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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, 2006
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 47,534,959 shares of common stock outstanding at October 30, 2006.
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 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 35
Part II - Other Information
Item 1. Legal Proceedings 36
Item 6. Exhibits 36
Signature 37
Exhibit Index 38
2
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
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2006 2005 2006 2005
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Net sales $ 863.4 $ 760.8 $2,535.9 $ 2,138.2
Manufacturing cost of sales 698.5 599.6 2,032.7 1,679.0
Selling and technical services 54.9 53.1 161.8 155.9
Research and process development 18.4 17.5 54.5 50.4
Administrative and general 25.8 26.2 76.7 70.7
Amortization of acquisition intangibles 10.6 8.8 28.7 21.6
Write-off of acquired in-process research and development - - - 37.0
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Earnings from operations 55.2 55.6 181.5 123.6
Other income (expense), net (1.2) 6.0 13.0 (44.9)
Equity in earnings of associated companies 0.8 0.8 2.5 7.4
Interest expense, net 14.5 15.9 43.7 63.9
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Earnings from continuing operations before income taxes and
cumulative effect of accounting change 40.3 46.5 153.3 22.2
Income tax provision (benefit) 15.3 11.6 40.7 (17.3)
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Earnings from continuing operations before cumulative effect 25.0 34.9 112.6 39.5
of accounting change
Cumulative effect of accounting change (net of income
tax benefit of $0.7) - - (1.2) -
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Earnings from continuing operations 25.0 34.9 111.4 39.5
Earnings from discontinued operations (net of income tax
provision of $0.2 and $0.8) - 0.5 - 1.2
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Net earnings $ 25.0 $ 35.4 $ 111.4 $ 40.7
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Basic net earnings per common share:
Earnings from continuing operations before cumulative effect
of accounting change $ 0.52 $ 0.76 $ 2.38 $ 0.88
Cumulative effect of accounting change, net of taxes - - (0.03) -
Earnings from discontinued operations, net of taxes - 0.01 - 0.03
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Net earnings $ 0.52 $ 0.77 $ 2.35 $ 0.91
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Diluted net earnings per common share:
Earnings from continuing operations before cumulative effect
of accounting change $ 0.51 $ 0.74 $ 2.32 $ 0.86
Cumulative effect of accounting change, net of taxes - - (0.02) -
Earnings from discontinued operations, net of taxes - 0.01 - 0.02
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Net earnings $ 0.51 $ 0.75 $ 2.30 $ 0.88
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Dividends per common share $ 0.10 $ 0.10 $ 0.30 $ 0.30
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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,
2006 2005
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Assets
Current assets
Cash and cash equivalents $ 29.3 $ 68.6
Trade accounts receivable, less allowance for doubtful accounts of
$6.4 and $7.8 at September 30, 2006 and December 31, 2005, respectively 520.9 493.8
Due from related party 3.2 8.0
Other accounts receivable 63.4 65.9
Inventories 453.4 424.7
Deferred income taxes 12.4 12.2
Other current assets 20.0 31.4
Assets held for sale 164.0 -
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Total current assets 1,266.6 1,104.6
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Investment in associated companies 21.3 20.3
Plants, equipment and facilities, at cost 1,851.8 2,064.3
Less: accumulated depreciation (861.2) (988.8)
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Net plant investment 990.6 1,075.5
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Acquisition intangibles, net of accumulated amortization of
$80.3 and $51.0 at September 30, 2006 and December 31, 2005, respectively 484.5 491.5
Goodwill 1,026.9 1,012.2
Other assets 103.5 106.4
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Total assets $3,893.4 $ 3,810.5
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Liabilities
Current liabilities
Accounts payable $ 291.5 $ 278.6
Short-term borrowings 35.3 34.3
Current maturities of long-term debt 8.0 51.2
Accrued expenses 219.3 218.3
Income taxes payable 36.0 43.5
Liabilities held for sale 15.4 -
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Total current liabilities 605.5 625.9
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Long-term debt 1,113.0 1,225.5
Pension and other postretirement benefit liabilities 424.4 432.5
Other noncurrent liabilities 257.5 224.4
Deferred income taxes 53.0 64.1
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 254.6 235.6
Retained earnings 1,246.6 1,149.7
Unearned compensation - (2.5)
Accumulated other comprehensive income (loss):
Minimum pension liability (115.0) (115.0)
Unrealized net gains on cash flow hedges 5.5 0.4
Accumulated translation adjustments 69.1 27.6
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(40.4) (87.0)
Treasury stock, at cost, 671,525 shares in 2006 and 1,833,812 shares in 2005 (21.3) (58.2)
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Total stockholders' equity 1,440.0 1,238.1
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Total liabilities and stockholders' equity $3,893.4 $ 3,810.5
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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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2006 2005
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Cash flows provided by (used in) operating activities
Net earnings $ 111.4 $ 40.7
Earnings from discontinued operations, net of taxes - 1.2
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Earnings from continuing operations 111.4 39.5
Non cash items included in net earnings from continuing operations:
Depreciation 84.5 82.7
Amortization 31.3 23.6
Share-based compensation 8.8 1.6
Deferred income taxes 7.3 (22.6)
Write-off of acquired in-process research and development - 37.0
Amortization of write-up to fair value of finished goods purchased in acquisition - 20.8
Gains on sale of assets - (1.2)
Losses on asset write-offs 25.3 -
Unrealized loss on derivative instruments - 20.9
Cumulative effect of accounting change 1.9 -
Other 3.2 (2.2)
Changes in operating assets and liabilities (excluding effect of acquisition):
Trade accounts receivable (58.4) 6.4
Other receivables 7.3 22.2
Inventories (48.4) 8.9
Other assets (0.8) 18.9
Accounts payable 10.5 (35.0)
Accrued expenses (8.3) (20.0)
Income taxes payable (9.4) (29.4)
Other liabilities (5.0) (3.6)
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Net cash provided by operating activities of continuing operations 161.2 168.5
Net cash provided by operating activities of discontinued operations - 4.9
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Net cash provided by operating activities 161.2 173.4
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Cash flows provided by (used in) investing activities
Additions to plants, equipment and facilities (62.2) (74.7)
Proceeds received on sale of assets - 177.6
Acquisition of business, net of cash received - (1,458.7)
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Net cash used in investing activities (62.2) (1,355.8)
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Cash flows provided by (used in) financing activities
Proceeds from long-term debt 188.7 874.4
Payments on long-term debt (364.6) (292.1)
Change in short-term borrowings (0.7) 467.8
Cash dividends (14.1) (13.2)
Proceeds from the exercise of stock options 40.5 12.8
Deferred financing costs - (4.9)
Excess tax benefits from share-based payment arrangements 9.4 -
Other (0.1) (0.7)
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Net cash provided by (used in) financing activities (140.9) 1,044.1
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Effect of currency rate changes on cash and cash equivalents 2.6 (7.6)
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Decrease in cash and cash equivalents (39.3) (145.9)
Cash and cash equivalents, beginning of period 68.6 323.8
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Cash and cash equivalents, end of period $ 29.3 $ 177.9
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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 2005 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.
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year's presentation.
2. ACQUISITION AND RELATED EVENTS
On February 28, 2005, we acquired the Surface Specialties business ("Surface
Specialties") of UCB SA ("UCB") for cash and stock valued at $1,799.7, of which
$1,508.9 ((euro)1,138.5 at 1.325 U.S. dollar per euro) was paid in cash and the
balance was paid in 5,772,857 shares of Cytec common stock ($290.8 at $50.37 per
Cytec share). During September 2005, we received $25.4 from UCB representing a
reduction of the purchase price for finalization of working capital amounts as
of the acquisition date. After considering the final working capital adjustment
and transaction costs incurred of $15.3, the acquisition was valued at $1,789.6.
The acquisition complemented our existing product lines by significantly
increasing our product offering to the coatings and additives industries
including the general industrial, automotive, architectural, plastic, graphic
arts and wood sectors.
