UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
Commission file number 1-12372
CYTEC INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3268660
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No).
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 357-3100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes |X| No [_].
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No [_].
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No |X|.
There were 46,118,689 shares of common stock outstanding at November 1, 2005.
-1-
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
10-Q Table of Contents
Page
Part I - Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
Part II - Other Information
Item 1. Legal Proceedings 31
Item 6. Exhibits 32
Signature 33
Exhibit Index 34
-2-
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
2005 2004(1) 2005 2004(1)
----------------------------------------------------------------------------------------------------------------------
Net sales $ 760.8 $ 433.5 $ 2,138.2 $ 1,270.7
Manufacturing cost of sales 599.6 332.4 1,679.0 954.1
Selling and technical services 53.1 34.0 155.9 103.8
Research and process development 17.5 10.0 50.4 29.4
Administrative and general 26.2 22.0 70.7 49.8
Amortization of acquisition intangibles 8.8 1.2 21.6 4.2
Write-off of acquired in-process research and development -- -- 37.0 --
----------------------------------------------------------------------------------------------------------------------
Earnings from operations 55.6 33.9 123.6 129.4
Other income (expense), net 6.0 (4.9) (44.9) (12.6)
Equity in earnings of associated companies 0.8 2.2 7.4 3.0
Interest expense, net 15.9 4.7 63.9 13.0
----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes 46.5 26.5 22.2 106.8
Income tax provision (benefit) 11.6 6.1 (17.3) 22.1
----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 34.9 20.4 39.5 84.7
Earnings from discontinued operations held for sale net of
income tax provision of $0.2 and $0.8 0.5 -- 1.2 --
----------------------------------------------------------------------------------------------------------------------
Net earnings 35.4 20.4 40.7 84.7
Premium paid to redeem preferred stock -- 9.9 -- 9.9
----------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 35.4 $ 10.5 $ 40.7 $ 74.8
======================================================================================================================
Basic net earnings per common share:
Earnings from continuing operations $ 0.76 $ 0.27 $ 0.88 $ 1.90
Earnings from discontinued operations held for sale 0.01 -- 0.03 --
Net earnings available to common stockholders $ 0.77 $ 0.27 $ 0.91 $ 1.90
======================================================================================================================
Diluted net earnings per common share:
Earnings from continuing operations $ 0.74 $ 0.26 $ 0.86 $ 1.85
Earnings from discontinued operations held for sale 0.01 -- 0.02 --
----------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 0.75 $ 0.26 $ 0.88 $ 1.85
======================================================================================================================
Dividends per common share $ 0.10 $ 0.10 $ 0.30 $ 0.30
======================================================================================================================
(1) 2004 results have been restated to show the retroactive application of the
change from the last-in, first-out ("LIFO") to the first-in, first-out
("FIFO") inventory method which was adopted on January 1, 2005. Refer to
Note 1.
See accompanying Notes to Consolidated Financial Statements
-3-
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions, except per share amounts)
September 30, December 31,
2005 2004 (1)
--------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 177.9 $ 323.8
Trade accounts receivable, less allowance for doubtful accounts of
$9.1 and $6.7 in 2005 and 2004, respectively 480.4 248.2
Due from related party 17.5 --
Other accounts receivable 65.6 54.1
Inventories 450.9 263.8
Deferred income taxes 12.0 23.3
Other current assets 30.7 29.3
--------------------------------------------------------------------------------------------------------------------
Total current assets 1,235.0 942.5
--------------------------------------------------------------------------------------------------------------------
Investment in associated companies 11.2 85.5
Plants, equipment and facilities, at cost 2,063.3 1,627.2
Less: accumulated depreciation (973.0) (948.6)
--------------------------------------------------------------------------------------------------------------------
Net plant investment 1,090.3 678.6
--------------------------------------------------------------------------------------------------------------------
Acquisition intangibles, net of accumulated amortization of
$43.2 and $23.1 in 2005 and 2004, respectively 505.4 66.8
Goodwill 1,017.6 342.4
Deferred income taxes -- 54.6
Other assets 83.8 81.2
--------------------------------------------------------------------------------------------------------------------
Total assets $3,943.3 $2,251.6
====================================================================================================================
Liabilities
Current liabilities
Accounts payable $ 243.3 $ 138.1
Short-term borrowings 446.7 --
Current maturities of long-term debt 89.7 119.0
Accrued expenses 238.3 178.1
Income taxes payable 68.8 61.5
--------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,086.8 496.7
--------------------------------------------------------------------------------------------------------------------
Long-term debt 919.8 300.1
Pension and other postretirement benefit liabilities 410.1 348.3
Deferred income taxes 75.1 --
Other noncurrent liabilities 233.9 174.5
Stockholders' equity
Common stock, $.01 par value per share, 150,000,000 shares authorized;
issued 48,132,640 shares 0.5 0.5
Additional paid-in capital 234.9 122.8
Retained earnings 1,135.9 1,108.5
Accumulated other comprehensive income (loss):
Unearned compensation (2.9) (3.1)
Minimum pension liability (103.7) (108.5)
Unrealized net gains (losses) on cash flow hedges 2.6 (0.5)
Accumulated translation adjustments 14.2 73.3
--------------------------------------------------------------------------------------------------------------------
(89.8) (38.8)
Treasury stock, at cost, 2,030,814 shares in 2005 and 8,297,863 shares in 2004 (63.9) (261.0)
--------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,217.6 932.0
--------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,943.3 $2,251.6
====================================================================================================================
(1) Balances at December 31, 2004 have been restated to show the retroactive
application of the change from the LIFO to the FIFO inventory method which
was adopted on January 1, 2005. Refer to Note 1.
See accompanying Notes to Consolidated Financial Statements
-4-
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Nine Months Ended
September 30,
---------------------------------------------------------------------------------------------------------------------
2005 2004 (1)
---------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities
Earnings from continuing operations $ 39.5 $ 84.7
Non cash items included in net earnings from continuing operations:
Dividends from associated companies greater than (less than) earnings (4.8) (1.9)
Depreciation 82.7 64.5
Amortization 25.2 8.6
Deferred income taxes (22.6) 11.4
Write-off of acquired in-process research and development 37.0 -
Amortization of write-up to fair value of finished goods purchased in acquisition 20.8 -
Gains on sale of assets (1.2) (0.6)
Unrealized loss on derivative instruments 20.9 -
Other 2.6 0.8
Changes in operating assets and liabilities (excluding effect of acquisition):
Trade accounts receivable 6.4 (40.4)
Other receivables 22.2 4.8
Inventories 8.9 (27.6)
Other assets 18.9 (17.0)
Accounts payable (35.0) 25.0
Accrued expenses (20.0) 6.6
Income taxes payable (29.4) (1.2)
Other liabilities (3.6) (33.0)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities of continuing operations 168.5 84.7
Net cash provided by operating activities of discontinued operations 4.9 -
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 173.4 84.7
---------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) investing activities
Additions to plants, equipment and facilities (74.7) (54.3)
Proceeds received on sale of assets 100.4 0.7
Proceeds received on sale of discontinued operation 75.8 -
Acquisition of business, net of cash received (1,458.7) -
Minority interest (0.7) -
Other 1.4 -
Advance payment received on land lease - 9.1
---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,356.5) (44.5)
---------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) financing activities
Proceeds from the exercise of stock options and warrants 12.8 20.9
Cash dividends (13.2) (11.7)
Proceeds from long-term debt 874.4 -
Payments on long-term debt (292.1) -
Change in short-term borrowings 467.8 (1.1)
Deferred financing costs (4.9) -
Purchase of treasury stock - (13.2)
Proceeds from termination of interest rate swap - 2.9
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,044.8 (2.2)
---------------------------------------------------------------------------------------------------------------------
Effect of currency rate changes on cash and cash equivalents (7.6) (4.0)
---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (145.9) 34.0
Cash and cash equivalents, beginning of period 323.8 251.1
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 177.9 $ 285.1
===================================================================================================================--
(1) 2004 results have been restated to show the retroactive application of the
change from the LIFO to the FIFO inventory method which was adopted on
January 1, 2005. Refer to Note 1.
See accompanying Notes to Consolidated Financial Statements
-5-
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Currencies in millions, except per share amounts, unless otherwise indicated)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for reporting on Form 10-Q. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP") have
been condensed or omitted pursuant to such rules and regulations. Financial
statements prepared in accordance with U.S. GAAP require management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses and other disclosures. In the opinion of
management of Cytec Industries Inc. (the "Company"), these financial statements
include all normal and recurring adjustments necessary for a fair presentation
of the financial position and the results of operations and cash flows of the
Company for the interim periods presented. The results of operations for any
interim period are not necessarily indicative of the results of operations for
the full year. The statements should be read in conjunction with the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements contained in the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 13, 2005 to restate its previously
issued financial statements for all years shown in the Company's 2004 Annual
Report on Form 10-K for the following item below. Unless indicated otherwise,
the terms "Company" and "Cytec" each refer collectively to Cytec Industries Inc.
and its subsidiaries.
Restatement for Change in Accounting Principle: Effective January 1, 2005, the
Company changed its inventory costing method for U.S. inventories from the LIFO
method to the FIFO method. The Company has applied this change retroactively by
restating its financial statements as required by Accounting Principles Board
Opinion No. 20, "Accounting Changes," and accordingly, previously reported
amounts in the accompanying financial statements have been restated for all
periods presented. As a result of this change, inventories at December 31, 2004
were increased by $41.7, retained earnings were increased by $25.4 and deferred
income tax assets were decreased by $16.3. See the table below for the effects
on the results of operations for the three and nine month periods ended
September 30, 2004 as a result of the retroactive restatement of the financial
statements related to the change in accounting principle. The Company has not
calculated and presented herein the impact on 2005 results as if the Company had
stayed on LIFO as the information is not believed to be meaningful given the
acquisition completed on February 28, 2005.
As a result of the retroactive adoption of the FIFO method of inventory
valuation discussed above, net earnings and earnings per share for the three and
nine month periods ended September 30, 2004 have been restated as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
2004 2004
-----------------------------------------------------------------------------------------
Net earnings, as originally reported $ 9.4 $ 71.0
Effect of retroactive adoption of FIFO 1.1 3.8
-----------------------------------------------------------------------------------------
Net earnings, as restated $ 10.5 $ 74.8
=========================================================================================
Basic net earnings per share, as originally reported $ 0.24 $ 1.81
Effect of retroactive adoption of FIFO 0.03 0.09
-----------------------------------------------------------------------------------------
Basic net earnings per share, as restated $ 0.27 $ 1.90
=========================================================================================
Diluted net earnings per share, as originally $ 0.23 $ 1.75
reported
Effect of retroactive adoption of FIFO 0.03 0.10
-----------------------------------------------------------------------------------------
Diluted net earnings per share, as restated $ 0.26 $ 1.85
=========================================================================================
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year's presentation.
2. RECENT ACQUISITION AND RELATED EVENTS
On February 28, 2005, the Company acquired the Surface Specialties business
("Surface Specialties") of UCB Group SA ("UCB") for cash and stock valued at
$1,799.6, of which $1,508.8 (euro 1,138.5 at 1.325 U.S. dollar per euro) was
paid in cash and the balance was paid in 5,772,857 shares of Cytec common stock
($290.8 at $50.37 per Cytec share). During September 2005, the Company received
$25.4 from UCB representing a reduction of the purchase price for finalization
of working capital amounts as of the acquisition date. After considering the
final working capital adjustment, the acquisition was valued at $1,774.3. In
connection with the acquisition, the Company also incurred transaction costs of
approximately $14.5.
-6-
In accordance with the purchase agreement, contingent consideration up to a
maximum of (euro)50.0 was to be determined in January 2006 based upon 2005
year-end results, of which (euro)20.0 ($26.5 at $1.325 per euro) was prepaid at
closing. In view of the parties' expectation that the contingent consideration
will not be payable, the Company was refunded the payment during September 2005
provided that a final year-end determination of the actual contingent payment
due, if any, will still be made.
The Company financed the cash component with $600.0 under an unsecured 364-day
credit facility, $725.0 under an unsecured five-year term loan and the remaining
$184.0 was paid from existing cash. During October 2005, the Company repaid the
remaining amounts owed under the 364-day credit facility with a portion of the
proceeds raised in a public debt offering. Refer to Note 9 for information about
the Company's public debt offering that closed during October, 2005 and other
disclosures concerning the Company's debt.
Upon closing, UCB became the owner of approximately 12.5% of the outstanding
shares of the Company. UCB and the Company also entered into a stockholder's
agreement (the "Stockholder's Agreement") which provides, subject to various
exceptions, that UCB must reduce its stake to less than 9% within three years,
less than 7% within four years and less than 5% within five years and which
provides that UCB will be prohibited from purchasing additional shares of Cytec
common stock or causing, advocating or participating in a change of control in
the ownership of Cytec. The Stockholder's Agreement also contains customary
terms and conditions including an obligation of UCB to vote its shares of Cytec
common stock in accordance with the Company's Board of Directors' recommendation
on certain matters.
