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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, 2007
Commission file number 1-12372
CYTEC INDUSTRIES INC.
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(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 such filing
requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated |_| filer
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 47,800,853 shares of common stock outstanding at October 26, 2007.
-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 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 28
Part II - Other Information
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity 31
Securities
Item 5. Other
Item 6. Exhibits 31
Signature 32
Exhibit Index 33
-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,
-------------------------------------------
2007 2006(1) 2007 2006(1)
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Net sales $ 875.1 $ 863.4 $ 2,602.6 $ 2,535.9
Manufacturing cost of sales 683.8 698.3 2,045.6 2,032.2
Selling and technical services 52.3 54.9 155.3 161.8
Research and process development 18.0 18.4 55.5 54.5
Administrative and general 29.2 25.8 84.4 76.7
Amortization of acquisition intangibles 9.7 10.6 28.6 28.7
Gain on sale of assets held for sale -- -- 15.7 --
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Earnings from operations 82.1 55.4 248.9 182.0
Other income (expense), net (1.4) (1.2) 0.1 13.0
Equity in earnings of associated companies 0.5 0.8 0.9 2.5
Interest expense, net 10.4 14.5 31.9 43.7
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Earnings before income taxes and cumulative effect of
accounting change 70.8 40.5 218.0 153.8
Income tax provision 18.4 15.4 59.1 40.9
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Earnings before cumulative effect of accounting change 52.4 25.1 158.9 112.9
Cumulative effect of accounting change (net of income
tax benefit of $0.7) -- -- -- (1.2)
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Net earnings $ 52.4 $ 25.1 $ 158.9 $ 111.7
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Basic net earnings per common share:
Earnings before cumulative effect of accounting change $ 1.09 $ 0.53 $ 3.30 $ 2.39
Cumulative effect of accounting change, net of taxes -- -- -- (0.03)
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Net earnings $ 1.09 $ 0.53 $ 3.30 $ 2.36
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Diluted net earnings per common share:
Earnings before cumulative effect of accounting change $ 1.06 $ 0.52 $ 3.23 $ 2.32
Cumulative effect of accounting change, net of taxes -- -- -- (0.02)
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Net earnings $ 1.06 $ 0.52 $ 3.23 $ 2.30
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Dividends per common share $ 0.10 $ 0.10 $ 0.30 $ 0.30
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(1) 2006 results were restated to show the effect of Financial Accounting
Standards Board Staff Position No. AUG AIR-1, "Accounting for Planned Major
Maintenance Activities" ("FSP AUG-AIR 1"), which we adopted retroactively during
the first quarter of 2007. For further details see Note 2 to the Consolidated
Financial Statements.
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,
2007 2006(1)
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Assets
Current assets
Cash and cash equivalents $ 68.7 $ 23.6
Trade accounts receivable, less allowance for doubtful accounts of
$4.6 and $5.1 at September 30, 2007 and December 31, 2006, respectively 584.3 510.3
Other accounts receivable 63.4 81.5
Inventories 498.7 474.6
Deferred income taxes 9.0 9.2
Other current assets 21.6 15.4
Assets held for sale 1.4 38.8
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Total current assets 1,247.1 1,153.4
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Investment in associated companies 22.4 23.3
Plants, equipment and facilities, at cost 1,987.0 1,895.5
Less: accumulated depreciation (970.1) (897.0)
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Net plant investment 1,016.9 998.5
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Acquisition intangibles, net of accumulated amortization of
$126.6 and $92.1 at September 30, 2007 and December 31, 2006, respectively 481.8 486.1
Goodwill 1,082.2 1,042.5
Deferred income taxes 24.5 33.2
Other assets 97.4 93.5
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Total assets $ 3,972.3 $ 3,830.5
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Liabilities
Current liabilities
Accounts payable $ 304.3 $ 298.8
Short-term borrowings 47.3 41.8
Current maturities of long-term debt 101.2 1.4
Accrued expenses 203.5 203.8
Income taxes payable 12.3 39.3
Deferred income taxes 12.5 2.0
Liabilities held for sale 0.5 16.3
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Total current liabilities 681.6 603.4
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Long-term debt 705.2 900.4
Pension and other postretirement benefit liabilities 338.6 371.1
Other noncurrent liabilities 321.8 273.6
Deferred income taxes 108.9 105.3
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 269.6 258.5
Retained earnings 1,484.4 1,339.6
Accumulated other comprehensive income (loss) 88.2 (5.7)
Treasury stock, at cost, 428,748 shares in 2007 and 510,006 shares in 2006 (26.5) (16.2)
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Total stockholders' equity 1,816.2 1,576.7
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Total liabilities and stockholders' equity $ 3,972.3 $ 3,830.5
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(1) Balances at December 31, 2006 have been restated to show the effect of
FSP AUG-AIR 1, which was adopted retroactively during the first quarter of
2007. For further details see Note 2 to the Consolidated Financial
Statements.
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,
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2007 2006(1)
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Cash flows provided by (used in) operating activities
Net earnings $ 158.9 $ 111.7
Non cash items included in net earnings:
Depreciation 74.6 84.5
Amortization 33.3 31.3
Share-based compensation 10.0 8.8
Deferred income taxes 14.8 7.7
Gain on sale of assets (15.7) --
Asset impairment charges -- 25.3
Cumulative effect of accounting change, net of taxes -- 1.9
Other 2.5 3.2
Changes in operating assets and liabilities, excluding effects of divestiture:
Trade accounts receivable (51.3) (58.4)
Other receivables 16.7 7.3
Inventories (5.0) (48.4)
Other assets (3.8) 0.7
Accounts payable (5.9) 10.5
Accrued expenses (0.8) (10.5)
Income taxes payable (9.2) (9.4)
Other liabilities (24.6) (5.0)
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Net cash provided by operating activities 194.5 161.2
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Cash flows provided by (used in) investing activities
Additions to plants, equipment and facilities (65.7) (62.2)
Proceeds received on sale of assets 30.2 --
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Net cash used in investing activities (35.5) (62.2)
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Cash flows provided by (used in) financing activities
Proceeds from long-term debt 222.0 188.7
Payments on long-term debt (319.6) (364.6)
Change in short-term borrowings, net 4.9 (0.7)
Cash dividends (14.4) (14.1)
Proceeds from the exercise of stock options 31.8 40.5
Purchase of treasury stock (49.6) --
Excess tax benefits from share-based payment arrangements 8.5 9.4
Other 0.1 (0.1)
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Net cash used in financing activities (116.3) (140.9)
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Effect of currency rate changes on cash and cash equivalents 2.4 2.6
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Increase/(decrease) in cash and cash equivalents 45.1 (39.3)
Cash and cash equivalents, beginning of period 23.6 68.6
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Cash and cash equivalents, end of period $ 68.7 $ 29.3
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(1) 2006 results were restated to show the effect of FSP AUG-AIR 1, which
was adopted retroactively during the first quarter of 2007. For further
details see Note 2 to the Consolidated Financial Statements.
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 included herein
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, these financial statements include all normal and
recurring adjustments necessary for a fair presentation of the financial
position and the results of our operations and cash flows 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
financial statements should be read in conjunction with the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements
contained in the Company's 2006 Annual Report on Form 10-K. Unless indicated
otherwise, the terms "Company", "Cytec", "we", "us" and "our" each refer
collectively to Cytec Industries Inc. and its subsidiaries.
2. DEFERRED PLANNED MAINTENANCE COSTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Staff Position No. AUG AIR-1, "Accounting for Planned Major Maintenance
Activities" ("FSP"). This FSP prohibits accruing as a liability the future costs
of periodic major overhauls and maintenance of plant and equipment under the
"accrue-in-advance" methodology, as the costs for future planned major
maintenance activities do not meet the definition of a liability. We adopted the
FSP as of January 1, 2007 and restated our prior consolidated financial
statements accordingly. Prior to adoption, we utilized the accrue-in-advance
method for incremental costs to be incurred for the planned major maintenance
activities in our Building Block Chemicals segment. We adopted the deferral
method to account for maintenance expenses incurred for scheduled maintenance
activities, which are amortized evenly until the next scheduled activity. The
impact to our consolidated results of operations was a $0.3 increase in net
earnings for the year ended December 31, 2006, and a $0.1 and a $0.3 increase in
net earnings for the three and nine months ended September 30, 2006,
respectively. As a result of these changes, basic and diluted earnings per share
for the three months ended September 30, 2006 increased $0.01 per share. The
impact on 2006 basic earnings per share for the nine months ended September 30,
2006 was an increase of $0.01 per share and diluted earnings per share is
unchanged. The impact to our consolidated financial position was an increase in
retained earnings of $6.6 as of December 31, 2006, as a result of an increase in
other assets for $2.3 for the addition of prior unamortized deferred charges and
a decrease in accrued expenses of $8.5, as well as adjustments of deferred taxes
for these respective items. There was no impact to our 2006 net cash provided by
operating activities in our consolidated statement of cash flows.
3. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits
companies to choose to measure certain financial assets and liabilities at fair
value (the "fair value option"). If the fair value option is elected, any
upfront costs and fees related to the item must be recognized in earnings and
cannot be deferred, e.g., debt issue costs. The fair value election is
irrevocable and may generally be made on an instrument-by-instrument basis, even
if a company has similar instruments that it elects not to fair value. At the
adoption date, unrealized gains and losses on existing items for which fair
value has been elected are reported as a cumulative adjustment to beginning
retained earnings. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact, if any, that the
adoption of SFAS 159 will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and requires additional
disclosures about fair-value measurements. SFAS 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments) and is intended to
increase the consistency of those measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. However, for some entities, the
application of SFAS 157 will change current practice. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We are still in the process of reviewing the impact of adopting
this statement. However, we do not expect the adoption of SFAS 157 to have a
material impact on our consolidated financial statements.
-6-
4. DIVESTITURES
In October 2006, we completed the first of three phases of the sale of our water
treatment chemicals and acrylamide product line to Kemira Group ("Kemira"). This
first phase included the product lines themselves, the related intellectual
property, the majority of the manufacturing sites and essentially all of the
sales, marketing, manufacturing, R&D and technical services personnel. The
manufacturing sites in the first phase included Mobile, Alabama, Longview,
Washington, Bradford, UK, and the acrylamide manufacturing plant at our Fortier,
Louisiana facility which will be operated by our personnel under a long term
manufacturing agreement. The sale of our Botlek manufacturing site in the
Netherlands was completed and transferred to Kemira in January 2007 as part of
the phase two closing. We will continue to supply acrylonitrile to the Kemira
acrylamide plants at Fortier and Botlek under long term supply agreements. In
addition, under various long term manufacturing agreements, we will manufacture
certain water treatment products for Kemira at several of our sites and Kemira
will manufacture for us certain mining chemicals at the Mobile, Alabama and
Longview, Washington sites and various other products at the Botlek site. These
contracts were all deemed to be at estimated fair value. Sales of certain assets
at subsidiaries in Asia/Pacific and Latin America were settled in the third
quarter 2007. Settlements for working capital at the remaining subsidiaries in
Asia/Pacific and Latin America are expected to occur in the fourth quarter 2007,
and the transfer of a subsidiary in Latin America is expected to close in the
fourth quarter of 2007 to complete the last phase of the transaction.