In accordance with the purchase agreement, contingent consideration up to a
maximum of (euro)50.0 was to be determined in January 2006 based upon 2005
year-end results, of which (euro)20.0 ($26.5 at 1.325 U.S. dollar per euro) was
prepaid at closing. In view of the parties' expectation that the contingent
consideration would not be payable, we were refunded the payment during
September 2005 provided that a final year-end determination of the actual
contingent payment due, if any, would still be made. Subsequently, we determined
that no amounts were due under this agreement.
Upon closing, UCB became the owner of approximately 12.5% of our outstanding
common shares. We entered into a stockholder's agreement (the "Stockholder's
Agreement") with UCB which provides, subject to various exceptions, that UCB
must reduce its stake to less than 9% within three years, less than 7% within
four years and less than 5% within five years and which provides that UCB will
be prohibited from purchasing additional shares of our common stock or causing,
advocating or participating in a change of control in the ownership of Cytec.
The Stockholder's Agreement also contains customary terms and conditions
including an obligation of UCB to vote its shares of Cytec common stock in
accordance with our Board of Directors' recommendation on certain matters.
Pursuant to regulatory approvals, we were required to divest the Surface
Specialties amino resins ("SSAR") product line. On August 31, 2005, we sold SSAR
to affiliates of INEOS Group Limited ("INEOS") for cash consideration of
(euro)64.0 ($78.2 at 1.22 U.S. dollar per euro). In the fourth quarter of 2005,
we paid $1.6 to INEOS representing a reduction of the selling price for final
working capital adjustments as of the acquisition date. After considering the
final working capital adjustment, the sale was valued at $76.6 ($72.8 net of
disposition related expenses of $3.8). From acquisition through the date of
sale, SSAR was classified as a discontinued operation. Revenues of SSAR were
$74.3 for the six months ended August 31, 2005 (acquisition through date of
sale). The net proceeds realized from the divestiture of SSAR were used to
reduce acquisition related debt.
6
In late 2004, we entered into $642.9 of forward-starting interest rate swaps to
hedge the benchmark interest rate and credit spread on certain debt anticipated
to be issued in 2005 in connection with the acquisition. Due to a subsequent
reduction in borrowing requirements, we liquidated $25.0 of these swaps in March
2005 at a cost of $0.4 and $60.4 of these swaps in June 2005 at a cost of $3.7.
In September 2005, we settled the remaining outstanding swaps at the same time
that we priced our public debt offering. The termination payment of $27.4 was
paid in October 2005. The swaps were marked to market and recorded currently in
earnings until their termination.
We had also previously entered into currency forward contracts that related to
approximately 87% of the euro exposure of (euro)1,190.0 for the cash component
of the Surface Specialties acquisition. The forward contracts, which matured on
February 28, 2005, were marked to market and recorded currently in earnings
until their maturity.
The impact on earnings for the three and nine months ended September 30, 2005 of
the mark to market adjustments on these swaps and forward contracts was a
pre-tax gain of $3.7 and net pre-tax expense of $44.2, respectively and was
recorded in other income (expense), net.
The following table summarizes the estimated fair value of the assets acquired
and the liabilities assumed in the acquisition. We completed the purchase price
allocation in the first quarter of 2006.
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Cash $ 34.6
Current deferred tax assets 28.3
Other current assets 533.1
Assets of discontinued operations held for sale 91.8
Property, plant and equipment 447.9
Goodwill 725.7
Acquired intangible assets 490.4
Acquired in-process research and development 37.0
Other assets 31.7
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Total assets acquired $2,420.5
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Current liabilities $ 285.3
Liabilities of discontinued operations held for sale 26.5
Long-term deferred tax liabilities 181.9
Long-term debt 9.9
Other long-term liabilities 127.3
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Total liabilities assumed 630.9
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Net assets acquired $1,789.6
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The $725.7 of goodwill is not tax deductible and, $38.0 was allocated to our
Cytec Performance Chemicals segment and $687.7 was allocated to our Cytec
Surface Specialties segment. Included in acquired intangible assets is $45.7
relating to certain trade names which were originally indefinite useful lives
(see Note 16 for revision to this conclusion in the second quarter of 2006). The
remaining acquired intangibles consist of customer-related ($382.6),
marketing-related ($96.5) and technology-related intangibles ($11.3), and are
being amortized over periods of 15 years. Immediately following the acquisition,
$37.0 of acquired in-process research and development costs were written off.
Following are the unaudited pro forma combined results of operations for the
three and nine months ended September 30, 2005 as if Cytec and Surface
Specialties had been combined and the sale of SSAR had been completed as of
January 1, 2005. Additionally, the write-off of in-process research and
development costs and the cost of sales effects of the inventory valuation
adjustments were excluded from the 2005 amounts as they are considered
non-recurring charges. The pro forma results do not include any anticipated cost
savings or other effects of the planned integration and are not indicative of
the results which would have actually occurred if the business combination had
been in effect on the dates indicated, or which may result in the future. The
pro forma information set forth below considers the following factors: the
issuance of 5,772,857 shares of our common stock to UCB in connection with the
acquisition; the issuance of acquisition-related debt of $1,325.0 at a
weighted-average interest rate of 3.79% and the associated increase in interest
expense, net of the after-tax proceeds from the sale of SSAR used to pay down
such debt; a net reduction in cash and an associated reduction in interest
income as a result of the on-hand cash utilized to purchase Surface Specialties;
increased amortization of acquisition intangibles; decreased depreciation
expense based on asset values and estimated useful lives included in the
valuation report; amortization of deferred financing costs; and the tax effects
of each of these items.
7
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Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
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Revenues $ 760.8 $ 2,363.0
Net earnings $ 34.9 $ 92.4
Net earnings per common share:
Basic $ 0.76 $ 2.06
Diluted $ 0.74 $ 2.01
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Amounts related to the Surface Specialties acquisition in this footnote include
all adjustments to date and may differ from the amounts included in the
consolidated financial statements in Form 10-Q as of and for the three and nine
months ended September 30, 2005 which were based on the preliminary purchase
price allocation.
3. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes". FIN 48 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on the related de-recognition, classification, interest and penalties,
accounting for interim periods, disclosure and transition of uncertain tax
positions. FIN 48 is effective for fiscal years beginning after December 15,
2006, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. We are evaluating the impact of
this new pronouncement on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Benefits, an amendment of FAS
87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires an employer that
sponsors postretirement plans to recognize an asset or liability for the
overfunded or underfunded status of plans. Additionally, employers would be
required to record all unrecognized prior service costs and credits,
unrecognized actual gains and losses and any unrecognized transition obligations
or assets in accumulated other comprehensive income. Such amounts would be
reclassified into earnings as components of net period benefit cost/income
pursuant to the current recognition and amortization provisions. Finally, SFAS
158 requires an employer to measure plan assets and benefit obligations as of
the date of the employer's statement of financial position, as opposed to at an
earlier measurement date as allowed previously. SFAS 158 does not alter the
basic approach to measuring plan assets, benefit obligations, or net periodic
benefit cost. Except for the measurement date requirement, SFAS 158 is effective
for fiscal years ending after December 15, 2006. The measurement date
requirement will not be effective until fiscal years ending after December 15,
2008. Based on the funded status and valuations as of December 31, 2005, we do
not expect the adoption of SFAS 158 to have a material impact on our
consolidated financial statements primarily due to the minimum pension
liabilities previously recognized on our financial statements. We plan to
reevaluate the impact on our consolidated financial statements based on revised
valuations at year end.
8
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 expected 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 do not expect the adoption of SFAS 157 to have a material
impact on our consolidated financial statements.