The global Surface Specialties business had revenues of approximately $1,350 in
2004 which included approximately $154 of sales from the Surface Specialties
amino resins ("SSAR") product line. Pursuant to regulatory approvals, the
Company was required to divest SSAR. On August 31, 2005, the Company sold SSAR
to affiliates of INEOS Group, Limited ("INEOS") for cash consideration of $78.0
((euro)64.0 at 1.22 U.S. dollar per euro), subject to certain customary closing
adjustments. Since acquisition, and through the date of sale, SSAR was
classified as a discontinued operation in the Company's consolidated financial
statements. The net proceeds realized from the divestiture of SSAR were used to
reduce acquisition related debt. Refer to Note 4 for additional information
relating to discontinued operations.
In late 2004, the Company entered into $642.9 of forward-starting interest rate
swaps to hedge the benchmark interest rate and credit spread on certain debt
anticipated to be issued in 2005 in connection with the acquisition. Due to a
subsequent reduction in borrowing requirements, the Company liquidated $25.0 of
these swaps in March 2005 at a cost of $0.4 and $60.4 of these swaps in June
2005 at a cost of $3.7. On September 29, 2005, the Company settled the remaining
outstanding swaps at the same time that it priced its public debt offering. The
termination payment of $27.4 was paid in October, 2005. The swaps were marked to
market and recorded currently in earnings until their termination. The net
pre-tax impact of the mark to market value on these swaps was a gain of $3.7 and
a loss of $25.0 for the three and nine month periods ended September 30, 2005,
respectively, which was recorded in other income (expense), net. In the fourth
quarter of 2004, the Company recorded a loss of $6.5 on these swaps.
The Company had also previously entered into foreign currency forward contracts
that related to approximately 87% of the euro exposure of (euro)1,190.0 for the
cash component of the Surface Specialties acquisition. The forward contracts,
which matured on February 28, 2005, were marked to market and recorded currently
in earnings until their maturity. The impact on earnings for the three months
ended March 31, 2005 of the marked to market adjustment on these forward
contracts was a net pre-tax expense of $19.2 and was recorded in other income
(expense), net. In the fourth quarter of 2004, the Company recorded a gain of
$33.3 on currency forward transactions entered into in connection with the
acquisition.
-7-
The following table summarizes the estimated fair value of the assets acquired
and the liabilities assumed in the acquisition. The Company is in the process of
finalizing third-party valuations of certain assets acquired and liabilities
assumed, as well as performing its own internal assessment; thus the table below
discloses a preliminary allocation of the purchase price. The preliminary
allocation is subject to change, and such change could be significant. The
Company expects to have the purchase price allocation substantially complete
later in 2005.
-------------------------------------------------------------------------------------------
Cash $ 34.7
Current deferred tax assets 26.9
Other current assets 534.3
Assets of discontinued operations held for sale 85.1
Property, plant and equipment 460.5
Goodwill 741.9
Acquired intangible assets 490.4
Acquired in-process research and development 37.0
Other assets 26.3
-------------------------------------------------------------------------------------------
Total assets acquired $2,437.1
===========================================================================================
Current liabilities $ 292.6
Liabilities of discontinued operations held for sale 26.5
Long-term deferred tax liabilities 184.0
Long-term debt 9.7
Other long-term liabilities 135.5
-------------------------------------------------------------------------------------------
Total liabilities assumed 648.3
-------------------------------------------------------------------------------------------
Net assets acquired $1,788.8
===========================================================================================
The $741.9 of goodwill is not tax deductible and was allocated to the Company's
Cytec Surface Specialties segment. The preliminary purchase price allocation
reflects an estimate of $527.4 of acquired intangible assets. Included in
acquired intangible assets is $45.7 relating to certain trade names which have
indefinite useful lives. The remaining intangibles that were acquired were
assigned to customer-related ($382.6), marketing-related ($50.8) and
technology-related intangibles ($11.3), and are being amortized over periods of
10 to 15 years. Immediately following the acquisition, $37.0 of acquired
in-process research and development costs were written off.
Following are the unaudited pro forma combined results of continuing operations
for the three and nine months ended September 30, 2005 and 2004 as if Cytec and
Surface Specialties had been combined as of January 1, 2004 but excludes the
results of SSAR which was classified as a discontinued operation while it was
owned by Cytec. Additionally, the write-off of in-process research and
development costs and inventory valuation adjustments were excluded from the
2005 and 2004 amounts as they are considered non-recurring charges. The pro
forma results include estimates and assumptions which are subject to adjustment
pending completion of the purchase price allocation. However, pro forma results
do not include any anticipated cost savings or other effects of the planned
integration and are not indicative of the results which would have actually
occurred if the business combination had been in effect on the dates indicated,
or which may result in the future. The pro forma information set forth below
considers the following factors: the issuance of 5,772,857 shares of Cytec
common stock to UCB in connection with the acquisition; the sale of SSAR on
January 1, 2004; the issuance of acquisition-related debt of $1,325.0 at a
weighted-average interest rate of 3.79% and the associated increase in interest
expense, net of the after tax proceeds from the sale of SSAR used to pay down
such debt; a net reduction in cash and an associated reduction in interest
income as a result of the on-hand cash utilized to purchase Surface Specialties;
increased amortization of acquisition intangibles; decreased depreciation
expense based on asset values and estimated useful lives included in the
preliminary valuation report; amortization of deferred financing costs and the
tax effects of each of these items.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------
Revenues $ 760.8 $ 730.0 $ 2,363.0 $ 2,159.1
Earnings from continuing operations $ 34.9 $ 24.8 $ 92.4 $ 110.7
Earnings from continuing operations per common share:
Basic $ 0.76 $ 0.55 $ 2.06 $ 2.45
Diluted $ 0.74 $ 0.53 $ 2.01 $ 2.39
----------------------------------------------------------------------------------------------------------------------
3. ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements: In December 2004, the FASB issued
SFAS No. 153, "Exchanges of Nonmonetary Assets" ("SFAS 153"). This statement is
based on the principle that most exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. SFAS 153 is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The adoption of this statement did not have a material effect on our
financial condition or results of operations.
-8-
Recently Issued Accounting Pronouncements: In December, 2004, the FASB issued
SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R
addresses the accounting for transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
When SFAS 123R becomes effective, it will replace SFAS No. 123 and supersede
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB No. 25") and will require companies to recognize compensation
expense in an amount equal to the fair value of share-based payments, such as
stock options granted to employees. Companies were required to implement the
proposed standard no later than July 1, 2005, however, the Securities and
Exchange Commission issued a statement in April, 2005 that allows registrants to
implement SFAS 123R at the beginning of their next fiscal year. As required, the
Company will adopt the new standard effective January 1, 2006 utilizing the
modified prospective basis as allowed under SFAS 123R (see Note 5).
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No.
43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Additionally, SFAS No. 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is required to be adopted by the
Company in the first quarter of 2006. The Company has determined that the
adoption of SFAS 151 will not have a material impact on its consolidated
financial statements.
4. SALE OF DISCONTINUED OPERATION
On August 31, 2005, the Company sold SSAR to INEOS for cash consideration of
(euro)64.0 ($78.0 at 1.22 U.S. dollar per euro; $75.8 net of disposition related
expenses), subject to certain customary closing adjustments. Since acquisition,
and through the date of sale, SSAR was classified as a discontinued operation in
the Company's consolidated financial statements. No gain or loss was realized on
the sale of SSAR. The net proceeds realized from the divestiture of SSAR were
used to reduce acquisition related debt.
A summary of the operating results of SSAR included in the Company's results for
the three and nine months ended September 30, is as follows:
Three Months Ended Nine Months
September 30, Ended September 30,
2005* 2005 **
----------------------------------------------------------------------------------------
Revenues $ 22.5 $ 74.3
========================================================================================
Earnings before income taxes $ 0.7 $ 2.0
Income tax provision 0.2 0.8
----------------------------------------------------------------------------------------
Earnings from discontinued operations $ 0.5 $ 1.2
========================================================================================
* Represents results for the two-month period ended August 31, 2005.
** Represents results for the six-month period ended August 31, 2005.
5. STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation under the recognition and
measurement principles of APB No. 25 and related interpretations. No stock-based
compensation cost is reflected in net earnings for stock options, as all stock
options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant. Compensation cost for
restricted stock is recorded based on the market value on the date of grant, and
compensation cost for performance stock is recorded based on the quoted market
price of the Company's common stock at the end of each period through the date
of vesting. The fair value of restricted and performance stock is charged to
unearned compensation in Stockholders' Equity and amortized to expense over the
requisite vesting periods. Stock appreciation rights ("SARS") are accounted for
as a liability under APB No. 25 and are payable in cash. Compensation cost for
SARS is recognized in the statement of operations over the vesting period and
through the life of the award based on changes in the current market price of
the Company's common stock over the market price at the grant date.
The following table illustrates the effect on net earnings and net earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
-9-
Compensation," to all stock-based employee compensation:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------------------------------------------------------------
Net earnings as reported $ 35.4 $ 10.5 * $ 40.7 $ 74.8 *
Add:
Stock-based employee compensation expense
included in reported net earnings, net of
related tax effects 0.5 0.7 1.0 1.8
Deduct:
Total stock-based employee compensation expense
determined under fair-value-based method for all
awards, net of related tax effects 1.8 1.7 5.4 5.2
---------------------------------------------------------------------------------------------------------------------------
Pro forma net earnings $ 34.1 $ 9.5 $ 36.3 $ 71.4
============================================================================================================================
Net earnings per share:
Basic, as reported $ 0.77 $ 0.27 * $ 0.91 $ 1.90 *
Basic, pro forma $ 0.74 $ 0.24 $ 0.81 $ 1.82
Diluted, as reported $ 0.75 $ 0.26 * $ 0.88 $ 1.85 *
Diluted, pro forma $ 0.72 $ 0.23 $ 0.79 $ 1.76
---------------------------------------------------------------------------------------------------------------------------
* 2004 results have been restated to show the effect of the retroactive
application of the change from the LIFO to the FIFO inventory method which
was adopted on January 1, 2005. Refer to Note 1.
The fair value of each stock option granted before January 1, 2005 was estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for the quarter ended September 30, 2004:
2004
---------------------------------------------- ------------
Expected life (years) 5.7
Expected volatility 46.6%
Expected dividend yield 1.0%
Risk-free interest rate 3.4%
Weighted average fair value per option $16.20
---------------------------------------------- ------------
For stock options granted after January 1, 2005, the fair value of each option
award is estimated on the date of grant using a binomial-lattice option
valuation model. The binomial-lattice model considers characteristics of fair
value option pricing that are not available under the Black-Scholes model.
Similar to the Black-Scholes model, the binomial model takes into account
variables such as volatility, dividend yield rate, and risk free interest rate.
However, in addition, the binomial model considers the contractual term of the
option, the probability that the option will be exercised prior to the end of
its contractual life, and the probability of termination or retirement of the
option holder in computing the value of the option. For these reasons, the
Company believes that the binomial-lattice model provides a fair value that is
more representative of actual experience and future expected experience than the
value calculated in previous years, using Black-Scholes. The assumptions for the
quarter ended September 30, 2005 are noted in the following table:
2005
------------------------------------------------- ---------------
Expected life (years) 5.8
Expected volatility 38.5%
Expected dividend yield 0.84%
Range of risk-free interest rate 2.1% - 4.2%
Weighted average fair value per option $17.78
------------------------------------------------- ---------------
6. EARNINGS PER SHARE (EPS)
Basic earnings per common share excludes dilution and is computed by dividing
net earnings by the weighted-average number of common shares outstanding (which
includes shares outstanding, less performance and restricted shares for which
vesting criteria have not been met) plus deferred stock awards, weighted for the
period outstanding. Diluted earnings per common share is computed by dividing
net earnings by the sum of the weighted-average number of common shares
outstanding for the period adjusted (i.e., increased) for all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued and any proceeds of the issuance had been used to repurchase
common stock at the average market price during the period. The proceeds are
assumed to be the sum of the amount to be paid to the Company upon exercise of
options, the amount of compensation cost attributed to future services and not
yet recognized and the amount of income taxes that would be credited to or
deducted from capital upon exercise.
-10-
The following shows the reconciliation of weighted average shares:
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding: 46,238,564 39,583,804 44,861,210 39,302,298
Effect of dilutive shares:
Options 976,112 1,352,877 1,090,970 1,098,512
Performance/Restricted Stock 113,261 91,560 90,510 83,367
-----------------------------------------------------------------------------------------------------------------------
Adjusted average shares outstanding 47,327,937 41,028,241 46,042,690 40,484,177
=======================================================================================================================
Stock options to purchase 913,850 shares of common stock were outstanding during
the three and nine months ended September 30, 2005 but were excluded from the
above calculation because their inclusion would have an anti-dilutive effect on
earnings per share.