The timing of the flow of funds is as follows: approximately $208.0 was received
in October 2006 for the first closing, and approximately $21.0 was received for
the second closing in January 2007. We also received approximately $6.0 in
February 2007 for a working capital adjustment from the first phase closing per
the terms of the contract. During the third quarter of 2007, we received
approximately $3.1 from completed transfers of the assets at various
subsidiaries in Asia/Pacific and Latin America. An estimated $6.0 is expected to
be received in the fourth quarter of 2007 from the third quarter transfers not
yet settled in cash and the pending transfer of one subsidiary in Latin America,
bringing estimated total proceeds to $244.0. We recorded a pre-tax gain of $75.5
($59.6 after-tax) related to the first phase closing in the fourth quarter of
2006, and a pre-tax gain of $15.7 ($15.3 after-tax) in the first quarter of 2007
from the phase two closing.
At the time of the sale of the manufacturing facilities included in this
transaction, we retained certain environmental liabilities related to those
sites. It was anticipated that these liabilities would be transferred to Kemira
at some point, and that the value assigned to these liabilities would be
negotiated between the parties. We are currently in negotiations to transfer
these liabilities, but a mutually agreed valuation has not yet been reached as
of September 30, 2007. It is possible that the final valuation agreed for the
transfer of these liabilities will exceed their current carrying values, and
that could impact the final proceeds and could require an adjustment to our net
earnings. In the event that an agreed valuation cannot be reached, we may retain
these liabilities and continue to manage them ourselves.
The assets and liabilities of our water treatment chemicals and acrylamide
product lines to be sold included in the September 30, 2007 and December 31,
2006 consolidated balance sheets are comprised of (excluding the aforementioned
environmental liabilities):
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September 30, December 31,
2007 2006
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Accounts receivable $ 0.6 $ 6.5
Inventories 0.8 4.3
Property, plant and equipment -- 26.6
Other assets -- 1.4
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Assets held for sale $ 1.4 $ 38.8
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Accounts payable $ -- $ 3.4
Accrued liabilities 0.5 12.7
Other noncurrent liabilities -- 0.2
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Liabilities held for sale $ 0.5 $ 16.3
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-7-
5. RESTRUCTURING OF OPERATIONS
In accordance with our policy, restructuring costs are included in our corporate
unallocated operating results consistent with management's view of its
businesses.
For the three and nine months ended September 30, 2007, we recorded net
restructuring charges of $2.8 and $5.4, respectively, primarily related to
several restructuring initiatives including: the 2006 decision to shut down our
manufacturing facility in Dijon, France, for costs that were anticipated at the
time the decision was made but were not accruable at that time under relevant
accounting rules as actual legal obligations had not yet been incurred;
restructuring of our manufacturing site in Willow Island, WV to cease
manufacture of several mature products in our polymer additives product line;
and restructuring of our liquid coating resins plant in Wallingford, CT to exit
a mature product line and consolidate and automate certain operations at the
site. We expect to incur additional restructuring costs of approximately $5.2 in
the remainder of 2007 and into 2008 that primarily relate to personnel and site
closure costs that are not accruable at September 30, 2007 for the 2007
restructuring initiatives. In addition, we may incur additional site remediation
and dismantlement costs for the Dijon facility. We are currently in the process
of attempting to sell the site. The restructuring for the three months ended
September 30, 2007 was charged as follows: manufacturing cost of sales $2.7, and
administrative and general $0.1. The restructuring for the nine months ended
September 30, 2007 was charged as follows: manufacturing cost of sales $5.0, and
administrative and general $0.4.
In 2006, we recorded severance of $19.5 including $8.4 related to the shut down
of the manufacturing facility in Dijon, $6.4 for the restructuring of our
Botlek, Netherlands facility, and $4.7 for other restructuring initiatives. As
of December 31, 2006, the reserve balance related to severance for the 2006
restructuring initiatives was $13.5 after cash payments of $6.4 and currency
translation adjustments. Also in 2006, we recorded an impairment charge of
$29.3, of which $13.8 was related to the Botlek facility for the impairment of
fixed assets related to our Polymer Additives product line in our Performance
Chemicals segment and $15.5 for the impairment of our manufacturing facility and
related intangible assets in Dijon. In addition, we recorded a restructuring
charge of $2.3 for other costs related to the Botlek facility.
2005 restructuring initiatives included aggregate charges of $16.8 related to
both Cytec Engineered Materials and Cytec Specialty Chemicals segments. As of
September 30, 2007, the reserve balance related to 2005 restructuring
initiatives was $0.6.
A summary of the restructuring activity is outlined in the table below:
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2005 2006 2007
Restructuring Restructuring Restructuring Total
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Balance
December 31, 2006 $ 1.4 $ 13.5 -- $ 14.9
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First Quarter 2007 charges -- 0.8 -- 0.8
Cash payments (0.7) (1.8) -- (2.5)
Currency translation adjustments -- 0.2 -- 0.2
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Balance
March 31, 2007 $ 0.7 $ 12.7 -- $ 13.4
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Second Quarter 2007 charges -- 1.8 -- 1.8
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Cash payments (0.2) (4.6) -- (4.8)
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Currency translation adjustments 0.1 -- -- 0.1
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Balance
June 30, 2007 $ 0.6 $ 9.9 -- $ 10.5
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Third Quarter 2007 charges -- 0.8 2.0 2.8
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Cash payments -- (4.1) -- (4.1)
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Non-cash charges -- -- (0.8)(1) (0.8)
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Currency translation adjustments -- 0.1 -- 0.1
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Balance
September 30, 2007 (2) $ 0.6 6.7 1.2 $ 8.5
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(1) Restructuring charge includes a $0.8 charge for asset write-downs relating
to excess raw material inventory and spare parts at Willow Island.
(2) Cash payments related to the above restructurings are expected to be
completed by the second quarter of 2008, except for certain long-term
severance payments.
-8-
6. SHARE-BASED COMPENSATION
On January 1, 2006, we adopted SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which requires companies to recognize compensation cost
in an amount equal to the fair value of share-based payments, such as stock
options granted to employees. In accordance with SFAS 123R, we recorded charges
related to stock options and stock appreciation rights that are settled with
common shares ("stock-settled SARS") of $3.1 and $9.5 for the three and nine
months ended September 30, 2007, respectively. The adoption of SFAS 123R was
recorded as of January 1, 2006 and resulted in a non-cash charge for the
cumulative effect of a change in accounting principle of $1.6 and a non-cash
credit of $0.4 for cash-settled SARS (as a result of the new requirement to
record expense at fair value) and non-vested and performance stocks (forfeitures
estimated now, as well as grant date only market value of the shares under
award), for a net charge of $1.2, net of a tax benefit of $0.7. The effect on
basic and diluted earnings per share for the cumulative effect charge was $0.03
and $0.02 per share, respectively, for the nine months ended September 30, 2006.
For stock options granted before January 1, 2005, the fair value of each stock
option grant was estimated on the date of grant using the Black-Scholes option
pricing model. For stock options and stock-settled SARS granted after January 1,
2005, the fair value of each award is estimated on the date of grant using a
binomial-lattice option valuation model. Stock-settled SARS are economically
valued the same as stock options. 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-lattice
model takes into account variables such as volatility, dividend yield, and
risk-free interest rate. However, in addition, the binomial-lattice 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, we believe 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 nine months ended September 30, 2007 and 2006 are noted in
the following table:
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2007 2006
----------------------------------------------------------------------
Expected life (years) 6.2 5.7
Expected volatility 27.2% 37.6%
Expected dividend yield 0.69% 0.81%
Range of risk-free interest rate 4.8% - 5.2% 4.4% - 4.7%
Weighted-average fair value per option $19.50 $19.01
----------------------------------------------------------------------
The expected life of options granted is derived from the output of the option
valuation model and represents the period of time that options granted are
expected to be outstanding. Expected volatilities are based on the combination
of implied market volatility and our historical volatility. The decrease in our
expected volatility from 2006 represents a change in methodology used to
calculate the expected volatility. Prior to 2007, our expected volatility was
based on a weighted average of the implied volatility and the mean reversion
volatility (represents the annualized volatility of the stock prices over our
entire stock history) of our stock with weighting of 10% and 90%, respectively.
In 2007, we changed the methodology to a weighted average of our implied
volatility and our most recent 6.2 years (which represents the most recent
expected life of the options/stock-SARS) volatility with weighting of 50% each.
We feel that the revised methodology is more representative of the market's
expectation of our volatility, based on recent trends and the mature industries
in which we participate. The risk-free rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant. SFAS 123R specifies that initial accruals be based on the
estimated number of instruments for which the requisite service is expected to
be rendered. Therefore, we are required to incorporate the probability of
pre-vesting forfeiture in determining the number of expected vested options. The
forfeiture rate is based on the historical forfeiture experience and prospective
actuarial analysis.
Stock Award and Incentive Plan:
The 1993 Stock Award and Incentive Plan (the "1993 Plan") provides for grants of
a variety of awards, such as stock options (including incentive stock options
and nonqualified stock options), non-vested stock (including performance stock),
stock appreciation rights (including those settled with common shares) and
deferred stock awards and dividend equivalents. At September 30, 2007, there are
approximately 4,700,000 shares reserved for issuance under the 1993 Plan.
We have utilized the stock option component of the 1993 Plan to provide for the
granting of nonqualified stock options and stock-settled SARS with an exercise
price at 100% of the market price on the date of the grant. Options and
stock-settled SARS are generally exercisable in installments of one-third per
year commencing one year after the date of grant and annually thereafter, with
contract lives of generally 10 years from the date of grant.
-9-
A summary of stock options and stock-settled SARS activity for the nine months
ended September 30, 2007 is presented below.
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Weighted
Weighted Average
Average Remaining Aggregate
Options and Stock-Settled SARS Number of Exercise Contractual Intrinsic
Activity: Units Price Life (Years) Value
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Outstanding at January 1, 2007 4,339,920 $ 35.00
Granted 586,006 58.22
Exercised (921,251) 35.85
Forfeited (134,393) 49.88
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Outstanding at September 30, 2007 3,870,282 $ 37.79 5.5 $ 118.4
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Exercisable at September 30, 2007 2,812,426 $ 31.80 4.3 $ 102.9
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Weighted
Average
Nonvested Options and Stock-Settled Number of Grant Date
SARS: Units Fair Value
--------------------------------------------------------------------
Nonvested at January 1, 2007 1,088,466 $ 18.24
Granted 586,006 19.50
Vested (513,811) 17.77
Forfeited (102,805) 19.05
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Nonvested at September 30, 2007 1,057,856 $ 19.09
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During the nine months ended September 30, 2007, we granted 586,006 units of
stock-settled SARS and stock options. We did not grant any stock-settled SARS
prior to 2006. The weighted-average grant-date fair value of the stock-settled
SARS and stock options granted during the nine months ended September 30, 2007
and 2006 was $19.50 and $19.01 per share, respectively. Stock-settled SARS are
deemed to be equity-based awards under SFAS 123R. The total intrinsic value of
stock options and stock-settled SARS exercised during the nine months ended
September 30, 2007 and 2006 was $24.9 and $25.6, respectively. Treasury shares
have been utilized for stock option exercises. The total fair value of stock
options vested during the nine months ended September 30, 2007 and 2006 was $9.1
and $9.7, respectively.
As of September 30, 2007, there was $10.6 of total unrecognized compensation
cost related to stock options and stock-settled SARS. That cost is expected to
be recognized over a weighted-average period of 1.6 years as the majority of our
awards vest over three years. Compensation cost related to stock options and
stock-settled SARS capitalized in inventory as of September 30, 2007 and
December 31, 2006 was approximately $0.5 and $0.4, respectively.
Cash received (for stock options only) and the total tax benefit realized from
stock options and stock-settled SARS exercised were $31.8 and $9.1 for the nine
months ended September 30, 2007 and $40.5 and $9.4 for the nine months ended
September 30, 2006, respectively. Cash used to settle cash-settled SARS was $0.8
and $0.3 for the nine months ended September 30, 2007 and 2006, respectively.