In September 2006, the FASB issued Staff Position No. AUG AIR-1, "Accounting for
Planned Major Maintenance Activities" ("FSP"). This FSP would prohibit 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. Our scheduled turnaround activities in our Building Block Chemicals
segment are considered planned major maintenance activities. This FSP is
effective for fiscal years beginning after December 15, 2006, and retrospective
application would be required. The adoption of this FSP will change our current
accounting. We are evaluating the impact of this new pronouncement on our
consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin 108, "Considering the Effects of Prior Year Misstatements
When Quantifying Misstatements in Current Year Financial Statements" ("SAB
108"). SAB 108 clarifies the staff's views regarding the process of quantifying
financial statement misstatements. SAB 108 allows registrants to adjust prior
year financial statements for immaterial errors in the carrying amount of assets
and liabilities as of the beginning of this fiscal year, with an offsetting
adjustment being made to the opening balance of retained earnings. SAB 108 is
effective for fiscal years ending on or after November 15, 2006 with earlier
adoption encouraged. We are currently evaluating the impact that the adoption of
SAB 108 will have on our consolidated financial statements.
4. DIVESTITURE, ASSET IMPAIRMENT CHARGE AND DISCONTINUED OPERATIONS
Divestiture
-----------
In July 2006, we announced we had reached a definitive agreement to sell our
water treatment chemicals and acrylamide product lines to Kemira Group
("Kemira"). In October 2006, we completed the first of three phases of the sale,
which include the entire product lines with the exception of our Botlek
manufacturing site in the Netherlands, which is expected to close in early 2007,
and certain assets at various subsidiaries in Asia/Pacific and Latin America
which are expected to close within the next six months. The timing of the flow
of funds is as follows: approximately $208.0 was received in October for the
first closing, an estimated $20.0 upon the Botlek closing, and an estimated
$12.0 upon completion of the transfer of the assets at the various subsidiaries
for an estimated total of $240.0. Between the first closing and the remaining
applicable closings, we will contract manufacture and sell water treatment
chemicals and acrylamide at the Botlek site solely to Kemira and provide
distribution services for Kemira for the products at those subsidiaries that
were not included in this closing. The remaining closings are subject to certain
conditions and the amounts could change due to final working capital
transferred. The estimated 2006 full year sales of the two product lines was
approximately $300.0. We expect to record a gain on this phase of the
transaction in the fourth quarter of 2006.
Included in the first phase of the sale are essentially all of the sales,
marketing, manufacturing, R&D and technical services personnel and four
manufacturing sites, 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. We will
also continue to supply acrylonitrile to the Kemira acrylamide plant under a
long term supply agreement. 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 once that phase of the transaction is complete.
Assets held for sale and liabilities held for sale as of September 30, 2006
amounted to $164.0 and $15.4, respectively.
The assets and liabilities of our water treatment chemicals and acrylamide
product lines included in the September 30, 2006 consolidated balance sheet are
comprised of:
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Accounts receivable and other current assets 52.1
Inventories 33.3
Property, plant and equipment 60.5
Goodwill 15.2
Other assets 2.9
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Assets held for sale $ 164.0
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Accounts payable $ 8.1
Accrued liabilities and other current liabilities 1.5
Other noncurrent liabilities 1.4
Deferred income taxes 4.4
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Liabilities held for sale $ 15.4
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9
Asset Impairment Charge
-----------------------
In the third quarter of 2006, based on forecasted cash flow information, we have
determined that our manufacturing facility in France and related intangible
assets were impaired. This facility manufactures solvent-borne alkyd and
solvent-borne acrylic based resins in our Cytec Surface Specialties ("CSS")
segment, which are used in the coating industry for sale in the European market.
These mature products are in a declining market with supplier overcapacity with
severe price erosion and are generating losses.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), we recorded an impairment charge of $15.4 to
write-down the carrying value of the manufacturing facility and related
intangible assets down to zero as we do not believe the assets are saleable and
the outlook for recovery of products it manufactures is not positive. Of the
impairment charge, $14.0 was charged to manufacturing cost of sales and $1.4 was
charged to amortization of acquisition intangibles. The impairment charges were
included in our corporate unallocated operating results and were not recorded in
the operating results of the CSS business segment as that is how management
views its businesses. We are reviewing options for this site going forward and
we expect to have a decision before year end, after consultation with our Works
Council and local authorities.
Discontinued Operations
-----------------------
Pursuant to regulatory approvals, we were required to divest SSAR and we
completed the sale of this business on August 31, 2005. SSAR developed and
manufactured amino resins for use in various industries. SSAR had assets and
liabilities that were located primarily in the U.S., Canada and Germany.
A summary of the operating results of SSAR for the three and nine months ended
September 30, 2005 included in the results of discontinued operations is as
follows:
Three Months Nine Months
Ended September Ended September
30, 2005 * 30, 2005 **
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Revenues $ 22.5 $ 74.3
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Earnings before income taxes $ 0.7 $ 2.0
Income tax expense 0.2 0.8
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Earnings from discontinued operations $ 0.5 $ 1.2
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* Represents results for the two-month period ended August 31, 2005.
** Represents results for the six-month period ended August 31, 2005.
5. RESTRUCTURING OF OPERATIONS
In accordance with our policy, restructuring costs were included in our
corporate unallocated operating results and were not recorded in the operation
results of the respective business segment.
For the three months ended September 30, 2006, primarily due to actions taken as
a result of the pending divestiture of the water treatment and acrylamide
product lines to Kemira, we recorded a restructuring charge of $1.4, which
related to the elimination of 16 positions. The restructuring costs included
estimated cash severance of $1.4, and it was charged to expense as follows:
manufacturing cost of sales $0.9, selling expense $0.4 and administrative
expense $0.1.
In the second quarter of 2006, we recorded a restructuring charge of $22.4,
which related to the elimination of 38 positions and write-off of fixed assets
related to our Polymer Additives product line in our Performance Chemicals
segment. The restructuring costs included estimated cash severance, reduction of
prepaid pensions and retirement of fixed assets and were charged as follows:
manufacturing cost of sales $22.1, and selling expense $0.3. In the third
quarter there was no activity.
10
A summary of the 2006 Cytec Performance Chemicals restructuring charge is
outlined in the table below:
-----------------------------------------------------------------
Cytec Performance
Chemicals
-----------------------------------------------------------------
Second quarter 2006 charges $22.4
Reduction of pension related prior
service costs (0.7)
Write-off of fixed assets (13.8)
-----------------------------------------------------------------
Balance at September 30, 2006 $ 7.9
-----------------------------------------------------------------
Cash payments related to both of the above restructurings are expected to be
substantially completed in early 2007.
In the first quarter of 2006, we recorded a restructuring charge of $1.7, which
related to the elimination of 19 positions associated with our Specialty
Chemicals segments. The restructuring costs, which were primarily severance
related, were charged to expense as follows: manufacturing cost of sales $0.4,
selling and technical services $0.5, research and process development $0.7 and
administrative and general $0.1. In the third quarter of 2006, there were cash
payments of $0.5.
A summary of this 2006 Specialty Chemicals restructuring charge is outlined in
the table below:
------------------------------------------------------------------
Cytec Specialty
Chemicals
------------------------------------------------------------------
First Quarter 2006 charges $1.7
Cash payments (0.2)
------------------------------------------------------------------
Balance at March 31, 2006 $1.5
Currency translation adjustment 0.1
Cash payments (0.1)
------------------------------------------------------------------
Balance at June 30, 2006 $1.5
Cash payments (0.5)
------------------------------------------------------------------
Balance at September 30, 2006 $1.0
------------------------------------------------------------------
Cash payments related to the above restructuring are expected to be
substantially completed in 2006 except for certain long term severance payments.
In 2005, we recorded aggregate restructuring charges of $16.8, which related to
the elimination of 136 positions worldwide. Of the total of 136 positions, 22
related to our Cytec Engineered Materials segment and 114 related to our
Specialty Chemicals segments. The restructuring costs, which were primarily
severance related, were charged to expense as follows: manufacturing cost of
sales, $5.0; selling and technical services, $3.7; research and process
development, $0.8; and administrative and general, $7.3. In the first quarter
and second quarter of 2006 we reduced this restructuring accrual by ($1.3) and
($0.7), respectively, primarily due to incurring less costs than originally
estimated as a result of fewer than expected personnel reductions primarily due
to attrition without severance and to personnel filling other open positions.