7. INVENTORIES
Effective January 1, 2005, the Company changed its inventory costing method for
U.S. inventories from the LIFO method to the FIFO method. Refer to Note 1.
Inventories consisted of the following:
September 30, December 31,
2005 2004*
--------------------------------------------------------------------
Finished goods $ 288.8 $ 165.0
Work in process 25.1 20.6
Raw materials & supplies 137.0 78.2
--------------------------------------------------------------------
Total inventories $ 450.9 $ 263.8
=====================================================================
* Balances at December 31, 2004 have been restated to show the retroactive
application of the change from the LIFO to the FIFO inventory method which
was adopted on January 1, 2005
8. EQUITY IN EARNINGS OF ASSOCIATED COMPANIES AND MINORITY INTERESTS
Through May 31, 2005, the Company had one associated company that was material
to its operations, CYRO Industries ("CYRO"), a 50% owned joint venture. On June
1, 2005, the Company sold its 50% ownership in CYRO to its joint venture partner
Degussa Specialty Polymers, a company of Degussa AG, for cash consideration of
$95.0 plus $5.4 for working capital adjustments. The proceeds of this
transaction essentially recovered the carrying value of Cytec's investment in
CYRO. Net after-tax proceeds realized from the sale of CYRO were utilized to
reduce $81.5 of acquisition-related debt.
Upon acquisition of Surface Specialties, Cytec acquired a 50% ownership interest
in SK Cytec Co., Ltd. ("SK Cytec"), a joint venture that manufacturers and sells
certain similar products to those sold by Surface Specialties. The operations of
SK Cytec are not material to the operations of the Company.
Summarized financial information for the Company's equity in earnings of CYRO
and SK Cytec during the periods of ownership and included in the Company's
results for the three and nine months ended September 30, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------------
Net sales $ 6.7 $ 83.7 $162.2 $ 232.9
Gross profit $ 2.1 $ 11.7 $ 30.9 $ 31.2
Net earnings $ 1.4 $ 4.3 $ 14.4 $ 5.9
Equity in earnings of associated company $ 0.8 $ 2.2 $ 7.4 $ 3.0
----------------------------------------------------------------------------------------------------------------------
-11-
Upon acquisition of Surface Specialties, Cytec also acquired ownership interests
in two majority-owned entities for which the net assets and results of
operations are consolidated. The earnings associated with the minority ownership
interests are included in other income (expense), net and amount to $0.1 and
$0.3, respectively, for the three and nine months ended September 30, 2005. The
minority ownership interests in the net assets of these entities are included in
other noncurrent liabilities and total $2.0 as of September 30, 2005.
9. DEBT
The Company funded a majority of the cash portion of the purchase price of the
Surface Specialties acquisition with bank debt. The Company borrowed $725.0
under its unsecured five-year term loan facility and $600.0 under its unsecured
364-day credit facility both at interest rates based on a floating LIBOR rate
plus an applicable margin which is based on the Company's credit rating and is
subject to change and both containing covenants that are customary for such
facilities. The $725.0 facility requires a payment of the lesser of $72.5 or the
then outstanding balance each December from 2005 through 2008 with a final
payment due February 2010. At September 30, 2005, $618.8 was outstanding under
the $725.0 facility.
During October 2005, Cytec sold $250.0 principal amount of 5.5% Notes due
October 1, 2010 and $250.0 principal amount of 6.0% Notes due October 1, 2015
(the "5-Year Notes" and the "10-Year Notes," respectively, and collectively, the
"Notes"). The Notes were offered under the Company's $600.0 shelf registration
statement. The Company received approximately $495.1 in net proceeds from the
offering after deducting the underwriting discount and other estimated offering
expenses. The net proceeds from the offering were used to repay all amounts
outstanding under our unsecured 364-day facility and our revolving credit
facility, which as of September 30, 2005 approximated $417.5 and $66.2,
respectively. The 364-day facility is now terminated. The weighted average
interest rate on the acquisition related debt which included the 364-day
facility was 3.69% at September 30, 2005. The Notes will pay interest on each
April 1 and October 1, commencing on April 1, 2006 through their respective due
dates. The Notes are unsecured and subordinated to any secured indebtedness of
Cytec. The Notes may be redeemed, in whole or in part, at the option of the
Company at any time subject to a prepayment adjustment.
In May 2005, the Company elected to redeem the Mandatory Par Put Remarketed
Securities ("MOPPRS"), at the optional redemption price of $141.0. The optional
redemption price represented the $120.0 principal amount of the securities and a
$21.0 pre-tax interest charge for redemption prior to their final maturity. The
redemption provided the Company with the ability to refinance this debt at a
lower cost and a shorter tenor. Due to this redemption, the Company recognized
additional interest expense of $1.0 from amounts related to the unamortized put
premium and rate lock agreements for these securities. The total expense of
$22.0 was recorded in the second quarter. The $350.0 unsecured five-year
revolving credit facility was used to fund a majority of the redemption of the
MOPPRS.
Long-term debt, including the current portion, consisted of the following:
September 30, 2005
Carrying
Face Value
-------------------------------------------------------------------------------------------------
Five-Year Term Loan Due February 15, 2010 $ 618.8 $ 618.8
6.75% Notes Due March 15, 2008 100.0 98.7
Five-Year Revolving Credit Due February 15, 2010 66.2 66.2
4.60% Notes Due July 1, 2013 200.0 201.7
Other 24.1 24.1
--------------------------------------------------------------------------------------------------
1,009.1 1,009.5
Less: Current maturities 89.7 89.7
--------------------------------------------------------------------------------------------------
Long-term debt $ 919.4 $ 919.8
==================================================================================================
10. CONTINGENCIES AND COMMITMENTS
Environmental Matters
The Company is subject to substantial costs arising out of environmental laws
and regulations, which include obligations to remove or limit the effects on the
environment of the disposal or release of certain wastes or substances at
various sites or to pay compensation to others for doing so.
As of September 30, 2005 and December 31, 2004, the aggregate environmental
related accruals were $103.9 and $70.7, respectively. The increase primarily
relates to the preliminary estimate of liabilities assumed upon the acquisition
of Surface Specialties related to the remediation at certain manufacturing
sites, primarily located in Europe. As of September 30, 2005 and December 31,
2004, $6.0 and $10.0, respectively, of the above amounts were included in
accrued expenses, with the remainder included in other noncurrent liabilities.
Environmental remediation spending for the three months ended September 30, 2005
and 2004 was $2.2 and $1.2, respectively and for the nine months ended September
30, 2005 and 2004 was $4.4 and $6.0, respectively.
-12-
These accruals can change substantially due to such factors as additional
information on the nature or extent of contamination, methods of remediation
required, changes in the apportionment of costs among responsible parties and
other actions by governmental agencies or private parties or if the Company is
named in a new matter and determines an accrual needs to be provided for or if
the Company determines it is not liable and no longer requires an accrual.
A further discussion of environmental matters can be found in Note 10 of the
Notes to the Consolidated Financial Statements contained in the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on
June 13, 2005.
Other Contingencies
The Company is the subject of numerous lawsuits and claims incidental to the
conduct of its or certain of its predecessors' businesses, including lawsuits
and claims relating to product liability, personal injury including asbestos,
contractual, employment and intellectual property matters.
As of September 30, 2005 and December 31, 2004, the aggregate self-insured and
insured contingent liability was $67.7 and $68.4, respectively, and the related
insurance receivable was $38.5 at September 30, 2005 and $37.9 at December 31,
2004. The liability related to asbestos claims included in the above amounts at
September 30, 2005 and December 31, 2004 was $48.3 and $50.4, respectively, and
the related insurance receivable was $34.6 at September 30, 2005 and $34.2 at
December 31, 2004. The Company anticipates receiving a net tax benefit for
payment of those claims to which full insurance recovery is not realized.
The following table presents information about the asbestos claims against the
Company:
Nine Months
Ended Year Ended
September 30, December 31,
2005 2004
----------------------------------------------------------------------------------------------------------
Number of claimants associated with claims closed during period 8,560 3,540
Number of claimants associated with claims opened during period 1,434 4,532
Number of claimants at end of period 20,821 27,947
==========================================================================================================
It should be noted that the ultimate liability and related insurance recovery
for all pending and anticipated future asbestos claims cannot be determined with
certainty due to the difficulty of forecasting the numerous variables that can
affect the amount of the liability and insurance recovery. These variables
include but are not limited to: (i) significant changes in the number of future
claims; (ii) significant changes in the average cost of resolving claims; (iii)
changes in the nature of claims received; (iv) changes in the laws applicable to
these claims; and (v) financial viability of co-defendants and insurers.
The Company is among several defendants in approximately 30 cases, in which
plaintiffs assert claims for personal injury, property damage, and other claims
for relief relating to lead pigment that was used as an ingredient decades ago
in paint for use in buildings. The different suits were brought by government
entities and/or individual plaintiffs, on behalf of themselves and others. The
suits variously seek compensatory and punitive damages and/or injunctive relief,
including funds for the cost of monitoring, detecting and removing lead-based
paint from buildings and for medical monitoring; for personal injuries allegedly
caused by ingestion of lead-based paint; and plaintiffs' attorneys' fees. The
Company believes that the suits are without merit and is vigorously defending
against all such claims. Accordingly, no loss contingency has been recorded. The
Company has access to a substantial amount of primary and excess general
liability insurance for property damage and believes these policies are
available to cover a significant portion of both its defense costs and indemnity
costs, if any, for lead pigment-related property damage claims.
In July 2005, the Supreme Court of Wisconsin held in a case in which the Company
was one of several defendants that Wisconsin's risk contribution doctrine
applies to bodily injury cases against manufacturers of white lead pigment.
Under this doctrine, manufacturers of white lead pigment may be liable for
injuries caused by white lead pigment based on their market shares unless they
can prove they are not responsible for the white lead pigment which caused the
injury in question. Seven other courts have previously rejected the
applicability of this and similar doctrines to white lead pigment. The Company
settled this case for an immaterial amount. Although similar cases may be filed
in Wisconsin, the Company does not believe that its liability, if any, in such
cases will be material, either individually or in the aggregate.
-13-
In June 2005, the Company reached an agreement with one of its insurers and
reached an agreement in principle with a second insurer regarding the payment of
past and future defense costs associated with the lead pigment litigation.
Through the nine months ended September 30, 2005, the Company was reimbursed
$3.6 relating to the recovery of past and current year defense costs under the
first agreement. Also for the three and the nine months ended September 30,
2005, the Company recorded in other income (expense), net, $1.4 and $2.9,
respectively, primarily related to the recovery of past defense costs from these
insurers.
In the first quarter of 2005, the Company increased its reserves by $4.4 as a
result of its agreement in principle to settle claims by a third party for the
costs of environmental remediation at a manufacturing site operated by the
former American Cyanamid Company ("Cyanamid") prior to 1944. In connection with
the Company's 1993 spin-off from Cyanamid, the Company agreed to indemnify
Cyanamid for claims of this nature. Under the terms of the settlement which was
finalized in the second quarter of 2005, the third party has released all claims
and indemnified the Company against third-party environmental remediation claims
arising from the alleged contamination at the site. Although the Company
believed it had meritorious defenses to this claim, the Company agreed to the
settlement to avoid incurring additional legal fees and any risk of an adverse
outcome in any related litigation.
In the second quarter of 2005, the Company increased its reserves by $2.4 as a
result of its agreement in principle, which was signed in the third quarter, to
settle certain claims by a third party for $2.7.
While it is not feasible to predict the outcome of all pending environmental
matters, lawsuits and claims, it is reasonably possible that there will be a
necessity for future provisions for costs for environmental matters and for
other contingent liabilities that in management's opinion, will not have a
material adverse effect on the consolidated financial position of the Company,
but could be material to the consolidated results of operations or cash flows of
the Company in any one accounting period. The Company cannot estimate any
additional amount of loss or range of loss in excess of the recorded amounts.
Moreover, many of these liabilities are paid over an extended period, and the
timing of such payments cannot be predicted with any certainty.
From time to time the Company is also included in legal proceedings as a
plaintiff involving tax, contract, patent protection, environmental and other
legal matters. Gain contingencies subject to litigation are recorded when they
are realized. A receivable for gain contingencies which the Company is confident
will be realized without resort to litigation is recorded based upon the
counterparty's most recent settlement offer.
A further discussion of other contingencies can be found in Note 10 of the Notes
to the Consolidated Financial Statements contained in the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on June 13,
2005.
Commitments
The Company frequently enters into long-term contracts with customers with terms
that vary depending on specific industry practices. The Company's business is
not substantially dependent on any single contract or any series of related
contracts. Descriptions of the Company's significant sales contracts at year end
are set forth in Note 10 of the Notes to Consolidated Financial Statements
contained in the Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on June 13, 2005.