The liability related to our cash-settled SARS was $5.1 at September 30, 2007
and $4.3 at December 31, 2006.
As provided under the 1993 Plan, we have also issued non-vested stock and
performance stock. Non-vested shares are subject to certain restrictions on
ownership and transferability that lapse upon vesting. Performance stock payouts
are based on the attainment of certain financial performance objectives and may
vary depending on the degree to which the performance objectives are met.
Performance stocks awarded in 2005 relate to the 2007 performance period. The
total amount of share-based compensation expense recognized for non-vested and
performance stock for the three and nine months ended September 30, 2007 was
$0.1 and $0.3, respectively, and $0.3 and $1.0 for the three and nine months
ended September 30, 2006, respectively.
Upon adoption of SFAS 123R, we calculated our additional paid-in capital pool
("APIC Pool") to be $41.4. Exercises of stock options and stock-settled SARS
since the adoption increased the APIC Pool to $60.5 at September 30, 2007.
-10-
7. 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 non-vested 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.
The following shows the reconciliation of weighted-average shares:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------------------
Weighted average shares outstanding 48,186,403 47,623,743 48,166,828 47,321,317
Effect of dilutive shares:
Options and stock-settled SARS 1,118,913 1,003,117 1,055,141 1,101,690
Performance/Restricted Stock 25,267 72,789 24,145 66,727
---------------------------------------------------------------------------------------
Adjusted average shares outstanding 49,330,583 48,699,649 49,246,114 48,489,734
---------------------------------------------------------------------------------------
Outstanding stock options to purchase 35,068 and 10,500 shares of common stock
as of September 30, 2007 and 2006, respectively, were excluded from the above
calculation because their inclusion would have had an anti-dilutive effect on
earnings per share. In addition, 508,945 and 628,940 of outstanding
stock-settled SARS as of September 30, 2007 and 2006, respectively, were
excluded from the above calculation due to their anti-dilutive effect on
earnings per share.
8. INVENTORIES
Inventories consisted of the following:
-----------------------------------------------------------------
September 30, December 31,
2007 2006
-----------------------------------------------------------------
Finished goods $345.6 $333.4
Work in process 36.6 26.4
Raw materials & supplies 116.5 114.8
-----------------------------------------------------------------
Total inventories 498.7 $474.6
-----------------------------------------------------------------
9. DEBT
Long-term debt, including the current portion, consisted of the following:
-----------------------------------------------------------------------------------------------------
September 30, 2007 December 31, 2006
-----------------------------------------------------------------------------------------------------
Carrying Carrying
Face Value Face Value
-----------------------------------------------------------------------------------------------------
Five-Year Term Loan Due February 15, 2010 $ -- $ -- $ 52.6 $ 52.6
Five-Year Revolving Credit Line Due June 7, 2012 -- -- 42.0 42.0
6.75% Notes Due March 15, 2008 100.0 99.7 100.0 99.3
5.5% Notes Due October 1, 2010 250.0 249.8 250.0 249.7
4.6% Notes Due July 1, 2013 200.0 201.3 200.0 201.5
6.0% Notes Due October 1, 2015 250.0 249.5 250.0 249.4
Other 6.1 6.1 7.3 7.3
-----------------------------------------------------------------------------------------------------
$ 806.1 $ 806.4 $ 901.9 $ 901.8
Less: Current maturities 101.5 101.2 1.4 1.4
-----------------------------------------------------------------------------------------------------
Long-term debt $ 704.6 $ 705.2 $ 900.5 $ 900.4
-----------------------------------------------------------------------------------------------------
-11-
During the first quarter of 2007, we repaid the $52.6 outstanding balance at
December 2006 under the five-year term loan and terminated this facility. In
June 2007, we amended and restated our revolving credit agreement to increase
the facility from $350.0 to $400.0 and extended the maturity date to June 2012.
There were no borrowings against the $400.0 unsecured five-year revolving credit
facility at September 30, 2007. This facility contains covenants that are
customary for such facilities.
The weighted-average interest rate on all of our debt was 5.07% and 4.81% for
the nine months ended September 30, 2007 and 2006, respectively. The
weighted-average interest rate on short-term borrowing outstanding as of
September 30, 2007 and 2006 was 4.69% and 4.62%, respectively.
10. ENVIRONMENTAL, CONTINGENCIES AND COMMITMENTS
Environmental Matters
We are 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, 2007 and December 31, 2006, the aggregate environmental
related accruals were $104.9 and $102.7, respectively. As of September 30, 2007
and December 31, 2006, $7.4 of the above amounts was included in accrued
expenses, with the remainder included in other noncurrent liabilities.
Environmental remediation spending for the three months ended September 30, 2007
and 2006 was $1.0 and $0.9, respectively, and for the nine months ended
September 30, 2007 and 2006 was $3.1 and $3.0, respectively.
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 we are named in
a new matter and determine that an accrual needs to be provided or if we
determine that we are not liable and no longer require an accrual.
A further discussion of environmental matters can be found in Note 13 of the
Notes to the Consolidated Financial Statements contained in our 2006 Annual
Report on Form 10-K.
Other Contingencies
We are the subject of numerous lawsuits and claims incidental to the conduct of
our or certain of our predecessors' businesses, including lawsuits and claims
relating to product liability, personal injury including asbestos,
environmental, contractual, employment and intellectual property matters.
During the third quarter of 2006, we completed a study of our asbestos related
contingent liabilities and related insurance receivables. We previously
commissioned a similar study in 2003. These studies are based on, among other
things, detailed data for the past ten years on the incidence of claims, the
incidence of malignancy claims, indemnity payments for malignancy and
non-malignancy claims, dismissal rates by claim and estimated future claims. In
conjunction with this study, we also conducted a detailed review of our
insurance position and estimated insurance recoveries. We expect to recover
close to 54% of our future indemnity costs and certain defense and processing
costs already incurred. We anticipate updating the study approximately every
three years or earlier if circumstances warrant. We are in the process of
negotiating coverage in place and commutation agreements with several of our
insurance carriers.
As a result of the findings from the 2006 study, we recorded an increase of $9.0
in September 2006 to our self insured and insured contingent liabilities for
pending and anticipated probable future claims and recorded a higher receivable
for probable insurance recoveries for past, pending and future claims of $6.8.
The reserve increase is attributable to higher settlement values which more than
offset a decrease in number of claimants. The increase in the receivable is a
result of the higher gross liability plus an increase in overall projected
insurance recovery rates.
As of September 30, 2007 and December 31, 2006, the aggregate self-insured and
insured contingent liability was $70.7 and $72.4, respectively, and the related
insurance recovery receivable for the liability as well as claims for past
payments was $37.7 at September 30, 2007 and $40.9 at December 31, 2006. The
asbestos liability included in the above amounts at September 30, 2007 and
December 31, 2006 was $54.0 and $54.6, respectively, and the insurance
receivable related to the asbestos liability as well as claims for past payments
was $35.8 at September 30, 2007 and $38.1 at December 31, 2006. We anticipate
receiving a net tax benefit for payment of those claims to which full insurance
recovery is not realized.
-12-
The following table presents information about the number of claimants involved
in asbestos claims with us:
--------------------------------------------------------------------------------------------------
Nine Months
Ended Year Ended
September 30, December 31,
2007 2006
-------------- --------------
Number of claimants at beginning of period 8,600 22,200
Number of claimants associated with claims closed during period (700) (15,800)
Number of claimants associated with claims opened during period 300 2,200
-------------- --------------
Number of claimants at end of period 8,200 8,600
--------------------------------------------------------------------------------------------------
Numbers in the foregoing table are rounded to the nearest hundred and are based
on information as received by us which may lag actual court filing dates by
several months or more. Claims are recorded as closed when a claimant is
dismissed or severed from a case. Claims are opened whenever a new claim is
brought, including from a claimant previously dismissed or severed from another
case. The significant decline in the number of claimants during 2006 primarily
reflects disposition of a large number of unwarranted filings in Mississippi
made immediately prior to the institution of tort reform legislation in that
state effective January 1, 2003.
It should be noted that the ultimate liability and related insurance recovery
for all pending and anticipated future 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.
At September 30, 2007, we are among several defendants in approximately 40 cases
in the U.S., in which plaintiffs assert claims for personal injury, property
damage, and other claims for relief relating to one or more kinds of lead
pigment that were 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. We believe that
the suits against us are without merit, and we are vigorously defending against
all such claims. Accordingly, no loss contingency has been recorded.
In July, 2005, the Supreme Court of Wisconsin held in a case in which we were
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 past market shares unless they can prove
they are not responsible for the white lead pigment which caused the injury in
question. We settled this case for an immaterial amount. Seven other courts have
previously rejected the applicability of this and similar doctrines to white
lead pigment. Although we are a defendant in approximately 30 similar cases in
Wisconsin and additional actions may be filed in Wisconsin, we intend to
vigorously defend ourselves if such case(s) are filed based on what we believe
to be our non-existent or diminutive market share. In October 2007, the
Wisconsin Court of Appeals affirmed the trial court's dismissal of the
plaintiff's strict liability and negligent design defect causes of action for
white lead carbonate in the case styled Ruben Godoy et al v. E.I DuPont de
Nemours et al., one of the approximately 30 Wisconsin lead cases. The decision
in this case reinforces our belief that our liability, if any, in these cases
will not be material, either individually or in the aggregate, and no loss
contingency has been recorded.
We have access to a substantial amount of primary and excess general liability
insurance for property damage and believe these policies are available to cover
a significant portion of both our defense costs and indemnity costs, if any, for
lead pigment related property damage claims. We have agreements with two of our
insurers which provide that they will pay for approximately fifty percent (50%)
of our defense costs associated with lead pigment related property damage
claims.
We commenced binding arbitration proceedings against SNF SA ("SNF") in 2000 to
resolve a commercial dispute relating to SNF's failure to purchase agreed
amounts of acrylamide under a long-term agreement. In July, 2004, the
arbitrators awarded us damages and interest aggregating approximately (euro)11.0
plus interest on the award at a rate of 7% per annum from July 28, 2004 until
paid. After further proceedings in France, we collected (euro)12.2 ($15.7)
related to the arbitration award including interest in the second quarter of
2006. Subsequent to the arbitration award, SNF filed a complaint alleging
criminal violation of French and European Community antitrust laws relating to
the contract, which was the subject of the arbitration proceedings, which
complaint was dismissed in December 2006. SNF has also filed a final appeal of
the court order which allowed us to enforce the award and a separate complaint
in France seeking compensation from Cytec for (euro)54.0 in damages it allegedly
suffered as a result of our attachment on various SNF receivables and bank
accounts to secure enforcement of the arbitration award. We believe that the
appeal and complaint are without merit. SNF also appealed the arbitration award
in Belgium where the Brussels Court of First Instance invalidated the award in
March 2007. We have appealed that decision to the Belgium Court of Appeals,
which will review the matter on a de novo basis. The Belgium decision should not
affect the enforceability of the award in France.
-13-
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 we believe will not have a material adverse
effect on our consolidated financial position, but could be material to our
consolidated results of operations or cash flows in any one accounting period.
We 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, we are also included in legal proceedings as a plaintiff
involving tax, contract, patent protection, environmental and other legal
matters. Gain contingencies related to these matters, if any, are recorded when
they are realized.
A further discussion of other contingencies can be found in Note 13 of the Notes
to the Consolidated Financial Statements contained in our 2006 Annual Report on
Form 10-K.
