 2005, $1,177 and $5,092, respectively, was charged to expenserelated to stock options.

The following table presents the weighted-average assumptionsused in the option pricing model for stock options granted during the three andnine months ended September 30, 2006 and 2005, respectively:
| ** **                     | ** ** | **Three months Ended  September 30,** | ** ** | **Nine months Ended  September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Volatility                     |       | 28.9                                                 | %          | 31.9                                                | %          | 28.9 | % | 31.9 | % |
| Risk-free  interest rate       |       | 5.07                                                 | %          | 1.60                                                | %          | 5.07 | % | 1.60 | % |
| Dividend yield                 |       | 0.70                                                 | %          | 0.49                                                | %          | 0.70 | % | 0.49 | % |
| Expected lives  (years)        |       | 8.0                                                  |       | 6.0                                                 |       | 8.0 |   | 6.0 |   |
| Fair value per option  granted |       | $                                                    | 15.75      |                                                | $          | 11.07 |   | $ | 15.75 |   | $ | 11.07 |   |
|                                |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

7

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For all of MacDermid’s stock options, the fair value of eachgrant was estimated at the date of grant using the Black-Scholes option pricingmodel.  The expected life of the stockoptions represents the period of time the stock options are expected to beoutstanding and is based on historical trends.

MacDermidhas five stock incentive plans under which there are outstanding stockoptions.  These plans have different terms and features as described below:

Equity Incentive Plan

In 1996, MacDermid adopted a non-qualified equity incentiveplan, approved by the shareholders in July 1995 (the “1995 Plan”).  The 1995 Plan provides for the issuance of upto 900,000 shares.  In February 2006, theCompensation Committee of the Company proposed that the Company’s shareholdersconsider the following changes to the 1995 plan:

·                  increasethe aggregate maximum number of shares that may be granted in any one year from50,000 to 150,000;

·                  allow theCompensation Committee to place additional restrictions and/or vestingrequirements on any award;

·                  shortenthe vesting term from four to three years;

·                  increasethe retirement age for accelerated vesting from 60 to 65, and

·                  change thepro-rata vesting to one-third per year over the three year vesting period incase of involuntary termination without cause.

The changes above were approved by the Company’s shareholdersin May 2006.

All shares of restricted stock issued under this plan must beheld and cannot be sold or transferred, except to the Company, for a period ofthree or four years depending on the date the restricted shares were originallyawarded.  The Company recognizescompensation expense for restricted shares issued under this plan equal to themarket value of the restricted shares on the date of grant. For restrictedstock awards granted prior to 2006, the restricted stock awards are granted atfair market value and the related expense is recognized at the date ofgrant.  For restricted stock awardsgranted after January 1, 2006, the restricted stock awards are granted at fairmarket value and the related expense is recognized over the vesting terms ofthe restricted stock awards.  The amountof expense recognized during the three and nine months ended September 30, 2006was $240 and $400, respectively.  Theamount of expense recognized during the three and nine months ended September30, 2005 was $0 and $135, respectively. The following table summarizes restricted stock award activity fromDecember 31, 2005 through September 30, 2006 regarding the Company’s equityincentive plan:

 
| **Equity  Incentive Plan:**              | ** ** | **Restricted Shares** | ** ** | **Weighted Average  Grant Date Fair Value** | ** ** |
|------------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------------|------------|
| Nonvested  balance at December 31, 2005  |       | 11,163                     |       | $                                                               | 28.67      |   |
| Changes during  the period:              |       |                       |       |                                                            |       |
| Shares granted                           |       | 76,665                     |       | $                                                               | 34.40      |   |
| Nonvested balance at  September 30, 2006 |       | 87,828                     |       | $                                                               | 33.67      |   |

 

As of September 30, 2006, there was $2,239 of totalunrecognized compensation cost related to restricted stock awards granted underthe Equity Incentive Plan.  That cost isexpected to be recognized over a weighted average period of 2.2 years.

Stock Option Plans

The1992 Plan

In1993, MacDermid adopted a non-qualified stock option plan, approved byshareholders in July 1992 (the “1992 Plan”). The 1992 Plan provides for the issuance of up to 2,700,000 shares.  Options granted under the 1992 plan, whichvest between four and six years, are generally exercisable at a fixed pricethat can be as low as two-thirds of the market price at the grant date.  The options are exercisable into restrictedshares of common stock, which cannot be sold or transferred, except back toMacDermid at cost, during the four-year period commencing with the exercisedate.  In February 2006, MacDermid’sBoard of Directors voted to cancel all remaining unissued shares in the 1992Plan.  As of September 30, 2006, therewere 12,065 options outstanding under the 1992 plan.

 

8

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The1998 Plan

MacDermidadopted a non-qualified stock option plan, approved by shareholders in July1999 (the “1998 Plan”).  The 1998 Planprovides for the issuance of up to 1,500,000 shares.  Options granted under the 1998 Plan generallyare exercisable during a ten-year period beginning with the grant date, at afixed price equal to a one-third-premium over market price at the date ofgrant.  The options are exercisable intounrestricted shares of common stock, except as otherwise provided, under theterms of the plan, at the time of grant. In February 2006, MacDermid’s Board of Directors voted to cancel allremaining unissued shares in the 1998 Plan. As of September 30, 2006, there were 793,400 options outstanding underthe 1998 plan.

The2001 Executive Plan

MacDermidadopted a non-qualified key executive stock option plan, approved byshareholders in July 2001 (the “2001 Executive Plan”).  The 2001 Executive Plan, as amended byMacDermid’s shareholders in 2004, provides for the issuance of up to 5,000,000shares.  Options granted under the 2001Executive Plan generally are exercisable during a six-year period beginning atthe vesting date, which is four years after the grant date.  The options are exercisable into unrestrictedshares of common stock, except as otherwise provided at the time of grant.  The options are also subject to an “IndexEffect”, which involves two tiers of variability:

·                  Theoption price is variable, either up or down, based upon the market price atdate of grant, adjusted for MacDermid’s stock price performance in comparisonto the Standard and Poor’s Specialty Chemicals Index during the six yearsfollowing the date of grant.  The optionsinitially had exercise prices ranging from $16.75 to $38.65 per share; theexercise prices of these options as of September 30, 2006, now range from$22.51 to $38.65 per share based on Company stock price performance.

·                  Thenumber of options exercisable is variable, either up or down, based upon amultiple either (a) determined by the cumulative percentage of owner earningsgrowth (defined as cash flow from operations less net capital expenditures), or(b) determined using earnings per share growth during the four year vestingperiod, based on targets set at the time of grant.  The multiple can range from 50% to 200% ofthe original shares issued.

Asof September 30, 2006, there were 3,038,902 options outstanding under the 2001Executive plan.

The2001 Employee Plan

In2001, the Company adopted a non-qualified all employee stock option plan,approved by shareholders in July 2001 (the “2001 Employee Plan”).  The 2001 Employee Plan provides for theissuance of up to 1,000,000 shares. Options granted under the 2001 Employee Plan generally are exercisableduring a six-year period beginning at the vesting date, which is four yearsafter the grant date, at a fixed price equal to the market price at the date ofgrant.  The options are exercisable intounrestricted shares of common stock, except as otherwise provided at the timeof grant.  In February 2006, MacDermid’sBoard of Directors voted to cancel all remaining unissued shares in the 2001Employee Plan.  As of September 30, 2006,there were 160,035 options outstanding under the 2001 Employee plan.

The2006 Plan

InFebruary 2006, the Company’s board of directors, adopted a non-qualified allemployee stock option plan approved by the Company’s shareholders in May 2006(the “2006 Plan”).  The 2006 Planprovides for the issuance of up to 1,100,000 shares.  Options granted under the 2006 Plan generallyare exercisable during a four-year period beginning at the vesting date, whichis six years after the grant date, at a price equal to the average of the Company’s closing common stock pricefor the previous five trading days preceding the stock option grant.  The options are exercisable into unrestrictedshares of common stock, except as otherwise provided at the time of grant.  During the three and nine months endedSeptember 30, 2006, 0 and 194,856, respectively, of stock options were grantedto employees, executive officers and non-employee directors of the Company at afair market price of $30.47.  As ofSeptember 30, 2006, there are 905,144 shares available for future grant underthe 2006 plan.  Total compensationexpense for the three and nine months ended September 30, 2006 related to stockoptions grants under the 2006 plans was $133 and $222, respectively.

9

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The following table summarizes stock option activity fromDecember 31, 2005 through September 30, 2006 regarding the Company’s fixedstock option plans:
| **Fixed Option Plans:** | ** ** | **Outstanding  Options** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted Average  Exercise Price**

**Per Share** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** |
|-----------------------------------|------------|--------------------------|------------|---------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Outstanding,  December 31, 2005   |       | 1,047,435                |       |                            |       | $                                                                  | 36.81      |                                                        | 4.2        |   |
| Granted                           |       | 194,856                  |       |                            |       | $                                                                  | 30.47      |                                                        |       |   |
| Exercised                         |       | (77,035                  | )          |                            |       | $                                                                  | 16.90      |                                                        |       |   |
| Forfeited                         |       | (4,900                   | )          |                            |       | $                                                                  | 22.90      |                                                        |       |   |
| Outstanding,  September 30, 2006  |       | 1,160,356                |       | $                               | —     |                                                               | $          | 37.13                                                       |       | 4.4 |   |
| Exercisable, September  30, 2006  |       | 930,625                  |       | $                               | —     |                                                               | $          | 38.83                                                       |       | 3.2 |   |

 

The weighted-average grant date fair value of stock optionsgranted under fixed option plans during the three and nine months endedSeptember 30, 2006 was $0 and $15.75, respectively.  The weighted-average grant date fair value ofstock options granted under fixed option plans during the three and nine monthsended September 30, 2005 was $0 and $11.07, respectively.   The total intrinsic value of stock optionsexercised under fixed option plans during the three and nine months endedSeptember 30, 2006 was $230 and $1,029, respectively.   The total intrinsic value of stock optionsexercised under fixed option plans during the three and nine months endedSeptember 30, 2005 was $1,067 and $4,950, respectively.

As of September 30, 2006, there was $2,983 of unrecognizedcompensation costs related to non-vested stock options under the fixed optionplans that is expected to be recognized over a weighted average period of 4.4years.  The total fair value of stockoptions vested under the fixed option plans during the three and nine months endedSeptember 30, 2006 was $21 and $75, respectively.  The total fair value of stock options vestedunder the fixed option plans during the three and nine months ended September30, 2005 was $0 and $0, respectively.

The following table summarizes stock option activity fromDecember 31, 2005 through September 30, 2006 regarding the Company’s indexedstock option plans:
| **Indexed Option Plan:** | ** ** | **Shares  Available  for Grant** | ** ** | **Outstanding  Options** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted Average  Exercise Price  Per Share** | ** ** | **Weighted Average  Remaining**

**Contractual Term** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|---------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Outstanding,  December 31, 2005    |       | 1,409,111                             |       | 3,525,889                |       |                            |       | $                                                              | 25.41      |                                                            | 6.8        |   |
| Granted                            |       | —                                |       | —                   |       |                            |       |                                                           |       |                                                            |       |
| Exercised                          |       | —                                |       | (97,500                  | )          |                            |       | $                                                              | 22.54      |                                                            |       |   |
| Forfeited                          |       | 70,500                                |       | (84,500                  | )          |                            |       | $                                                              | 32.05      |                                                            |       |   |
| Index effect                       |       | 304,987                               |       | (304,987                 | )          |                            |       | $                                                              | 9.92       |                                                            |       |   |
| Outstanding,  September 30, 2006   |       | 1,784,598                             |       | 3,038,902                |       | $                               | 9,866      |                                                           | $          | 26.88                                                           |       | 6.1 |   |
| Exercisable, September  30, 2006   |       | —                                |       | 1,403,777                |       | $                               | 9,638      |                                                           | $          | 23.26                                                           |       | 4.9 |   |

 

The weighted-average grant date fair value of stock optionsgranted under the indexed option plan during the three and nine months endedSeptember 30, 2006 was $0 and $0, respectively. The weighted-average grant date fair value of stock options grantedunder the indexed option plan during the three and nine months ended September30, 2005 was $0 and $11.07, respectively. The total intrinsic value of stockoptions exercised under indexed option plan during the three and nine monthsended September 30, 2006 was $0 and $715, respectively.   The total intrinsic value of stock optionsexercised under indexed option plan during the three and nine months endedSeptember 30, 2005 was $436 and $436, respectively.

As of September 30, 2006, there was $4,919 unrecognizedcompensation costs related to non-vested stock options under the indexed optionplan that is expected to be recognized over a weighted average period of 4.9years.  The total fair value of stockoptions vested under the indexed option plan during the three and nine monthsended September 30, 2006 was $47 and $3,756, respectively.  The total fair value of stock options vestedunder the indexed option plan during the three and nine months ended September30, 2005 was $0 and $0, respectively.

10

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Note 6.                                  Goodwill and Other Intangible Assets

In the first quarter of 2006, the Companyreviewed its foreign currency conversion rates used to convert goodwill andintangible assets. Beginning in 2002, the Company held all goodwill and certainintangible assets related to the acquisition of Canning Ltd. (“Canningintangibles”) constant at historic currency conversion rates, effectivelyholding the value of goodwill and Canning intangibles constant at 2002 currencyconversion rates.  This resulted in anunderstatement of goodwill and Canning intangibles as of December 31,2005.  As a result, the Company hasdetermined that certain restatement adjustments are necessary as describedbelow to state these assets at the current currency conversion rates.

Upon further investigation the Company’smanagement determined that goodwill related to the 1998 acquisition of CanningLtd. had been pushed-down into the books of the acquisition holding companyinstead of being pushed down to the books of the geographic business segments,where it is tested for impairment.  TheCompany should have allocated the goodwill into the books of the regionalbusiness segments benefiting from the acquisition.  The goodwill, however, was “pushed down” to,and denominated in British Pounds as opposed to being pushed-down to, anddenominated in the currencies of the regions to which the goodwill benefits.