Set for the below are more specific terms about the Company's significant
contracts entered into during 2005:
The Company is obligated to manufacture a customer's requirements for certain
resins utilized in the automotive industry under a long-term manufacturing
agreement which may be terminated upon two years prior written notice.
-14-
11. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), which represents the change in
equity from non-owner sources, for the three and nine months ended September 30,
are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 * 2005 2004 *
----------------------------------------------------------------------------------------------------------------------
Net earnings as reported $ 35.4 $ 20.4 $ 40.7 $ 84.7
Other comprehensive income (loss):
Minimum pension liability adjustments (0.2) -- 4.8 --
Unrealized gain (loss) on cash flow hedges 2.3 0.5 3.1 0.3
Foreign currency translation adjustments 3.0 9.4 (59.1) (7.1)
----------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 40.5 $ 30.3 $(10.5) $ 77.9
======================================================================================================================
* 2004 results have been restated to show the retroactive application of the
change from the LIFO to the FIFO inventory method which was adopted on
January 1, 2005. Refer to Note 1.
12. INCOME TAXES
The Company recognized a tax expense of $11.6 (effective tax rate of 25%) from
continuing operations for the three months ended September 30, 2005 and a tax
benefit of $17.3 (effective tax rate benefit of 78%) for the nine months ended
September 30, 2005 versus an effective tax rate of 23% and 21% respectively, in
2004. The Company's 2005 effective tax rate for the quarter and year to date was
favorably impacted by hedging losses incurred in the U.S. in connection with the
Surface Specialties acquisition, the MOPPRS redemption, and reduction in tax
expense due to the completion of tax audits of various prior years as discussed
below. The rate was unfavorably impacted by the write-off of acquired in-process
research and development expenses related to the Surface Specialties
acquisition, for which there is no tax benefit. Excluding these items, the
Company's underlying annual effective tax rate for the nine months ended
September 30, 2005 was 26%, down from the 27% that was estimated for the first
six months of 2005. This rate reflects the Company's continued earnings growth
in lower tax jurisdictions and, to a lesser extent, a favorable international
tax ruling received in the first quarter of 2004. The Company's underlying
effective tax rate for the comparable period in 2004 was 23%. The increase in
the underlying rate for 2005 is due to the acquisition of Surface Specialties
which operates in a mix of countries with higher effective tax rates than the
countries in which the heritage Cytec business operated.
In January, 2005, the Company received notice that the Congressional Joint
Committee on Taxation (the "Joint Committee") approved the final IRS examination
findings for the years 1999 through 2001 and a separate tax refund claim filed
by the Company for 1998. Such Joint Committee approval resulted in a tax refund
of approximately $0.2 and $0.1 for the years 1998 and 2000 respectively, which
was recorded in the first quarter of 2005. The Company also recorded a reduction
in tax expense of approximately $16.2 for the three months ended March 31, 2005
to reflect the final resolution of these audits.
In May, 2005, the Company received a final notice from the Norwegian Assessment
Board disclosing an increase to taxable income with respect to a 1999
restructuring of certain of the Company's European operations. The tax liability
attributable to this assessment, excluding interest and possible penalties, is
approximately 84.0 Norwegian krone ($12.9) as of September 30, 2005. This final
assessment reflects a 20.7 Norwegian krone decrease in the assessed tax
liability compared with the prior audit report issued by the tax authorities. As
a result, the Company recorded a corresponding reduction in tax expense of
approximately $4.2, including interest, in the quarter ended June 30, 2005 to
reflect this final assessment. The Company has retained tax counsel to assist in
the defense of the final assessment since the issue will likely be litigated
given the Company's vigorous defense in protesting the increase of taxable
income. Notwithstanding the Company's meritorious defenses in this matter, in
prior years as this matter developed, the Company accrued for the potential
unfavorable outcome of this dispute for the full amount of the tax liability of
the assessment. In October 2005, the Company received notice from the Norwegian
authorities demanding a tax payment of 55.0 Norwegian krone ($8.5) with respect
to the above matter. The Company is currently evaluating its response to this
demand but will likely deposit such amount with the tax authorities in the
fourth quarter of 2005 pending final resolution of the matter. Assuming the
dispute resolution process follows a normal course, a complete resolution of the
Norwegian issue will probably not occur until late 2006.
The Company also received a separate notice from the Norwegian tax authorities
in the second quarter of 2005 disclosing a complete termination of pleadings
regarding a potential Norway permanent establishment ("PE") with respect to a
Company affiliate. Given the favorable resolution of this PE issue, the Company
has adjusted its contingency reserves accordingly and recorded a reduction in
tax expense of $5.4, including interest, in the second quarter ended June 30,
2005.
-15-
13. OTHER FINANCIAL INFORMATION
On July 21, 2005 the Board of Directors declared a $0.10 per common share cash
dividend, paid on August 25, 2005 to shareholders of record as of August 10,
2005. Cash dividends paid in the third quarter of 2005 and 2004 were $4.6 and
$3.9, respectively, and for the nine months ended September 30, 2005 and 2004
were $13.2 and $11.7, respectively. On October 20, 2005 the Board of Directors
declared a $0.10 per common share cash dividend, payable on November 25, 2005 to
shareholders of record as of November 10, 2005.
Income taxes paid for the nine months ended September 30, 2005 and 2004 were
$42.8 and $10.4, respectively. Income taxes paid during the nine months ended
September 30, 2005 included $16.5 of pre-acquisition income tax liabilities of
Surface Specialties for which reimbursement from UCB has been arranged. Interest
paid for the nine months ended September 30, 2005 and 2004 was $53.6 and $15.7,
respectively. Interest paid for the nine months ended September 30, 2005
included interest charges of $21.0 which resulted from the redemption of the
MOPPRS prior to their final maturity.
Included in due from related party on the accompanying balance sheet are certain
tax reimbursements to be received from UCB in accordance with the terms of the
purchase agreement entered into in connection with the acquisition of Surface
Specialties. Additionally, in connection with certain transition services
agreements entered into with UCB upon closing of the purchase of Surface
Specialties, included in accrued expenses at September 30, 2005 are $4.9 related
to such agreements. Through September 30, 2005, results of operations reflect
expenses of $11.6 recognized under these agreements.
On September 30, 2004, the Company redeemed its Series C Cumulative Preferred
Stock for $10.0 in cash which had a liquidation value of $0.1. As a result, a
charge to net earnings available to common stockholders of $9.9 was recorded as
a premium paid to redeem preferred.
For the three months ended September 30, 2005, the Company recorded in
administrative and general, $1.1 of employee severance costs which are expected
to be paid during the fourth quarter.
14. SEGMENT INFORMATION
Effective with the acquisition of Surface Specialties, the Company realigned its
organizational and reporting structure. The following tables disclose net sales
and earnings (loss) from operations under the new reporting structure for all
periods presented. The total assets of the Cytec Surface Specialties segment
includes the assets acquired on February 28, 2005 (refer to Note 2). Also total
assets of $249.1 were transferred to the Cytec Performance Specialties segment
on January 1, 2005.
Summarized information for the Company's four segments is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -----------------------------------
2005 2004 2005 2004
----------- ------------ ------------- -------------
Net sales
Cytec Performance Specialties
Sales to external customers $ 172.4 $ 176.1 $ 531.6 $ 497.5
Intersegment sales 1.1 1.3 3.9 3.4
Cytec Surface Specialties 392.8 76.0 996.4 229.5
Cytec Engineered Materials 135.7 121.2 404.5 369.6
Building Block Chemicals
Sales to external customers 59.9 60.2 205.7 174.1
Intersegment sales 13.7 19.6 58.5 59.7
------- --------- --------- ---------
Net sales from segments 775.6 454.4 2,200.6 1,333.8
Elimination of intersegment revenue (14.8) (20.9) (62.4) (63.1)
------- --------- --------- ---------
Net sales $ 760.8 $ 433.5 $ 2,138.2 $ 1,270.7
=============================================================================================================================
% of % of % of % of
sales sales sales sales
------- ------- ------- --------
Earnings (loss) from operations
Cytec Performance Specialties $ 14.6 8% $ 13.5 8% $ 45.8 9% $ 33.9 7%
Cytec Surface Specialties 22.2 6% 7.3 10% 1.8 0% 27.8 12%
Cytec Engineered Materials 27.6 20% 19.5 16% 76.3 19% 69.6 19%
Building Block Chemicals (4.3) -6% 3.7 5% 9.7 4% 12.5 5%
------- --------- --------- ---------
Earnings from segments 60.1 8% 44.0 10% 133.6 6% 143.8 11%
Corporate and Unallocated (4.5) (10.1) (10.0) (14.4)
------- --------- --------- ---------
Earnings from operations $ 55.6 7% $ 33.9 8% $ 123.6 6% $ 129.4 10%
============================================================================================================================
-16-
15. GOODWILL AND OTHER ACQUISITION INTANGIBLES
The following is the activity in the goodwill balances for each segment. The
2004 beginning balances have been restated to reflect the new organizational
structure referred to in Note 14:
Cytec Cytec Surface Cytec
Performance Engineered
Specialties Specialties Materials Corporate Total
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ 63.6 $ 30.7 $ 247.4 $ 0.7 $ 342.4
2005 Acquisition (Note 2) - 741.9 - - 741.9
Currency translation 0.7 (61.2) 0.1 - (60.4)
Other - - (6.3) - (6.3)
--------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2005 $ 64.3 $ 711.4 $ 241.2 $ 0.7 $1,017.6
==========================================================================================================================
The Company recorded a reduction to goodwill of $6.3 as a result of the
favorable resolution of a tax contingency related to an acquisition that
occurred in a prior reporting period.
Other acquisition intangibles as of September 30, 2005 and December 31, 2004,
consisted of the following major classes:
Weighted Accumulated
Average Gross carrying value amortization Net carrying value
Useful Life -------------------------------------------------------------------------------------------
September December 31, September December 31, September December 31,
30, 30, 30,
(years) 2005 2004 2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------
Technology-based 15.3 $52.7 $42.5 $(14.3) $(12.2) $ 38.4 $30.3
Marketing-related 15.4 60.0 11.6 (7.6) (4.0) 52.4 7.6
Marketing-related indefinite 41.8 - - - 41.8 -
Customer-related 15.0 394.1 35.8 (21.3) (6.9) 372.8 28.9
--------------------------------------------------------------------------------------------------------------------------------
Total $548.6 $89.9 $(43.2) $(23.1) $505.4 $66.8
================================================================================================================================
Amortization of acquisition intangibles for the three months ended September 30,
2005 and 2004 was $8.8 and $1.2, respectively and for the nine months ended
September 30, 2005 and 2004 were $21.6 and $4.2, respectively. Amortization
expense for the nine months ended September 30, 2005 includes seven months of
amortization of the acquisition intangibles associated with the Company's
purchase of Surface Specialties. Assuming no change in the gross carrying amount
of acquisition intangibles and the currency exchange rates remain constant, the
estimated amortization of acquisition intangibles for the fiscal year 2005 is
$29.7 and for the years 2006 through 2009 is $34.1 per year. Included in
marketing-related intangibles at September 30, 2005 is $41.8 relating to certain
trade names purchased upon acquisition of Surface Specialties which have
indefinite useful lives.
16. DERIVATIVE FINANCIAL INSTRUMENTS AND COMMODITY HEDGING ACTIVITIES
A further discussion regarding the Company's derivative financial instruments
and commodity hedging activities at year-end can be found in Note 4 to the
Consolidated Financial Statements contained in the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on June 13, 2005.
Derivative Financial Instruments
On September 29, 2005, the Company entered into (euro)207.9 of five-year cross
currency swaps and (euro)207.9 of ten-year cross currency swaps. The swaps
included an initial exchange of $500.0 on October 4, 2005 and will require final
principal exchanges of $250.0 on each settlement date of the 5-Year and 10-Year
Notes (October 1, 2010 and October 1, 2015), respectively. At the initial
principal exchange, we paid US dollars to counterparties and received euros.
Upon final exchange, we will provide euros to counterparties and receive U.S.
dollars. The swaps also call for an exchange of fixed euro interest payments for
fixed US dollar interest receipts. With respect to the 5-Year swaps, the Company
will receive 5.5% per annum and will pay 3.784% per annum on each April 1 and
October 1, through the maturity date of the 5-Year swaps. With respect to the
10-Year swaps, the Company will receive 6.0% per annum and will pay 4.5245% per
annum on each April 1 and October 1, through the maturity date of the 10-Year
swaps. The cross currency swaps have been designated as cash flow hedges of the
changes in value of the future euro interest and principal receipts that result
from changes in the US dollar to euro exchange rates on certain Euro denominated
intercompany receivables the Company has with its subsidiaries.