The reduction in the first quarter was credited to expense as follows:
manufacturing cost of sales, ($1.0): selling and technical services ($0.2) and
research and process development, ($0.1). The reduction in the second quarter
was credited as follows: manufacturing cost of sales ($0.5) and selling and
technical services ($0.2). In the third quarter there was a reduction of ($0.2)
primarily due to fewer than expected personnel reductions.
11
A summary of the 2005 restructuring charges is outlined in the table below:
-----------------------------------------------------------------------------------------------
Cytec
Engineered Cytec Specialty
Materials Chemicals Total
-----------------------------------------------------------------------------------------------
2005 charges $ 1.6 $ 15.2 $ 16.8
Cash payments - (6.3) (6.3)
-----------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ 1.6 $8.9 $ 10.5
Reduction in estimated costs - (1.3) (1.3)
Cash payments (0.4) (2.1) (2.5)
-----------------------------------------------------------------------------------------------
Balance at March 31, 2006 $ 1.2 $ 5.5 $ 6.7
Reduction in estimated costs (0.7) - (0.7)
Currency translation adjustment - 0.2 0.2
Cash payments - (2.3) (2.3)
-----------------------------------------------------------------------------------------------
Balance at June 30, 2006 $ 0.5 $ 3.4 $ 3.9
Reduction in estimated costs - (0.2) (0.2)
Currency translation adjustment - (0.1) (0.1)
Cash payments (0.1) (0.8) (0.8)
-----------------------------------------------------------------------------------------------
Balance at September 30, 2006 $ 0.4 $ 2.3 $ 2.7
-----------------------------------------------------------------------------------------------
The table above may not foot due to the rounding
Cash payments related to the above restructurings are expected to be
substantially completed in 2006 except for certain long-term severance payments.
6. SHARE-BASED COMPENSATION
In December, 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R addresses the accounting for transactions in
which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. SFAS 123R supersedes Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
and 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.
On January 1, 2006, we adopted SFAS 123R using the modified prospective method.
Under this method, we are required to record compensation cost for the unvested
portion of previously granted awards that remain outstanding as of January 1,
2006. Results for prior periods have not been restated. We previously accounted
for our share-based compensation under the recognition and measurement principle
of APB No. 25 and related Interpretations. Prior to the SFAS 123R adoption, no
share-based compensation cost was reflected in net income for stock options, as
all stock options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant. Also, prior to the SFAS 123R
adoption, compensation cost for restricted ("non-vested") stock was recorded
based on the market value on the date of grant, and compensation cost for
performance stock was recorded based on the market price of our common stock at
the end of each period through the date of vesting. Compensation cost for
non-vested and performance stocks was charged to unearned compensation in
Stockholders' Equity and amortized to expense over the requisite vesting
periods. Stock appreciation rights payable in cash ("cash-settled SARS") were
accounted for as liabilities under APB 25. Compensation cost for cash-settled
SARS was recognized over the vesting period and through the life of the award
based on changes in the market price of our common stock over the market price
at the grant date.
12
As a result of the adoption of SFAS 123R, we recorded additional charges related
to stock options and stock appreciation rights that are settled with common
shares ("stock-settled SARS") of $2.7 and $8.0 for the three and nine months
ended September 30, 2006, respectively. The effect on net earnings, cash
provided by operating activities, and cash provided by financing activities were
$1.7, $(1.7), and $1.7 respectively, for the three months ended September 30,
2006. The effect on net earnings, cash provided by operating activities, and
cash provided by financing activities were $5.1, $(9.4), and $9.4 respectively,
for the nine months ended September 30, 2006. The effect on basic and diluted
earnings per share was a reduction of $0.04 and $0.03 per share for the three
months ended September 30, 2006, respectively. The effect on basic and diluted
earnings per share was a reduction of $0.11 per share for the nine months ended
September 30, 2006. With the adoption of SFAS 123R, unearned compensation cost
for non-vested and performance stocks was credited to additional paid-in capital
on January 1, 2006. The compensation cost for performance stock is recorded
based on the market value on the original date of grant, and not based on the
price of our common stock at the end of each reporting period as formerly was
required under APB No. 25. Compensation cost for cash-settled SARS is recognized
based on the fair value of the award at the end of each period through the date
of vesting, also a change from APB No. 25. SFAS 123R requires that we estimate a
forfeiture rate for all share-based awards. We monitor share option exercise and
employee termination patterns to estimate forfeiture rates within the valuation
model. Prior to the SFAS 123R adoption, forfeitures were recorded as they
occurred. 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 per share. In addition, the unearned
stock compensation cost at the adoption date of $3.1 relating to previous grants
of non-vested and performance stocks was offset against additional paid-in
capital.
The following table illustrates the effect on the net earnings and earnings per
share if we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", to all share-based employee compensation for the three and nine
months ended September 30, 2005. Option forfeitures were accounted for as they
occurred and no amounts of compensation expense have been capitalized into
inventory or other assets, but instead were considered period expenses in the
pro forma amounts below:
Three Months Nine Months
Ended September 30, Ended September 30,
2005 2005
-------------------------------------------------------------------------------------------
Net earnings as reported $ 35.4 $ 40.7
Add:
Stock-based employee compensation expense
included in reported net earnings, net of
related tax effects 0.5 1.0
Deduct:
Total stock-based employee compensation expense
determined under fair-value-based method for all
awards, net of related tax effects 1.8 5.4
-------------------------------------------------------------------------------------------
Pro forma net earnings $ 34.1 $ 36.3
-------------------------------------------------------------------------------------------
Net earnings per share:
Basic, as reported $ 0.77 $ 0.91
Basic, pro forma $ 0.74 $ 0.81
Diluted, as reported $ 0.75 $ 0.88
Diluted, pro forma $ 0.72 $ 0.79
-------------------------------------------------------------------------------------------
13
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, 2006 and 2005 are noted in
the following table:
----------------------------------------------------------------------------------
2006 2005
----------------------------------------------------------------------------------
Expected life (years) 5.7 5.8
Expected volatility 37.6% 38.5%
Expected dividend yield 0.81% 0.84%
Range of risk-free interest rate 4.4% - 4.7% 2.1% - 4.2%
Weighted-average fair value per option $19.01 $17.78
----------------------------------------------------------------------------------
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 long-term historical volatility. 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
shares), stock appreciation rights (including those settled with common shares)
and deferred stock awards and dividend equivalents. At September 30, 2006, there
are approximately 5,700,000 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 at 100% of the
market price on the date the grant. Options and stock-settled SARS are generally
exercisable in installments of 33 1/(3)% 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.
A summary of stock options and stock-settled SARS activity for the nine months
ended September 30, 2006 is presented below.
------------------------------------------------------------------------------------------------------
Weighted
Average
Weighted Remaining
Average Contractual Aggregate
Options and Stock-Settled SARS Number of Exercise Price Life Intrinsic
Activity: Units Per Unit (Years) Value
------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2005 5,137,923 $32.79
Granted 650,300 49.55
Exercised (1,208,847) 33.16
Forfeited (56,277) 44.43
Outstanding at September 30, 2006 4,523,099 $34.95 5.4 $93.4
------------------------------------------------------------------------------------------------------
Exercisable at September 30, 2006 3,406,016 $30.93 4.3 $84.0
------------------------------------------------------------------------------------------------------
14
-------------------------------------------------------------------------
Weighted
Average
Number of Grant Date Fair
Nonvested Units: Units Value Per Unit
-------------------------------------------------------------------------
Nonvested at December 31, 2005 1,101,746 $13.49
Granted 650,300 19.01
Vested (596,668) 16.18
Forfeited (38,295) 18.45
-------------------------------------------------------------------------
Nonvested at September 30, 2006 1,117,083 $18.25
-------------------------------------------------------------------------
During the nine months ended September 30, 2006, we granted 650,300 shares of
stock-settled SARS and did not grant any stock options. We did not grant any
stock-settled SARS before 2006. The weighted-average grant-date fair value of
the stock-settled SARS granted during the nine months ended September 30, 2006
was $19.01 per share, which are deemed to be equity-based awards under SFAS
123R. The total intrinsic value of stock options exercised during the nine
months ended September 30, 2006 was $25.6. Treasury shares have been utilized
and reissued upon stock option exercises. The total fair value of stock options
vested during the nine months ended September 30, 2006 was $9.7.