Acquired intangible assets as of September30, 2006 and December 31, 2005, are as follows:

|            | ** ** | **As of September 30, 2006** | ** ** |
|------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **Gross Carrying**                          | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** ** | ** ** | **Amount**                                       | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Patents    |       | $                                                | 18,871     |   | $ | (11,335 | ) | $ | 7,536 |   |
| Trademarks |       | 22,075                                           |       | (3,396 | ) | 18,679 |   |
| Others     |       | 19,885                                           |       | (4,776 | ) | 15,109 |   |
| Total      |       | $                                                | 60,831     |   | $ | (19,507 | ) | $ | 41,324 |   |

 

|            | ** ** | **As of December 31, 2005** | ** ** |
|------------|------------|-------------------------------------------------|------------|
| ** ** | ** ** | **As Reported  Gross Carrying**       | ** ** | **Restatement  Foreign Currency** | ** ** | **Accumulated** | ** ** | **Restated Net** | ** ** |
| ** ** | ** ** | **Amount**                                      | ** ** | **Adjustments** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Patents    |       | $                                               | 17,573     |   | $ | 252 |   | $ | (9,276 | ) | $ | 8,549 |   |
| Trademarks |       | 19,908                                          |       | 536 |   | (2,671 | ) | 17,773 |   |
| Others     |       | 17,440                                          |       | — |   | (2,846 | ) | 14,594 |   |
| Total      |       | $                                               | 54,921     |   | $ | 788 |   | $ | (14,793 | ) | $ | 40,916 |   |

 

In February 2006, the Company re-evaluatedthe value assigned to Autotype’s intangible assets and the revised valuationincreased the value of the technology know-how intangible asset by $2,145.  This amount was deducted from Goodwill andcharged to the intangible asset account. In March 2006, the Company notified employees in Autotype’s Kvistgaard,Denmark facility that the plant would be relocated to Wantage, England, andadded $369 to goodwill pursuant to Emerging Issues Task Force No. 95-3,Recognition of Liabilities in Connection with a Purchase Business Combination (“EITF95-3”) related to employee severance benefits. In March 2006, Goodwill was reduced by an adjustment of $135 to true-upseverance costs related to Autotype’s Schaumberg, Illinois plant.  In June 2006, the Company recorded anadditional amount of $890 to goodwill related to the closure of Autotype’sKvistgaard, Denmark facility in accordance with EITF 95-3 related to thefacility closure.  The Company alsorecorded in June 2006 an amount of $180 to goodwill related to closure ofAutotype’s Schaumberg, Illinois plant in accordance with EITF 95-3.

Amortization expense related to amortizationof intangible assets for the three and nine months ended September 30, 2006,was $1,361 and $4,256, respectively. Amortization expense related to amortization of intangible assets forthe three and nine months ended September 30, 2005, was $650 and $1,486,respectively.  Amortization expense forintangible assets is expected to range from $3,862 to $4,476 over the next fiveyears.

Useful lives for amortizable patents areapproximately fifteen years.  Otherintangible assets have useful lives of five to fifteen years.

11

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The following table presents the changes ingoodwill allocated to the reportable segments for the nine months September 30,2006: 
| **Reportable Segment** | ** ** | **As reported  balance at  December 31,  2005** | ** ** | **Restatement  Allocation and  Foreign  Currency  Adjustments** | ** ** | **Restated  Balance at  December 31,  2005** | ** ** | **Acquisitions  and Purchase  Accounting  Adjustments** | ** ** | **Nine months  ended  September 30,  2006 Currency  Translation  Adjustments** | ** ** | **Balance at  September 30,  2006** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| Advanced Surface  Finishing |       | $                                                              | 155,953    |                                                                 | $          | (3,457                                                 | )          | $                                                            | 152,496    |                                                                                          | $          | (856                                          | )          | $ | 7,501 |   | $ | 159,141 |   |
| Printing  Solutions         |       | 80,579                                                         |       | 9,860                                                                |       | 90,439                                                 |       | 866                                                          |       | 1,290                                                                                         |       | 92,595                                        |       |
| Total                       |       | $                                                              | 236,532    |                                                                 | $          | 6,403                                                  |       | $                                                            | 242,935    |                                                                                          | $          | 10                                            |       | $ | 8,791 |   | $ | 251,736 |   |

 

Included in the September 30, 2006 amountsabove is the allocation of goodwill from the June 2005 Autotype acquisition,which is based on the purchase price allocation and totals $32,776 and $9,453,respectively, for the Advanced Surface Finishing and the Printing Solutionssegments.   Included in the December 31,2005 amounts above is the allocation of goodwill from the June 2005 Autotypeacquisition, which is based on the purchase price allocation and totals $33,796and $8,449, respectively, for the Advanced Surface Finishing and the PrintingSolutions segments.

Statement of Financial Accounting StandardsNo. 142, Goodwill and Other Intangible Assets (“SFAS 142”), stipulates thatMacDermid is required to perform goodwill and other intangible asset impairmenttests on at least an annual basis and more frequently in certaincircumstances.  MacDermid will performthe annual impairment testing for 2006 during the fourth fiscal quarter.  Currently, MacDermid is not aware of anyevent that occurred since the last impairment testing date that would havecaused the Company’s goodwill or intangible assets to become impaired.

Note 7.                                  Other Comprehensive Income

Therestatement adjustments necessary to properly convert goodwill and intangibleassets are offset with a corresponding restatement adjustment to theAccumulated Other Comprehensive (Loss) Income section of Shareholders’ Equityas described in Notes 2 and 6 above. These restatement adjustments have no impact on earnings as reported inthe Company’s financial statements dated December 31, 2005, or any of thetangible assets or liabilities.

The components of comprehensive income for the three and nine monthsended September 30, 2006 and 2005, are as follows:
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                             | ** ** | ** **                                           | ** ** | **(restated)**                                      | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| Net earnings                           |       | $                                                    | 13,090     |                                                | $          | 12,917 |   | $ | 41,904 |   | $ | 36,630 |   |
| Other  comprehensive income:           |       |                                                 |       |                                                |       |   |   |   |   |
| Other                                  |       | (957                                                 | )          | 1,007                                               |       | (173 | ) | 4,718 |   |
| Foreign currency translation adustment |       | 1,470                                                |       | (4,036                                              | )          | 17,515 |   | (30,850 | ) |
| Comprehensive income                   |       | $                                                    | 13,603     |                                                | $          | 9,888 |   | $ | 59,246 |   | $ | 10,498 |   |

 

Note 8.                                  Segment Reporting

MacDermid operates on a worldwide basis, supplyingproprietary chemicals for two distinct segments, Advanced Surface Finishing andPrinting Solutions.  These segments aremanaged separately as each segment has differences in technology and marketingstrategies.  Chemicals supplied by theAdvanced Surface Finishing segment are used for cleaning, activating,polishing, mechanical plating and galvanizing, electro-plating, phosphatising,stripping and coating, filtering, anti-tarnishing and rust retarding for metaland plastic surfaces associated with automotive and industrial applications.The Advanced Surface Finishing segment also supplies chemicals for etchingcopper and imprinting electrical patterns for various electronics applicationsand lubricants and cleaning agents associated with offshore oil and gasoperations.  The products supplied by thePrinting Solutions segment include offset printing blankets and photo-polymerplates used in packaging and newspaper printing, offset printing applications,and digital printers and related supplies. Net sales for all the Company’s products fall into one of these twobusiness segments.

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The results of operations for each business segment includecertain corporate operating costs which are allocated based on the relativeburden each segment bears on those costs. Identifiable assets for each business segment are reconciled to totalconsolidated assets including unallocated corporate assets.  Unallocated corporate assets consistprimarily of deferred tax assets, deferred bond financing fees and certainother long term assets not directly associated with the support of theindividual segments.  Intersegment loansand accounts receivable are included in the calculation of identifiable assetsand are eliminated separately.
| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Results of  operations by segment: |       |                                                 |       |                                                |       |   |   |   |   |
| Net sales:                         |       |                                                 |       |                                                |       |   |   |   |   |
| Advanced Surface Finishing         |       |                                                 |       |                                                |       |   |   |   |   |
| Total segment net sales            |       | $                                                    | 123,288    |                                                | $          | 113,179 |   | $ | 366,421 |   | $ | 320,231 |   |
| Intersegment sales                 |       | (1,918                                               | )          | (2,176                                              | )          | (5,796 | ) | (6,755 | ) |
| Net external sales for the segment |       | 121,370                                              |       | 111,003                                             |       | 360,625 |   | 313,476 |   |
|                               |       |                                                 |       |                                                |       |   |   |   |   |
| Printing Solutions                 |       | 78,925                                               |       | 82,257                                              |       | 247,285 |   | 228,312 |   |
| Consolidated net sales             |       | $                                                    | 200,295    |                                                | $          | 193,260 |   | $ | 607,910 |   | $ | 541,788 |   |
|                               |       |                                                 |       |                                                |       |   |   |   |   |
| Operating profit:                  |       |                                                 |       |                                                |       |   |   |   |   |
| Advanced Surface Finishing         |       | $                                                    | 19,001     |                                                | $          | 16,925 |   | $ | 55,052 |   | $ | 47,764 |   |
| Printing Solutions                 |       | 6,156                                                |       | 7,209                                               |       | 22,576 |   | 24,429 |   |
|                               |       |                                                 |       |                                                |       |   |   |   |   |
| Consolidated  operating profit     |       | $                                                    | 25,157     |                                                | $          | 24,134 |   | $ | 77,628 |   | $ | 72,193 |   |

 

|                                  | ** ** | **As of**         | ** ** |
|----------------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                       | ** ** | **2006**               | ** ** | **2005 (Restated)** | ** ** |
| Identifiable  assets by segment: |       |                   |       |   |   |
| Advanced Surface Finishing       |       | $                      | 559,008    |   | $ | 550,364 |   |
| Printing Solutions               |       | 349,454                |       | 316,050 |   |
| Unallocated corporate assets     |       | 118,416                |       | 95,430 |   |
| Intercompany eliminations        |       | (131,633               | )          | (141,917 | ) |
| Consolidated  assets             |       | $                      | 895,245    |   | $ | 819,927 |   |

 

Note 9.                                  Inventory

The major components ofinventory as of September 30, 2006 and December 31, 2005, were as follows:

|                             | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Finished goods              |       | $                                | 74,628     |                            | $          | 51,820 |   |
| Raw materials  and supplies |       | 41,347                           |       | 35,679                          |       |
| Equipment                   |       | 7,869                            |       | 5,474                           |       |
| Inventories, net            |       | $                                | 123,844    |                            | $          | 92,973 |   |

 

 

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Note 10.                            Pension and Postretirement Benefit Plans

Thefollowing table shows the components of the net periodic pension benefit coststhe Company incurred in the three and nine months ended September 30, 2006 and2005:
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **Domestic**                                             | ** ** | **Foreign** | ** ** | **Domestic** | ** ** | **Foreign** | ** ** |
| Net periodic benefit  cost:         |       |                                                     |       |   |   |   |   |   |   |
| Service cost                        |       | $                                                        | 1,043      |   | $ | — |   | $ | 939 |   | $ | 144 |   |
| Interest cost                       |       | 1,069                                                    |       | 801 |   | 895 |   | 815 |   |
| Expected return on plan  assets     |       | (964                                                     | )          | (919 | ) | (798 | ) | (807 | ) |
| Amortization of prior  service cost |       | 7                                                        |       | — |   | 6 |   | — |   |
| Recognized actuarial  loss          |       | 196                                                      |       | 267 |   | 83 |   | 57 |   |
| Net periodic benefit cost           |       | $                                                        | 1,351      |   | $ | 149 |   | $ | 1,125 |   | $ | 209 |   |

 
| ** **                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **Domestic**                                            | ** ** | **Foreign** | ** ** | **Domestic** | ** ** | **Foreign** | ** ** |
| Net periodic benefit  cost:         |       |                                                    |       |   |   |   |   |   |   |
| Service cost                        |       | $                                                       | 3,128      |   | $ | — |   | $ | 2,814 |   | $ | 432 |   |
| Interest cost                       |       | 3,206                                                   |       | 2,331 |   | 2,688 |   | 2,445 |   |
| Expected return on plan  assets     |       | (2,891                                                  | )          | (2,675 | ) | (2,394 | ) | (2,421 | ) |
| Amortization of prior  service cost |       | 21                                                      |       | — |   | 18 |   | — |   |
| Recognized actuarial  loss          |       | 587                                                     |       | 777 |   | 249 |   | 398 |   |
| Net periodic benefit cost           |       | $                                                       | 4,051      |   | $ | 433 |   | $ | 3,375 |   | $ | 854 |   |

 

Theestimated net periodic benefit cost for other postretirement benefits was $126and  $378, respectively, for the threeand nine months ended September 30, 2006. The estimated net periodic benefit cost for other postretirementbenefits was $160 and $480, respectively, for the three and nine months endedSeptember 30, 2005.

MacDermidpreviously disclosed in its financial statements for the year ended December31, 2005, that the Company expects to contribute $9,000 to MacDermid’s pensionplans in 2006.  During the first quarterof 2006, the Company increased the 2006 expected contribution amount to$12,000.  As of September 30, 2006,$8,800 of contributions have been made. The current portion of pension and postretirement benefit plans isincluded in other current liabilities in the Company’s balance sheet atSeptember 30, 2006 and December 31, 2005.

Note 11.                            Going Private Transaction

On September 5, 2006, Daniel H. Leever, MacDermid’s Chairman and ChiefExecutive Officer, together with Court Square Capital Partners, a relatedparty, submitted a proposal to MacDermid’s Board of Directors to acquire all ofthe Company’s outstanding common stock at a price of $32.50 per share in cash.  MacDermid’s board of directors formed aspecial committee of independent directors to consider the proposal and reviewand evaluate alternative proposals that may be developed or received from otherparties. The committee has retained a financial advisor and a legal advisor toassist it in its work. There can be no assurance that any agreement onfinancial and other terms satisfactory to the special committee will resultfrom the committee’s evaluation of the proposal by the group of investors ledby Mr. Leever or any other proposals, or that any extraordinary transactionwill be approved or completed.

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Note 12.                            Contingencies, Environmental and LegalMatters

EnvironmentalIssues:

MacDermidis a manufacturer and distributor of specialty chemical products, and istherefore exposed to the risk of liability or claims with respect toenvironmental cleanup or other matters, including those in connection with thedisposal of hazardous materials.  TheCompany is subject to extensive domestic and foreign laws and regulationsrelating to environmental protection and worker health and safety, includingthose governing discharges of pollutants into the air and water, the managementand disposal of hazardous substances and wastes, and the cleanup ofcontaminated properties.  The Company hasincurred, and will continue to incur, significant costs and capitalexpenditures in complying with these laws and regulations.  Significant additional costs could beincurred, including cleanup costs, fines, sanctions, and third-party claims, asa result of violations of or liabilities under environmental laws.  To ensure compliance with applicableenvironmental, health and safety laws and regulations, the Company maintains adisciplined environmental and occupational safety and health complianceprogram, which includes conducting regular internal and external audits atCompany plants to identify and categorize potential environmental exposure.