-17-
As of September 30, 2005, the Company had $49.3 of euro forward contracts
outstanding. The forward contracts plus the euro-denominated bank borrowings,
naturally hedge the Company's euro-denominated inter-company loans receivable
and provide a hedge of the Company's net investment in Cytec Surface Specialties
SA/NV.
As of September 30, 2005, including the impact of the outstanding euro forward
contracts, the Company's total debt of $1,456.2 is denominated approximately 59%
in euros, 40% in dollars and the balance denominated in various other
currencies.
Commodity Hedging Activities
At September 30, 2005, the Building Block Chemicals segment Fortier plant's 2005
remaining forecasted natural gas utility requirements were 82% hedged utilizing
natural gas forward contracts at an average cost of $7.41 per MMBTU. These
contracts have delivery dates ranging from October, 2005 to December, 2005.
Additionally, the plant's 2006 gas utility requirements were 23% hedged at
September 30, 2005 at an average cost of $7.98 per MMBTU, and these contracts
have delivery dates ranging from January to July, 2006.
In addition, at September 30, 2005, the Company held natural gas swaps with a
favorable fair value of $6.0, net of taxes, which will be reclassified into
Manufacturing Cost of Sales as product is sold.
17. EMPLOYEE BENEFIT PLANS
Net periodic cost for the Company's pension and postretirement benefit plans was
as follows:
Pension Plans Postretirement Plans
--------------------------------- -----------------------------
Three Months Ended September 30,
----------------------------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------
Service cost $ 6.0 $ 3.5 $ 0.4 $ (0.1)
Interest cost 8.3 8.5 2.9 2.2
Expected return on plan assets (9.3) (10.3) (0.9) (1.1)
Net amortization and deferral 3.6 2.7 (2.5) (2.7)
----------- ----------- ------------ ----------
Net periodic cost $ 8.6 $ 4.4 $ (0.1) $ (1.7)
----------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------
Service cost $ 17.6 $ 10.8 $ 0.9 $ 0.8
Interest cost 26.2 25.9 10.1 10.7
Expected return on plan assets (29.1) (29.1) (3.5) (3.7)
Net amortization and deferral 9.6 5.8 (7.8) (7.9)
----------- ----------- ------------ ----------
Net periodic cost $ 24.3 $ 13.4 $ (0.3) $ (0.1)
==========================================================================================================
The Company disclosed in its 2004 consolidated financial statements for the year
ended December 31, 2004, that it expected to contribute $15.8 and $20.5,
respectively, to its pension and postretirement plans in 2005. The Company now
expects to contribute approximately $11.0 and $19.5, respectively, to these
plans in 2005. Through September 30, 2005, $8.2 and $12.5 in contributions were
made, respectively. The Company makes these voluntary contributions as a part of
its normal financial planning. In conjunction with the acquisition, the Company
is in the process of evaluating its pension and post-retirement plans and
related funding requirements and, as such, contributions relating to the
acquired businesses have not been included in contributions amounts discussed
above.
The Company also sponsors various defined contribution retirement plans in the
United States and a number of other countries, consisting primarily of savings
and profit growth sharing plans. Contributions to the savings plans are based on
matching a percentage of employees' contributions. Contributions to the profit
growth sharing plans are generally based on the Company's financial performance.
Amounts expensed related to these plans for the three months ended September 30,
2005 and 2004 were $4.6 and $4.3, respectively, and for the nine months ended
September 30, 2005 and 2004 were $13.7 and $12.1, respectively.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
-18-
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements. Currencies are in millions, except per share amounts. Percentages
are approximate.
GENERAL
Cytec is a global specialty chemicals and materials company and sells its
products to diverse major markets for aerospace, automotive and industrial
coatings, chemical intermediates, mining, plastics and water treatment. Sales
volume by region and the impact of exchange rates are important measures that
are analyzed by management.
On February 28, 2005, the Company acquired the Surface Specialties business of
UCB. The acquisition was recorded using the purchase method of accounting.
Accordingly, the results of operations of Surface Specialties have been included
in the Company's consolidated results from the date of acquisition. A further
discussion of the acquisition of Surface Specialties can be found in Note 2 to
the Notes to the Consolidated Financial Statements contained herein.
The Company reports its net sales in four segments: Cytec Performance
Specialties, Cytec Surface Specialties, Cytec Engineered Materials and Building
Block Chemicals. The Cytec Performance Specialties and Cytec Surface Specialties
segments are collectively referred to as Specialty Chemicals. The Company also
reports its net sales in four geographic regions: North America, Latin America,
Asia/Pacific and Europe/Middle East/Africa. The destination of the sale
determines the region under which it is reported consistent with management's
view of the business. North America consists of the United States and Canada.
Latin America includes Mexico, Central America, South America and the Caribbean
Islands. Asia/Pacific is comprised of Asia, Australia and the islands of the
South Pacific Rim.
Raw material cost changes year on year are an important factor in profitability
especially in years of high volatility. Oil and natural gas costs are
significantly higher than the year ago period and many of the Company's raw
materials are derived from these two commodities. Key raw materials for the
Specialty Chemicals and Building Block Chemicals segments are propylene,
ammonia, methanol derivatives, acrylic acid and natural gas for energy. Key raw
materials for the Cytec Engineered Materials segment are carbon fiber and
various resins. Discussion of the year to year impact of raw materials and
energy is provided in our segment discussion. In addition, higher global demand
levels and, occasionally, operating difficulties at suppliers, have limited the
availability of certain of the Company's raw materials. Due to recent hurricane
activity in the Gulf region, the Company is now experiencing further increases
in the cost of natural gas and oil-related raw materials. The Company may not be
able to pass along all of the recent increases in the form of higher selling
prices. For a discussion of market risks at year-end, refer to "Customers and
Suppliers" in Part I, Item 1. "Business," contained in the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on June 13,
2005.
QUARTER ENDED SEPTEMBER 30, 2005, COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2004
Consolidated Results
Net sales for the third quarter of 2005 were $760.8 compared with $433.5 for the
third quarter of 2004, an increase of 76% of which 73% was due to the
acquisition of Surface Specialties, selling prices increased 4%, exchange rate
changes increased sales 1% and selling volumes were down 2%. On a segment basis
the Cytec Engineered Materials sales increase was associated primarily with
increased selling volumes to the large commercial aircraft and rotorcraft
sectors. The Cytec Performance Specialties segment experienced a decrease in
sales due to lower selling volumes, however the segment benefited from price
increases as well as from the net favorable impact of exchange rate changes.
Cytec Surface Specialties sales increased as a result of the acquisition of
Surface Specialties. The Building Block Chemicals segment sales decreased
slightly due to a decrease in selling volumes as a result of the impact of the
hurricanes, Katrina and Rita, and slowing demand offset somewhat by higher
selling prices.
For a detailed discussion on revenues refer to the Segment Results section
below.
Manufacturing cost of sales was $599.6, or 78.8% of net sales in the third
quarter of 2005 compared with $332.4 or 76.7% of sales for the comparable period
of 2004. The direct impact from the hurricanes was $5.2 related to maintenance
and repair costs, extra labor and related expenses, energy and start up costs
plus an estimated $3.9 due to lost production and the corresponding fixed cost
absorption and related sales loss. Raw material and energy costs increased $8.8
versus the comparable period of 2004. Exchange rate changes increased cost of
sales approximately $0.8.
Selling and technical services was $53.1 in 2005 versus $34.0 in the prior year.
This increase was primarily attributable to the inclusion of expenses related to
Surface Specialties as heritage selling and technical services expenses remained
flat.
Research and process development was $17.5 in 2005 versus $10.0 in the prior
year. This increase was primarily attributable to the inclusion of expenses
related to Surface Specialties with a base decrease in heritage research and
process development expenses of $0.8.
-19-
Administrative and general expenses were $26.2 in 2005 versus $22.0 in the prior
year. This increase was primarily attributable to the inclusion of expenses
relating to Surface Specialties and a charge of $1.1 related to employee
severance costs. Included in the third quarter of 2004 is a charge of $8.0
related to the settlement of the carbon fiber class action lawsuit and several
other minor litigation matters.
Amortization of acquisition intangibles was $8.8 in 2005 versus $1.2 in the
prior year. This increase resulted from the inclusion of amortization expense
relating to the intangibles which resulted from the acquisition of Surface
Specialties.
Other income (expense), net was income of $6.0 in 2005 compared with expense of
$4.9 in the prior year. Included in the 2005 results was a gain of $3.7 related
to derivative contracts entered into to hedge interest rate exposure associated
with the debt offering which closed in October, 2005 as well as a $1.4 benefit
related to the recovery of past lead litigation defense costs from an insurance
carrier. Included in the 2004 quarter was a charge of $2.0 in connection with
the settlement of a series of disputed matters with the holder of the Series C
Cumulative Preferred Stock ("Series C Stock").
Equity in earnings of associated companies was $0.8 in 2005 versus $2.2 in the
prior year. The decrease in earnings was primarily due to the inclusion in 2004
of the results from of CYRO. On June 1, 2005, the Company sold its 50% ownership
in CYRO to its joint venture partner Degussa Specialty Polymers, a company of
Degussa AG.
Interest expense, net was $15.9 in 2005 as compared with $4.7 in the prior year.
The increase resulted from a higher outstanding weighted-average debt balance
during 2005 resulting from the debt incurred in connection with the Company's
acquisition of Surface Specialties.
The Company recognized a tax provision of $11.6, or 25%, on earnings from
continuing operations for the quarter ended September 30, 2005. For the quarter
ended September 30, 2004, the effective tax rate was a tax provision of 23%. The
Company's effective tax rate for the third quarter of 2005 was unfavorably
impacted by U.S. hedging gains and favorably impacted by a reduction in income
tax expense related to the decrease in the underlying annual effective tax rate
for the first six months of 2005 to 26% from 27%. This reduction in income tax
expense did not apply to the hedge losses and MOPPRS redemption for which taxes
were recorded at higher rates and the write off of in-process research and
development costs from the acquisition which are not tax deductible. Excluding
these items, the Company's underlying annual effective tax rate for the quarter
ended September 30, 2005 was 26 %.
Earnings from discontinued operations were $0.5 and reflect the results of SSAR
for the two months ended August 31, 2005, the date on which the Company divested
SSAR.
On September 30, 2004, the Company redeemed its Series C Stock for $10.0 in cash
which had a liquidation value of $0.1. As a result, a charge to net earnings
available to common stockholders of $9.9 was recorded as a premium paid to
redeem preferred stock during the quarter ended September 30, 2004.
Net earnings available to common stockholders for 2005 were $35.4 ($0.75 per
diluted share) compared with net earnings for 2004 of $10.5 ($0.26 per diluted
share) or an increase of $24.9 after tax earnings. Included in the current
quarter is an after tax gain of $2.4 related to interest rate derivative
transactions associated with the Surface Specialties acquisition and a
restructuring charge of $0.8 after tax related to employee severance. The
remainder of the increase is due to higher earnings.
Segment Results (Sales to external customers)
Year-to-year comparisons and analyses of changes in net sales by segment and
region are set forth below and reflect the new organizational and reporting
structure of the Company's reportable segments for all periods presented.
Cytec Performance Specialties
% Change Due to
Total ----------------------------------------
2005 2004 % Change Price Volume/Mix Currency
-------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
North America $66.2 $68.0 -3% 9% -12% 0%
Latin America 30.1 27.0 11% 1% 2% 8%
Asia/Pacific 23.8 28.3 -16% 3% -21% 2%
Europe/Middle East/Africa 52.3 52.8 -1% 4% -5% 0%
------------- ------------
Total $172.4 $176.1 -2% 5% -9% 2%
==================================================================================================================================
-20-
Overall selling volume decreased 9% and is primarily attributable to decreased
sales in all product lines except phosphines. Sales volumes were down 12% in
North America due to the Company's decision to give up low margin business in
certain product lines, the impact on customer orders caused by the hurricanes
and continuing sluggish demand. Also mining chemicals was impacted by certain
customer strikes. Sales volumes were down 21% in Asia/Pacific and primarily
resulted from the Company's decision to give up low margin business and
softening demand in the polymer additives product line. Net price increases in
North America and Europe, primarily for water treatment chemicals, partly offset
the net decrease in volumes.
Earnings from operations were $14.6, or 8% of sales, compared with $13.5, or 8%
of sales, in 2004. The increase in earnings is primarily attributable to price
increases of $9.0 and net favorable exchange rate changes of $2.8 partially
offset by decreased selling volumes particularly in the polymer additives
product line and higher raw material and energy costs of $2.4.
