Editor's note: An earlier version of this article mentioned Cabot Corporation as a competitor of MacDermid and associated MacDermid's ColorSpan brand with its Autotype acquisition. These inaccuracies have been corrected in the version below.
MacDermid (NYSE:MRD) has received praise from Fool analyst Bill Mann for its shareholder-friendly financial reports, putting it on a short list that includes Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) and Expeditors International (NASDAQ:EXPD). After looking through its latest quarterly release and seeing it elaborate on a Foolish favorite like owner earnings, I applaud the company's straightforward announcements but must reserve judgment on its performance.
Founded in 1922 by a Scottish immigrant named Archie MacDermid, the company was initially dedicated to metal finishing. The chemical specialist now has a wide range of applications used in the production of everything from cell phones to chrome-coated alloy wheels, and manufactures water-based fluids that are used in hydraulic systems on offshore oil rigs.
These chemical-applications products make up 57.9% of its net sales through the first nine months of fiscal 2005. The rest come from MacDermid's printing solutions, which include the ColorSpan printer brand.
In the third quarter, the company's printer business sounded like a sweet Scottish bagpipe, growing revenues by 25.6% compared with the same period a year ago. Strength from this division helped increase MacDermid's total sales by 19.6%. As expected, Asian sales contributed the greatest growth, increasing regional revenues by 31.6%.
The Autotype acquisition in June was the primary driver behind the strong sales growth; excluding the effect of Autotype, sales grew a much more modest 5.8%. Although the acquisition added a positive bounce to revenues, it had a negative effect on margins. The lower operating margins from Autotype sales were a drag on MacDermid's overall operating margins, which decreased to 12.5% from 15.9% in the year-ago period.
Aside from these profitability pressures, MacDermid's balance sheet is also of concern. For a business that intends to expand through acquisitions, a cash balance of $60.3 million that is offset by long-term debt of $301.3 million doesn't offer much wiggle room. Also, owner earnings as reported on the press release fell 92%, so cash generation will be even more crucial in the coming quarters. To fulfill its growth strategy without taking on too much debt, it will be critical for the company to improve these measures.
There is a Scottish proverb, "A smaa leak will sink a great ship." Although acquiring Autotype provided a wind for the sails, shareholders will want to be wary of this ship until they determine that these leaks have been patched.
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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