AssetRetirement Obligations:

Inaccordance with Statement of Financial Accounting StandardsNo. 143, “Accounting for Asset Retirement Obligations”,   asinterpreted by FASB Interpretation No. 47, “Accounting for ConditionalAsset Retirement Obligations”, theCompany has recognized asset retirement obligations for properties where theCompany can make a reasonable estimate of the future cost, including thoseobligations for which the timing and/or method of settlement are conditional ona future event that may or may not be within the control of the Company.  In identifying asset retirement obligations,the Company considers identification of legally enforceable obligations,changes in existing laws, estimate of potential settlement dates and thecalculation of an appropriate discount rate to be used in calculating the fairvalue of the obligations.   At September30, 2006 and December 31, 2005 the Company has accrued $1,512 and $1,404,respectively, for its asset retirement obligation for remediation activities atmanufacturing and administrative sites in the United States, Europe andAustralia.  The Asset RetirementObligation balances are included in the long-term environmental liabilities inthe Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005.

Onan ongoing basis, management evaluates its estimates and assumptions; however,actual amounts could differ from those based on such estimates and assumptions.Changes in the estimate during three and nine months ended September 30, 2006and 2005, were not significant.  Thefollowing table shows changes in the carrying amount of the Company’s assetretirement obligation for the nine months ended September 30, 2006:

| Balance at January 1, 2006     |   | $   | 1,404  |   |
|--------------------------------|--------|-----|--------|--------|
| Accretion  expense             |   | 108 |   |
| Balance at September  30, 2006 |   | $   | 1,512  |   |

 

EnvironmentalRemediation:

Asof September 30, 2006 and December 31, 2005, $3,198 and $4,119, respectively,was reserved for various environmental matters. Ultimate costs may vary fromcurrent estimates and reserves, and the discovery of additional contaminants atthese or other sites, or the imposition of additional cleanup obligations, orthird-party claims relating thereto, could result in significant additionalcosts.

Thefollowing summary provides some details regarding the Company’s environmentalliabilities:

·                  MacDermid is named as a potentiallyresponsible party (“PRP”) at two Superfund sites (Fike-Artel in Nitro, WestVirginia, and Solvents Recovery in Southington, Connecticut), in which manyother PRPs are also involved.  Withrespect to both of these sites, the Company has entered into cost sharingagreements that result in costs of less than $10 per year for funding MacDermid’sshare of the ongoing cleanup costs at each site. No reserve has beenestablished, given the deminimus nature of the costs. The Company’s costsharing percentage at each site is 0.2%. On October 31, 2005, the Environmental Protection Agency (“EPA”)notified the Company of alleged deminimus responsibility for certaincontamination at the Mercury Refining Site in New York.  MacDermid entered into a settlement agreementwith the EPA to resolve this deminimus liability for a payment of $1.

·                  Some of the Company’s facilities have anextended history of chemical and industrial activity. The Company is directlyinvolved in the remediation of sites that have environmental contaminationarising from its operations. These sites 

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include certain sites suchas the Kearny, New Jersey and Waukegan, Illinois sites, which were acquired inthe December 1998 acquisition of W. Canning plc.  With respect to the Kearny, New Jersey site,the Canning subsidiary withheld, under the Acquisition Agreement, a deferredpurchase price payment of approximately $1,600. Clean-up costs at these sitesare estimated to be between $2,000 and $5,000. The owners of the Kearny, NewJersey site have primary responsibility for clean-up costs.  Investigations into the extent ofcontamination at these sites are, however, ongoing.

·                  MacDermid is in the process of characterizingcontamination at the Huntingdon Avenue, Waterbury, Connecticut site, which wasclosed in the quarter ended September 30, 2003. The extent of required remediation activities at the Huntingdon Avenuesite has not yet been determined; however, the Company does not anticipate thatit will be materially affected by the environmental remediation costs.

·                  During the third quarter of 2006, MacDermidentered into an agreement with the city council of Birmingham, England wherebyMacDermid  agreed to the variation andrevocation of the Hazardous Substance Consent (“HSC”) for the MacDermid PalmerStreet facility that allowed MacDermid to store certain hazardous substancesfor the receipt of $5,617 (3,000 British Pounds) immediately and the receipt ofan additional $1,873 (1,000 British Pounds) payable when MacDermid revokes its’amended HSC for the Palmer Street site and ceases all storage activity at thePalmer Street site (an expected three year period).  The total amount of $7,490 will be adjustedin the fourth quarter of 2006 upon completion of an environmental study at thePalmer Street site.  As of September 30,2006, the $7,490 is included in other long-term liabilities in the ConsolidatedBalance Sheet.

·                  Legal Proceedings:

Fromtime to time there are various legal proceedings pending against theCompany.  MacDermid considers all suchproceedings to be ordinary litigation incident to the nature of ourbusiness.  Certain claims are covered byliability insurance.  MacDermid believesthat the resolution of these claims, to the extent not covered by insurance,will not individually or in the aggregate, have a material adverse effect onits financial position or results of operations.  To the extent reasonably estimable, reserveshave been established regarding pending legal proceedings.

Note 13.                            Restructuring Activities

During the three and nine months ended September 30, 2006, MacDermidrecognized restructuring charges in the amount of $1 and $2,108, respectively,related to employee severance and other charges.  During the three and nine months ended September30, 2005, MacDermid recognized restructuring charge in the amount of $1,077 and$1,462, respectively, related to employee severance and other charges.

Duringthe first quarter 2006, MacDermid’s implemented restructuring plans related tothe operations of the US MPS business unit. In the first quarter of 2006, MacDermid recorded restructuring chargesof $601 against earnings which consists entirely of employee severance costsrelated to the reduction of thirteen management, sales and administrativeposition reductions in the US MPS business unit.  Of the initial restructuring amount of $601,the Company paid $349 as of September 30, 2006, and reversed $252 of theinitial $601 in the third quarter of 2006. No more payments are expected related to this initiative.

During the first quarter ended March 31, 2006, the Company continuedits efforts to maximize synergies related to the Autotype acquisition byannouncing the relocation of the Autotype’s Kvistgaard, Denmark facility to anexisting facility in Wantage, England. The closure of the Autotype Denmark facility impacted twenty oneemployees in manufacturing, administrative, and managerial roles.  Total severance benefits of $369 were chargedto goodwill during the first quarter 2006 under Emerging Issues Task Force No.95-3, Recognition of Liabilities in Connection with a Purchase BusinessCombination (“EITF 95-3”).  An additional$583 in costs related to the Autotype acquisition not qualifying for purchaseaccounting treatment was charged to the income statement during the firstquarter of 2006.  During the secondquarter of 2006, the Company completed the relocation of Autotype’s Kvistgaard,Denmark facility.  The plant inKvistgaard, Denmark was closed and production was transferred to Autotype’sexisting facility in Wantage, England. During the three months ended June 30, 2006, $890 was charged togoodwill, in accordance with EITF 95-3, in connection with the closure ofAutotype’s Denmark facility, these costs included lease restoration costs,severance payments and asset write-offs. During the three months ended June 30, 2006 $401 charged torestructuring expense for stay bonus payments and moving costs formanufacturing equipment relocated to Autotype’s Wantage, England facility.

During the second quarter of 2006, the Company completed the relocationof Autotype’s Schaumburg, Illinois facility to the Company’s existing facilityin Middletown, Delaware.  In connectionwith this relocation $180 of lease restoration costs were charged to goodwillin the second quarter of 2006 in accordance with EITF 95-3.  During the third quarter of 2006, the 

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Company expensed $212 related to relocation costs in connection withmoving the Autotype Schaumburg, Illinois facility to the Middletown, Delawarefacility.

During the first quarter of 2006 the Company proceeded with plans tomerge Autotype’s Singapore plant into an existing ASF facility inSingapore.  The amalgamation of thesefacilities will not include employee severance, and as such most costsassociated with the merger do not qualify as purchase accounting costs and wereexpensed.  During the first quarter of2006, a charge of $195 was recorded to the income statement related toequipment relocation related to this consolidation initiative.  During the second quarter of 2006, a chargeof $98 was recorded to the income statement related to equipment relocationrelated to this consolidation initiative.

The activity in the accrued restructuring balances related to all ofthe plans described above was as follows for the nine months ended September 30,2006, by segment:
| ** **                        | ** ** | ** **            | ** ** | **For the nine months ended September 30, 2006** | ** ** | **As of September 30, 2006** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | ** **            | ** ** | ** **                                                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **            | ** ** | ** **                                                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **costs and** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Balance,**          | ** ** | ** **                                                                          | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **adjustments  nine months  ended** | ** ** | **Total  expected** | ** ** |
| ** **                        | ** ** | **December 31,** | ** ** | **Restructuring**                                                                   | ** ** | **Goodwill**                                     | ** ** | **Cash** | ** ** | **Non-cash** | ** ** | **September 30,** | ** ** | **costs and** | ** ** |
| ** **                        | ** ** | **2005**              | ** ** | **Charges**                                                                         | ** ** | **adjustments**                                  | ** ** | **payments** | ** ** | **Adjustments** | ** ** | **2006** | ** ** | **adjustments** | ** ** |
| Printing  Solutions:              |       |                  |       |                                                                                |       |                                             |       |   |   |   |   |   |   |   |   |
| Equipment  relocation             |       | $                     | 134        |                                                                                | $          | 117                                              |       | $ | — |   | $ | (140 | ) | $ | 1 |   | $ | (22 | ) | $ | 112 |   |
| Asset disposals                   |       | 18                    |       | —                                                                              |       | 723                                              |       | — |   | — |   | 723 |   | 741 |   |
| Site clean-up  costs              |       | 45                    |       | —                                                                              |       | 164                                              |       | — |   | — |   | 164 |   | 209 |   |
| Severance and  other benefits     |       | 1,739                 |       | 1,246                                                                               |       | 426                                              |       | (1,661 | ) | 17 |   | 28 |   | 1,767 |   |
| Legal and other                   |       | 5                     |       | 74                                                                                  |       | 18                                               |       | (36 | ) | — |   | 56 |   | 61 |   |
| Total Printing  Solutions         |       | $                     | 1,941      |                                                                                | $          | 1,437                                            |       | $ | 1,331 |   | $ | (1,837 | ) | $ | 18 |   | $ | 949 |   | $ | 2,890 |   |
|                              |       |                  |       |                                                                                |       |                                             |       |   |   |   |   |   |   |   |   |
| Advanced Surface  Finishing:      |       |                  |       |                                                                                |       |                                             |       |   |   |   |   |   |   |   |   |
| Equipment  relocation             |       | $                     | 36         |                                                                                | $          | 175                                              |       | $ | — |   | $ | (175 | ) | $ | (74 | ) | $ | (74 | ) | $ | (38 | ) |
| Asset disposals                   |       | 12                    |       | —                                                                              |       | —                                           |       | — |   | — |   | — |   | 12 |   |
| Site clean-up  costs              |       | 30                    |       | —                                                                              |       | 108                                              |       | — |   | — |   | 108 |   | 138 |   |
| Severance and  other benefits     |       | 791                   |       | 496                                                                                 |       | (135                                             | )          | (863 | ) | (274 | ) | (776 | ) | 15 |   |
| Total Advanced Surface  Finishing |       | $                     | 869        |                                                                                | $          | 671                                              |       | $ | (27 | ) | $ | (1,038 | ) | $ | (348 | ) | $ | (742 | ) | $ | 127 |   |
| Total  restructuring charges      |       | $                     | 2,810      |                                                                                | $          | 2,108                                            |       | $ | 1,304 |   | $ | (2,875 | ) | $ | (330 | ) | $ | 207 |   | $ | 3,017 |   |
| Other acquisition  charges        |       | $                     | 385        |                                                                                | $          | —                                           |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 385 |   |
| Total                             |       | $                     | 3,195      |                                                                                | $          | 2,108                                            |       | $ | 1,304 |   | $ | (2,875 | ) | $ | (330 | ) | $ | 207 |   | $ | 3,402 |   |

 

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Note 14.                            Loss on Disposal

During the three and nine months ended September 30, 2006, MacDermidrecorded a loss on disposal of $0 and $2,224, respectively, related to twoseparate dispositions.  The first disposal related to MacDermidEquipment (“MEI”), a small equipment manufacturing unit that supported theCompany’s electronics sales.  In 2001,the Company wrote off all the inventory on MEI’s balance sheet.  Inventory was the only significant asset onMEI’s books, and the write off effectively impaired the Company’s investment inthe subsidiary.  In February 2006, the Companysold the subsidiary for one dollar and recorded a loss on disposal of assets of$1,664, which reduced the Company’s first quarter 2006 tax rate.  The second disposal related to a dormantinternational business unit that was disposed in the first quarter of2006.  A loss on disposal of assets of$560 was recorded in the first quarter 2006 related to this dormant businessunit.

Note 15.                            Miscellaneous Gains

In July 2006, the Company sold an idle manufacturing plant located inFranklin Park, Illinois for $1,588 and recognized a gain related to this saleof  $589 in the third quarter of 2006.

In September 2006, the Company sold its interest in a chemicaldistribution company in Hong Kong for 6,000 Hong Kong dollars, or $770.  In connection with this sale the Companyrecognized a gain of  $519 during thethird quarter of 2006.

Note 16.                            Subsequent Event

On November 4, 2006, theCompany’s Chairman and Chief Executive Officer had restrictions lift on 180,000shares of MacDermid common stock.  Inaccordance with the terms of 1995 Plan, the Company’s Chairman and ChiefExecutive Officer returned 65,759 shares of MacDermid common stock to theCompany at a price of $32.83 per share. Total proceeds from this transaction were $2,159 which was used forpayment of his tax withholding liability that resulted from the lapse ofrestrictions on the 180,000 shares of common stock.  The Company will account for this purchase ofcommon stock under the treasury method.

Note 17.                            Guarantor Financial Statements

MacDermid, Inc. (“Issuer”) issued 9 1/8%SeniorSubordinated Notes (“Bond Offering”) effective June 20, 2001, for the faceamount of $301,500, which pay interest semiannually on January 15th and July15th and mature in 2011.  The proceedswere used to pay down existing long-term debt. This Bond Offering is guaranteed by substantially all existing andfuture directly or indirectly 100% owned domestic restricted subsidiaries ofMacDermid, Inc. (“Guarantors”).  TheGuarantors, fully, jointly and severally, irrevocably and unconditionallyguarantee the performance and payment when due of all the obligations under theBond Offering.  MacDermid’s foreignsubsidiaries (“Non-Guarantors”) are not guarantors of the indebtedness underthe Bond Offering.