As of September 30, 2006, there was approximately $11.5 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 1.7 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, 2006
was approximately $0.3.
Prior to the adoption of SFAS 123R, we presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the
Statement of Cash Flows. SFAS 123R requires that the cash flows resulting from
tax benefits in excess of the compensation cost recognized for those options
(excess tax benefits) be classified as financing cash flows. Tax benefit
realized from stock options exercised were $1.7 and $9.4 for the three and nine
months ended September 30, 2006 and $0.6 and $4.2 for the three and nine months
ended September 30, 2005, respectively. Cash received from stock options
exercised was $40.1 and cash used to settle cash-settled SARS was $0.3 for the
nine months ended September 30, 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 share 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 shares awarded in 2004 and 2005 relate to the 2006 and 2007
performance periods, respectively. The total amount of share-based compensation
expense recognized for non-vested and performance stock was $0.3 and $1.0 for
the three and nine months ended September 30, 2006 and $0.7 and $1.6 for the
three and nine months ended September 30, 2005, respectively.
In the event of a "change of control" (as defined in the 1993 Plan), (i) any
award under the 1993 Plan carrying a right to exercise that was not previously
exercisable and vested will become fully exercisable and vested, (ii) the
restrictions, deferral limitations, payment conditions and forfeiture applicable
to any other award granted under the 1993 Plan will lapse and such awards will
be deemed fully vested and (iii) any performance conditions imposed with respect
to awards shall be deemed to be fully achieved.
In November 2005, the FASB issued FASB Staff Position 123(R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-based Payment
Awards" (" FSP 123R- 3"). FSP 123R-3 provides an elective alternative transition
method of calculating the additional paid-in capital pool ("APIC Pool") of
excess tax benefits available to absorb tax deficiencies recognized subsequent
to the adoption of SFAS 123R to the method otherwise required by paragraph 81 of
SFAS 123R. After evaluating the alternative methods, we elected the alternative
transition method described in FSP 123R-3 and used this method to estimate our
APIC Pool upon adoption of SFAS 123R. Upon adoption of SFAS 123R, we calculated
our APIC Pool to be $41.4. Exercises of stock options for the nine months ended
September 30, 2006 increased the APIC Pool to $50.7.
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 restricted shares for which
vesting criteria have not been met) plus deferred stock awards, weighted for the
period outstanding. Diluted earnings per common share is computed by dividing
net earnings by the sum of the weighted-average number of common shares
outstanding for the period adjusted (i.e., increased) for all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued and any proceeds of the issuance had been used to repurchase
common stock at the average market price during the period. The proceeds are
assumed to be the sum of the amount to be paid to the Company upon exercise of
options, the amount of compensation cost attributed to future services and not
yet recognized and the amount of income taxes that would be credited to or
deducted from capital upon exercise.
15
The following shows the reconciliation of weighted average shares:
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------------
2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding: 47,623,743 46,238,564 47,321,317 44,861,210
Effect of dilutive shares:
Options 1,003,117 976,112 1,101,690 1,090,970
Performance/Restricted Stock 72,789 113,261 66,727 90,510
-----------------------------------------------------------------------------------------------------------------------
Adjusted average shares outstanding 48,699,649 47,327,937 48,489,734 46,042,690
-----------------------------------------------------------------------------------------------------------------------
Stock options to purchase 639,440 and 671,940 shares of common stock were
outstanding during the three and nine months ended 2006, respectively, and stock
options to purchase 913,850 shares of common stock were outstanding during the
three and nine months ended September 30, 2005. These shares were excluded from
the above calculation because their inclusion would have an anti-dilutive effect
on earnings per share.
8. INVENTORIES
Inventories consisted of the following:
-----------------------------------------------------------------------
September 30, December 31,
2006 2005
-----------------------------------------------------------------------
Finished goods $303.1 $ 288.4
Work in process 28.1 26.3
Raw materials & supplies 122.2 110.0
-----------------------------------------------------------------------
Total inventories 453.4 $ 424.7
-----------------------------------------------------------------------
9. ASSOCIATED COMPANY AND MINORITY INTERESTS
Upon acquisition of Surface Specialties, we acquired a 50% ownership
interest in SK Cytec Co., Ltd., a joint venture that manufacturers and sells
similar products to those sold by Surface Specialties. The operations of SK
Cytec Co., Ltd. are not material to the operations of the Company.
Upon acquisition of Surface Specialties, Cytec also acquired ownership interests
in two majority-owned entities for which the net assets and results of
operations are consolidated. The earnings associated with the minority ownership
interests are included in other income (expense), net and amount to $0.2 and
$0.2 for the three months ended September 30, 2006 and 2005 and $0.6 and $0.5
for the nine months ended September 30, 2006 and 2005, respectively. The
minority ownership interests in the net assets of these entities are included in
other noncurrent liabilities and total $2.0 as of September 30, 2006 and 2005.
10. DEBT
Long-term debt, including the current portion, consisted of the following:
---------------------------------------------------------------------------------------------------------------------------
September 30, 2006 December 31, 2005
---------------------------------------------------------------------------------------------------------------------------
Carrying Carrying
Face Value Face Value
---------------------------------------------------------------------------------------------------------------------------
Five-Year Term Loan Due February 14, 2010 $ 252.5 252.5 $ 461.2 $ 461.2
6.75% Notes Due March 15, 2008 100.0 99.2 100.0 98.8
5.5% Notes Due October 1, 2010 250.0 249.7 250.0 249.6
4.6% Notes Due July 1, 2013 200.0 201.5 200.0 201.7
6.0% Notes Due October 1, 2015 250.0 249.4 250.0 249.4
Other 68.7 68.7 16.0 16.0
---------------------------------------------------------------------------------------------------------------------------
$ 1,121.2 1,121.0 $ 1,277.2 $ 1,276.7
Less: Current maturities 8.0 8.0 51.2 51.2
---------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 1,113.2 1,113.0 $ 1,226.0 $ 1,225.5
---------------------------------------------------------------------------------------------------------------------------
16
The five-year term loan requires a payment of the lesser of $72.5 or the then
outstanding balance each December through 2008 with a final payment due February
2010. As of September 30, 2006, we have prepaid all of the December payments
through 2008. At September 30, 2006, we may borrow up to an additional $295.0
under our $350.0 revolving credit facility. Borrowing against this facility
totaled $55.0 at September 30, 2006. The facilities contain covenants that are
customary for such facilities.
The weighted-average interest rate on all of our debt was 4.81% and 4.24% for
the nine months ended September 30, 2006 and 2005, respectively. The
weighted-average interest rate on short-term borrowing outstanding as of
September 30, 2006 and 2005 was 4.62% and 3.52%, respectively.
11. 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, 2006 and December 31, 2005, the aggregate environmental
related accruals were $103.3 and $102.9, respectively. As of September 30, 2006
and December 31, 2005, $7.5 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, 2006
and 2005 was $0.9 and $2.2, respectively, and for the nine months ended
September 30, 2006 and 2005 was $3.0 and $4.4, 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 11 of the
Notes to the Consolidated Financial Statements contained in our 2005 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, the Actuarial and Analytics Practice of AON
Risk Consultants ("AON") completed a study of our asbestos related contingent
liabilities and related insurance receivables. We previously commissioned a
similar study from AON in 2003. For these studies, we provided AON with, 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, and dismissal rates by claim. The actuarial methodology
employed by AON was primarily based on epidemiological data assumptions
regarding asbestos disease manifestation, the information provided by us, and
the estimates of claim filing and indemnity costs that may occur in the future.