Cytec Surface Specialties
% Change Due to
----------------------------------------
Total Acquisition/
2005 2004 % Change Price Volume Currency
-------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
North America $109.4 $38.0 188% 5% 183% 0%
Latin America 15.8 4.1 285% -5% 283% 7%
Asia/Pacific 61.8 16.0 286% 0% 284% 2%
Europe/Middle East/Africa 205.8 17.9 1,050% 2% 1,047% 1%
------------- ------------
Total $392.8 $76.0 417% 3% 413% 1%
=================================================================================================================================
For all regions, selling volumes increased 413% primarily as a result of the
inclusion of sales attributable to the acquisition of Surface Specialties. For
the acquired businesses, on a pro-forma basis, volumes were down about 4%,
selling prices were up 10% and exchange was up 1%. Heritage volumes decreased 3%
which was primarily attributable to weak demand in North America and Europe.
Earnings from operations were $22.2, or 6% of sales, compared with $7.3 or 10%
of sales in 2004. The increase in earnings is primarily attributable to the
inclusion of results of operations attributable to Surface Specialties. Price
increases of $2.1 and the effect of favorable exchange rates of $0.9 more than
offset higher heritage raw material and energy costs of $2.3.
Cytec Engineered Materials
% Change Due to
Total ----------------------------------------
2005 2004 % Change Price Volume/Mix Currency
-------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
North America $ 89.0 $ 80.8 10% 0% 10% 0%
Latin America(1) 0.3 0.6 --- --- --- ---
Asia/Pacific 8.5 5.1 67% 4% 63% 0%
Europe/Middle East/Africa 37.9 34.7 9% 4% 5% 0%
------------- ------------
Total $135.7 $121.2 12% 2% 10% 0%
=================================================================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 10% which were led by increases in the North
America, Europe/Middle East/Africa and the Asia/Pacific regions. The increases
resulted largely from sales to the large commercial aircraft and rotorcraft
sectors primarily due to increased build rates for these aircraft and new
business.
Earnings from operations were $27.6, or 20% of sales, compared with $19.5, or
16% of sales, in 2004. The increase was primarily attributable to higher selling
volumes and the resulting leverage as well as selling price increases offsetting
higher raw material and energy costs.
Building Block Chemicals
% Change Due to
Total ----------------------------------------
2005 2004 % Change Price Volume/Mix Currency
------------------------------------------- -------------- ------------ ---------------- --------- ---------------- -------------
North America $ 30.7 $ 29.9 3% 13% -10% 0%
Latin America(1) 0.9 0.9 -- -- -- --
Asia/Pacific 6.7 20.3 -67 3% -70% 0%
Europe/Middle East/Africa 21.6 9.1 136% 23% 113% 0%
-------------- ------------
Total $ 59.9 $ 60.2 0% 11% -11% 0%
=================================================================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
-21-
Overall selling volumes decreased 11% primarily due to the reduced production
levels at the Fortier, Louisiana manufacturing facility and the interruption of
its natural gas supply, both of which related to the impact of Hurricanes
Katrina and Rita. The sale of acrylonitrile into the Asia/Pacific region
decreased from the prior year as product was repositioned into the Europe/Middle
East/Africa region in order to maximize returns. Sales of hydrocyanic acid and
sulfuric acid in North America were also negatively impacted by forced plant
outages due to the storms.
Loss from operations was $4.3 or 6% of sales, compared with earnings from
operations of $3.7, or 5% of sales, in 2004. The direct impact from the
hurricanes was $5.2 related to maintenance and repair costs, extra labor and
related expenses, energy and start up costs plus an estimated $3.9 due to lost
production and the corresponding fixed cost absorption and related sales loss.
Higher selling prices of $6.3 more than offset higher raw material and energy
costs of $4.5.
NINE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2004
Consolidated Results
Net sales for the first nine months of 2005 were $2,138.2 compared with $1,270.7
for the prior year period, up 68% of which 60% is due to the inclusion of sales
from Surface Specialties which was acquired on February 28, 2005. The Cytec
Performance Specialties segment experienced increased sales which resulted
primarily from selling price increases as well as from the net favorable impact
of exchange rates. The Cytec Engineered Materials segment sales increase is
principally volume related, primarily from increased sales to the large
commercial transport and rotorcraft sectors. The Building Block Chemicals
segment sales increased principally from higher selling prices, while volumes
decreased. Net sales and operating results for the Building Blocks segment were
significantly impacted by the effects of hurricanes Katrina and Rita.
For a detailed discussion on revenues refer to the Segment Results section
below.
Manufacturing cost of sales was $1,679.0 or 78.5% of net sales for the first
nine months of 2005 compared with $954.1 or 75.1% of net sales during the prior
year period. Manufacturing cost of sales was impacted primarily by the following
items: higher raw material and energy costs of $69.4; a charge of $20.8 related
to purchase accounting for finished goods inventory of the acquired business
recorded at fair value which exceeded normal manufacturing cost and the direct
impact from the hurricanes of $5.2 related to maintenance and repair costs,
extra labor and related expenses, energy and start up costs plus an estimated
$3.9 due to lost production and the corresponding fixed cost absorption. The
remainder of the increase is primarily due to the inclusion of the acquired
Surface Specialties business.
Selling and technical services was $155.9 in 2005 versus $103.8 in the prior
year. This increase was primarily attributable to the inclusion of seven months
of expenses relating to Surface Specialties with an increase in heritage selling
and technical services expenses accounting for $5.1 of which $0.8 was for
employee severance costs, $1.8 from unfavorable exchange rate changes and the
remainder of the increase is the result of increased investments in people and
qualification work in the Cytec Engineered Materials segment.
Research and process development was $50.4 in 2005 versus $29.4 in the prior
year. This increase was primarily attributable to the inclusion of seven months
of expenses relating to Surface Specialties and $0.5 related to employee
severance costs.
Administrative and general expenses were $70.7 in 2005 versus $49.8 in the prior
year. This increase was primarily attributable to the inclusion of seven months
of expenses relating to Surface Specialties and a charge of $2.4 related to the
anticipated settlement of a litigation matter in the second quarter and employee
severance costs of $1.1. Included in administrative expenses for the prior year
period is a charge of $8.0 related to the settlement of the carbon fiber class
action lawsuit and several other minor litigation matters.
Amortization of acquisition intangibles was $21.6 in 2005 versus $4.2 in the
prior year. This increase resulted from the inclusion of seven months of
amortization expense relating to the intangibles which resulted from the
acquisition of Surface Specialties.
In connection with the acquisition of Surface Specialties, $37.0 of acquired
in-process research and development costs were expensed in the first quarter of
2005.
-22-
Other income (expense), net was expense of $44.9 in 2005 compared with expense
of $12.6 in the prior year. Included in the 2005 results are charges related to
derivative contracts entered into to hedge currency and interest rate exposure
associated with the acquisition of Surface Specialties. The Company entered into
foreign currency contracts to offset the potential dollar to euro exchange rate
fluctuation that would have an impact on the acquisition cost in dollars and
this resulted in a loss of $19.2. The foreign currency contracts have
subsequently matured. In anticipation of future long-term debt that would be
issued to refinance debt, the Company also entered into interest rate
derivatives which resulted in the recognition of a loss of $25.0. Also included
is a charge of $4.4 for a settlement to resolve a dispute over an environmental
matter. Included in year-to-date 2004 results are charges of $6.1 for settlement
of several environmental remediation and toxic tort lawsuits and a charge of
$2.0 related to the settlement of a series of disputed matters with the holder
of the Series C Stock.
Equity in earnings of associated companies was $7.4 in 2005 versus $3.0 in the
prior year. The increase in earnings was primarily due to an increase in sales
volumes and selling prices experienced by CYRO. The 2005 results include only
the five months of results related to CYRO as the Company sold its 50% ownership
stake in CYRO on May 31, 2005 to its joint venture partner Degussa Specialty
Polymers, a company of Degussa AG.
Interest expense, net was $63.9 in 2005 compared with $13.0 in the prior year.
The increase resulted from a higher outstanding weighted-average debt balance
during 2005 resulting from the debt incurred in conjunction with the Company's
acquisition of Surface Specialties and $22.0 of interest charges and unamortized
put premiums and rate lock agreements related to the redemption of the MOPPRS in
the second quarter of 2005.
The Company's effective tax rate on the loss from continuing operations for the
nine months ended September 30, 2005 was a tax benefit of 78%. For the nine
months ended September 30, 2004, the effective tax rate was a tax provision of
21%. The Company's effective tax rate for 2005 was favorably impacted by U.S.
hedging losses, the redemption of the MOPPRS and the resolution of various tax
audits of prior year returns as discussed in Note 12 of the accompanying
financial statements. The effective tax rate was unfavorably impacted by the
write-off of acquired in-process research and development expenses related to
the Surface Specialties acquisition, for which there is no tax benefit. The
Company's underlying effective tax rate for the nine months ended September 30,
2005 was 26% excluding these items.
Earnings from discontinued operations were $1.2 in 2005 and reflect the results
of SSAR for the six months ended August 31, 2005, the date on which the Company
divested SSAR.
On September 30, 2004, the Company redeemed its Series C Stock for $10.0 in cash
which had a liquidation value of $0.1. As a result, a charge to net earnings
available to common stockholders of $9.9 was recorded as a premium paid to
redeem preferred stock during the quarter ended September 30, 2004.
Net earnings available to common stockholders for 2005 were $40.7 ($0.88 per
diluted share) compared with net earnings for 2004 of $74.8 ($1.85 per diluted
share). The decrease of $34.1 in net earnings resulted primarily from: the
write-off of $37.0 of in-process research and development costs; interest
charges and unamortized put premiums of $14.0 after tax related to the
redemption of the MOPPRS prior to their final maturity; a $15.2 after tax
amortization charge from the write-up to fair value of the acquired inventory
that was subsequently sold; a $28.1 after tax charge related to currency and
interest rate derivative transactions associated with the Surface Specialties
acquisition; a charge of $1.8 after tax for settlement of a certain litigation
matter; employee restructuring costs of $1.8 after tax; a $3.2 settlement to
resolve a dispute over an environmental matter; an income tax benefit of $25.7
reflecting favorable resolution of tax audits with respect to prior year tax
returns; all of which was were partially offset by the higher overall sales
attributable to the acquisition.
Segment Results (Sales to external customers)
Year-to-year comparisons and analyses of changes in net sales by product line
segment and region are set forth below and reflect the new organizational and
reporting structure of its reportable segments for all periods presented.
Cytec Performance Specialties
% Change Due to
Total ----------------------------------------
2005 2004 % Change Price Volume/Mix Currency
-------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
North America $213.0 $200.3 6% 9% -3% 0%
Latin America 89.3 74.4 20% 5% 10% 5%
Asia/Pacific 75.0 74.6 1% 4% -6% 3%
Europe/Middle East/Africa 154.3 148.2 4% 5% -4% 3%
------------- ------------
Total $531.6 $497.5 7% 7% -2% 2%
=================================================================================================================================
-23-
Overall selling volume decreased 2% and is primarily attributable to decreased
sales in the polymer additives and specialty additives product lines due to the
sluggish demand in North American and Europe as well as the Company's decision
to give up low margin business. On a regional basis, sales volumes in Latin
America increased 10% primarily due to improved demand for mining chemicals for
copper mining applications. Selling prices increased as a result of
implementation of price increase initiatives to cover the significantly higher
raw material and energy costs.
Earnings from operations were $45.8, or 9% of sales, compared with $33.9 or 7%
of sales in 2004. The increase in earnings is primarily attributable to the
impact of price increases of $31.6 and net favorable impact of exchange rate
changes of $9.3 which more than offset higher raw material and energy costs of
$16.4 and the lower selling volumes.
Cytec Surface Specialties
% Change Due to
----------------------------------------
Total Acquisition
2005 2004 % Change Price Volume Currency
-------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
North America $284.7 $114.3 149% 4% 145% 0%
Latin America 37.2 12.8 191% -2% 188% 5%
Asia/Pacific 153.0 45.9 233% 1% 230% 2%
Europe/Middle East/Africa 521.5 56.5 823% 1% 818% 4%
------------- ------------
Total $996.4 $229.5 334% 2% 330% 2%
=================================================================================================================================
Selling volumes increased 330% as a result of the inclusion of sales
attributable to Surface Specialties which was acquired on February 28, 2005 with
base volumes remaining unchanged for heritage businesses. In North America and
Latin America, all of the volume increase is acquisition related. In
Asia/Pacific, base business grew 8% while in Europe/Middle East/Africa, base
volumes were down 2% due to weak demand.
Earnings from operations were $1.8, or 0% of sales, compared with earnings from
operations of $27.8 or 12% of sales in 2004. The decrease in earnings is
primarily attributable to the write-off of in-process research and development
costs of $37.0 and a charge of $20.8 related to purchase accounting for finished
goods inventory of the acquired business recorded at fair value which exceeded
normal manufacturing cost. Also, higher heritage raw material and energy costs
of $11.9 were only partially recovered by price increases of $4.8 and the net
favorable impact of exchange rate changes of $3.4.