UnderMacDermid’s Bond Offering, the Company has several covenants that relate to theCompany’s fixed charge ratio (as defined in the Bond Offering agreement), assetsales, incurrence of additional indebtedness, and restricted payments. Therestricted payment covenant is used to measure the amount of dividends, sharerepurchases, and extraordinary repayments of debt that MacDermid may undertake.The covenant provides for a basket, with respect to, the above mentioned items.The basket is created by taking the aggregate of 50% of net income (or 100% ofany net loss, adjusted for non-cash charges) since June 2001 to present. Whendividend payments are made, they are charged against the basket.  As of September 30, 2006 and December 31,2005, MacDermid had $99,223 and $81,972, respectively, available for futurerestricted payments.  The net assets ofthe Guarantors are restricted and may not be transferred to anyone other thanthe Issuer or another Guarantor without the consent of the Trustee of the Bond Offering,subject to specified baskets.  Thus thenet assets of the Guarantors can be transferred to the Issuer or otherGuarantors within the group freely, but cannot be transferred outside the groupof Guarantors and the Issuer without the consent of the Trustee of the BondOffering, subject to certain baskets.

Inconnection with the restatement adjustments made to goodwill, intangibles andaccumulated other comprehensive (loss) income as described in Notes 2, 6 and 7above, the Company recalculated certain ratios whose components changed as a resultof these restatement adjustments.  TheCompany restated its goodwill balances and re-performed the net worth,restricted payment, and indebtedness covenant tests as of December 31, 2005, ascalculated in accordance with Bond Offering agreement.  The restatement adjustments noted above didnot trigger a default, and as such, the Company concluded that the aboverestatement adjustments had no impact on its Bond Offering covenant tests as ofDecember 31, 2005.

Certainamounts in the Condensed Consolidating Balance Sheet as of December 31, 2005were restated.  The restatementadjustments necessary to properly convert goodwill and intangible assets areoffset with a corresponding restatement adjustment to the Accumulated OtherComprehensive (Loss) Income section of Shareholders’ Equity in the Condensed

 

18

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ConsolidatingBalance Sheet as of December 31, 2005. The equity method was used byMacDermid with respect to investments in subsidiaries for these financialstatements.  The equity method also hasbeen used by subsidiary guarantors with respect to investments in non-guarantorsubsidiaries.  Financial statements forsubsidiary guarantors are presented as a combined entity.  The financial information includes certainallocations of revenues and expenses based on management’s best estimates,which are not necessarily indicative of the financial position, results ofoperations and cash flows that these entities would have achieved on astand-alone basis.  Therefore, thesestatements should be read in conjunction with the consolidated financialstatements and notes thereto included in the Annual Report on Form 10-K for theyear ended December 31, 2005.

The following financial information sets forth our CondensedConsolidating Balance Sheets as of September 30, 2006 and December 31, 2005;the Condensed Consolidating Statements of Earnings for the three and ninemonths ending September 30, 2006 and 2005; and the Condensed ConsolidatingStatements of Cash Flows for the nine months ending September 30, 2006 and2005:

CONDENSED CONSOLIDATING STATEMENTS OFEARNINGS

THREE MONTHS ENDED SEPTEMBER 30, 2006

(Unaudited)
| ****                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **MacDermid  Incorporated  and Subsidiaries** | ** ** |
|------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|----------------------------------------------------|------------|
| Net  sales                                     |       | $          | 25,476     |                        | $          | 50,941                         |       | $                | 143,052    |                                               | $          | (19,174 | ) | $ | 200,295 |   |
| Cost  of sales                                 |       | 16,847     |       | 29,215                      |       | 89,354                         |       | (19,174          | )          | 116,242                                            |       |
| Gross  profit                                  |       | 8,629      |       | 21,726                      |       | 53,698                         |       | —           |       | 84,053                                             |       |
|                                           |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Operating  expenses:                           |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Selling,  technical and administrative         |       | 10,246     |       | 10,771                      |       | 31,497                         |       | —           |       | 52,514                                             |       |
| Research  anddevelopment                       |       | 1,580      |       | 2,588                       |       | 3,321                          |       | —           |       | 7,489                                              |       |
| Gain  on asset sales and business dispositions |       | (589       | )          | —                      |       | (519                           | )          | —           |       | (1,108                                             | )          |
| Restructuring                                  |       | (110       | )          | 67                          |       | 44                             |       | —           |       | 1                                                  |       |
|                                           |       | 11,127     |       | 13,426                      |       | 34,343                         |       | —           |       | 58,896                                             |       |
| Operating  (loss) profit                       |       | (2,498     | )          | 8,300                       |       | 19,355                         |       | —           |       | 25,157                                             |       |
|                                           |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Equity  in earnings of subsidiaries            |       | 19,428     |       | 13,821                      |       | —                         |       | (33,249          | )          | —                                             |       |
| Interest  income                               |       | 558        |       | 67                          |       | 233                            |       | —           |       | 858                                                |       |
| Interest  expense                              |       | (7,276     | )          | (15                         | )          | (63                            | )          | —           |       | (7,354                                             | )          |
| Other,  net                                    |       | (70        | )          | 180                         |       | 120                            |       | —           |       | 230                                                |       |
|                                           |       | 12,640     |       | 14,053                      |       | 290                            |       | (33,249          | )          | (6,266                                             | )          |
|                                           |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Earnings  (loss) before income taxes           |       | 10,142     |       | 22,353                      |       | 19,645                         |       | (33,249          | )          | 18,891                                             |       |
| Income  tax benefit (expense)                  |       | 2,948      |       | (2,925                      | )          | (5,824                         | )          | —           |       | (5,801                                             | )          |
| Net earnings (loss)                            |       | $          | 13,090     |                        | $          | 19,428                         |       | $                | 13,821     |                                               | $          | (33,249 | ) | $ | 13,090 |   |

 

19

----

 

CONSOLIDATED STATEMENTS OF EARNINGS

THREE MONTHS ENDED SEPTEMBER 30, 2005

(Unaudited)
| ****                                  | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **MacDermid  Incorporated  and Subsidiaries** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|----------------------------------------------------|------------|
| Net sales                             |       | $          | 22,582     |                        | $          | 52,586                         |       | $                | 125,609    |                                               | $          | (7,517 | ) | $ | 193,260 |   |
| Cost of sales                         |       | 15,349     |       | 27,266                      |       | 74,880                         |       | (7,517           | )          | 109,978                                            |       |
| Gross profit                          |       | 7,233      |       | 25,320                      |       | 50,729                         |       | —           |       | 83,282                                             |       |
|                                  |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Operating expenses:                   |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Selling, technical and administrative |       | 8,903      |       | 11,186                      |       | 31,298                         |       | —           |       | 51,387                                             |       |
| Research and development              |       | 1,528      |       | 2,345                       |       | 2,811                          |       | —           |       | 6,684                                              |       |
| Restructuring and acquisition         |       | —     |       | 379                         |       | 698                            |       | —           |       | 1,077                                              |       |
|                                  |       | 10,431     |       | 13,910                      |       | 34,807                         |       | —           |       | 59,148                                             |       |
| Operating (loss) profit               |       | (3,198     | )          | 11,410                      |       | 15,922                         |       | —           |       | 24,134                                             |       |
|                                  |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Equity in earnings of subsidiaries    |       | 19,588     |       | 11,345                      |       | —                         |       | (30,933          | )          | —                                             |       |
| Interest income                       |       | 141        |       | 35                          |       | 358                            |       | —           |       | 534                                                |       |
| Interest expense                      |       | (7,510     | )          | 6                           |       | (131                           | )          | —           |       | (7,635                                             | )          |
| Other, net                            |       | 598        |       | 158                         |       | 43                             |       | —           |       | 799                                                |       |
|                                  |       | 12,817     |       | 11,544                      |       | 270                            |       | (30,933          | )          | (6,302                                             | )          |
|                                  |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Earnings (loss) before income taxes   |       | 9,619      |       | 22,954                      |       | 16,192                         |       | (30,933          | )          | 17,832                                             |       |
| Income tax benefit (expense)          |       | 3,298      |       | (3,366                      | )          | (4,847                         | )          | —           |       | (4,915                                             | )          |
| Net  earnings (loss)                  |       | $          | 12,917     |                        | $          | 19,588                         |       | $                | 11,345     |                                               | $          | (30,933 | ) | $ | 12,917 |   |

 

20

----

 

CONDENSED CONSOLIDATING STATEMENTS OFEARNINGS

NINE MONTHS ENDED SEPTEMBER 30, 2006

(Unaudited)
| ****                                                 | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **MacDermid  Incorporated  and Subsidiaries** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|----------------------------------------------------|------------|
| Net sales                                            |       | $          | 69,887     |                        | $          | 172,604                        |       | $                | 413,633    |                                               | $          | (48,214 | ) | $ | 607,910 |   |
| Cost of sales                                        |       | 45,263     |       | 101,978                     |       | 244,984                        |       | (48,214          | )          | 344,011                                            |       |
| Gross profit                                         |       | 24,624     |       | 70,626                      |       | 168,649                        |       | —           |       | 263,899                                            |       |
|                                                 |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Operating expenses:                                  |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Selling, technical and administrative                |       | 33,057     |       | 31,883                      |       | 95,319                         |       | —           |       | 160,259                                            |       |
| Research anddevelopment                              |       | 4,924      |       | 7,707                       |       | 10,157                         |       | —           |       | 22,788                                             |       |
| (Gain) loss on asset sales and business dispositions |       | (589       | )          | —                      |       | 1,705                          |       | —           |       | 1,116                                              |       |
| Restructuring                                        |       | 221        |       | 560                         |       | 1,327                          |       | —           |       | 2,108                                              |       |
|                                                 |       | 37,613     |       | 40,150                      |       | 108,508                        |       | —           |       | 186,271                                            |       |
| Operating (loss) profit                              |       | (12,989    | )          | 30,476                      |       | 60,141                         |       | —           |       | 77,628                                             |       |
|                                                 |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Equity in earnings of subsidiaries                   |       | 61,839     |       | 41,999                      |       | —                         |       | (103,838         | )          | —                                             |       |
| Interest income                                      |       | 1,691      |       | 174                         |       | 534                            |       | —           |       | 2,399                                              |       |
| Interest expense                                     |       | (21,121    | )          | (44                         | )          | (189                           | )          | —           |       | (21,354                                            | )          |
| Other, net                                           |       | 389        |       | 361                         |       | (898                           | )          | —           |       | (148                                               | )          |
|                                                 |       | 42,798     |       | 42,490                      |       | (553                           | )          | (103,838         | )          | (19,103                                            | )          |
|                                                 |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Earnings (loss) before income taxes                  |       | 29,809     |       | 72,966                      |       | 59,588                         |       | (103,838         | )          | 58,525                                             |       |
| Income tax benefit (expense)                         |       | 12,095     |       | (11,127                     | )          | (17,589                        | )          | —           |       | (16,621                                            | )          |
| Net  earnings (loss)                                 |       | $          | 41,904     |                        | $          | 61,839                         |       | $                | 41,999     |                                               | $          | (103,838 | ) | $ | 41,904 |   |

 

21

----

 

CONSOLIDATED STATEMENTSOF EARNINGS

NINE MONTHS ENDED SEPTEMBER 30, 2005

(Unaudited)
| ****                                   | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **MacDermid  Incorporated  and Subsidiaries** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|----------------------------------------------------|------------|
| Net  sales                             |       | $          | 67,402     |                        | $          | 146,046                        |       | $                | 350,220    |                                               | $          | (21,880 | ) | $ | 541,788 |   |
| Cost  of sales                         |       | 45,543     |       | 73,458                      |       | 203,706                        |       | (21,880          | )          | 300,827                                            |       |
| Gross  profit                          |       | 21,859     |       | 72,588                      |       | 146,514                        |       | —           |       | 240,961                                            |       |
|                                   |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Operating  expenses:                   |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Selling,  technical and administrative |       | 29,992     |       | 30,812                      |       | 86,777                         |       | —           |       | 147,581                                            |       |
| Research  and development              |       | 4,769      |       | 6,994                       |       | 7,962                          |       | —           |       | 19,725                                             |       |
| Restructuring  and acquisition         |       | —     |       | 379                         |       | 1,083                          |       | —           |       | 1,462                                              |       |
|                                   |       | 34,761     |       | 38,185                      |       | 95,822                         |       | —           |       | 168,768                                            |       |
| Operating  (loss) profit               |       | (12,902    | )          | 34,403                      |       | 50,692                         |       | —           |       | 72,193                                             |       |
|                                   |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Equity  in earnings of subsidiaries    |       | 56,128     |       | 34,271                      |       | —                         |       | (90,399          | )          | —                                             |       |
| Interest  income                       |       | 843        |       | 44                          |       | 947                            |       | —           |       | 1,834                                              |       |
| Interest  expense                      |       | (22,654    | )          | (18                         | )          | (332                           | )          | —           |       | (23,004                                            | )          |
| Other,  net                            |       | 826        |       | 455                         |       | (1,074                         | )          | —           |       | 207                                                |       |
|                                   |       | 35,143     |       | 34,752                      |       | (459                           | )          | (90,399          | )          | (20,963                                            | )          |
|                                   |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Earnings  (loss) before income taxes   |       | 22,241     |       | 69,155                      |       | 50,233                         |       | (90,399          | )          | 51,230                                             |       |
| Income  tax benefit (expense)          |       | 14,389     |       | (13,027                     | )          | (15,962                        | )          | —           |       | (14,600                                            | )          |
| Net  earnings (loss)                   |       | $          | 36,630     |                        | $          | 56,128                         |       | $                | 34,271     |                                               | $          | (90,399 | ) | $ | 36,630 |   |

 