Commitments
We frequently enter into long-term contracts with customers with terms that vary
depending on specific industry practices. Our business is not substantially
dependent on any single contract or any series of related contracts.
Descriptions of our significant sales contracts at December 31, 2006 are set
forth in Note 13 of the Notes to Consolidated Financial Statements contained in
our 2006 Annual Report on Form 10-K.
11. COMPREHENSIVE INCOME
The components of comprehensive income, 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,
2007 2006(1) 2007 2006(1)
-------------------------------------------------------------------------------------------------
Net earnings as reported $ 52.4 $ 25.1 $ 158.9 $ 111.7
Other comprehensive income:
Accumulated pension liability (2) (3.0) -- 14.8 --
Unrealized gains on cash flow hedges 8.6 13.7 19.0 5.1
Foreign currency translation adjustments 46.4 2.9 60.1(3) 41.5
-------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 104.4 $ 41.7 $ 252.8 $ 158.3
-------------------------------------------------------------------------------------------------
(1) 2006 results were restated to show the effect of FSP AUG-AIR 1, which
was adopted retroactively during the first quarter of 2007. For
further details see Note 2 to the Consolidated Financial Statements.
(2) 2007 includes amortization, impacts of a curtailment and
remeasurement related to certain U.S. plans, and a settlement in the
Netherlands related to the sale of the water treatment and acrylamide
product lines. For further details see Note 17 to the Consolidated
Financial Statements.
(3) 2007 includes the impact of recognizing $13.8 of foreign currency
translation adjustments in first quarter net earnings as a component
of the gain on the sale of the water treatment and acrylamide product
lines.
12. INCOME TAXES
The effective income tax rate for the three and nine months ended September 30,
2007 was a tax provision of 26.0% ($18.4) and 27.1% ($59.1), respectively,
compared to 38.2% ($15.4) and 26.7% ($40.9) for the three and nine months ended
September 30, 2006. Included in the amount for the third quarter 2007 is a $3.5
tax benefit as a result of the recently enacted tax legislation that lowered the
German corporate tax rates effective January 1, 2008, thereby requiring a
commensurate reduction in our net deferred tax liabilities with respect to this
tax jurisdiction. The 2007 effective tax rate for the quarter and year to date
was unfavorably impacted by a shift in our earnings to higher tax jurisdictions,
changes in U.S. tax laws regarding export incentives, and a French restructuring
charge for which no tax benefit was given due to the unlikely utilization of
related net operating losses. The rate was favorably affected by the relatively
low tax expense of $0.4 with respect to a $15.7 gain recorded in the first
quarter of 2007 on the second phase of the water business divestiture and
changes in U.S. tax laws regarding manufacturing incentives. Excluding these
items and accrued interest and penalties on unrecognized tax benefits in
accordance with FIN 48 as described below, the underlying estimated annual
effective tax rate for the nine months ended September 30, 2007 was 29.7%, with
a normalized effective rate of 30.25% including such interest and penalties. We
increased our normalized effective tax rate to 30.25% in the third quarter,
compared to 29.75% for the six months ended June 30, 2007, primarily due to
changes in the estimated profitability mix by entity.
-14-
The 2006 effective tax rate for the quarter and year to date was negatively
impacted by the limited tax benefit available on the French asset impairment
charge offset by the positive impact of a tax benefit from a restructuring
charge recorded at 29.6%, the favorable resolution of a legal dispute which was
effectively recorded at a tax provision of 20% and a reduction in income tax
expense of $3.5 as a result of the completion of prior years U.S. tax audits.
In 2005, we received a final notice from the Norwegian Assessment Board
disclosing an increase to taxable income with respect to a 1999 restructuring of
certain of our European operations. The tax liability attributable to this
assessment, excluding interest and possible penalties, was approximately 84.0
Norwegian krone ($15.4). We unsuccessfully contested this assessment before a
Norwegian tribunal in 2006 and filed an appeal in response to this adverse
decision during the first quarter of 2007. During the third quarter of 2007, the
Norwegian Court of Appeals in a 2 to 1 decision upheld the original tax
assessment of approximately 84.0 Norwegian krone ($15.4). After reviewing the
Court of Appeals decision and the merits of the case, we have decided to appeal
the case to the Norwegian Supreme Court during the fourth quarter of 2007.
In the event the Norwegian authorities ultimately prevail in their assessment,
approximately 22.0 Norwegian krone ($4.0) of tax related to this matter will be
remitted in subsequently filed tax returns beginning with the 2005 taxable
period in accordance with Norwegian law. As a result, we remitted 4.4 Norwegian
krone ($0.7) of additional tax in 2006 for the 2005 taxable period related to
this dispute. Accordingly, the accrued balance at September 30, 2007 for this
contingency was 24.7 Norwegian krone ($4.5), which represents our remaining
liability (including interest) regarding this matter in the event we ultimately
accept the Norwegian's court decision as final. We also expect to pay 3.5
Norwegian krone ($0.6) during 2007 for this issue related to the 2006 taxable
period.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109,
Accounting for Income Taxes" ("FIN 48"). FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon settlement with the tax authorities. FIN 48 also provides guidance
on derecognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures.
We adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, we recognized a $0.3 decrease in the liability for
unrecognized tax benefits. This decrease in liability resulted in an increase to
the January 1, 2007 retained earnings balance in the amount of $0.3. In
addition, as of January 1, 2007, we reclassified $19.3 of unrecognized tax
benefits from current taxes payable to non-current taxes payable, which is
included in other non-current liabilities on the consolidated balance sheet. The
amount of unrecognized tax benefits at January 1, 2007 is $25.6 (gross) of which
$18.9 would impact our effective tax rate, if recognized. As of September 30,
2007, the amount of unrecognized tax benefits is $31.6 (gross) of which $23.2
would impact our effective tax rate, if recognized. There are no known uncertain
tax positions which are reasonably possible to change over the next twelve
months necessitating a significant change in our unrecognized tax benefits.
We recognize interest and penalties related to unrecognized tax benefits in
income tax expense in the consolidated statements of income. We had recorded a
liability for the payment of interest and penalties of approximately $2.4 as of
January 1, 2007, increasing to approximately $3.3 as of September 30, 2007.
The Internal Revenue Service (the "IRS") has completed and closed its audits of
our tax returns through 2003. During the second quarter of 2007, the IRS
commenced the audit of our tax returns for the years 2004 and 2005.
State income tax returns are generally subject to examination for a period of
3-5 years after filing of the respective return. The state impact of any federal
changes remains subject to examination by various states for a period of up to
one year after formal notification to the states. We have various state income
tax returns in the process of examination and administrative appeals.
International jurisdictions have statutes of limitations generally ranging from
3-5 years after filing of the respective return. Years still open to examination
by tax authorities in major jurisdictions include Austria (2005 onward), Belgium
(2004 onward), Germany (2005 onward), Netherlands (2005 onward), Canada (2001
onward), UK (2005 onward), Italy (2005 onward), China (2003 onward), and Norway
(1999 onward). We are currently under examination in several of these
jurisdictions.
13. OTHER FINANCIAL INFORMATION
-15-
On July 19, 2007 the Board of Directors declared a $0.10 per common share cash
dividend, paid on August 27, 2007 to shareholders of record as of August 10,
2007. Cash dividends paid in the third quarter of 2007 and 2006 were $4.8 and
$4.7, respectively, and for the nine months ended September 30, 2007 and 2006
were $14.4 and $14.1, respectively. On October 18, 2007 the Board of Directors
declared a $0.10 per common share cash dividend, payable on November 26, 2007 to
shareholders of record as of November 9, 2007.
Income taxes paid for the nine months ended September 30, 2007 and 2006 were
$45.4 and $43.1, respectively. Interest paid for the nine months ended September
30, 2007 and 2006 was $31.5 and $42.4, respectively. Interest income for the
nine months ended September 30, 2007 and 2006 was $1.1 and $1.4, respectively.
UCB SA ("UCB") was considered a related party during the year ended December 31,
2006 since it then owned more than 10% of Cytec's outstanding common stock. UCB
announced in March 2007 that it had sold all of its Cytec shares and as a
result, UCB is no longer a related party. As of September 30, 2007 and December
31, 2006, $2.4 was owed from UCB, which is included in other accounts receivable
on the accompanying consolidated balance sheet. The balance represents amounts
to be received from UCB for certain pre-acquisition tax liabilities which we
have paid or will pay as a result of our acquisition of Surface Specialties.
14. SEGMENT INFORMATION
Summarized segment information for our four segments for the three and nine
months ended September 30 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2007 2006(1) 2007 2006(1)
--------- --------- --------- ---------
Net sales
Cytec Performance Chemicals
Sales to external customers $ 180.7 $ 233.0 $ 544.6 $ 688.6
Intersegment sales 1.1 1.3 4.8 5.2
Cytec Surface Specialties 413.0 383.6 1,237.0 1,148.3
Cytec Engineered Materials 162.2 150.9 492.3 441.6
Building Block Chemicals
Sales to external customers 119.2 95.9 328.7 257.4
Intersegment sales 8.8 20.8 26.8 67.2
--------- --------- --------- ---------
Net sales from segments 885.0 885.5 2,634.2 2,608.3
Elimination of intersegment revenue (9.9) (22.1) (31.6) (72.4)
--------- --------- --------- ---------
Net sales $ 875.1 $ 863.4 $ 2,602.6 $ 2,535.9
--------------------------------------------------------------------------------------
% of % of % of % of
sales sales sales sales
------ ------ ------ ------ ------ ------ ------
Earnings (loss) from operations
-------------------------------
Cytec Performance Chemicals $ 18.3 10% $ 20.8 9% $ 54.9 10% $ 56.8 8%
Cytec Surface Specialties 31.2 8% 18.8 5% 79.7 6% 78.0 7%
Cytec Engineered Materials 28.8 18% 26.7 18% 96.2 20% 78.8 18%
Building Block Chemicals 9.4 7% 10.1 9% 16.6 5% 16.3 5%
------ ------ ------ ------
Earnings from segments 87.7 10% 76.4 9% 247.4 9% 229.9 9%
Corporate and Unallocated (2) (5.6) (21.0) 1.5 (47.9)
------ ------ ------ ------
Earnings from operations $ 82.1 9% $ 55.4 6% $248.9 10% $182.0 7%
-------------------------------------------------------------------------------------------------------------
(1) 2006 results were restated to show the effect of FSP AUG-AIR 1, which was
adopted retroactively during the first quarter of 2007. For further details see
Note 2 to the Consolidated Financial Statements.
(2) In the third quarter of 2007 Corporate and Unallocated includes a net
restructuring charge of $2.8 for costs related to the shut down of a
manufacturing facility in France and restructuring of our polymer additive
manufacturing facility in Willow Island and our liquid coating resins
manufacturing facility in Wallingford. For nine months 2007, Corporate and
Unallocated includes a restructuring charge of $5.4 for the aforementioned items
and a $15.7 gain as a result of completion of the second phase of the sale of
our water treatment chemicals and acrylamide product lines to Kemira (see Note 4
and 5). Nine months 2006 Corporate and Unallocated includes an asset impairment
charge of $15.4 and a net restructuring charge of $22.6 principally relating to
permanently shutting down manufacturing operations in Dijon, France and $15.7
gain relating to a resolution of a legal dispute (see note 10).
-16-
15. GOODWILL AND OTHER ACQUISITION INTANGIBLES
The following is the activity in the goodwill balances for each segment.