Cytec Engineered Materials
% Change Due to
Total ----------------------------------------
2005 2004 % Change Price Volume/Mix Currency
-------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -------------
North America $261.2 $248.8 5% 1% 4% 0%
Latin America(1) 1.1 1.3 --- --- --- ---
Asia/Pacific 22.1 15.2 45% 1% 44% 0%
Europe/Middle East/Africa 120.1 104.3 15% 2% 12% 1%
------------- ------------
Total $404.5 $369.6 9% 1% 8% 0%
=================================================================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 8%. Increased sales to the Europe/Middle
East/Africa, North America and Asia/Pacific regions related to increased volumes
to the large commercial transport and rotorcraft sectors primarily due to
increased build rates and new business.
Earnings from operations were $76.3, or 19% of sales, compared with $69.6, or
19% of sales, in 2004. The increase was primarily attributable to increased
selling volumes offset somewhat by manufacturing difficulties in Europe and
increased investments in technical commercial and research to support future
growth initiatives.
Building Block Chemicals
% Change Due to
Total ----------------------------------------
2005 2004 % Change Price Volume/Mix Currency
------------------------------------------- -------------- ------------ ---------------- --------- ---------------- -------------
North America $ 110.3 $ 88.0 25% 20% 5% 0%
Latin America(1) 2.9 2.2 -- -- -- --
Asia/Pacific 38.1 52.6 -28% 14% -42% 0%
Europe/Middle East/Africa 54.4 31.3 74% 37% 34% 3%
-------------- ------------
Total $205.7 $174.1 18% 21% -4% 1%
=================================================================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
-24-
Sales are higher overall due to higher selling prices, primarily for
acrylonitrile, and were in line with the increase in raw material costs. Selling
volumes decreased 4% overall. Selling volumes to the Asia/Pacific region were
weak due to sluggish demand in light of higher selling prices but partially
offset by increased volumes to the Europe/Middle East/Africa region where local
production outages increased demand for imported acrylonitrile. North America
selling volumes were up 5% with the majority due to increased acrylonitrile
sales resulting from new business although this was somewhat offset by the
impact of hurricanes Katrina and Rita.
Earnings from operations were $9.7, or 4% of sales, compared with $12.5, or 5%
of sales, in 2004. The decrease in earnings reflects the impact from the
hurricanes of about $5.2 related to maintenance and repair costs, extra labor
and related expenses, energy and start up costs. In addition the lower
production levels reduced fixed cost absorption by approximately $3.9.
Offsetting this were higher selling prices of $37.0 which more than offset
increased raw material and energy costs of $35.8 and improved cost controls.
LIQUIDITY AND FINANCIAL CONDITION
At September 30, 2005 the Company's cash balance was $177.9 compared with $323.8
at year end 2004. This decrease was primarily attributable to the use of cash to
pay for a portion of the purchase price of Surface Specialties and to
subsequently reduce debt, partially offset by cash generated from operations and
sales of assets and discontinued operations.
Cash flows provided by operating activities were $173.5 compared with $84.7 for
2004. The increase in operating cash flow is largely attributable to the
addition of Surface Specialties. Significant one-time non-cash charges
negatively impacted earnings but did not impact operating cash flow. The
acquisition also resulted in significant increases in non-cash depreciation and
amortization expenses. Other receivables reflect cash flows of $22.2 primarily
due to the reimbursement from UCB for the payment of $16.2 of pre-acquisition
tax liabilities for which we have been indemnified. Income taxes payable
decreased $29.4 reflecting payment of the pre-acquisition income tax liabilities
of $16.5 and the favorable resolution of several prior year tax matters in the
first and second quarters which amounted to $21.6 and which resulted in a
reduction of income taxes payable. Inventories decreased $8.9 reflecting efforts
to bring inventory levels in line with demand levels. Accounts payable also
decreased $20.0 primarily as a result of the inventory reduction efforts. Other
assets decreased $18.9 primarily from the cash realization of gains on
acquisition related derivative instruments that were recognized in 2004.
Cash flows used in investing activities were $1,356.5 for 2005 compared with
$44.5 for 2004. This increase was primarily attributable to the acquisition of
Surface Specialties. See below for further discussion. The increase was partly
offset by $100.4 received from the sale of the Company's 50% investment in CYRO
and $75.8 received from the sale of SSAR, which was classified as a discontinued
operation upon acquisition through the date of sale (see discussion below).
Capital spending for the nine months ended September 30, 2005 was $74.7. Capital
spending for the full year is expected to approximate $100.0.
Net cash flows provided by financing activities were $1,044.8 in 2005 compared
with net cash flows used in financing activities of $2.2 during 2004. This
increase primarily resulted from borrowings under the Company's credit
facilities used to purchase Surface Specialties.
On February 28, 2005, the Company acquired the Surface Specialties business
("Surface Specialties") of UCB Group SA ("UCB") for cash and stock valued at
$1,799.6, of which $1,508.8 (euro 1,138.5 at 1.325 U.S. dollar per euro) was
paid in cash and the balance was paid in 5,772,857 shares of Cytec common stock
($290.8 at $50.37 per Cytec share). During September 2005, the Company received
$25.4 from UCB representing an adjustment to the purchase price for finalization
of working capital amounts as of the acquisition date. After considering the
final working capital adjustment, the acquisition is valued at $1,788.8. In
connection with the acquisition, the Company also incurred transaction costs
approximating $14.5.
The Company financed the cash component with $600.0 under an unsecured 364-day
credit facility, $725.0 under an unsecured five-year term loan and the remaining
$184.0 was paid from existing cash. During October 2005, Cytec sold $250.0
principal amount of 5.5% Notes due October 1, 2010 and $250.0 principal amount
of 6.0% Notes due October 1, 2015 (collectively, the "Notes"). The Notes were
offered under the Company's $600.0 shelf registration statement. The Company
received approximately $495.1 in net proceeds from the offering after deducting
the underwriting discount and other estimated offering expenses. The net
proceeds from the offering were used to repay all amounts outstanding under our
unsecured 364-day facility and our revolving credit facility, which as of
September 30, 2005 approximated $417.5 and $66.2, respectively. The 364-day
facility is now terminated. The Notes will pay interest on each April 1 and
October 1, commencing on April 1, 2006 through their respective due dates. The
Notes are unsecured and subordinated to any secured indebtedness of Cytec. The
Notes may be redeemed, in whole or in part, at the option of the Company at any
time subject to a prepayment adjustment.
Upon closing, UCB became the owner of approximately 12.5% of the outstanding
shares of the Company. UCB and the Company also entered into a Stockholder's
Agreement which provides, subject to various exceptions, that UCB must reduce
its stake to less than 9% within three years, less than 7% within four years and
less than 5% within five years and which provides that UCB will be prohibited
from purchasing additional shares of Cytec common stock or causing, advocating
or participating in a change in control in the ownership of Cytec. The
Stockholder's Agreement also contains customary terms and conditions including
an obligation of UCB to vote its shares of Cytec common stock in accordance with
the Company's Board of Directors' recommendation on certain matters.
-25-
Pursuant to regulatory approvals, the Company was required to divest SSAR. On
August 31, 2005, the Company sold SSAR to affiliates of INEOS Group Limited
("INEOS") for cash consideration of (euro)64.0 ($78.0 at 1.22 U.S. dollar per
euro; $75.8 net of disposition related expenses), subject to certain customary
closing adjustments. Since acquisition, and through the date of sale, SSAR was
classified as a discontinued operation in the Company's consolidated financial
statements. The net proceeds realized from the divestiture of SSAR were used to
reduce acquisition related debt.
In late 2004, the Company entered into $642.9 of forward-starting interest rate
swaps to hedge the benchmark interest rate and credit spread on certain debt
anticipated to be issued in 2005 in connection with the acquisition. Due to a
subsequent reduction in borrowing requirements, the Company liquidated $25.0 of
these swaps in March 2005 at a cost of $0.4 and $60.4 of these swaps in June
2005 at a cost of $3.7. On September 29, 2005, the Company settled the remaining
outstanding swaps at the same time that it priced its public debt offering. The
termination payment of $27.4 was paid in October, 2005. The swaps were marked to
market and recorded currently in earnings until their termination. The net
pre-tax impact of the mark to market value on these swaps was a gain of $3.7 and
a loss of $25.0 for the three and nine month periods ended September 30, 2005,
respectively, which was recorded in other income (expense), net. In the fourth
quarter of 2004, the Company recorded a loss of $6.5 on these swaps.
The Company had also previously entered into foreign currency forward contracts
that related to approximately 87% of the euro exposure of (euro)1,190.0 for the
cash component of the Surface Specialties acquisition. The forward contracts,
which matured on February 28, 2005, were marked to market and recorded currently
in earnings until their maturity. The impact on earnings for the three months
ended March 31, 2005 of the marked to market adjustment on these forward
contracts was a net pre-tax expense of $19.2 and was recorded in other income
(expense), net. In the fourth quarter of 2004, the Company recorded an
unrealized gain of $33.3 on currency forward transactions entered into in
connection with the acquisition.
In connection with the acquisition, the Company suspended its stock buy-back
program and does not anticipate making future stock buy-backs for at least two
years from the closing date in order to maximize the funds available for debt
service and other corporate purposes.
In June, 2005, the Company sold its 50% ownership in CYRO to its joint venture
partner Degussa Specialty Polymers, a company of Degussa AG, for cash
consideration of $95.0 plus $5.4 for working capital adjustments. The proceeds
of this transaction essentially recovered the carrying value of Cytec's
investment in CYRO. Net after-tax proceeds realized from the sale of CYRO were
used to reduce $81.5 of acquisition-related debt.
In order to take advantage of current interest rates, the Company elected to
redeem the MOPPRS in May, 2005, at the optional redemption price of $141.0. The
optional redemption price represented the $120.0 principal amount of the
securities and a $21.0 pre-tax interest charge for redemption prior to their
final maturity. The redemption provided the Company with the ability to
refinance this debt at a significantly lower cost and a shorter tenor. Upon
redemption, the Company recognized additional interest expense of $1.0 from
amounts related to the unamortized put premium and rate lock agreements for
these securities. The total expense of $22.0 was recorded in the second quarter.
The $350.0 unsecured five-year revolving credit facility was used to fund a
majority of the redemption of the MOPPRS.
On September 29, 2005, the Company entered into (euro)207.9 of five-year cross
currency swaps and (euro)207.9 of ten-year cross currency swaps. The swaps
included an initial exchange of $500.0 on October 4, 2005 and will require final
principal exchanges of $250.0 on each settlement date of the 5-Year and 10-Year
Notes (October 1, 2010 and October 1, 2015), respectively. At the initial
principal exchange, we paid US dollars to counterparties and received euros.
Upon final exchange, we will provide euros to counterparties and receive U.S.
dollars. The swaps also call for an exchange of fixed euro interest payments for
fixed US dollar interest receipts. With respect to the 5-Year swaps, the Company
will receive 5.5% per annum and will pay 3.784% per annum on each April 1 and
October 1, through the maturity date of the 5-Year swaps. With respect to the
10-Year swaps, the Company will receive 6.0% per annum and will pay 4.5245% per
annum on each April 1 and October 1, through the maturity date of the 10-Year
swaps. The cross currency swaps have been designated as cash flow hedges of the
changes in value of the future euro interest and principal receipts that result
from changes in the US dollar to euro exchange rates on certain Euro denominated
intercompany receivables the Company has with its subsidiaries.
After accounting for the cross currency swaps, the "all-in" effective interest
rate including amortization of underwriters' discount and estimated other
issuance costs is approximately 4.0% and 4.7% for the 5-Year and 10-Year Notes,
respectively.
-26-
As of September 30, 2005, the Company had $49.3 of euro forward contracts
outstanding. The forward contracts plus the euro-denominated bank borrowings,
naturally hedge the Company's euro-denominated inter-company loans receivable
and provide a hedge of the Company's net investment in Cytec Surface Specialties
SA/NV.
As of September 30, 2005, including the impact of the outstanding euro forward
contracts, the company's total debt of $1,456.2 is denominated approximately 59%
in euros, 40% in dollars and the balance denominated in various other
currencies.
Cytec has the ability to issue $100.0 more of debt or equity securities under
the shelf registration statement and such securities may be issued at any time,
however, the Company has no immediate plans to offer additional securities under
the registration statement. Additionally, as a result of the repayment of the
revolving credit facility in October, the Company may borrow up to $350.0 under
such facility.
During the first nine months of 2005 the company paid three quarterly cash
dividends of $0.10 per common share which aggregated $13.2. On October 20, 2005
the Board of Directors declared a $0.10 per common share cash dividend, payable
on November 25, 2005 to shareholders of record as of November 10, 2005.
The Company believes that it has the ability to fund its operating cash
requirements, planned capital expenditures and dividends as well as the ability
to meet its debt service requirements for the foreseeable future from existing
cash and from internal cash generation. However, from time to time, based on
such factors as local tax regulations, prevailing interest rates and the
Company's plans for capital investment or other investments, it may make
economic sense to utilize our existing line of credit in order to meet those
cash requirements, which may include debt-service related disbursements.