22

----

CONDENSED CONSOLIDATING BALANCE SHEETS

SEPTEMBER 30, 2006

(UNAUDITED)

 
| ****                                            | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **MacDermid  Incorporated  and Subsidiaries** | ** ** |
|-------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|----------------------------------------------------|------------|
| **Assets**                                      | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **                                         | ** ** |
| Current  assets:                                |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Cash  and cash equivalents                      |       | $          | 53,795     |                        | $          | 2,735                          |       | $                | 52,435     |                                               | $          | — |   | $ | 108,965 |   |
| Accounts  receivables, net                      |       | 11,679     |       | 19,422                      |       | 135,369                        |       | —           |       | 166,470                                            |       |
| Due  (to) from affiliates                       |       | 21,294     |       | 99,983                      |       | (121,277                       | )          | —           |       | —                                             |       |
| Inventories,  net                               |       | 8,158      |       | 41,023                      |       | 74,663                         |       | —           |       | 123,844                                            |       |
| Prepaid  expenses                               |       | 2,100      |       | 3,405                       |       | 9,628                          |       | —           |       | 15,133                                             |       |
| Deferred  income taxes                          |       | 8,141      |       | 1,799                       |       | 5,760                          |       | —           |       | 15,700                                             |       |
| Total  current assets                           |       | 105,167    |       | 168,367                     |       | 156,578                        |       | —           |       | 430,112                                            |       |
|                                            |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Property,  plant and equipment, net             |       | 11,574     |       | 29,890                      |       | 77,491                         |       | —           |       | 118,955                                            |       |
| Goodwill                                        |       | 51,524     |       | 79,112                      |       | 121,100                        |       | —           |       | 251,736                                            |       |
| Intangibles,  net                               |       | —     |       | 4,619                       |       | 36,705                         |       | —           |       | 41,324                                             |       |
| Investments  in subsidiaries                    |       | 545,954    |       | 284,075                     |       | —                         |       | (830,029         | )          | —                                             |       |
| Deferred  income taxes                          |       | 17,501     |       | 8,619                       |       | 11,193                         |       | —           |       | 37,313                                             |       |
| Other  assets, net                              |       | 5,173      |       | 3,632                       |       | 7,000                          |       | —           |       | 15,805                                             |       |
| Total  assets                                   |       | $          | 736,893    |                        | $          | 578,314                        |       | $                | 410,067    |                                               | $          | (830,029 | ) | $ | 895,245 |   |
|                                            |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Current  liabilities:                           |       |       |       |                        |       |                           |       |             |       |                                               |       |
|                                            |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Accounts  and dividends payable                 |       | $          | 6,670      |                        | $          | 12,560                         |       | $                | 48,762     |                                               | $          | — |   | $ | 67,992 |   |
| Accrued  compensation                           |       | 3,482      |       | 2,655                       |       | 11,585                         |       | —           |       | 17,722                                             |       |
| Accrued  interest                               |       | 5,381      |       | 376                         |       | 112                            |       | —           |       | 5,869                                              |       |
| Accrued  income taxes payable                   |       | (590       | )          | 6,428                       |       | 4,876                          |       | —           |       | 10,714                                             |       |
| Other  current liabilities                      |       | 12,830     |       | 9,769                       |       | 22,693                         |       | —           |       | 45,292                                             |       |
| Total  current liabilities                      |       | 27,773     |       | 31,788                      |       | 88,028                         |       | —           |       | 147,589                                            |       |
|                                            |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Long-term  obligations                          |       | 300,622    |       | —                      |       | 162                            |       | —           |       | 300,784                                            |       |
| Retirement  benefits, less current portion      |       | 5,445      |       | —                      |       | 16,787                         |       | —           |       | 22,232                                             |       |
| Deferred  income taxes                          |       | —     |       | —                      |       | 12,613                         |       | —           |       | 12,613                                             |       |
| Long-term  environmental                        |       | 2,750      |       | —                      |       | 448                            |       | —           |       | 3,198                                              |       |
| Other  long-term liabilities                    |       | 2,155      |       | 571                         |       | 7,955                          |       | —           |       | 10,681                                             |       |
| Total  liabilities                              |       | 338,745    |       | 32,359                      |       | 125,993                        |       | —           |       | 497,097                                            |       |
|                                            |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Total  shareholders’ equity                |       | 398,148    |       | 545,955                     |       | 284,074                        |       | (830,029         | )          | 398,148                                            |       |
| Total liabilities and shareholders’ equity |       | $          | 736,893    |                        | $          | 578,314                        |       | $                | 410,067    |                                               | $          | (830,029 | ) | $ | 895,245 |   |

 

23

----

 

CONDENSED CONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2005

(UNAUDITED)

(RESTATED)
| ****                                             | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **MacDermid  Incorporated  and Subsidiaries** | ** ** |
|--------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|----------------------------------------------------|------------|
| **Assets**                                       | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **                                         | ** ** |
| Current assets:                                  |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Cash and cash equivalents                        |       | $          | 46,925     |                        | $          | 3,131                          |       | $                | 30,876     |                                               | $          | — |   | $ | 80,932 |   |
| Accounts receivables, net                        |       | 10,811     |       | 22,799                      |       | 122,108                        |       | —           |       | 155,718                                            |       |
| Due (to) from affiliates                         |       | 23,496     |       | 94,217                      |       | (117,713                       | )          | —           |       | —                                             |       |
| Inventories, net                                 |       | 5,994      |       | 27,606                      |       | 59,373                         |       | —           |       | 92,973                                             |       |
| Prepaid expenses                                 |       | 3,122      |       | 1,749                       |       | 9,237                          |       | —           |       | 14,108                                             |       |
| Deferred income taxes                            |       | 11,372     |       | —                      |       | 5,257                          |       | —           |       | 16,629                                             |       |
| Total current assets                             |       | 101,720    |       | 149,502                     |       | 109,138                        |       | —           |       | 360,360                                            |       |
|                                             |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Property, plant and equipment, net               |       | 16,362     |       | 28,924                      |       | 77,943                         |       | —           |       | 123,229                                            |       |
| Goodwill                                         |       | 51,760     |       | 79,112                      |       | 112,063                        |       | —           |       | 242,935                                            |       |
| Intangibles, net                                 |       | —     |       | 4,880                       |       | 36,036                         |       | —           |       | 40,916                                             |       |
| Investments in subsidiaries                      |       | 484,326    |       | 245,050                     |       | —                         |       | (729,376         | )          | —                                             |       |
| Deferred income taxes                            |       | 25,550     |       | —                      |       | 12,117                         |       | —           |       | 37,667                                             |       |
| Other assets, net                                |       | 6,222      |       | 3,866                       |       | 4,732                          |       | —           |       | 14,820                                             |       |
| Total assets                                     |       | $          | 685,940    |                        | $          | 511,334                        |       | $                | 352,029    |                                               | $          | (729,376 | ) | $ | 819,927 |   |
|                                             |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Current liabilities:                             |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Accounts and dividends payable                   |       | $          | 9,122      |                        | $          | 9,950                          |       | $                | 42,966     |                                               | $          | — |   | $ | 62,038 |   |
| Accrued compensation                             |       | 2,118      |       | 3,248                       |       | 10,895                         |       | —           |       | 16,261                                             |       |
| Accrued interest                                 |       | 12,654     |       | 24                          |       | 106                            |       | —           |       | 12,784                                             |       |
| Accrued income taxes payable                     |       | (2,350     | )          | 7,622                       |       | 6,189                          |       | —           |       | 11,461                                             |       |
| Other current liabilities                        |       | 16,465     |       | 5,643                       |       | 17,187                         |       | —           |       | 39,295                                             |       |
| Total current liabilities                        |       | 38,009     |       | 26,487                      |       | 77,343                         |       | —           |       | 141,839                                            |       |
|                                             |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Long-term obligations                            |       | 300,516    |       | 271                         |       | 256                            |       | —           |       | 301,043                                            |       |
| Retirement benefits, less current portion        |       | 5,066      |       | —                      |       | 17,277                         |       | —           |       | 22,343                                             |       |
| Deferred income taxes                            |       | —     |       | —                      |       | 11,489                         |       | —           |       | 11,489                                             |       |
| Long-term environmental                          |       | 3,271      |       | 233                         |       | 615                            |       | —           |       | 4,119                                              |       |
| Other long-term liabilities                      |       | —     |       | 17                          |       | —                         |       | —           |       | 17                                                 |       |
| Total liabilities                                |       | 346,862    |       | 27,008                      |       | 106,980                        |       | —           |       | 480,850                                            |       |
|                                             |       |       |       |                        |       |                           |       |             |       |                                               |       |
| Total shareholders’ equity                  |       | 339,078    |       | 484,326                     |       | 245,049                        |       | (729,376         | )          | 339,077                                            |       |
| Total  liabilities and shareholders’ equity |       | $          | 685,940    |                        | $          | 511,334                        |       | $                | 352,029    |                                               | $          | (729,376 | ) | $ | 819,927 |   |

 

24

----

 

CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOWS

NINEMONTHS ENDED SEPTEMBER 30, 2006

(Unaudited)
| ** **                                                   | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **MacDermid  Incorporated  and Subsidiaries** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|----------------------------------------------------|------------|
| Net cash flows provided by (used in) operating activities    |       | $          | 9,612      |                        | $          | (47                            | )          | $                                                  | 23,810     |   | $ | 33,375 |   |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Investing activities:                                        |       |       |       |                        |       |                           |       |                                               |       |
| Capital expenditures                                         |       | (894       | )          | (1,837                      | )          | (4,799                         | )          | (7,530                                             | )          |
| Proceeds from disposition of fixed assets                    |       | —     |       | 1,590                       |       | 680                            |       | 2,270                                              |       |
| Proceeds from disposition of business                        |       | —     |       | —                      |       | 770                            |       | 770                                                |       |
| Other                                                        |       | 235        |       | 315                         |       | (806                           | )          | (256                                               | )          |
| Net cash flows (used in) provided by investing activities    |       | (659       | )          | 68                          |       | (4,155                         | )          | (4,746                                             | )          |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Financing activities:                                        |       |       |       |                        |       |                           |       |                                               |       |
| Net short-term repayments                                    |       | —     |       | (146                        | )          | (104                           | )          | (250                                               | )          |
| Repayments of long-term borrowings                           |       | —     |       | (271                        | )          | (108                           | )          | (379                                               | )          |
| Issuance of treasury shares                                  |       | 26         |       | —                      |       | —                         |       | 26                                                 |       |
| Proceeds from exercise of stock options                      |       | 3,422      |       | —                      |       | —                         |       | 3,422                                              |       |
| Dividends paid                                               |       | (5,532     | )          | —                      |       | —                         |       | (5,532                                             | )          |
| Net cash flows used in financing activities                  |       | (2,084     | )          | (417                        | )          | (212                           | )          | (2,713                                             | )          |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Effect of exchange rate changes on cash and cash equivalents |       | —     |       | —                      |       | 2,117                          |       | 2,117                                              |       |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Net increase (decrease) in cash and cash equivalents         |       | 6,869      |       | (396                        | )          | 21,560                         |       | 28,033                                             |       |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Cash and cash equivalents at beginning of period             |       | 46,925     |       | 3,131                       |       | 30,876                         |       | 80,932                                             |       |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Cash  and cash equivalents at end of period                  |       | $          | 53,794     |                        | $          | 2,735                          |       | $                                                  | 52,436     |   | $ | 108,965 |   |

 

25

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CONSOLIDATED CONDENSEDSTATEMENTS OF CASH FLOWS

NINE MONTHS ENDEDSEPTEMBER 30, 2005

(Unaudited)
| ** **                                                   | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **MacDermid  Incorporated  and Subsidiaries** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|----------------------------------------------------|------------|
| Net cash flows provided by (used in) operating activities    |       | $          | 36,730     |                        | $          | (42,775                        | )          | $                                                  | 37,237     |   | $ | 31,192 |   |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Investing activities:                                        |       |       |       |                        |       |                           |       |                                               |       |
| Capital expenditures                                         |       | (2,201     | )          | (1,301                      | )          | (7,308                         | )          | (10,810                                            | )          |
| Acquisition of business                                      |       | —     |       | (27,070                     | )          | (66,083                        | )          | (93,153                                            | )          |
| Proceeds from disposition of fixed assets and business       |       | 895        |       | —                      |       | 612                            |       | 1,507                                              |       |
| Net cash flows (used in) investing activities                |       | (1,306     | )          | (28,371                     | )          | (72,779                        | )          | (102,456                                           | )          |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Financing activities:                                        |       |       |       |                        |       |                           |       |                                               |       |
| Net proceeds from short-term borrowings                      |       | —     |       | —                      |       | 2,965                          |       | 2,965                                              |       |
| Net proceeds from (repayments of) long-term borrowings       |       | 34         |       | 44                          |       | (263                           | )          | (185                                               | )          |
| Issuance of treasury shares                                  |       | 33         |       | —                      |       | —                         |       | 33                                                 |       |
| Proceeds from exercise of stock options                      |       | (71,195    | )          | 73,912                      |       | —                         |       | 2,717                                              |       |
| Dividends paid                                               |       | (4,858     | )          | —                      |       | —                         |       | (4,858                                             | )          |
| Net cash flows (used in) provided by financing activities    |       | (75,986    | )          | 73,956                      |       | 2,702                          |       | 672                                                |       |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Effect of exchange rate changes on cash and cash equivalents |       | —     |       | —                      |       | (6,930                         | )          | (6,930                                             | )          |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Net (decrease) increase in cash and cash equivalents         |       | (40,562    | )          | 2,810                       |       | (39,770                        | )          | (77,522                                            | )          |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Cash and cash equivalents at beginning of period             |       | 69,512     |       | 688                         |       | 67,629                         |       | 137,829                                            |       |
|                                                         |       |       |       |                        |       |                           |       |                                               |       |
| Cash  and cash equivalents at end of period                  |       | $          | 28,950     |                        | $          | 3,498                          |       | $                                                  | 27,859     |   | $ | 60,307 |   |

 

 

26

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**ITEM 2:**

**Management’sDiscussion and Analysis of Financial Condition and Results of Operations(in thousand of dollars, except shares and per share data)**

CONSOLIDATEDOVERVIEW

Goodwill and Intangible Asset Restatement Adjustments

As discussed in Notes 2, 6 and 7 to the Consolidated FinancialStatements in Part I, Item 1, in the first quarter of fiscal 2006 we reviewed our foreign currencyconversion rates used to convert goodwill and intangible assets. Beginning in2002, we held all goodwill and certain intangible assets related to theacquisition of Canning Ltd. (“Canning intangibles”) constant at historiccurrency conversion rates, effectively holding the value of goodwill andCanning intangibles constant at 2002 currency conversion rates.  This resulted in an understatement ofgoodwill and Canning intangibles as of December 31, 2005.  In connection with our adoption of theprovision of Statement of Financial Accounting Standards No. 154, AccountingChanges and Error Corrections, in the first quarter of 2006, we restated theDecember 31, 2005 balances of Goodwill, Intangibles and Other Comprehensive(Loss) Income to correct an error related to foreign currency translation.  As a result, we made certain restatement adjustmentsto our December 31, 2005 Consolidated Balance Sheet to state these assets atthe correct currency conversion rates. We also restated Other Comprehensive Income for the three and ninemonths ended September 30, 2005 to correct an error related to foreign currencytranslation.