In conjunction with AON, 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 AON study, we recorded an increase of $9.0
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 $6.7. 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, 2006 and December 31, 2005, the aggregate
self-insured and insured contingent liability was $72.9 and $65.8, respectively,
and the related insurance recovery receivable related to the liability as well
as claims for past payments was $43.2 at September 30, 2006 and $37.7 at
December 31, 2005. The asbestos related liability included in the above amounts
at September 30, 2006 and December 31, 2005 was $54.6 and $47.8, respectively,
and the insurance receivable related to the liability as well as claims for past
payments was $40.2 at September 30, 2006 and $34.7 at December 31, 2005. We
anticipate receiving a net tax benefit for payment of those claims to which full
insurance recovery is not realized.
17
The following table presents information about the number of claimants involved
in asbestos claims with us:
-------------------------------------------------------------------------------------------------------------------
Nine Months
Ended Year Ended
September30, December 31,
2006 2005
----------------------- ------------------
Number of claimants at beginning of period 18,100 28,000
Number of claimants associated with claims closed during period (11,900) (12,000)
Number of claimants associated with claims opened during period 2,900 2,100
----------------------- ------------------
Number of claimants at end of period 9,100 18,100
-------------------------------------------------------------------------------------------------------------------
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.
The final 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.
We are among several defendants in approximately 30 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. Seven other courts have previously rejected the applicability of this
and similar doctrines to white lead pigment. We settled this case for an
immaterial amount. Although we are a defendant to three more 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. Accordingly, we do not
believe that our liability, if any, in such cases will 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. We obtained a court order in France to enforce the award, which order was
appealed by SNF. In March, 2006, the Court of Appeal of Paris denied SNF's
appeal and affirmed the court order. In the second quarter of 2006, we collected
(euro)12.2 ($15.6) related to the arbitration award including interest which was
included in other income, expense (net) in the second quarter. 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 and has also filed a final appeal of the
appellate court's order. SNF has also filed a complaint in France seeking
compensation from Cytec for (euro)54.0 alleging 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 both complaints and
the appeal are without merit.
18
In February 2006, a subsidiary of DSM filed a lawsuit against us seeking
immediate dissolution of American Melamine Industries ("AMEL"), the melamine
manufacturing joint venture between DSM and Cytec, or the appointment of a
receiver for the joint venture, the rescission of the manufacturing services
agreement between Cytec and AMEL and compensatory damages. In May 2006, the
court denied DSM's request for relief. In July 2006, DSM agreed to pay us $7.4
to settle past and future obligations under the manufacturing services
agreement, dismiss the lawsuit, and agreed to transfer their 50% interest in
AMEL to us. The agreement was effective August 1, 2006. On August 1, 2006 we
recorded $4.5 of income as a credit to manufacturing cost of sales pertaining to
a payment from DSM which approximates cost reimbursements we expected to receive
from DSM for the last five months of 2006.
While it is not feasible to predict the outcome of all pending environmental
matters, lawsuits and claims, it is reasonably possible that there will be a
necessity for future provisions for costs for environmental matters and for
other contingent liabilities that in management's opinion, will not have a
material adverse effect on 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, if any, are recorded when they are realized.
A further discussion of other contingencies can be found in Note 11 of the Notes
to the Consolidated Financial Statements contained in our 2005 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, 2005 are set
forth in Note 11 of the Notes to Consolidated Financial Statements contained in
our 2005 Annual Report on Form 10-K.
12. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), which represents the change in
equity from non-owner sources, for the three and nine months ended September 30,
are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------------------
Net earnings as reported $ 25.0 $ 35.4 $ 111.4 $ 40.7
Other comprehensive income (loss):
Minimum pension liability adjustments - (0.2) - 4.8
Unrealized gains on cash flow hedges 13.7 2.3 5.1 3.1
Foreign currency translation adjustments 2.9 3.0 41.5 (59.1)
------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 41.6 $ 40.5 $ 158.0 $(10.5)
------------------------------------------------------------------------------------------------------------------------
13. INCOME TAXES
The effective rate for the three and nine months ended September 30, 2006 was a
tax provision of 38.0% ($15.3) and 26.5% ($40.7), respectively, compared to a
tax provision of 25.0% ($11.6) for the three months ended September 30, 2005 and
a tax benefit of 78.0% ($17.3) for the nine months ended September 30, 2005. 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 underlying effective tax rate from 27.0%
to 27.5% primarily due to the reduction of earnings of divested product lines in
lower tax jurisdictions.
19
The 2006 year to date effective tax rate was also negatively by the limited tax
benefit available on the French asset impairment charge offset by the positive
impact in the second quarter of 2006 of 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, as more fully
discussed below, offset to a lesser extent by the December 31, 2005 expiration
of the U.S. research and development tax credit. In the event the U.S.
government again elects to extend this credit consistent with prior tax law,
this will likely have a favorable impact on our effective tax rate going
forward. Excluding all these items, the underlying annual effective tax rate for
the nine months ended September 30, 2006 was 27.5%.
The 2005 effective tax rate for the quarter and year to date was favorably
impacted by hedging losses incurred in the U.S. in connection with the Surface
Specialties acquisition, the MOPPRS redemption, and reduction in tax expense of
$9.6 due to partial resolution of a tax audit in Norway. The rate was
unfavorably impacted by the write-off of acquired in-process research and
development expenses related to the Surface Specialties acquisition, for which
there is no tax benefit. Excluding these items, the underlying annual effective
tax rate for the nine months ended September 30, 2005 was 26.0%.
In May, 2006, we received notice that the Internal Revenue Service approved the
final settlement with respect to a federal income tax audit for the 2002 and
2003 calendar years. Such approval resulted in a minor tax refund, which was
recorded in the second quarter of 2006. We also recorded a reduction in tax
expense of approximately $3.5 during the second quarter of 2006 to reflect the
final resolution of this audit. The IRS is also currently preparing to conduct
audits of our tax returns for the years 2004 and 2005 commencing in early 2007.
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 ($13.0). We retained tax counsel to assist in our defense of the
final assessment given our vigorous defense in protesting this taxable income
increase. Notwithstanding our meritorious defenses in these matters, in prior
years as these matters developed, we accrued for the potential unfavorable
outcome of this dispute for the full amount of the tax liability including
interest thereon.
This final assessment reflected a 20.7 Norwegian krone decrease in the assessed
tax liability compared with the prior audit report issued by the tax
authorities. As a result, we recorded a corresponding reduction in tax expense
of approximately $4.2, including interest, in the quarter ended June 30, 2005 to
reflect this final assessment.
In 2005, we also received notice from the Norwegian authorities demanding a tax
payment of 56.0 Norwegian krone ($8.5) plus accrued interest regarding this
matter, and remitted this amount as a deposit pending the final resolution of
this dispute.
During the third quarter 2006, we litigated this issue before a Norwegian
tribunal to contest the full assessment. In October 2006, we received
notification that the Norwegian court has issued a decision in favor of the
Norwegian tax authorities sustaining the entire assessment. We are currently
reviewing the court's decision with our Norwegian counsel to determine if
further appeals are warranted.
In the event the Norwegian authorities ultimately prevail in their assessment,
approximately 22.0 Norwegian krone ($3.4) 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, 2006 for this
contingency was 24.7 Norwegian krone ($3.8), which represents our remaining
liability regarding this matter in the event we ultimately accept the Norwegian
court's decision as final.