The Company has not guaranteed any indebtedness of its remaining unconsolidated
associated company.
Excluding the impact of increasing raw materials, inflation is not considered
significant since the rate of inflation has remained relatively low in recent
years and investments in areas of the world where inflation poses a risk are
limited. The impact of increasing raw material costs are discussed under
"Customers and Suppliers" in "Business" in Item 1 in the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on June 13,
2005.
2005 OUTLOOK
In its November 3, 2005 press release, which was also furnished as an exhibit to
a current report on Form 8-K, the Company set forth its assumptions and
management's best estimate of the full year 2005 earnings at the time based on
various assumptions set forth in its press release. There can be no assurance
that sales or earnings will develop in the manner projected. Actual results may
differ materially. See "Comments on Forward Looking Statements."
In addition, the Company recently combined its two Specialty Chemicals
divisions, Cytec Surface Specialties and Cytec Performance Specialties into a
new unit named Cytec Specialty Chemicals. The new Cytec Specialty Chemicals
organization provides the base for a new level of business process improvements
and cost efficiencies in such areas as manufacturing, procurement, supply chain
and various other support functions. In its November 3, 2005 press release, the
Company indicated that this combination together with other cost take out
initiatives, particularly in the area of manufacturing, is expected to result in
the announcement of a restructuring charge in the fourth quarter in a range of
$10.0 to $20.0.
OTHER
American Melamine Industries ("AMEL"), a 50% owned manufacturing joint venture
with a subsidiary of DSM N.V., operates the melamine manufacturing plant with an
annual production capacity of approximately 160 million pounds at the Company's
Fortier facility. The Company typically uses approximately 80% to 90% of its 50%
share of AMEL's production, primarily for the production of certain products
sold by its Cytec Surface Specialties segment with the balance being sold to
third parties. In accordance with the terms of the joint venture agreement, DSM
has given the Company notice of termination of the joint venture which would be
effective August 1, 2007. The Company is in the process of discussing future
operations and ownership options of the melamine plant with DSM.
SIGNIFICANT ACCOUNTING ESTIMATES / CRITICAL ACCOUNTING POLICIES
See "Critical Accounting Policies" under Item 7A of the Company's 2004 Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on
February 25, 2005.
In addition to these critical accounting policies, the Company now believes the
following to also be critical:
- The application of SFAS No. 141 related to the accounting for business
combinations is critical given the February 28, 2005 acquisition of
Surface Specialties and the ongoing allocation of the purchase price
to the fair values of acquired assets and liabilities assumed.
-27-
- The application of SFAS No. 133 related to derivative instruments and
hedging activities is critical given the Company's engagement in
derivative instruments to hedge the Company's exposure to potentially
unfavorable changes primarily in its euro-denominated assets and
liabilities.
The above-referenced policies are more fully described in Notes 1F and 1H to the
Consolidated Financial Statements contained in the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on June 13, 2005.
COMMENTS ON FORWARD-LOOKING STATEMENTS
A number of the statements made by the Company in this report, in the Company's
Annual Report on Form 10-K, or in other documents, including but not limited to
the Chairman, President and Chief Executive Officer's letter to Stockholders,
its press releases and other periodic reports to the Securities and Exchange
Commission, may be regarded as "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning the
Company's (including its segments) outlook for the future, anticipated results
of acquisitions and divestitures, pricing trends, the effects of changes in
currency rates and forces within the industry, the completion dates of and
anticipated expenditures for capital projects, expected sales growth,
operational excellence strategies and their results, expected annual effective
tax rates, long-term goals of the Company and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical facts. Such statements
are based upon the current beliefs and expectations of management and are
subject to significant risks and uncertainties. Actual results may vary
materially from those set forth in the forward-looking statements.
The following factors, among others, could affect the anticipated results: the
ability to integrate successfully Surface Specialties, including realization of
anticipated synergies within the expected timeframes or at all, and ongoing
operations of the business; the retention of current ratings on the Company's
debt; changes in global and regional economies; the financial well-being of end
consumers of the Company's products; changes in demand for the Company's
products or in the quality, costs and availability of its raw materials and
energy; customer inventory reductions; the actions of competitors; currency and
interest rate fluctuations; technological change; the Company's ability to
renegotiate expiring long-term contracts; changes in employee relations,
including possible strikes; government regulations, including those related to
taxation and those particular to the purchase, sale and manufacture of chemicals
or operation of chemical plants; governmental funding for those military
programs that utilize the Company's products; litigation, including its inherent
uncertainty and changes in the number or severity of various types of claims
brought against the Company; difficulties in plant operations and materials
transportation, including those caused by hurricanes or other natural forces;
environmental matters; returns on employee benefit plan assets and changes in
the discount rates used to estimate employee benefit liabilities; changes in the
medical cost trend rate; changes in accounting principles or new accounting
standards; political instability or adverse treatment of foreign operations in
any of the significant countries in which we operate; war, terrorism or
sabotage; epidemics; and other unforeseen circumstances.
-28-
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of market risks at year-end, refer to Item 7A of the Company's
Annual Report on Form 10-K for the year ended December 31, 2004, filed with the
Securities and Exchange Commission on February 25, 2005. During 2005, the
Company executed various foreign exchange transactions that do not materially
alter the market risk assessment performed as of December 31, 2004. For a
discussion of the currency hedges entered into as part of the acquisition of
Surface Specialties, refer to "Liquidity and Financial Condition" in Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Other 2005 financial instrument transactions include:
Commodity Price Risk: At September 30, 2005, the Building Block Chemicals
segment Fortier plant's 2005 remaining forecasted natural gas utility
requirements were 82% hedged utilizing natural gas forward contracts. These
contracts have delivery dates ranging from October, 2005 to December, 2005.
Additionally, the plant's 2006 gas utility requirements were 23% hedged at
September 30, 2005, and these contracts have delivery dates ranging from January
to July 2006.
At September 30, 2005, the Company held natural gas swaps with a favorable fair
value of $6.0, net of taxes, which will be reclassified into Manufacturing Cost
of Sales as product is sold.
Assuming other factors are held constant, a hypothetical increase/decrease of
10% in the price of natural gas would cause an increase/decrease of
approximately $2.2 in the value of the contracts referred to above.
Interest Rate Risk: At September 30, 2005, the outstanding borrowings of the
Company consisted of $446.7 of short-term borrowings and long-term debt,
including the current portion, which had a carrying value of $1,009.5 a face
value of $1,009.1 and a fair value, based on dealer quoted values, of
approximately $996.5.
Assuming other factors are held constant, a hypothetical increase/decrease of 1%
in the weighted average prevailing interest rates on our variable rate debt
outstanding as of September 30, 2005, interest expense would increase/decrease
by approximately $2.9 for the next fiscal quarter. However, due to the fixed
rate associated with the Notes that were issued in a public offering during
October, 2005, the impact of this hypothetical increase/decrease in prevailing
interest rates would only increase interest expense by approximately $1.5 for
the next fiscal quarter.
Currency Rate Risk: On September 29, 2005, the Company entered into (euro)207.9
of five-year cross currency swaps and (euro)207.9 of ten-year cross currency
swaps to effectively convert the 5-Year Notes and 10-Year Notes into
euro-denominated liabilities. The swaps included an initial exchange of $500.0
on October 4, 2005 and will require final principal exchanges of $250.0 on each
settlement date of the 5-Year and 10-Year Notes (October 1, 2010 and October 1,
2015), respectively. At the initial principal exchange, we paid US dollars to
counterparties and received euros. Upon final exchange, we will provide euros to
counterparties and receive US dollars. The swaps also call for an exchange of
fixed euro interest payments for fixed US dollar interest receipts. With respect
to the 5-Year swaps, the Company will receive 5.5% per annum and will pay 3.784%
per annum on each April 1 and October 1, through the maturity date of the 5-Year
swaps. With respect to the 10-Year swaps, the Company will receive 6.0% per
annum and will pay 4.5245% per annum on each April 1 and October 1, through the
maturity date of the 10-Year swaps. The cross currency swaps have been
designated as cash flow hedges of the changes in value of the future euro
interest and principal receipts that results from changes in the US dollar to
euro exchange rates on certain Euro denominated intercompany receivables the
Company has with its subsidiaries.
As of September 30, 2005, the Company had $49.3 of euro forward contracts
outstanding. The forward contracts plus the euro-denominated bank borrowings,
naturally hedge the Company's euro-denominated inter-company loans receivable
and provide a hedge of the Company's net investment in Cytec Surface Specialties
SA/NV.
Assuming other factors are held constant, a hypothetical increase/decrease of
10% in the euro exchange rate would cause an increase/decrease of approximately
$50.0 in the value of the hedging instruments referred to above.
For a discussion of the interest rate derivative activities entered into as part
of the acquisition of Surface Specialties, refer to "Liquidity and Financial
Condition" in Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
-29-
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's Disclosure
Committee carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures as required by Exchange Act Rule 13a-15(b) as of the
period ended September 30, 2005. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's current
disclosure controls and procedures are effective.
The acquisition of Surface Specialties on February 28, 2005 represents a
material change in internal control over financial reporting since management's
last assessment of the Company's internal controls over financial reporting
which was as of December 31, 2004. The acquired Surface Specialties businesses
utilize separate information and accounting systems and processes and it has not
been possible to complete an evaluation and review of the internal controls over
financial reporting since the acquisition was completed. Management intends to
complete its assessment of the effectiveness of internal controls over financial
reporting for the acquired business within one year of the date of the
acquisition.
With the exception of the Surface Specialties acquisition as noted above, there
were no changes in internal controls over financial reporting that occurred
during the quarter ended September 30, 2005 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
-30-
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is the subject of numerous lawsuits and claims incidental to the
conduct of its or its predecessors' businesses, including lawsuits and claims
relating to product liability, personal injury, environmental, contractual,
employment and intellectual property matters. Many of the matters relate to the
use, handling, processing, storage, transport or disposal of hazardous
materials. The Company believes that the resolution of such lawsuits and claims,
including those described below, will not have a material adverse effect on the
consolidated financial position of the Company, but could be material to the
consolidated results of operations and cash flows of the Company in any one
accounting period. The Company, in this section, includes certain predecessor
entities being indemnified by Cytec.
Material developments to legal proceedings described in Cytec's 2004 Annual
Report on Form 10-K and 2005 Quarterly Reports on Form 10-Q are set forth below.
In July 2005, the Supreme Court of Wisconsin held in a case in which the Company
was one of several defendants that Wisconsin's risk contribution doctrine
applies to bodily injury cases against manufacturers of white lead pigment.
Under this doctrine, manufacturers of white lead pigment may be liable for
injuries caused by white lead pigment based on their market shares unless they
can prove they are not responsible for the white lead pigment which caused the
injury in question. Seven other courts have previously rejected the
applicability of this and similar doctrines to white lead pigment. The Company
settled this case for an immaterial amount. Although similar cases may be filed
in Wisconsin, the Company does not believe that its liability, if any, in such
cases will be material, either individually or in the aggregate.
The following table presents information about asbestos claims activity during
the nine months ended September 30, 2005:
For the Nine Month
Period Ended
September 30,
2005
-----------------------
Number of claimants at beginning of period 27,947
Number of claimants associated with claims closed during period 8,560
Number of claimants associated with claims opened during period 1,434
Number of claimants at end of period 20,821
=============================================================================================
In addition to liabilities with respect to the specific cases described above,
because the production of certain chemicals involves the use, handling,
processing, storage, transportation and disposal of hazardous materials, and
because certain of the Company's products constitute or contain hazardous
materials, the Company has been subject to claims of injury from direct exposure
to such materials and from indirect exposure when such materials are
incorporated into other companies' products. There can be no assurance that, as
a result of past or future operations, there will not be additional claims of
injury by employees or members of the public due to exposure, or alleged
exposure, to such materials.
-31-
See also the Note 10 of the Notes to the Consolidated Financial Statements,
herein.
Item 6. EXHIBITS
(a). Exhibits
See Exhibit Index on page 34 for exhibits filed with this Quarterly Report on
Form 10-Q.
-32-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYTEC INDUSTRIES INC.
By: /s/ James P.Cronin
------------------------------
James P. Cronin
Executive Vice President and
Chief Financial Officer
November 4, 2005
-33-
Exhibit Index
12 Computation of Ratio of Earnings to Fixed Charges for the three and
nine months ended September 30, 2005 and 2004
31.1 Certification of David Lilley, Chief Executive Officer, Pursuant to
Rule 13a-14(a) of the Securities Exchange Act
31.2 Certification of James P. Cronin, Chief Financial Officer, Pursuant to
Rule 13a-14(a) of the Securities Exchange Act
32.1 Certification of David Lilley, Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002
32.2 Certification of James P. Cronin, Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002
-34-