Wealso determined that goodwill related to the 1998 acquisition of Canning Ltd.had been pushed-down into the books of the acquisition holding company insteadof being pushed down to the books of the geographic business segments, where itis tested for impairment.  We should haveallocated the goodwill into the books of the regional business segmentsbenefiting from the acquisition.  Thegoodwill, however, was pushed-down to, and denominated in British Pounds asopposed to being pushed-down to, and denominated in the currencies of theregions that benefit from the goodwill.

Therestatement adjustments necessary to properly convert goodwill and intangibleassets are offset with a corresponding restatement adjustment to theAccumulated Other Comprehensive (Loss) Income section of Shareholders’ Equityin our December 31, 2005 Consolidated Balance Sheet.

These restatement adjustments have no impacton earnings as reported in our financial statements dated December 31, 2005, orany of the tangible assets and liabilities accounts stated therein.  For financial reporting purposes, we treatedthese restatement adjustments similar to a reclassification of the affectedDecember 31, 2005 balances.

Executive Overview

Our consolidated businessconsists of two business segments, Advanced Surface Finishing (“ASF”) andPrinting Solutions (“MPS”).  The ASFsegment supplies chemicals used for finishing metals and non-metallic surfacesfor automotive and other industrial applications, electro-plating metalsurfaces, etching, and imaging to create electrical patterns on circuit boardsfor the electronics industry, and offshore lubricants and cleaners for theoffshore oil and gas markets.  Theacquisition of Autotype International Ltd and associated entities (“Autotype”)in June 2005 further augments this segment by adding production of hard coatedfilms for the membrane switch and touch screen markets.   The MPS segment supplies an extensive lineof offset printing blankets, photo-polymer plates and wide-format digitalprinters for use in the commercial printing and packaging industries for imagetransfer.  The acquisition of Autotypeadded high quality stencil materials and digital pre-press products for screenprinting to the MPS segment.

In both of our business segments, we continue toinvest significant resources in research and development and intellectualproperties such as patents, trademarks, copyrights and trade secrets, as ourbusiness depends on these activities for our financial stability and futuregrowth.

27

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Wefocus on growing revenues and the generation of cash from operations in orderto build shareholder value. Specifically, we plan to improve top line salesgrowth over the longer term by focusing on:

·                  utilizingour technical service and outstanding products to penetrate global markets forall products,

·                  supportingworking capital initiatives focused on maximizing cash flows during a period ofcontinued economic uncertainty in our primary markets,

·                  emphasizingefficiency improvements throughout the organization,

·                  addingnew products through internal research and development, relying heavily on ourinternal knowledge base,

·                  strengtheningthe common identity of our products through a new branding initiative called “YesWe Can!”, and

·                  strategicacquisitions of companies, products, or technologies.

Ourproducts are sold in a competitive, global economy, which exposes us to certaincurrency, economic and regulatory risks and opportunities. Approximately 57% ofour net sales and identifiable assets for the nine month period ended and as ofSeptember 30, 2006, are denominated in currencies other than the United Statesdollar.  These currencies includepredominantly the Euro, British Pound, the Hong Kong Dollar, the Chinese Yuanand the Japanese Yen. We do not manage our foreign currency exposure in amanner that would eliminate the effects of changes in foreign exchange rates onour earnings, cash flows and fair values of assets and liabilities; therefore,our financial performance could be positively or negatively impacted by changesin foreign exchange rates in any given reporting period. For most currencies,we are a net receiver of the foreign currency and therefore benefit from aweaker United States Dollar and are adversely affected by a stronger UnitedStates Dollar relative to the foreign currency. For the three and nine months ended September 30, 2006, net sales andnet earnings were positively impacted as the United States Dollarweakened against the Euro, the British Pound, the Chinese Yuan and the JapaneseYen when compared to exchange rates at the beginning of the year.  For the quarter ended September 30, 2006, netsales and net earnings were positively impacted as the United States dollarweakened against the Euro, the British Pound and the Chinese Yuan when comparedto the same period in 2005.  For the ninemonths ended September 30, 2006 net sales and net earnings were negativelyimpacted as the United States dollar strengthened against the Euro, the BritishPound, the Chinese Yuan and the Japanese Yen when compared to the same periodin 2005.  In both cases, the absoluteimpact on earnings was immaterial.

Ourcompetitors include many large multi-national chemical firms based in Europe,Asia, and the United States.  Newcompetitive products or pricing policies of our competitors can materiallyaffect demand for and pricing of our products, which could have a significantimpact on our financial results.

Weare influenced predominantly by two general industries:  the specialty chemical and printingindustries.  In the specialty chemicalindustry, profit is generated by creating proprietary products and processtechnologies, and delivering high levels of customer service.  Currently, a number of key characteristicsand trends are impacting the industry, including market fragmentation,globalization, the need for financial resources to support research anddevelopment, a renewed focus on core businesses and the increasing importanceof size and scale.  The Asian marketpresents growth opportunities, and our ASF segment continued to see growth inAsia due to favorable market conditions. In 2005, we opened a second facility in China to support our expansionin this market.  Our growth in theelectronics market in Asia was partially offset by market weakness inEurope.  We also experienced growth inour Offshore Fluids products in 2005, which continued in 2006, due largely to aworldwide increase in offshore oil field development activities. In theprinting industry, we continue to see challenging growth opportunities in anincreasingly competitive environment. The industry is marked by globalization, market fragmentation, pricingpressures, and the growing digital printing technologies.  Our business groups that supply offsetprinting blankets and photo-polymer plates continue to be affected by anoverall soft market and changes in our distribution system, as we areincreasingly selling directly to our customers in the United States.  Our digital printer group, which manufactureswide-media printers, is currently benefiting from the market acceptance of ournew product offerings.

Weseek to enhance our profitability by investing in technology, designcapabilities and new product initiatives that respond to the needs of ourcustomers and consumers. We will continue to seek ways to expand our businessin Asia, Europe and the Americas.  Weintend to selectively pursue strategic acquisitions, where appropriate, toexpand or complement our existing business. We expect that any such acquisitions will be consistent with our corebusinesses, and will strengthen our relationships with our customers, enhanceour existing products, processes and technological capabilities or lower ourcosts.  Our ability to increase sales inthe future will depend, in part, on our success in penetrating Asian marketsand leveraging our existing customer base across all product lines in Europeand in the Americas.  We continuallyevaluate alternatives to lower the operating costs of our company.  This includes the realignment of our existingmanufacturing capacity, facility closures or similar actions.

28

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InJune 2005, we acquired all of the outstanding capital stock of Autotype fromNorcros (Holdings) Limited of the UK. The acquisition broadened our product offerings in both of our operatingsegments.  Net assets acquired, includinggoodwill and intangibles, totaled $92,432. The net assets and results of operations are included in our financialstatements since the acquisition date. For more information regarding this acquisition, see Note 17 to theConsolidated Financial Statements in our 2005 Annual Report on Form 10-K.

Duringthe second quarter ended June 30, 2006, we completed our integration of theAutotype units by closing three Autotype plants and relocating production toexisting facilities in order to maximize synergies from the acquisition.Production in Autotype’s Kvistgaard, Denmark facility was transferred to anexisting facility in Wantage, England. The closure of the Autotype Denmark facility impacts twenty oneemployees in manufacturing, administrative, and managerial roles.  See Note 13 to the Consolidated FinancialStatements in Part I, Item 1 for further information related to the closure ofthe Denmark facility.

Duringthe second half of 2005 and  the firsthalf of 2006, as part of our effort to lower the operating costs of ourcompany, we began to implement certain consolidation actions.  These actions are intended to better alignour manufacturing capacity with the changing needs of our customers, eliminateexcess capacity, lower our operating costs, and streamline our organizationalstructure for improved long-term profitability. The restructuring actionsconsist primarily of facility consolidations and closures, including themovement of certain manufacturing operations, and employee terminations. Inconnection with the restructuring actions, we incurred charges of $1 and$2,108, respectively during the three and nine months ended September 30,2006.  For more information regarding ourconsolidation actions, see Note 13 to the Consolidated Financial Statements inPart I, Item 1 and Note 18 to the Consolidated Financial Statements in our 2005Annual Report on Form 10-K.

Forthe three and nine months ended September 30, 2006, our consolidated resultsreflected top line sales growth of $7,035 and $66,122, respectively, ascompared to the same periods last year.  Our acquisition of Autotype contributed$21,291 and $22,231 in sales for the three months ended September 30, 2006 and2005 respectively, and $70,068 and $27,173 in sales for the nine months endedSeptember 30, 2006 and 2005 respectively. Sales in our existing business units increased $7,975 and $23,227respectively, for the three and ninemonths ended September 30, 2006, or 4.7% and 4.5%, respectively, whencompared to same periods last year.

For the three and nine months ended September 30,2006, sales in our existing ASF segment increased a total of $10,804 and$25,766, respectively, or 10.8% and 8.6%, respectively, when compared to thesame periods last year on strong sales in both the Americas and Asia asindustrial production recovers in the United States and continues to grow inAsia.  Electronic sales were higher inAsia for both the three and nine months ended September 30, 2006 when comparedto the same periods in 2005.  Sales inour existing MPS units were lower for the threeand nine months ended September 30, 2006 when compared to the same periods lastyear.

Froma cash flow standpoint, our liquidityposition remained sufficient during the nine months ended September 30, 2006,with working capital of $282,523 at September 30, 2006.  Cash increased $28,033 during the nine monthsended September 30, 2006, primarily due cash provided by operating activitiesof $33,375, effect of exchange rate changes on cash of $2,117, offset by cash usedin investing activities of $4,746.

RESULTSOF OPERATIONS

Weintend the discussion of our financial condition and results of operations thatfollows to provide information that will assist you in understanding ourConsolidated Financial Statements, the changes in certain key items in thosefinancial statements from quarter to quarter, and the primary factors thataccounted for those changes, as well as how certain accounting principles,policies and estimates affect our Consolidated Financial Statements.  The discussion of results of operationsincludes both consolidated and segment-level information.

29

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Summaryof the consolidated results for the three and nine months ended September 30,2006 and 2005:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------|------------|----------------------------------|------------|------------|------------|---------------------------------|------------|------------|------------|
| ** **                      | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ****                            | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **%Change**                     | ** ** | **2006**   | ** ** | **2005** | ** ** | **%Change** | ** ** |
| ** **                      | ** ** | ** **                       | ** ** | ** ** | ** ** | **Favorable**                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Favorable** | ** ** |
| ** **                      | ** ** | ** **                       | ** ** | ** ** | ** ** | **(Unfavorable)**               | ** ** | ** ** | ** ** | ** ** | ** ** | **(Unfavorable)** | ** ** |
| Net sales                       |       | $                                | 200,295    |       | $          | 193,260                         |       | 3.6        | %          | $ | 607,910 |   | $ | 541,788 |   | 12.2 | % |
| Cost of sales                   |       | 116,242                          |       | 109,978    |       | (5.7                            | )%         | 344,011    |       | 300,827 |   | (14.4 | )% |
| Gross profit                    |       | 84,053                           |       | 83,282     |       | 0.9                             | %          | 263,899    |       | 240,961 |   | 9.5 | % |
|                            |       |                             |       |       |       |                            |       |       |       |   |   |   |   |
| Gross profit  percentage        |       | 42.0                             | %          | 43.1       | %          | **                              |       | 43.4       | %          | 44.5 | % | ** |   |
|                            |       |                             |       |       |       |                            |       |       |       |   |   |   |   |
| Operating  expenses             |       | 58,896                           |       | 59,148     |       | 0.4                             | %          | 186,271    |       | 168,768 |   | (10.4 | )% |
|                            |       |                             |       |       |       |                            |       |       |       |   |   |   |   |
| Operating profit                |       | 25,157                           |       | 24,134     |       | 4.2                             | %          | 77,628     |       | 72,193 |   | 7.5 | % |
| Interest income  (expense), net |       | (6,496                           | )          | (7,101     | )          | 8.5                             | %          | (18,955    | )          | (21,170 | ) | 10.5 | % |
| Other, net                      |       | 230                              |       | 799        |       | **                              |       | (148       | )          | 207 |   | ** |   |
|                            |       | (6,266                           | )          | (6,302     | )          | 0.6                             | %          | (19,103    | )          | (20,963 | ) | 8.9 | % |
| Earnings before income  taxes   |       | 18,891                           |       | 17,832     |       | 5.9                             | %          | 58,525     |       | 51,230 |   | 14.2 | % |
| Income taxes                    |       | (5,801                           | )          | (4,915     | )          | (18.0                           | )%         | (16,621    | )          | (14,600 | ) | (13.8 | )% |
| Net earnings                    |       | $                                | 13,090     |       | $          | 12,917                          |       | 1.3        | %          | $ | 41,904 |   | $ | 36,630 |   | 14.4 | % |
| Basic earnings  per share       |       | $                                | 0.42       |       | $          | 0.42                            |       | 0.0        | %          | $ | 1.36 |   | $ | 1.21 |   | 12.4 | % |
| Diluted earnings per  share     |       | $                                | 0.42       |       | $          | 0.42                            |       | 0.0        | %          | $ | 1.34 |   | $ | 1.19 |   | 12.6 | % |
|                                 |            |                                  |            |            |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

**Not a meaningful statistic.

**Threemonths ended September 30, 2006 compared to three months ended September 30,2005**

Netsales

Duringthe three months ended September 30, 2006, our consolidated net sales grew by$7,035, or 3.6%, compared to the same period in 2005.  On a currency-adjusted basis, net sales grewby 2.6%. Our ASF segment benefited from volume growth in our industrial,electronics and offshore fluids products. Our electronics group continued to see growth all through Asia due tofavorable market conditions, and the industrial product lines continue toexperience gains in Asia and in the Americas. Our offshore fluids products continues to benefit from increasing salesin both the Americas and Europe.  Our MPSsegment had slightly lower sales in the third quarter of 2006 compared to thethird quarter of 2005 due to lower sales at our Colorspan business unit.

Costof sales and gross profit

Costof sales for the three months ended September 30, 2006, increased $6,264 or5.7% when compared to the same period last year.  On a currency-adjusted basis, cost of salesincreased by 4.6%. Cost of sales on a percent-of-sales basis increased 1.1% comparedto the same quarter last year.  Grossprofit percentages decreased to 42.0% for the three months ended September 30,2006, from 43.1% compared to the same period last year primarily due to higherraw material costs, lower gross profit at our Autotype business unit andproduct mix sales in the third quarter 2006 compared to the third quarter 2005.