We also received a separate notice from the Norwegian tax authorities in the
second quarter of 2005 disclosing a complete termination of pleadings regarding
a potential Norway permanent establishment ("PE") with respect to a Company
affiliate. Given the favorable resolution of this PE issue, we adjusted our
contingency reserves accordingly and recorded a reduction in tax expense of
$5.4, including interest, in the second quarter ended June 30, 2005.
14. OTHER FINANCIAL INFORMATION
On July 20, 2006, the Board of Directors declared a $0.10 per common share cash
dividend, paid on August 25, 2006 to shareholders of record as of August 11,
2006. Cash dividends paid in the third quarter of 2006 and 2005 were $4.7 and
$4.6, respectively, and for the nine months ended September 30, 2006 and 2005
were $14.1 and $13.2, respectively. On October 19, 2006, the Board of Directors
declared a $0.10 per common share cash dividend, payable on November 27, 2006 to
shareholders of record as of November 10, 2006.
20
Income taxes paid for the nine months ended September 30, 2006 and 2005 were
$43.1 and $42.8, respectively. Interest paid for the nine months ended September
30, 2006 and 2005 was $42.4 and $53.6, respectively. Interest income for the
nine months ended September 30, 2006 and 2005 was $1.4 and $2.7, respectively.
Included in due from related party are certain tax reimbursements to be received
from UCB in accordance with the terms of the purchase agreement entered into in
connection with the acquisition of Surface Specialties. Included in accrued
expenses are immaterial amounts due to UCB under certain transition services
agreements.
15. SEGMENT INFORMATION
We have previously restated segment information for all periods presented in
order to reflect our current organizational structure as announced in October
2005.
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,
--------------------------------- -----------------------------------
2006 2005 2006 2005
----------- ------------ ------------- -------------
Net sales
Cytec Performance Chemicals
Sales to external customers $ 233.0 $ 211.6 $ 688.6 $ 634.9
Intersegment sales 1.3 1.1 5.2 3.9
Cytec Surface Specialties 383.6 353.6 1,148.3 893.1
Cytec Engineered Materials 150.9 135.7 441.6 404.5
Building Block Chemicals
Sales to external customers 95.9 59.9 257.4 205.7
Intersegment sales 20.8 13.7 67.2 58.5
------- --------- --------- ---------
Net sales from segments 885.5 775.6 2,608.3 2,200.6
Elimination of intersegment revenue (22.1) (14.8) (72.4) (62.4)
------- --------- --------- ---------
Net sales $ 863.4 $ 760.8 $ 2,535.9 $ 2,138.2
------------------------------------------------------------------------------------------------------------------------
% of % of % of % of
sales sales sales sales
------- ------- ------- --------
Earnings (loss) from operations
Cytec Performance Chemicals $ 20.8 9% $ 16.5 8% $ 56.8 8% $ 39.6 6%
Cytec Surface Specialties 18.8 5% 20.3 6% 78.0 7% 8.0 1%
Cytec Engineered Materials 26.7 18% 27.6 20% 78.8 18% 76.3 19%
Building Block Chemicals 9.9 8% (4.3) -6% 15.8 5% 9.7 4%
------- --------- --------- ---------
Earnings from segments 76.2 9% 60.1 8% 229.4 9% 133.6 6%
Corporate and Unallocated (21.0) (2) (4.5) (47.9) (1),(2) (10.0)
------- --------- --------- ---------
Earnings from operations $ 55.2 6% $ 55.6 7% $ 181.5 7% $ 123.6 6%
---------------------------------------------------------------------------------------------------------------------------------
(1) Includes net restructuring charges of $23.4 (see Note 5)
(2) Includes asset impairment charge of $15.4 related to our Surface Specialties
manufacturing facility in France, restructuring charge of $1.1 related to
headcount reduction in Specialty Chemicals, and a charge of $2.2 related to the
update of our asbestos related contingent liabilities and related insurance
receivables (see Note 4, 5, and 11)
21
16. GOODWILL AND OTHER ACQUISITION INTANGIBLES
The following is the activity in the goodwill balances for each segment.
Cytec Cytec Cytec
Performance Surface Engineered
Specialties Specialties Materials Corporate Total
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ 101.5 $ 668.7 $ 241.3 $ 0.7 $ 1,012.2
Currency translation 1.0 32.3 (0.1) - 33.2
Other (15.2) (1) (3.3) (2) - - (18.5)
--------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2006 $ 87.3 $ 697.7 $ 241.2 $ 0.7 $ 1,026.9
--------------------------------------------------------------------------------------------------------------------------
(1) Reclassification of goodwill related to water treatment chemicals and
acrylamide product lines to assets held for sale (see Note 4)
(2) Includes a reduction to goodwill of $2.6 in early 2006 as a result of
finalizing the purchase price allocation of Surface Specialties business. Also,
in the third quarter of 2006, we recorded a reduction of $0.7 which was related
to the adjustment of pre-acquisition tax attributes associated with the
acquisition
Other acquisition intangibles consisted of the following major classes:
Weighted Accumulated
Average Gross carrying value amortization Net carrying value
Useful Life September 30, December 31, September 30, December 31, September 30, December 31,
(years) 2006 2005 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------------
Technology-based 15.2 $ 53.2 $ 52.2 $(18.1) $(15.0) $ 35.1 $ 37.2
Marketing-related < 2.0 1.8 - (1.0) - 0.8 -
Marketing-related 15.0 61.2 58.9 (13.2) (9.0) 48.0 49.9
Marketing-related 40.0 42.2 - (0.3) - 41.9 -
Marketing-related indefinite - 41.8 - - - 41.8
Customer-related 15.0 406.4 389.6 (47.7) (27.0) 358.7 362.6
------------------------------------------------------------------------------------------------------------------------------------
Total $564.8 $542.5 $(80.3) $(51.0) $484.5 $491.5
------------------------------------------------------------------------------------------------------------------------------------
Amortization of acquisition intangibles for the three months ended September 30,
2006 and 2005 was $10.6 and $8.8, respectively, and for the nine months ended
September 30, 2006 and 2005 were $28.7 and $21.6, respectively. Amortization
expense for the nine months ended September 30, 2006 includes $1.4 related to
the impairment of our manufacturing facility in France (see Note 4).
Amortization expense for the nine months ended September 30, 2005 includes seven
months of amortization of the acquisition intangibles associated with the
purchase of Surface Specialties. Assuming no further change in the gross
carrying amount of acquisition intangibles, the estimated amortization of
acquisition intangibles is $37.0 for the year 2006, $35.2 for the year 2007,
$34.6 per year for the years 2008 through 2009 and $34.4 for the year 2010.
At December 31, 2005, $41.8 of marketing-related intangibles related to trade
names in the Radcure product line purchased in the Surface Specialties
acquisition were classified as having indefinite lives. Management performed its
annual review of non-amortizable intangible assets in the second quarter of 2006
following completion of the 2006 strategic planning process. As a result, the
strategic plan included decisions to cease utilization of two minor trade names
in the Radcure portfolio, one in September 2006 and the other by the end of
2007. As of June 30, 2006, the fair value of these two trade names was
determined to be $1.8 and have been reclassified accordingly in the table above.
The first has been fully amortized during the second quarter and the second is
being amortized through the end of 2007. In addition, management revised its
estimate of the useful life of the remaining Radcure trade name portfolio from
indefinite to an estimated life of 40 years. As of June 30, 2006, the remaining
portion of Radcure trade name had a fair value of $42.2. This has also been
reclassified in the table above and amortization of these trade names began
effective July 1, 2006.
17. DERIVATIVE FINANCIAL INSTRUMENTS AND COMMODITY HEDGING ACTIVITIES
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, 2006, 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.
22
At September 30, 2006, net contractual amounts of forward contracts outstanding
translated into U. S. dollar amounts of $121.0. Of this total, $110.2 was
attributed to the net exposure in forward selling of U. S. dollars. The
remaining $10.8 was the net exposure in forward buying of Euros, translated into
U. S. dollar equivalent amount. The unfavorable fair value of currency
contracts, based on forward exchange rates at September 30, 2006, was $0.8.