----------------------------------------------------------------------------------------------------------------------------
Cytec Cytec
Performance Cytec Surface Engineered
Chemicals Specialties Materials Corporate Total
----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2006 $ 88.2 $ 712.4 $ 241.2 $ 0.7 $ 1,042.5
Currency exchange rate changes 2.7 37.0 -- -- 39.7
----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2007 $ 90.9 $ 749.4 $ 241.2 $ 0.7 $ 1,082.2
----------------------------------------------------------------------------------------------------------------------------
Other acquisition intangibles consisted of the following major classes:
Accumulated
Weighted Gross carrying value amortization Net carrying value
Average -------------------------------------------------------------------------------------------------
Useful Life September 30, December 31, September 30, December 31, September 30, December 31,
(years) 2007 2006 2007 2006 2007 2006
-----------------------------------------------------------------------------------------------------------------
Technology-based 15.2 $ 56.7 $ 53.9 $ (22.8) $ (19.1) $ 33.9 $ 34.8
Marketing-related <2.0 2.1 1.9 (1.9) (1.2) 0.2 0.7
Marketing-related 15.8 64.6 62.3 (19.7) (15.0) 44.9 47.3
Marketing-related 40.0 47.0 43.6 (1.5) (0.5) 45.5 43.1
Customer-related 15.0 438.0 416.5 (80.7) $ (56.3) 357.3 360.2
------------------------------------------------------------------------------------------------------------------------------------
Total $ 608.4 $ 578.2 $ (126.6) $ (92.1) $ 481.8 $ 486.1
------------------------------------------------------------------------------------------------------------------------------------
Amortization of acquisition intangibles for the three months ended September 30,
2007 and 2006 was $9.7 and $10.6, respectively, and for the nine months ended
September 30, 2007 and 2006 were $28.6 and $28.7, respectively. 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 2007 is $38.2, for the years 2008 and 2009 is
$37.5 per year, and for the years 2010 and 2011 is $37.4 per year.
16. DERIVATIVE FINANCIAL INSTRUMENTS AND COMMODITY HEDGING ACTIVITIES
Derivative Financial Instruments
We periodically enter into currency forward contracts primarily to hedge
currency fluctuations of transactions denominated in currencies other than the
functional currency of the business. At September 30, 2007, the principal
transactions hedged involved accounts receivable, accounts payable and
intercompany loans. When hedging currency exposures, our practice is to hedge
such exposures with forward contracts denominated in the same currency and with
similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction.
At September 30, 2007, net contractual amounts of forward contracts outstanding
translated into U. S. dollar amounts of $139.6. Of this total, $134.4 was
attributed to the net exposure in forward selling of U.S. dollars. The remaining
$5.2 was the net exposure in forward selling of Euros, translated into U. S.
dollar equivalent amount. The favorable fair value of currency contracts, based
on forward exchange rates at September 30, 2007, was $2.5 (unfavorable fair
value at December 31, 2006 of $1.3).
Our euro denominated bank borrowings are used to provide a partial hedge of our
net investment in our Belgium-based subsidiary, Cytec Surface Specialties SA/NV.
From time to time we also enter into designated forward euro contracts to adjust
the amount of the net investment hedge. At September 30, 2007, we had designated
forward contracts to purchase (euro)58.0.
In September 2005, we 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 each on the settlement date of the 5-Year Notes due October 1, 2010
and 10-Year Notes due October 1, 2015. At the initial principal exchange, we
paid U.S. 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 a semi-annual exchange of fixed euro interest payments for fixed U.S.
dollar interest receipts. With respect to the five year swaps, we 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 five year swaps. With respect to the ten year
swaps, we 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 ten 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 U.S. dollar to euro exchange rates on certain euro denominated
intercompany receivables we have with one of our subsidiaries. At September 30,
2007, the unfavorable fair values of the five and ten year swaps were $31.5 and
$27.0, respectively, and at December 31, 2006, the unfavorable fair values of
the five and ten year swaps were $16.9 and $16.4, respectively.
-17-
Commodity Hedging Activities
At September 30, 2007, we held natural gas swaps with an unfavorable fair value
of $2.0, which will be reclassified into Manufacturing Cost of Sales through
August 2008 as these swaps are settled.
For more information regarding our hedging activities and derivative financial
instruments, refer to Note 7 to the Consolidated Financial Statements contained
in our 2006 Annual Report on Form 10-K.
17. EMPLOYEE BENEFIT PLANS
Net periodic cost for our pension and postretirement benefit plans was as
follows:
Postretirement
Pension Plans Plans
---------------- ---------------
Three Months Ended September 30,
-------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------------
Service cost $ 4.5 $ 6.1 $ 0.3 $ 0.2
Interest cost 10.4 12.4 3.0 3.4
Expected return on plan assets (11.6) (12.0) (0.8) (1.0)
Net amortization and deferral 3.1 8.8 (2.5) (2.6)
----- ----- ----- -----
Net periodic cost $ 6.4 $15.3 $ 0.0 $ 0.0
-------------------------------------------------------------------------------
Nine Months Ended September 30,
-------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------------
Service cost $14.6 $18.6 $ 0.9 $ 0.6
Interest cost 32.8 33.9 10.2 6.7
Expected return on plan assets (33.4) (33.3) (3.2) (2.4)
Net amortization and deferral 11.0 16.4 (7.7) (4.5)
Curtailments/settlements (1) 3.3 -- -- --
----- ----- ----- -----
Net periodic cost $28.3 $35.6 $ 0.2 $ 0.4
-------------------------------------------------------------------------------
(1) Primarily represents a settlement charge related to the transfer of plan
assets and liabilities in the Netherlands related to the sale of the water
treatment and acrylamide product lines, which was charged against the gain
on sale.
We disclosed in our 2006 Annual Report on Form 10-K that we expected to
contribute $36.4 and $13.5, respectively, to our pension and postretirement
plans in 2007. Through September 30, 2007, $33.2 and $9.5 in contributions were
made, respectively.
In March 2007 we announced a change to certain of our U.S. pension plans from
defined benefit plans to defined contribution plans effective December 31, 2007.
A related plan curtailment was recorded in the first quarter of 2007, which
resulted in a decrease in our pension liabilities of $13.4, with a corresponding
increase in accumulated other comprehensive income ("AOCI") of $8.2 and an
adjustment to deferred taxes of $5.2. The curtailment had an immaterial effect
on our consolidated statement of income. We considered these plan changes to be
significant events as contemplated by SFAS 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS 158") and accordingly, the
liabilities and assets for the affected plans have been remeasured as of March
31, 2007. The remeasurement resulted in a decrease to pension liabilities of
approximately $6.1, with a corresponding increase of $3.7 in AOCI, and an
adjustment to deferred taxes for $2.4. The remeasurement was driven by a change
in the discount rate assumption for the affected plans (from 5.85% at December
31, 2006 to 6.00% at March 31, 2007), and slightly better than expected returns
on plan assets for the three months ended March 31, 2007.
In September 2007, using updated demographic data, our actuaries revised the
estimated funded status of our U.S pension plans as of January 1, 2007. As a
result,. we recorded an increase of $6.8 to our U.S. pension liabilities, with a
corresponding decrease of $4.1 in AOCI and an adjustment to deferred taxes for
$2.7, to reflect the funded status at January 1, 2007 as determined by the
actuarial valuation. In addition, we recorded adjustments to the estimated
impact of the above mentioned first quarter event based on the same updated
data. On a year-to-date basis, net of these adjustments, the plan curtailment
resulted in a decrease in our pension liabilities of $14.9, with a corresponding
increase in AOCI of $9.1 and an adjustment to deferred taxes of $5.8. The
updated data did not effect the remeasurement recorded in the first quarter.
-18-
We also sponsor 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 our financial performance. Amounts
expensed related to these plans for the three months ended September 30, 2007
and 2006 were $4.2 and $4.1, respectively, and for the nine months ended
September 30, 2007 and 2006 were $15.2 and $13.4 respectively.
-19-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements. Currency amounts are in millions, except per share amounts.
Percentages are approximate.
GENERAL
We are a global specialty chemicals and materials company which sells our
products to diverse major markets for aerospace, adhesives, automotive and
industrial coatings, chemical intermediates, inks, mining and plastics. Sales
price and volume by region and the impact of exchange rates on our reporting
segments are important measures that are analyzed by management.
In the course of our ongoing operations, a number of strategic product line
acquisitions and dispositions have been made. The results of operations of the
acquired businesses have been included in our consolidated results from the
dates of the respective acquisitions.
We also report 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 and selling price changes are an
important factor in profitability especially in years of high volatility. Global
oil and natural gas costs in certain countries are highly volatile and many of
our raw materials are derived from these two commodities. Discussion of the year
to year impact of raw materials, energy costs changes, and our ability to
recover these increases through higher selling prices 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
our raw materials which have contributed to increased costs for some of these
raw materials.
Quarter Ended September 30, 2007, Compared With Quarter Ended September 30, 2006
Consolidated Results
Net sales for the third quarter of 2007 were $875.1 compared with $863.4 for the
third quarter of 2006, an increase of $11.7 or 1.4%. Performance Chemical sales
were down due to the divestiture of the water treatment chemicals product line.
Excluding the divestiture, sales were up slightly due to a change in exchange
rates. In the Cytec Surface Specialties segment, sales increased primarily as a
result of increased selling prices and changes in exchange rates partially
offset by lower volume attributable to the discontinuation of unprofitable
solvent-borne products in Europe and weak demand in North America. The Cytec
Engineered Materials segment sales increase was primarily due to increased
volumes in the large commercial aircraft market segment. The Building Block
Chemicals segment sales increased due to higher volumes of acrylonitrile and
melamine which more than offset the negative impact of the divestiture of the
acrylamide product line.
For a detailed discussion on sales refer to the Segment Results section below.
Manufacturing cost of sales was $683.8 or 78% of sales during the third
quarter of 2007 compared with $698.3 or 81% of sales for the third quarter 2006.
The decrease in manufacturing cost of sales reflects the divestiture of the
water treatment and acrylamide product lines in the fourth quarter of 2006,
higher restructuring charges and other special items included in the prior year
period as noted below and the benefits of prior restructuring initiatives
partially offset by higher costs to support the higher selling volumes and
higher raw material costs of approximately $20.0. The year on year improvement
in manufacturing cost of sales percentage is driven by these same factors plus
higher selling prices and volume leverage. Included in the third quarter of 2007
is a $2.7 restructuring charge related to our polymer additives manufacturing
site in Willow Island, West Virginia, the restructuring of our liquid coating
resins plant in Wallingford, Connecticut, and additional costs relating to the
closure of an unprofitable manufacturing facility in Dijon, France. The third
quarter of 2006 includes a net benefit of $2.7 related to a payment from a
former melamine joint venture partner for early termination of the partnership.
Also included in the third quarter 2006 is a net restructuring charge of $0.6,
an impairment charge of $14.0 related to an unprofitable Cytec Surface
Specialties manufacturing site in France, and a charge of $2.2 related to an
increase in our asbestos contingent liability. See Note 5 to the consolidated
financial statements for additional detail of the net restructuring charges.
Selling and technical services was $52.3 in 2007 versus $54.9 in the same
quarter prior year. The decrease was primarily related to the divestiture of the
water treating chemicals product line which decreased costs approximately $4.0
partially offset by increased spending of $1.4 in the Cytec Engineered Materials
segment to support the higher sales growth.
-20-
Research and process development was $18.0 in 2007 versus $18.4 in the prior
year. This net decrease is due to a R&D expense reimbursement of $1.3 in the
Cytec Surface Specialties segment for a research incentive and a reduction of
$0.6 in the Performance Chemicals segment due to the divestiture of the water
treating chemicals product line partially offset by increases in Cytec
Engineered Materials and Cytec Surface Specialties.