30

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Operatingexpenses

Operatingexpenses decreased $252 or 0.4% in the three months ended September 30, 2006compared to the same period in 2005, and 0.3% on a currency-adjustedbasis.   Our selling, technical andadministrative expense was higher in the third quarter of 2006 when compared tothe third quarter of 2005 due to higher sales and higher legal expense.  Research and development costs were higher inthe third quarter of 2006 when compared to the third quarter of 2005 due tohigher levels of research and development programs at several of our businessunits.  Offsetting the above increases inoperating expenses in the third quarter of 2006 was $1,108 of miscellaneousgains recognized in the third quarter of 2006. In July 2006 we sold an idle manufacturing plant located in FranklinPark, Illinois for $1,588 and recognized a gain related to this sale of $589 inthe third quarter of 2006.  In September 2006, we sold our interest in achemical distribution company in Hong Kong for 6,000 Hong Kong dollars, or$770.  In connection with this sale theCompany recognized a gain of  $519 duringthe third quarter of 2006.  We also hadsignificantly lower restructuring charges in the third quarter of 2006 whencompared to the third quarter of 2005.

Operatingprofit

Operatingprofit for the three months ended September 30, 2006 was $25,157, an increaseof $1,023, or 4.2% compared the same period last year.  On a currency-adjusted basis, operatingprofit increased 3.6%.  For the threemonths ended September 30, 2006 our ASF segment had increased operating profits$2,076 or 12.3% compared to the same period last year due primarily to highersales in our ASF  business units.  For the three months ended September 30, 2006our MPS segment had decreased operating profits of $1,053, or 14.6% dueprimarily to lower operating profits at our MPS-Americas and Colorspan businessunits.

Interestincome (expense)

Netinterest expense decreased by $605, or 8.5% in the three months ended September30, 2006 compared with the same period last year.  This decrease is primarily due to higherinterest income earned during the third quarter of 2006 compared to the sameperiod in 2005 because of higher cash balances and higher interest rates andlower interest expense in the third quarter of 2006 compared to the same periodof 2005 because of lower debt balances.

Other,net

Forthe three months ended September 30, 2006, other net income decreased $569 or71.2%.  The decrease is primarily due todividend income received in the third quarter 2005 that did not recur in thethird quarter 2006.

Incometax expense

Our effective tax ratefor the three months ended September 30, 2006, was 30.7%, up from 27.6% in thesame period last year.  The difference inthe tax rate is due to higher tax benefits related to the 2004 tax return aswell as a tax settlement that were recorded in the third quarter of 2005.  Further, no tax benefit for research anddevelopment credits have been booked in the third quarter of 2006 due to theuncertainty regarding the extension of the research and development credit byUnited States Congress.

Netearnings

Netearnings for the three months ended September 30, 2006 increased $173 or 1.3%compared to the same period in 2005.  Ona currency-adjusted basis, net income increased 0.8% compared to the samequarter last year.  As discussed above,there are several factors that both positively and negatively impacted our netearnings for the third quarter of 2006.

**Ninemonths ended September 30, 2006 compared to nine months ended September 30,2005**

Netsales

Forthe nine months ended September 30, 2006 net sales increased $66,122, or 12.2%,compared to the same period in 2005.  Ona currency-adjusted basis, net sales grew by 13.3%.  Our Autotype business unit accounted for$42,895 or 64.9% of the sales increase. Sales in our ASF segment increased by $47,149 during the nine monthsended September 30, 2006 compared to the same period last year.  Sales in our MPS segment increased by $18,973during the nine months ended September 30, 2006 compared to the same periodlast year.

 

31

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OurASF segment benefited from volume growth in the industrial, electronics andoffshore fluid product groups. Electronics and industrial products experienced higher sales in theAmericas and strong sales in Asia, while sales in Europe were slightly higherthan the first nine months of the same period in 2005.  Sales in the offshore fluids products remainsahead of last year on increased sales in the Americas.  Sales in our MPS segment were higher throughthe first nine months compared with last year due to the inclusion of Autotypesales for nine months in 2006 compared to three and a half months in 2005 andhigher sales from our Colorspan business unit.

Costof sales and gross profit

Costof sales for the nine months ended September 30, 2006, increased $43,184 or14.4% when compared to the same period last year.  On a currency-adjusted basis, cost of sales increased by 15.4%.  Gross profit for the nine months ended September 30, 2006 was 43.4%compared with 44.5% for the same period last year.  This is primarily attributable to Autotype,whose conversion costs run slightly higher than our traditional product linesand higher material costs for the nine months ended September 30, 2006 comparedto the same period last year.

Operatingexpenses

Forthe nine months ended September 30, 2006, operating expenses increased $17,503or 10.4% during the nine months ended September 30, 2006, compared to the sameperiod in 2005, or 11.0% on a currency-adjusted basis.  The increase is attributable primarily to theinclusion of Autotype’s operating expenses for the full nine months endedSeptember 30, 2006, whereas in the same period in 2005 we only incurred threeand one half months of operating expenses related to Autotype.   During the nine months ended September 30,2006, we recorded $2,108 of restructuring expenses and $1,116 for net loss ondisposal of assets and miscellaneous gains from sales of businesses.  There were no similar business disposalcharges in the same period of 2005. Operating expenses in our existing units increased by $4,176, or 2.6%,primarily due to a charge of $1,913 recorded in the first quarter of 2006related to an unsuccessful acquisition, higher restructuring expense of $646,the $1,116 net loss on disposals and higher legal costs during the nine months ended September 30, 2006compared to the same period last year.

Duringthe first quarter of 2006, we recognized a loss on disposal of assets of $2,224related to the disposal of two dormant business units.  The first disposal related to MacDermidEquipment (“MEI”), a small equipment manufacturing unit that supported ourelectronics sales.  In 2001, we wrote offall the inventory on MEI’s balance sheet. Inventory was the only significant asset on MEI’s books, and the writeoff effectively impaired our investment in the subsidiary.  In February 2006, we sold the subsidiary forone dollar and recorded a loss on disposal of assets of $1,664 which reducedour first quarter 2006 tax rate.  Byselling the subsidiary for one dollar, we saved costs that would have beenassociated with shutting down the business, including severance, assetdisposal, and site clean up costs.  Thesecond disposal related to a dormant international business unit that wasdisposed in the first quarter of 2006.  Aloss on disposal of assets of $560 was recorded in the first quarter 2006.

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

Operatingprofit

Operatingprofit increased $5,435, or 7.5% for nine months ended September 30, 2006compared to the same period last year. On a currency-adjusted basis operating profit increased 8.7%.  For the nine months ended September 30, 2006our ASF segment had increased operating profits $7,288, or 15.3% compared tothe same period last year due primarily to higher profits in all our ASFbusiness units and the inclusion of Autotype operating profits for a full ninemonths in 2006 compared to three and one half months in 2005.  For the nine months ended September 30, 2006 ourMPS segment had decreased operating profits of $1,853, or 7.6% due primarily tolower operating profit in our MPS North American business unit offset by thelegal settlement of approximately $2,500 recorded in the nine months endedSeptember 30, 2005.

Interestincome (expense)

Interestincome during the first nine months of 2006 increased $565 compared to the sameperiod last year due to higher cash balances and higher interest rates earnedin 2006.    Interest expense decreased$1,650 in the first nine months of 2006 compared with the same period lastyear.  Short term borrowings were up in2005 as we prepared for our acquisition of Autotype and we had expense of $387related to an interest rate swap for the nine months ended September 30,2005.  There was no interest swap expensein the nine months ended September 30, 2006.

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Other,net

Forthe nine months ended September 30, 2006, other, net expenses totaled $148compared to other net income of $207 for the same period in 2005.  The decrease is primarily due to dividendincome received in 2005 that did not recur in 2006.

Incometax expense

Our effective tax ratefor the nine months ended September 30, 2006, was 28.4%, down from 28.5% in thesame period in 2005.  The decrease is dueto the disposal of MEI in the first quarter of 2006, which lowered oureffective tax rate in the first quarter of 2006.  The tax rate is also lower because of the mixof profits from lower foreign tax rates during the nine months ended September30, 2006 compared to the same period in 2005. Offsetting these decreases is an increase in higher expectedrepatriations for 2006 versus 2005 which increased our 2006 tax rate and lowerresearch and development credits in 2006 compared to 2005.  We expect that our effective tax rate for theyear will approximate 28.5%.  Factorssuch as  our dividend repatriation policyand the Research and Development tax credit pending in the United StatesCongress will influence the actual tax rate.

Netearnings

Netearnings for the nine months ended September 30, 2006 increased $5,274 or 14.4%compared to the same period in 2005.  Ona currency-adjusted basis net income increased 15.4%. There are several factorsthat both positively and negatively impacted our net earnings during the firstnine months of 2006 as discussed above.

LIQUIDITYAND CAPITAL RESOURCES

Overview

Our primary source of liquidity during the three andnine months ended September 30, 2006 was cash generated from operatingactivities.  We expect that our futureworking capital, capital expenditures and dividend requirements will besatisfied primarily from existing cash balances, cash generated from operationsand available credit facilities.

Thetable below summarizes our cash flows for the nine months ended September 30,2006 and 2005:
| ****                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **Variance** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|--------------|------------|
| Cash provided by  (used in):             |       |     |       |     |       |         |       |
| Operating activities                     |       | $        | 33,375     |     | $          | 31,192       |       | $ | 2,183 |   |
| Investing activities                     |       | (4,746   | )          | (102,456 | )          | 97,710       |       |
| Financing activities                     |       | (2,713   | )          | 672      |       | (3,385       | )          |
| Effect of  exchange rate changes on cash |       | 2,117    |       | (6,930   | )          | 9,047        |       |
| Net change in cash                       |       | $        | 28,033     |     | $          | (77,522      | )          | $ | 105,555 |   |

 

Cashflow from operating activities increased during the nine months ended September30, 2006, compared to the same period in 2005 primarily as a result of higherincome offset by the timing of tax payments and changes in our inventory,accounts receivable and accrued expenses. Increases in accounts receivable and inventories are a result of ourcurrent focus on driving growth in sales.  For the nine months ended September 30, 2006 we paid taxes totaling$15,627 compared to tax payments of $12,657 in the same period of 2005.

Netcash used in investing activities decreased by $97,710 for the nine monthsended September 30, 2006, compared to the same period in 2005.  This change is due primarily to the 2005purchase of Autotype and a decrease in capital spending during the first ninemonths of 2006 compared to the first nine months of 2005.  The majority of capital spending during firstnine months of 2005 was related to a new plant in China for our ASF segment.

Netcash used in financing activities increased by $3,385 for the nine months endedSeptember 30, 2006, when compared to the same period last year. This increasewas primarily the result of lower short-term borrowing during the nine monthsended September 30, 2006 compared to the same period in 2005, increaseddividends paid during the nine months ended September 30, 2006 compared to thesame period in 2005 offset by higher proceeds from the exercise of stockoptions during the nine months ended September 30, 2006 compared to the sameperiod in 2005.

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OurBoard of Directors from time-to-time authorizes the purchase of issued andoutstanding shares of our common stock. Such additional shares may be acquiredthrough privately negotiated transactions or on the open market.  Any future repurchases by us will depend onvarious factors, including the market price of the shares, our business andfinancial position and general economic and market conditions.  Additional shares acquired pursuant to suchauthorizations will be held in our treasury and will be available for us toissue for various corporate purposes without further shareholder action (exceptas required by applicable law or the rules of any securities exchange on which theshares are then listed).  At September30, 2006, the outstanding authorization to purchase approximately 5,000,000shares would cost approximately $163,100.

Webelieve that we have the financial flexibility to deliver shareholder valuedescribed above while meeting our contractual obligations.  As of September 30, 2006, we currently have$108,965 in cash and cash equivalents and working capital of $282,523.  Excluding our non-monetary items, prepaidexpenses and deferred taxes, our working capital is $127,846.  We also have a long-term credit arrangement,which consists of a combined revolving loan facility that permits borrowings,denominated in US dollars and certain foreign currencies, of up to $75,000.  There has been no balance outstanding, oractivity on this revolving loan facility for any of the periods presented.  This long-term credit facility wasestablished in March 2006 to replace a $50,000 long-term credit facility whichwas to expire in April 2006.  We haveother uncommitted credit facilities which presently total approximately$50,860.  These credit facilities expireand may be renewed on a yearly basis.

Therevolving credit facility above includes the following financial covenants:

·                  a ratio of bank-definedearnings before income taxes (“EBIT”) to interest expense greater than 2.75 to1.0 through December 31, 2006, and 3.0 to 1.0 for any fiscal quarter ending onor after March 31, 2007.

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

·                  A ratio of bank-definedtotal outstanding senior debt to earnings before tax, depreciation andamortization (“EBITDA”) to be greater than 2.0 to 1.0.

We were in compliance with all of these covenants as ofSeptember 30, 2006.  If these covenants are violated, and we areunable to negotiate a waiver or amendment thereof, the lender would have theright to declare an event of default, terminate the remaining commitment andaccelerate all principal and interest outstanding.  There has been no balance outstanding oractivity on this committed revolving loan facility for any of the periodspresented.

We have a 9 1/8% Senior Subordinated Notes (“BondOffering” or “Bonds”), due 2011, for the face amount of $301,500.  Interest on the Bonds is due semi-annually onJanuary 15th and July 15th.  Pursuant to theBond Offering, we are subject to covenants requiring certain qualitative andquantitative thresholds, including a requirement to maintain a defined fixedcharge ratio greater than or equal to 2.25 to 1.0.  The incurrence of additional debt (excludingthe Bonds) is also limited, as are certain defined restricted payments.  We were in compliance with all of thesecovenants as of September 30, 2006.  Ifthese covenants are violated, and we are unable to negotiate a waiver oramendment thereof, the Bonds may be called for payment.

Thefollowing table reflects our ability to fund both our required obligations,anticipated pension funding and our shareholder growth initiatives for nexttwelve months:

|                                                                                                                            |   |    |    |
|----------------------------------------------------------------------------------------------------------------------------|--------|---------|---------|
| Cash and cash  equivalents as of September 30, 2006                                                                        |   | $       | 108,965 |   |
| Other net  current assets (excluding prepaid expenses and deferred income taxes) and  liabilities as of September 30, 2006 |   | 142,725 |    |
|                                                                                                                       |   |    |    |
| Available  borrowings under revolving loan facility                                                                        |   | 75,000  |    |
| Availability  under other uncommitted credit facilities                                                                    |   | 50,860  |    |
| Total cash available and potentially available                                                                             |   | 377,550 |    |
|                                                                                                                       |   |    |    |
| Contractual cash  commitments due in next twelve months                                                                    |   | 42,422  |    |
| Pension funding  expenditures                                                                                              |   | 12,000  |    |
| Expected capital  expenditures                                                                                             |   | 15,000  |    |
| Expected  dividend payments                                                                                                |   | 7,400   |    |
| Excess of cash available and potentially available  over                                                                   |   |    |    |
| Requirements                                                                                                               |   | $       | 300,728 |   |

 

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Ourliquidity position remained sufficient as of September 30, 2006.  Future pension funding expenditures arediscretionary subject to minimum fundings as required by the EmployeeRetirement Income Security Act, asset performance of the various plans, changesin pension plan asset allocation and other factors.   Our ability to obtain additional financing,if necessary, will depend upon a number of factors, including our future performanceand financial results, and capital market conditions. We cannot assure you thatwe will be able to raise additional capital on reasonable terms or at all.

Asdiscussed in Note 11 of the Notes to Consolidated Financial Statements in PartI, Item 1, on September 5, 2006, we received a proposal from a group ofinvestors led by Daniel H. Leever, our Chairman and Chief Executive Officer,and Court Square Capital Partners, a related party, to acquire all of ouroutstanding shares for $32.50 per share in cash (the “Going Private” transaction).Credit rating agencies have indicated that our debt rating would be downgradedif the proposed Going Private transaction were to materialize.

ProposalFor Going Private Transaction

OnSeptember 5, 2006, we received a proposal letter from Daniel H. Leever, ourChairman and Chief Executive Officer, and Court Square Capital Partners, arelated party, to purchase all of our outstanding common stock at $32.50 pershare in cash.  We can provide noassurance that any transaction will occur or, if one is undertaken, its termsor timing.  Our Board of Directors hasestablished a special committee of its outside directors to consider theproposal and our response thereto. The special committee consists ofindependent directors.  The specialcommittee has retained Wachtell, Lipton, Rosen & Katz as its legal advisorand has retained Merrill Lynch as its financial advisor to assist it. Thespecial committee cautions our shareholders and others considering trading inits securities that it has only received the proposal and that no decisionshave been made by the special committee or the Board of Directors with respectto the nature of our response to the proposal or otherwise. There can be noassurance as to the approval, terms or timing of when this or any other transactionwill be approved or consummated.

CRITICALACCOUNTING ESTIMATES

Inpreparing the consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America, management mustundertake decisions that impact the reported amounts and relateddisclosures.  Such decisions include theselection of the appropriate accounting principles to be applied and alsoassumptions upon which accounting estimates are based.  Management applies judgment based on itsunderstanding and analysis of the relevant circumstances to reach thesedecisions.  By their nature, thesejudgments are subject to an inherent degree of uncertainty.  Accordingly actual results could differsignificantly from the estimates applied.

Ourcritical accounting policies are consistent with those disclosed in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2005.

##### FORWARD-LOOKINGSTATEMENTS

Thisreport and other of our reports include forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995. Thesestatements relate to analyses and other information that is based on forecastsof future results and estimates of amounts not yet determinable. Thesestatements also relate to future prospects, developments and businessstrategies. The statements contained in this report that are not statements ofhistorical fact may include forward-looking statements that involve a number ofrisks and uncertainties.

Thewords “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,”“plan,” “predict,” “project,” “will” and similar terms and phrases, includingreferences to assumptions, have been used to identify forward-lookingstatements. These forward-looking statements are made based on management’sexpectations and beliefs concerning future events affecting us and are subjectto uncertainties and factors relating to our operations and businessenvironment, all of which are difficult to predict and many of which are beyondour control, that could cause actual results to differ materially from thosematters expressed in or implied by these forward-looking statements. The following factors are among those that maycause actual results to differ materially from the forward-lookingstatements:  our ability to performstrategic acquisitions and dispositions, our ability to integrate ouracquisitions into our operations, environmental liabilities, changes in generaleconomic, business and industry conditions, changes in current advertising,promotional and pricing levels, changes in political and social conditions andlocal regulations, foreign currency fluctuations, trends in the specialtychemical and printing industries, inflation, significant litigation; changes insales mix, competition, disruptions of established supply channels, degree ofacceptance of new products, difficulty of forecasting sales at various times invarious markets, the availability, terms and deployment of capital, and theother factors discussed elsewhere in this report and in our most recent AnnualReport on Form 10-K, our other Securities and Exchange Commission filings andour press releases.

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All forward-looking statements should be considered in light of thesefactors. We undertake no obligation to update forward-looking statements orrisk factors to reflect new information, future events or otherwise.

**ITEM 3:**

**Quantitative andQualitative Disclosures About Market Risk**

Weare exposed to market risk in the normal course of business activity due to ouroperations in different foreign currencies and our ongoing investing andfinancing activities.  The risk of losscan be assessed from the perspective of adverse changes in fair values, cashflows and future earnings.  We haveestablished policies and procedures governing our management of market risksand the use of financial instruments to manage exposure to such risks.  Management continually reviews the balancebetween foreign-currency-denominated assets and liabilities in order tominimize our exposure to foreign exchange fluctuations; however we do notcurrently actively hedge any of our foreign currency risk.

We operate manufacturing facilities in ten countries and sellproducts in over twenty-five countries. Approximately 57% of our net sales and total assets are denominated incurrencies other than the United States Dollar, predominantly the Euro, theBritish Pound, the Japanese Yen, the Chinese Yuan and the Hong KongDollar.  For the three and nine monthsending September 30, 2006 foreign currency translation had a slight positiveeffect on net income.  The impact ofexchange rate changes on operating cash flows historically has been comparableto the impact on earnings.

Our business operations consist principally of manufactureand sale of specialty chemicals, supplies and related equipment to customersthroughout much of the world. Approximately 41% of our business is concentrated in the printingbusiness, used for a wide variety of applications, while 59% of our business isconcentrated on customers supplying a wide variety of chemicals tomanufacturers of automotive, other industrial, electronics and offshoreapplications.   As is usual for thesebusinesses, we generally do not require collateral or other security as acondition of sale, rather relying on credit approval, balance limitation andmonitoring procedures to control credit risk of trade account financialinstruments.  Management believes thatreserves for losses, which are established based upon review of accountbalances and historical experience, are adequate.

Inthe past, we were exposed to interest rate risk, primarily from our floatinginterest rate credit facilities.  At thetime, we entered into interest rate swap agreements for the purpose of reducingour exposure to possible future changes in interest rates on thesefacilities.  On September 20, 2001, werefinanced these facilities with 9 1/8% Senior Subordinated Notes, whichreduced our exposure to changing interest rates and is currently unhedged.    For additional information, see Note 17 tothe Consolidated Financial Statements in Part I, Item 1, Guarantor FinancialStatements. Based upon our current debt structure and expected levels ofborrowing for the remainder of 2006, an increase in interest rates would notresult in an incremental interest expense.

We do not enter into derivative financial instruments for tradingpurposes but have certain other supply agreements for raw material inventoriesand have chosen not to enter into any price hedging with our suppliers forcommodities.

**ITEM 4:**

**Controls and Procedures**

We maintain disclosure controls and procedures designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Securities Exchange Act of 1934, as amended, (“Exchange Act”) is recorded,processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rulesand forms.

We carried out an evaluation as of the last day of the period coveredby this Quarterly Report on Form 10-Q, under the supervision and with theparticipation of our management, including our Chief Executive Officer andSenior Vice President, Finance, of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in theSecurities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)).  Based upon that evaluation, the ChiefExecutive Officer and Senior Vice President, Finance, concluded that ourdisclosure controls and procedures (a) are effective to ensure that informationrequired to be disclosed by us in reports filed or submitted under the ExchangeAct is timely recorded, processed, summarized and reported and (b) included,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in reports filed or submitted under the ExchangeAct is accumulated and communicated to our management, including our ChiefExecutive Officer and Senior Vice President, Finance, as appropriate to allowtimely decisions regarding required disclosure.

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While preparing our March 31, 2006 Form 10-Q we identified an error anda material weakness in our internal control over accounting for foreigncurrency translation in our consolidation reporting process and the preparationof the Statement of Comprehensive Income translation in our consolidationreporting process and the preparation of the Statement of Comprehensive Incomedescribed below.  The material weaknessrelated to our accounting for foreign currency translation and consequently tothe preparation of the Statement of Comprehensive Income, and did not extend toour entire system of internal control over financial reporting.  The error noted was first recognized in April2006, while management and our new independent auditor were reviewing ourfinancial statements in preparation of our March 31, 2006 Form 10-Q and isfurther explained below.

A material weakness is a control deficiency, or combination of controldeficiencies, that result in a more than remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.  Duringpreparation of our March 31, 2006 Form 10-Q management and our new independentauditors reviewed our historical goodwill and intangible balances.  Upon further review it was determined thatour historical foreign goodwill and intangibles balances were not correctlytranslated into United States Dollars after we had adopted the provisions ofStatement of Financial Accounting Standards No. 141, Business Combination  (“SFAS 141”) on April 1, 2001.  SFAS 141 required us to allocate goodwill andintangibles to our business units that benefited the most from assets acquiredin a business combination.  Beginning in2002, we held all goodwill and certain intangible assets related to theacquisition of Canning Ltd. (“Canning intangibles”) constant at historiccurrency conversion rates, effectively holding the value of goodwill andCanning intangibles constant at 2002 currency conversion rates consistent.  This resulted in an understatement ofgoodwill and Canning intangibles as of December 31, 2005 and an understatementin Other Comprehensive Income for the year ended December 31, 2005.

Goodwill and intangible assets denominated in foreign currencies werenot translated into United States Dollars at the current period translationrates as required by Statement of Financial Accounting Standards No. 52Foreign Currency Translation. The error in our accounting for foreign currencytranslation was corrected by restating our December 31, 2005 balances that wereaffected by this error.

In light of the error described above, as of the date of the filing ofthis Quarterly Report on Form 10-Q, we have adopted remedial measures toaddress the deficiency in our internal control that gave rise to theunderstatement of goodwill and intangibles balances as of December 31, 2005 andthe understatement of Other Comprehensive Income for the year ended December31, 2005.  In addition, we have appliedcompensating procedures and processes as necessary to ensure the accuracy ofour financial reporting.  Such additionalprocedures included a comprehensive review of our foreign goodwill andintangible balances and Other Comprehensive Income, a risk assessment of ourcritical accounting policies and procedures and a review of our critical accountingpolicies and procedures which was performed by an outside professional servicesfirm. Accordingly, management believes that the remedial measures implementedto correct the material weakness in our internal control over accounting forforeign currency translation in our consolidation reporting process and thepreparation of the Statement of Comprehensive Income has been effective tocorrect the material weakness and that the consolidated financial statementsincluded in this Quarterly Report on Form 10-Q presents fairly, in all materialrespects, our financial condition, results of operations and cash flows as of,and for, the periods presented.

Other than indicated above, there were no changes in our internalcontrol over financial reporting that occurred during the quarter endedSeptember 30, 2006, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Senior VicePresident, Finance, does not expect that our disclosure controls will preventor detect all errors and all fraud. A control system, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurancethat the control system’s objectives will be met. Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within our company have been detected. These inherent limitations includethe realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake. Controls can also becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the controls. The design of anysystem of controls is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.Over time, controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with associated policies orprocedures. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected.

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**PART II.  OTHER INFORMATION**

**ITEM 1 : LegalProceedings**

Refer to Note 12, Contingencies and LegalMatters to the Consolidated Financial Statements in Part I Item 1 of thisQuarterly Report on Form 10-Q.

**ITEM 1A : RiskFactors**

We are affected by risks specific to us aswell as factors that affect all businesses operating in a global market.  The significant factors known to us thatcould materially affect our business, operating results and financial conditionare described in our most recently filed Annual Report on Form 10-K (Item1A).  There has been no material changein those risk factors other than as set forth below.

*Consummation of atransaction to acquire all of our outstanding common stock that results insubstantially more debt to us could have an adverse effect on us, such as adowngrade of the ratings of our debt securities, and that downgrade could besignificant*.

On September 5, 2006, wereceived a proposal from investors led by Daniel H. Leever, our Chairman andChief Executive Officer, and Court Square Capital Partners, a related party, toacquire all of our outstanding common stock for $32.50 per share in cash. Theinvestors include members of our senior management. In response to theproposal, Moody’s Investor Services placed our long-term debt rating underreview for possible downgrade. Standard & Poor’s put our long-term debtrating on credit watch with negative implications. There can be no assurancethat any definitive offer will be made, that any agreement will be executed, orthat the management proposal or any other transaction will be approved orconsummated. Accordingly, no assurance can be given that the consummation ofany particular transaction will not result in substantially more debt to us andhave an adverse effect on us, such as a downgrade in the ratings of our debtsecurities, which could be significant. Additionally, consummation of anytransaction could have other adverse effects on us.

The absence of a proposal toacquire our common stock would likely have an adverse effect on the marketprice of our common stock.  On the lasttrading day prior to the announcement of management’s proposal, our commonstock closed at $28.82 per share. After the announcement, the stock price roseto trade close to the $32.50 per share proposal price. If this proposal wererejected or withdrawn, or if no similar transaction presented itself, the stockprice would likely retreat from its current trading range.

**ITEM 2 :Unregistered Sales of Equity Securities and Use of Proceeds**

None.

**ITEM 3 : DefaultsUpon Senior Securities**

None.

**ITEM 4 :Submission of Matters to a Vote of Security Holders**

None during the fiscal quarter ended September 30,2006.

**ITEM 5: OtherInformation**

None.

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**ITEM 6: Exhibits**

| 31.1 |   | Certification of Chief Executive Officer pursuant to  Rule13a-14(a) and Rule15d-14(a) of the Securities Exchange Act, as amended                                       |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Chief Financial Officer pursuant to  Rule13a-14(a) and Rule15d-14(a) of the Securities Exchange Act, as amended                                       |
| 32   |   | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to 18U.S.C. 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                         | MacDermid, Incorporated    |
|-------------------------|----------------------------|
|                    |                       |  (Registrant) |
|                    |                       |   |
|                    |                       |   |
| Date: November  9, 2006 | /s/ Daniel H. Leever       |
|                    |                       | Daniel H. Leever |
|                    |                       | Chairman and |
|                    |                       | Chief Executive Officer |
|                    |                       |   |
|                    |                       |   |
| Date: November  9, 2006 | /s/ Gregory M. Bolingbroke |
|                    |                       | Gregory M. Bolingbroke |
|                    |                       | Senior Vice President, Finance |

 

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