Administrative and general expenses were $29.2 in 2007 which was up from $25.8
in the prior year. The increase in 2007 was primarily due to exchange rate
changes, higher compensation expenses, and increased audit fees. The 2006
results included $0.2 for integration expenses primarily associated with the
transition off of UCB's information technology system infrastructure and $0.3 of
restructuring expenses.
Amortization of acquisition intangibles was $9.7 in 2007 versus $10.6 in the
prior year. 2006 included a $1.4 write-down of intangibles related to the
unprofitable manufacturing facility in France.
Other income (expense), net was expense of $1.4 in 2007 compared with expense of
$1.2 in the prior year.
Equity in earnings of associated companies was $0.5 versus $0.8 in the prior
year. The lower earnings are primarily due to a lower sales demand at our
associated company.
Interest expense, net was $10.4 in 2007 compared with $14.5 in the prior year.
The decrease is primarily due to the lower average debt compared to the prior
year.
Our tax provision was $18.4 or 26.0% compared to a tax provision of $15.4 or
38.2% for the prior year period. Included in the amount for the third quarter
2007 is a $3.5 tax benefit as a result of the recently enacted tax legislation
that lowered the German corporate tax rates effective January 1, 2008, thereby
requiring a commensurate reduction in our net deferred tax liabilities with
respect to this tax jurisdiction. The 2007 normalized annual effective tax rate
for the quarter was unfavorably impacted by a shift in our earnings to higher
tax jurisdictions, which included a further increase in the annual rate to
30.25% from the 29.75% for the first two quarters of 2007, and a French
restructuring charge for which no tax benefit was given due to the unlikely
utilization of related net operating losses. The 2006 effective tax rate for the
quarter was negatively impacted primarily by the limited tax benefit available
on the French asset impairment charge as well as an increase during the quarter
in the normalized effective tax rate from 27.0% to 27.5% primarily due to the
reduction of earnings of divested product lines in lower tax jurisdictions.
Net earnings for the third quarter of 2007 were $52.4 ($1.06 per diluted share),
an increase from the net earnings of $25.1 ($0.52 per diluted share) in the
third quarter 2006. The 2007 earnings are higher due to increased volume and
higher selling prices, in excess of increased raw material costs, a net
after-tax restructuring charge of $2.2 in 2007 versus $15.6 of 2006
restructuring and impairment charges, lower interest expenses, and a $3.5
benefit as a result of lower German corporate tax rate, partially offset by the
loss of earnings due to the divestiture of the water treatment chemicals product
lines.
Net earnings for 2006 of $25.1 included an after-tax net restructuring charge of
$0.8, an after-tax impairment charge of $14.8 related to an unprofitable
European manufacturing facility and an after-tax charge of $1.6 related to an
increase in asbestos contingent liabilities.
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.
Cytec Performance Chemicals
% Change Due to
Total -------------------------------------------------
2007 2006 % Change Price Volume/Mix Divestiture Currency
--------------------------------------------------------------------------------------------------------------------------
North America $ 65.7 $ 85.0 -23% -- -3% -20% --
Latin America 31.8 33.2 -4% -1% 6% -9% --
Asia/Pacific 30.7 34.1 -10% -- -- -12% 2%
Europe/Middle East/Africa 52.5 80.7 -35% -- -2% -37% 4%
----------------------------------------------------------------------------------------
Total $ 180.7 $ 233.0 -22% -- -1% -23% 2%
---------------------------------------------------------------------------------------------------------------------------
Overall selling volumes were down 24% primarily attributable to the divestiture
of the water treating chemicals product line. Excluding the divestiture, volumes
decreased 1% with volume gains in pressure sensitive adhesives, and urethanes
which were more than offset by losses in all other product lines. On a regional
basis, sales volumes were down in North America driven by decreases in mining
chemicals, specialty additives and phosphines. European volumes were down due to
lower sales of mining chemicals and polymer additives. Sales volume in
Asia/Pacific were flat with sales up in Latin America driven by increases in
mining chemicals. Overall selling prices were flat with a slight decrease in
Latin America. Changes in exchange rates increased sales 2%.
-21-
Earnings from operations were $18.3, or 10% of sales in 2007, compared with
$20.8, or 9% of sales, in 2006. The decrease in earnings is primarily due to
higher raw material costs of approximately $2.0 and the divestiture of the water
treating chemicals product line.
Cytec Surface Specialties
% Change Due to
Total -------------------------------------
2007 2006 % Change Price Volume/Mix Currency
----------------------------------------------------------------------------------------------------------
North America $ 89.0 $ 91.3 -3% 1% -4% --
Latin America 18.1 15.8 15% -3% 12% 6%
Asia/Pacific 72.6 66.0 10% 6% 1% 3%
Europe/Middle East/Africa 233.3 210.5 11% 8% -4% 7%
-----------------------------------------------------------------------------
Total $ 413.0 $ 383.6 8% 6% -3% 5%
----------------------------------------------------------------------------------------------------------
Selling volumes decreased 3% primarily due to the negative impact of
discontinuing unprofitable solvent-borne products in Europe and soft demand in
North America. North America volumes declined due to lower demand and losses due
to price competition in liquid coating resins. Volumes in Asia/Pacific were up
slightly, as gains in Radcure resins and liquid coating resins were partially
offset by a decrease in powder coating resins. Selling prices were up 6% due to
increases in liquid coating resins and powder coating resins across all regions
while selling prices were essentially flat in Radcure resins with price
increases in Europe mostly offset by pricing decreases in all other regions.
Changes in exchange rates increased sales by 5%.
Earnings from operations were $31.2, or 8% of sales in 2007, compared with
$18.8, or 5% of sales in 2006. The increase in earnings is primarily
attributable to higher selling prices which more than offset higher raw material
costs of approximately $10.0 and lower sales volumes.
Cytec Engineered Materials
% Change Due to
Total -------------------------------------
2007 2006 % Change Price Volume/Mix Currency
----------------------------------------------------------------------------------------------------------
North America $ 104.9 $ 96.7 9% 2% 7% --
Latin America(1) 0.2 0.3 -- -- -- --
Asia/Pacific 12.9 11.7 10% -- 10% --
Europe/Middle East/Africa 44.2 42.2 5% -- 3% 2%
---------- ---------- ---------- ---------- ---------- ----------
Total $ 162.2 $ 150.9 7% 1% 5% 1%
----------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 5% primarily due to higher volumes to the
large commercial aircraft, high performance automotive, launch and business jet
market sectors partially offset by some declines in the rotorcraft sector.
Overall selling prices increased 1% with increased prices in North America
across a number of market sectors. Changes in exchange rates increased sales by
1%.
Earnings from operations were $28.8, or 18% of sales, compared with $26.7, or
18% of sales, in 2006. The impact of increases in sales volumes and higher
selling prices were partially offset by increases in raw material costs of
approximately $6.0, increased production costs due to the higher production
volumes, and higher operating expenses to support the current growth and future
growth initiatives.
Building Block Chemicals
% Change Due to
Total ---------------------------------------------------
2007 2006 % Change Price Volume/Mix Divestiture Currency
-----------------------------------------------------------------------------------------------------------------------
North America $ 65.6 $ 45.1 46% 4% 49% -7% --
Latin America(1) 1.3 1.3 -- -- -- -- --
Asia/Pacific 11.7 14.8 -21% 10% -30% -1% --
Europe/Middle East/Africa 40.6 34.7 17% 9% 49% -41% --
-------------------------------------------------------------------------------------------
Total $ 119.2 $ 95.9 24% 7% 36% -19% --
-----------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
-22-
Overall selling volumes were up 17%. Sales volumes were reduced 19% due to the
divestiture of the acrylamide product line. which was more than offset by a 26%
increase in volume due to sales of acrylonitrile to the purchaser of the
divested product line. Base selling volumes increased 10% principally in
acrylonitrile and melamine. Melamine volumes increased primarily due to
increased capacity available following our takeover of the manufacturing plant
in August 2006, which previously was a 50-50 manufacturing joint venture with a
third party. Overall selling prices increased 7% primarily due to acrylonitrile.
Earnings from operations were $9.4 or 8% of sales in 2007, compared with $10.1,
or 10% of sales, in 2006. Included in 2006 is a net benefit of approximately
$2.7 related to a payment from our former melamine joint venture partner for
early termination of the manufacturing joint venture.
Nine months Ended September 30, 2007, Compared With Nine months Ended September
30, 2006
Consolidated Results
Net sales for the first nine months of 2007 were $2,602.6 compared with $2,535.9
for the prior year period, an increase of $66.7 or 2.6%. The Cytec Performance
Chemicals segment sales volumes decreased primarily due to the divestiture of
the water treating chemicals product line while volumes and prices were
basically flat. In the Cytec Surface Specialties segment, sales increased
primarily as a result of the higher selling prices and changes in exchange rates
which were partially offset by lower volumes. The Cytec Engineered Materials
segment sales increased primarily due to higher volumes primarily to the large
commercial aircraft sector and a slight increase in selling prices. The Building
Block Chemicals segment sales were up despite the negative impact of the
divestiture of the acrylamide product line which was more than offset by
increased volumes of acrylonitrile to the purchaser of the divested product line
as well as higher selling volumes of melamine and increased selling prices.
For a detailed discussion on sales refer to the Segment Results section below.
Manufacturing cost of sales was $2,045.6 or 79% for the first nine months
of 2007 compared with $2,032.2 or 80% of sales for the first nine months of
2006. Most of the increase is due to incremental costs to produce the higher
sales volumes and higher raw materials costs of approximately $75.0 partially
offset by reduced costs due to the divestiture of the water treatment chemicals
and acrylamide product lines, higher restructuring charges and other special
items included in the prior year period as noted below and previous
restructuring initiatives. The year on year improvement in manufacturing cost of
sales percentage is driven by these same factors plus higher selling prices and
volume leverage. The first nine months of 2007 includes a $5.0 net restructuring
charge while the first nine months of 2006 included a net restructuring charge
of $21.9, $2.2 related to a contingent liability increase for asbestos and a
$14.0 asset impairment charge. See Note 5 to the consolidated financial
statements for additional detail of the net restructuring charge.
Selling and technical services was $155.3 in 2007 versus $161.8 in the prior
year. The reduction was primarily due to the divestiture of the water treatment
chemicals product line partially offset by higher spending in Engineered
Materials and Surface Specialties.
Research and process development was $55.5 in 2007 versus $54.5 in the prior
year. The change is due to higher spending in Engineered Materials and Surface
Specialties to develop and qualify new products and applications more than
offsetting the decline due to the divestiture of the water treatment chemicals
product line.
Administrative and general expenses were $84.4 in 2007 versus $76.7 in the prior
year. The increase in 2007 was primarily attributable to changes in exchange
rates, higher compensation expenses, and increases in audit fees. The first nine
months of 2007 also includes $0.4 of additional expense related to the
restructuring of the Dijon, France manufacturing facility, while the first nine
months of 2006 includes integration expenses of $1.2 in administrative and
general expenses associated with transitioning off of UCB's information
technology system infrastructure and a net $0.5 restructuring charge.
Amortization of acquisition intangibles was $28.6 in 2007 versus $28.7 in the
prior year. 2006 included a $1.4 write-down of intangibles related to the
unprofitable manufacturing facility in France.
Other income (expense), net was income of $0.1 in 2007 compared to income of
$13.0 in the prior year period. Included in the first nine months of 2006 is a
gain of $15.7 in connection with proceeds collected in an arbitration award in
settlement of the commercial dispute as discussed in Note 10 of the consolidated
financial statements.
Equity in earnings of associated companies was $0.9 in 2007 versus $2.5 in the
prior year. The decline is attributable to the lower sales demand at our
associated company.
Interest expense, net was $31.9 in 2007 compared with $43.7 in the prior year.
The decrease is primarily due to lower average debt levels.
-23-
The effective income tax rate for the nine months ended September 30, 2007 was a
tax provision of 27.1% ($59.1) compared to a tax benefit of 26.7% ($40.9) for
the nine months ended September 30, 2006. Included in the amount for nine months
2007 is a $3.5 tax benefit as a result of the recently enacted tax legislation
that lowered the German corporate tax rates effective January 1, 2008, thereby
requiring a commensurate reduction in our net deferred tax liabilities with
respect to this tax jurisdiction. The 2007 effective tax rate was unfavorably
impacted by a shift in our earnings to higher tax jurisdictions, changes in U.S.
tax laws regarding export incentives, and a French restructuring charge for
which no tax benefit was given due to the unlikely utilization of related net
operating losses. The rate was favorably affected by the relatively low tax
expense of $0.4 with respect to a $15.7 gain recorded in the first quarter of
2007 on the second phase of the water business divestiture and changes in U.S.
tax laws regarding manufacturing incentives. We increased our normalized
effective tax rate to 30.25% in the third quarter, compared to 29.75% for the
six months ended June 30, 2007, primarily due to changes in the estimated
profitability mix by entity.
The 2006 effective rate was negatively impacted by the limited tax benefit
available on the French asset impairment charge as well as an increase during
the quarter in the normalized effective tax rate from 27.0% to 27.5% primarily
due to the reduction of earnings of divested product lines in lower tax
jurisdictions. The year to date 2006 effective tax rate was also positively
impacted by a tax benefit from a restructuring charge recorded at 29.6% and a
favorable decision in a legal dispute, a portion of which was recorded in a
lower tax entity resulting in an effective rate of 20.0%. Also favorably
impacting the rate was a reduction in tax expense of $3.5 as a result of the
completion of prior years U.S. tax audits. Excluding these items, the normalized
annual effective tax rate for the nine months ended September 30, 2006 was
27.5%.
Net earnings for 2007 were $158.9 ($3.23 per diluted share) compared with net
earnings for 2006 of $111.7 ($2.30 per diluted share). The improvement in net
earnings is primarily attributable to higher operating earnings from increased
selling volumes in excess of raw materials costs, and benefits from prior
restructuring initiatives. Earnings also increased due to lower net interest
expense partially offset by the higher effective tax rate as discussed above.
Included in the 2007 results are after-tax net restructuring charges of $4.8, a
favorable German tax rate adjustment of $3.5, and after-tax gain of $15.3 from
the closing of the sale of the water treatment chemicals product line.
Net earnings for 2006 of $111.7 ($2.30 per diluted share) included after-tax net
restructuring charges of $16.5, an after-tax charge of $1.6 related to
completion of a detailed update of our asbestos contingent liability, after-tax
costs of $0.9 related to surface specialties integration, an after-tax gain of
$12.5 related to a favorable resolution of a legal dispute, an income tax
benefit of $3.5 related to the completion of prior years tax audits and the
cumulative effect of an accounting change after-tax charge of $1.2 related to
the adoption of SFAS 123R.
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.
Cytec Performance Chemicals
% Change Due to
------------------------------------------
Total %
2007 2006 Change Price Volume/Mix Divestiture Currency
-----------------------------------------------------------------------------------------------------------------------------
North America $198.4 $261.3 -24% - -4% -20% -
Latin America 93.4 100.4 -7% 1% -3% -6% 1%
Asia/Pacific 97.2 94.6 3% -1% 9% -7% 2%
Europe/Middle East/Africa 155.6 232.3 -33% 1% - -38% 4%
-----------------------------------------------------------------
Total $544.6 $688.6 -21% - -1% -22% 2%
=============================================================================================================================
Overall selling volumes decreased 23% primarily due to the divestiture of the
water treating chemicals product line. Excluding the divestiture, overall
volumes decreased 1%. North America volume declines in specialty additives and
alumina were partially offset by the increases in polymer additives. Volume in
Asia/Pacific increased for alumina and specialty additives. Overall volumes in
Latin America decreased primarily in mining chemicals. Overall selling prices
were flat and changes in exchange rates increased sales 2%.
Earnings from operations were $54.9, or 10% of sales, compared with $56.8, or 8%
of sales, in 2006. Earnings were down slightly due to lower volumes, higher raw
material costs of approximately $12.0 and the divestiture of the water treating
chemical product line partially offset by restructuring and more favorable
product mix. Operating margins improved from 2006, primarily due to the benefits
of the 2006 polymer additive restructuring and product mix.
-24-
Cytec Surface Specialties
% Change Due to
Total % --------------------------
2007 2006 Change Price Volume/Mix Currency
--------------------------------------------------------------------------------
North America $269.1 $284.5 -5% 2% -7% -
Latin America 52.6 45.2 16% 2% 10% 4%
Asia/Pacific 205.6 194.0 6% 6% -1% 1%
Europe/Middle East/Africa 709.7 624.6 14% 8% -2% 8%
----------------------------------------------------
Total $1,237.0 $1,148.3 8% 6% -3% 5%
================================================================================
Overall selling volumes decreased 3% primarily due to discontinuing sales of
unprofitable solvent-borne resin products in Europe and weak demand across most
product lines in North America. Volume increased 10% in Latin America across all
product lines. Overall selling prices increased 6% primarily due to higher
selling prices in liquid coating resins and powder coating resins in all
regions. Changes in exchange rates increased sales by 5% across all product
lines and most regions.
Earnings from operations were $79.7, or 6% of sales, compared with $78.0, or 7%
of sales, in 2006. The increase in earnings is primarily due to increased
selling prices partially offset by raw material price increases of approximately
$48.0 and volume decreases in solvent-borne resin products.
Cytec Engineered Materials
% Change Due to
Total % --------------------------
2007 2006 Change Price Volume/Mix Currency
--------------------------------------------------------------------------------
North America $311.8 $276.9 13% 2% 11% -
Latin America(1) 0.9 0.9 - - - -
Asia/Pacific 36.9 32.5 14% 1% 13% -
Europe/Middle East/Africa 142.7 131.3 9% 2% 5% 2%
----------------------------------------------------
Total $492.3 $441.6 11% 1% 9% 1%
================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 9% from higher volumes in the large commercial
aircraft market segment primarily due to build rates, and the launch vehicle
market segment due to new program sales, and increases in other high performance
market segments. Overall selling prices increased 1% due to price increases
across a number of markets in most regions. Changes in exchange rates increased
sales 1%
Earnings from operations were $96.2, or 20% of sales, compared with $78.8, or
18% of sales in 2006. The impact of increased volumes and higher selling prices
was partially offset by increased raw materials of approximately $8.0 and higher
manufacturing costs due to the higher volumes as well as increased operating
expenses to support the current growth and future growth initiatives.
Building Block Chemicals
-----------------------------------------
% Change Due to
Total % -----------------------------------------
2007 2006 Change Price Volume/Mix Divestiture Currency
------------------------------------------------------------------------------------------------------
North America $178.3 $131.3 36% 2% 41% -7% -
Latin America(1) 2.4 4.1 - - - - -
Asia/Pacific 23.4 26.8 -13% 13% -25% -1% -
Europe/Middle East/Africa 124.6 95.2 31% 11% 59% -39% -
-----------------------------------------------------------------
Total $328.7 $257.4 28% 6% 41% -19% -
======================================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes were up 22%. Sales were negatively impacted 19% by the
divestiture of the acrylamide product line which was more than offset by
increased volumes of acrylonitrile to the purchaser of the divested product
line. Melamine sales were higher in the nine month period primarily due to
increased capacity available following our takeover of the manufacturing plant
in August 2006, which previously was a 50-50 joint venture with a third party.
Overall selling prices increased sales by 6%.
Earnings from operations were $16.6, or 5% of sales, compared with $16.3, or 6%
of sales, in 2006. The increase in earnings was primarily due to higher volumes
of acrylonitrile and melamine as well as 6% higher selling prices partially
offset by the divestiture of the acrylamide product line, higher raw material
costs of approximately $7.0 as well as the lower production due to the planned
maintenance turnaround of the acrylonitrile manufacturing facility in June 2007.
Included in 2006 is net benefit of approximately $2.7 related to a payment from
our former melamine joint venture partner for early termination of the
manufacturing joint venture.
-25-
LIQUIDITY AND FINANCIAL CONDITION
At September 30, 2007 our cash balance was $68.7 compared with $23.6 at year end
2006.
Cash flows provided by operating activities were $194.5 in 2007 compared with
$161.2 in 2006. Trade accounts receivable increased $51.3 reflecting the
increase in sales and slightly higher days outstanding. Other receivables
decreased $16.7 which includes payments received for certain rebates of $2.3 and
insurance recoveries of $3.3. Inventory increased $5.0 due to higher raw
material cost and inventory levels to meet increasing demand. Days on hand
decreased by approximately four days from year end 2006. Other liabilities
decreased $24.6, which includes pension and other postretirement benefit
contributions of $42.7 partially offset by current year accruals of $28.5.
Cash flows used in investing activities were $35.5 for 2007 compared with $62.2
for 2006. This decrease was primarily attributable to the proceeds of $30.2
received related to the sale of our water treatment chemicals and acrylamide
product line to Kemira Group. Capital spending for the nine months 2007 was
$65.7, although this is expected to trend higher as activity on our expansion
projects in the Engineered Materials and Surface Specialty segments increase
over the last quarter of the year.
Net cash flows used in financing activities were $116.3 in 2007 compared with
$140.9 for 2006. This change is primarily due to a reduction in net debt
repayments in 2007. For nine months 2007, we had net debt repayments of $97.6
and treasury stock repurchases of 804,800 shares for $49.6, which were partially
offset by proceeds received on the exercise of stock options of $31.8 and excess
tax benefits from share-based payment arrangements of $8.5. For nine months
2006, we had net debt repayments of $176.6, which were partially offset by
proceeds received on the exercise of stock options of $40.5 and excess tax
benefits from share-based payment arrangements of $9.4. In June 2007, we amended
and restated our revolving credit agreement to increase the facility from $350.0
to $400.0, and extend the maturity date to June 2012. There was no borrowing
against the $400.0 unsecured five-year revolving credit facility at September
30, 2007.
Approximately $19.2 remained authorized under our stock buyback program as of
September 30, 2007. We anticipate repurchases will be made from time-to-time on
the open market or in private transactions and will be utilized for share-based
compensation plans and other corporate purposes.
On July 19, 2007 the Board of Directors declared a $0.10 per common share cash
dividend, paid on August 27, 2007 to shareholders of record as of August 10,
2007. Cash dividends paid in the third quarter of 2007 and 2006 were $4.8 and
$4.7, respectively, and for the nine months ended September 30, 2007 and 2006
were $14.4 and $14.1, respectively. On October 18, 2007 the Board of Directors
declared a $0.10 per common share cash dividend, payable on November 26, 2007 to
shareholders of record as of November 9, 2007.
We believe that we have the ability to fund our operating cash requirements,
planned capital expenditures and dividends as well as the ability to meet our
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 our plans for capital
investment or other investments, it may make economic sense to utilize our
existing credit lines in order to meet those cash requirements, which may
include debt-service related disbursements.
We have not guaranteed any indebtedness of our 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 our 2006 Annual Report on
Form 10-K.
There were no material changes in contractual obligations from December 31, 2006
to September 30, 2007. Reference is also made to Note 12 in the Notes to
Consolidated Financial Statements included herein which describes certain gross
liabilities at September 30, 2007 totaling $31.6 for unrecognized tax benefits
that will be resolved at some point over the next several years.
-26-
OTHER
2007 OUTLOOK
In our October 18, 2007 press release, which was also furnished as an exhibit to
a current report on Form 8-K, we presented our best estimate of the full year
2007 earnings at the time based on various assumptions set forth in the 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."
SIGNIFICANT ACCOUNTING ESTIMATES / CRITICAL ACCOUNTING POLICIES
See "Critical Accounting Policies" under Item 7A of our 2006 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on February 28,
2007 and incorporated by reference herein. There were no changes to our critical
accounting policies except as follows.
Accounting for Uncertainty in Income Taxes
During the first quarter of 2007, we adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement
No. 109, Accounting for Income Taxes" ("FIN 48"). Under FIN 48, we recognize the
tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than fifty percent likelihood of being
realized upon effective settlement. See Note 12 of the Consolidated Financial
Statements for additional details on the impact of adoption of FIN 48.
COMMENTS ON FORWARD-LOOKING STATEMENTS
A number of the statements made by us in this report, in our 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, our 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 our
(including our segments) outlook for the future, anticipated results of
acquisitions and divestitures, restructuring initiatives and their expected
results, pricing trends, the effects of changes in currency rates and forces
within the industry, the completion dates and effective capacity of and
anticipated expenditures for capital projects, expected sales growth,
operational excellence strategies and their results, expected annual effective
tax rates, our long-term goals, legal settlements 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 our current beliefs and expectations 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 successfully complete planned restructuring activities, including
realization of the anticipated savings and operational improvements resulting
from such activities; the retention of current ratings on our debt; changes in
global and regional economies; the financial well-being of end consumers of our
products; changes in demand for our products or in the quality, costs and
availability of our raw materials and energy; customer inventory reductions; the
actions of competitors; currency and interest rate fluctuations; technological
change; our 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 our products; litigation,
including its inherent uncertainty and changes in the number or severity of
various types of claims brought against us; 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Currencies
in millions)
For a discussion of market risks at year end, refer to Item 7A of our Annual
Report on Form 10-K for the year ended December 31, 2006, filed with the
Securities and Exchange Commission on February 28, 2007 and incorporated by
reference herein. Other 2007 financial instrument transactions include:
-27-
Commodity Price Risk: At September 30, 2007, we held natural gas swaps, with an
unfavorable fair value of $2.0, which will be reclassified into Manufacturing
Cost of Sales through August 2008 as these swaps are settled.
Assuming all other factors are held constant, a hypothetical increase/decrease
of 10% in the price of natural gas would cause an increase/decrease of
approximately $1.5 in the value of the swaps.
Interest Rate Risk: At September 30, 2007, our outstanding borrowings consisted
of $47.3 of short-term variable rate borrowings and $806.4 of long-term fixed
rate debt, including the current portion. The long-term debt had a face value of
$806.1 and a fair value, based on dealer quoted values, of approximately $797.7
at September 30, 2007.
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, 2007, interest expense would increase/decrease
by approximately $0.1 for the next fiscal quarter.
Currency Risk: We periodically enter into currency forward contracts primarily
to hedge currency fluctuations of transactions denominated in currencies other
than the functional currency of the business. At September 30, 2007, the
principal transactions hedged involved accounts receivable, accounts payable and
intercompany loans. When hedging currency exposures, our practice is to hedge
such exposures with forward contracts denominated in the same currency and with
similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction.
At September 30, 2007, net contractual amounts of forward contracts outstanding
translated into U. S. dollar amounts of $139.6. The favorable fair value of
currency contracts, based on forward exchange rates at September 30, 2007, was
$2.5. Assuming that period-end exchange rates between the underlying currencies
of all outstanding contracts and the various hedged currencies were to adversely
change by a hypothetical 10%, the fair value of all outstanding contracts at
September 30, 2007 would decrease by approximately $20.8. However, since these
contracts hedge specific transactions, any change in the fair value of the
contracts would be offset by changes in the underlying value of the item or
transaction being hedged.
In September, 2005, we 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 a semi-annual exchange of fixed euro interest
payments for fixed U.S. dollar interest receipts. With respect to the five year
swaps, we 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 five year swaps. With
respect to the ten year swaps, we 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 ten 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 U.S. dollar to euro exchange rates on
certain euro denominated intercompany loans receivable we have with one of our
subsidiaries. At September 30, 2007, the unfavorable fair value of the five and
ten year swaps were $31.5 and $27.0, respectively. Assuming other factors are
held constant, a hypothetical increase of 10% in the U.S. dollar to euro
exchange rate would have an adverse effect of approximately $55.8 on the
combined value of the cross-currency swaps.
Our euro denominated bank borrowings are used to provide a partial hedge of our
net investment in our Belgium-based subsidiary, Cytec Surface Specialties SA/NV.
From time to time we also enter into forward euro contracts to adjust the level
of this net investment hedge. At September 30, 2007, we had forward contracts to
purchase (euro)58.0 which were designated as a net investment hedge. Assuming
other factors are held constant, a hypothetical decrease of 10% in the U.S.
dollar to euro exchange rate would have an adverse impact of approximately $8.2
in the value of these forward contracts.
Item 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation
of the 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
June 30, 2007. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective.
We continue the process of implementing our Cytec Specialty Chemicals global
enterprise-wide planning systems for the acquired business of Surface
Specialties. The world-wide implementation is expected to be completed in early
2009 and includes changes that involve internal control over financial
reporting. Although we expect this implementation to proceed without any
material adverse effects, the possibility exists that the migration to our
global enterprise-wide planning systems could adversely affect our internal
control, our disclosure control and procedures or our results of operations in
future periods. We are reviewing each system and site as they are being
implemented and the controls affected by the implementation. Appropriate changes
have been or will be made to any affected internal control during the
implementation. We will test all significant modified controls resulting from
the implementation to ensure they are functioning effectively.
-28-
As of January 1, 2007, we began utilizing the aforementioned global systems for
the acquired Surface Specialties entities in the United States and Canada. In
conjunction with this implementation, the former U.S. legal entity for the
Surface Specialty business was also merged with the Cytec Industries Inc. U.S.
legal entity. On August 1, 2007, we also began utilizing the global systems for
our entities in China. We have reviewed the results of the merger and the
concurrent systems implementation and have concluded that neither had a negative
impact on our internal control over financial reporting.
There were no changes in internal control over financial reporting that occurred
during the three months ended September 30, 2007 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
-29-
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS (Currencies in millions)
We are the subject of numerous lawsuits and claims incidental to the conduct of
our or our 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. We believe
that the resolution of such lawsuits and claims, including those described
below, will not have a material adverse effect on our consolidated financial
position, but could be material to our consolidated results of operations and
cash flows in any one accounting period. We, in this section, include certain
predecessor entities being indemnified by us.
Material developments to legal proceedings described in our 2006 Annual Report
on Form 10-K and Forms 10-Q since that date are set forth below.
The following table presents information about asbestos claims activity during
the nine months ended September 30, 2007:
--------------------------------------------------------------------------------
For the Nine Month
Period Ended
September 30,
2007
--------------------------------------------------------------------------------
Number of claimants at beginning of period 8,600
Number of claimants associated with claims closed during
period (700)
Number of claimants associated with claims opened during
period 300
--------------------------------------------------------------------------------
Number of claimants at end of period 8,200
================================================================================
Numbers in the foregoing table are rounded to the nearest hundred and are based
on information as received by the Company, which may lag actual court filing
dates by several months or more. Claims are recorded as closed when a claimant
is dismissed or severed from a case. Claims are opened whenever a new claim is
brought, including from a claimant previously dismissed or severed from another
case.
In October 2007, the Wisconsin Court of Appeals affirmed the trial court's
dismissal of the plaintiff's strict liability and negligent design defect causes
of action for white lead carbonate in the case styled Ruben Godoy et al v. E.I
DuPont de Nemours et al., one of the approximately 30 Wisconsin lead cases in
which we are a defendant. The decision in this case reinforces our belief that
our liability, if any, in these cases will not be material, either individually
or in the aggregate, and no loss contingency has been recorded.
See also Note 10 of the Notes to the Consolidated Financial Statements herein.
-30-
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES (Currencies in millions, except per share
amounts)
During the nine months ended September 30, 2007, we repurchased common stock for
$49.6 under our stock buyback program, which was suspended in October 2004 and
reinstated in February 2007. Approximately $19.2 remained authorized under the
buyback program as of September 30, 2007. Pursuant to this program, shares can
be repurchased in open market transactions or privately negotiated transactions
at our discretion.
Approximate Dollar
Total Number of Value of Shares
Total Number Shares Purchased That May Yet Be
of Shares Average Price as Part of Publicly Purchased
Period Purchased Per Share Announced Program Under the Program
------------------- -------------- --------------- ------------------ ------------------
March 1, 2007 -
March 31, 2007 170,000 $57.04 170,000 $59.0
------------------- -------------- --------------- ------------------ ------------------
April 1, 2007 -
April 30, 2007 72,000 $55.64 72,000 $55.0
------------------- -------------- --------------- ------------------ ------------------
May 1, 2007 -
May 31, 2007 78,000 $57.81 78,000 $50.5
------------------- -------------- --------------- ------------------ ------------------
June 1, 2007 -
June 30, 2007 112,800 $60.75 112,000 $43.7
------------------- -------------- --------------- ------------------ ------------------
August 1, 2007 -
August 31, 2007 182,000 $64.63 182,000 $31.9
------------------- -------------- --------------- ------------------ ------------------
September 1, 2007 -
September 30, 2007 190,000 $66.94 190,000 $19.2
------------------- -------------- --------------- ------------------ ------------------
Item 5. OTHER
REGULATORY DEVELOPMENTS
The Registration, Evaluation and Authorization of Chemicals ("REACH")
legislation became effective in the European Union on June 1, 2007. This
legislation requires manufacturers and importers of certain chemicals to
register certain chemicals and evaluate their potential impact on human health
and the environment. Under REACH, where warranted by a risk assessment,
specified uses of some hazardous substances may be restricted. Covered
substances must be pre-registered by December 31, 2008. Subsequently,
registration is required based on volume for covered substances manufactured or
imported into the European Union in quantities greater than one metric ton per
year. The European Commission is preparing technical guidance documents to
facilitate the implementation of REACH, but this guidance is not expected to be
available until the end of 2007. Currently, REACH is expected to take effect in
three primary stages over eleven years following the final effective date. The
registration, evaluation and authorization phases would require expenditures and
resource commitments, for example, in order to compile and file comprehensive
reports, including testing data, on each chemical substance and perform chemical
safety assessments. We do not expect to incur significant costs for REACH
compliance in 2007. However, the overall cost of compliance over the next 10-15
years could be substantial. In addition, it is possible that REACH may affect
raw material supply, customer demand for certain products, and our decision to
continue to manufacture and sell certain products in the European Union.
Item 6. EXHIBITS
(a). Exhibits
See Exhibit Index on page xx for exhibits filed with this Quarterly Report on
Form 10-Q.
-31-
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/ David M. Drillock
-----------------------
David M. Drillock
Vice President and
Chief Financial Officer
October 31, 2007
-32-
Exhibit Index
-------------
12 Computation of Ratio of Earnings to Fixed Charges for the three and
nine months ended September 30, 2007 and 2006
31.1 Certification of David Lilley, Chief Executive Officer, Pursuant to
Rule 13a-14(a) of the Securities Exchange Act
31.2 Certification of David Drillock, 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 David Drillock, Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002
-33-