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, 2006, 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,
2006, the unfavorable fair values of the five and ten year swaps were $7.1 and
$8.2, respectively.
Commodity Hedging Activities
At September 30, 2006, the Building Block Chemicals segment Fortier plant's 2006
remaining forecasted natural gas utility requirements were 34% hedged utilizing
natural gas forward contracts at an average cost of $9.69 per MMBTU. These
contracts had a total fair value of $1.1 and delivery dates ranging from
October, 2006 to December, 2006. Due to market conditions, we are transitioning
from natural gas forward contracts to natural gas swaps to hedge the plant's
future utility requirements. At September 30, 2006, 58% of the plant's 2006
remaining forecasted natural gas utility requirements were hedged through
natural gas swaps and forwards.
At September 30, 2006, we held natural gas swaps, including the gas swaps for
Fortier plant, with an unfavorable fair value of $6.8, which will be
reclassified into Manufacturing cost of sales through June 2007 as these swaps
are settled.
For more information regarding our hedging activities and derivative financial
instruments, refer to Note 5 to the Consolidated Financial Statements contained
in our Annual Report on Form 10-K.
18. EMPLOYEE BENEFIT PLANS
Net periodic cost for our pension and postretirement benefit plans was as
follows:
Pension Plans Postretirement Plans
--------------------------------- -----------------------------
Three Months Ended September 30,
----------------------------------------------------------------------
2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------
Service cost $ 6.1 $ 6.0 $ 0.2 $ 0.4
Interest cost 12.4 8.3 3.4 2.9
Expected return on plan assets (12.0) (9.3) (1.0) (0.9)
Net amortization and deferral 8.8 3.6 (2.6) (2.5)
----------- ----------- ------------ ----------
Net periodic cost $ 15.3 $ 8.6 $ 0.0 $ (0.1)
----------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------------------
2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------
Service cost $ 18.6 $ 17.6 $ 0.6 $ 0.9
Interest cost 33.9 26.2 6.7 10.1
Expected return on plan assets (33.3) (29.1) (2.4) (3.5)
Net amortization and deferral 16.4 9.6 (4.5) (7.8)
----------- ----------- ------------ ----------
Net periodic cost $ 35.6 $ 24.3 $ 0.4 $ (0.3)
----------------------------------------------------------------------------------------------------------
23
Net periodic cost of U.S. pension plans for fiscal 2006 was reviewed by our
actuary during the third quarter of 2006 using updated demographic and census
information and as a result, we recorded an additional $1.5 to our net periodic
cost during the quarter. Also based on further review, it was determined that
the valuation of the plan assets for one of our international plans utilized by
our actuaries was not appropriate and as a result, we recorded an additional
charge of $2.5 during the third quarter of 2006 to appropriately reflect the
revised asset value for actuarial purposes.
We disclosed in our Annual Report on Form 10-K for the year ended December 31,
2005, that we expected to contribute $23.8 and $19.4, respectively, to our
pension and postretirement plans in 2006. Through September 30, 2006, $38.5 and
$10.5 in contributions were made, respectively. Our current estimate is to
contribute approximately $72.0 and $13.0, respectively, to our pension and
postretirement plans in 2006. The additional pension contributions in 2006 were
primarily made to improve the funded status of our U.S. pension plans and
simultaneously reduce the minimum required contributions in 2007. Postretirement
contributions are lower than expected due to the favorable effects of medicare
reimbursements, increased use of prefunded VEBA trust assets, and slightly lower
than expected benefit payments.
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, 2006
and 2005 were $4.1 and $4.6, respectively, and for the nine months ended
September 30, 2006 and 2005 were $13.4 and $13.7 respectively.
24
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. On February 28, 2005, we acquired the
Surface Specialties business of UCB in a transaction valued at $1,789.6. A
further discussion of acquisitions and dispositions can be found in Note 2 to
the Notes to the Consolidated Financial Statements contained herein.
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 are an important factor in profitability
especially in years of high volatility. Global oil and natural gas costs in
certain countries are significantly higher than the year ago period and many of
our raw materials are derived from these two commodities. Discussion of the year
to year impact of raw materials and energy is provided in our segment
discussion. In addition, higher global demand levels and, occasionally,
operating difficulties at suppliers, have limited the availability of certain of
our raw materials.
On January 1, 2006 we adopted SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"). For further details see Note 6 to the Consolidated Financial
Statements.
Quarter Ended September 30, 2006, Compared With Quarter Ended September 30, 2005
Consolidated Results
Net sales for the third quarter of 2006 were $863.4 compared with $760.8 for the
third quarter of 2005. In the Cytec Surface Specialties segment, sales increased
primarily as a result of increased volumes in the Radcure resins and powder
coating resins product lines with net selling prices flat. Cytec Performance
Chemical sales were up due to higher volumes in mining and specialty additives
and phosphines with selling prices flat. The Cytec Engineered Materials segment
sales increase was mainly volume related with higher sales to the large
commercial aircraft and military markets as well as price increases in a number
of markets. The Building Block Chemicals segment sales increased due to higher
volume and increased selling prices partially driven by higher raw material and
energy costs.
For a detailed discussion on sales refer to the Segment Results section below.
Manufacturing cost of sales was $698.5 or 81% of sales during the third quarter
of 2006 compared with $599.6 or 79% of sales for the third quarter of 2005. The
third quarter of 2006 increase is primarily due to the higher sales volumes and
higher raw material costs of $28.3 as well as 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 asbestos contingent liability. The third quarter of 2006 also
included income of $4.5 related to a payment from a former melamine joint
venture partner for early termination of the partnership. See Note 5 to the
consolidated financial statements for additional detail of the net restructuring
charges and Note 11 regarding the termination of the melamine joint venture.
Also included in the 2006 result is the charge related to stock options and
stock-settled SARS of $0.5 due to the application of SFAS 123R in 2006.
Selling and technical services was $54.9 in 2006 versus $53.1 in the prior year.
The increase was due to additional technology spending in Cytec Engineered
Materials, a $0.3 restructuring charge, charges of $0.8 related to stock options
and stock-settled SARS due to the application of SFAS 123R partially offset by
cost reduction initiatives in the Surface Specialties segment.
25
Research and process development was $18.4 in 2006 versus $17.5 in the prior
year. This increase was partially due to planned increased spending in Cytec
Engineered Materials, the charge of $0.2 related to stock options and
stock-settled SARS due to the application of SFAS 123R in 2006 partially offset
by cost reduction initiatives in the Performance Chemicals and Surface
Specialties segments.
Administrative and general expenses were $25.8 in 2006 which was slightly down
versus $26.2 in the prior year. This is primarily due to the benefits of
previous restructuring initiatives offset by $0.2 for integration expenses
primarily associated with transition off of UCB's information technology system
infrastructure, $0.3 of restructuring, and the charge of $1.2 related to stock
options and stock-settled SARS due to the application of SFAS 123R in 2006. The
2005 results included a charge of $1.1 related to employee severance costs.
Amortization of acquisition intangibles was $10.6 in 2006 versus $8.8 in the
prior year. The increase was primarily due to the write-down of $1.4 of
intangibles related to the unprofitable manufacturing facility in France as well
as higher amortization of certain Radcure trademarks in the Cytec Surface
Specialties segment.
Other income (expense), net was expense of $1.2 in 2006 compared with income of
$6.0 in the prior year. Included in the 2005 results was a gain of $3.7 related
to derivative contracts entered into to hedge interest rate exposure associated
with the debt offering which closed in October, 2005 as well as a $1.4 benefit
related to the recovery of past lead litigation defense costs from an insurance
carrier.
Equity in earnings of associated companies was $0.8 which was flat with $0.8 in
the prior year. On June 1, 2005, we sold our 50% ownership stake in CYRO
Industries to our joint venture partner Degussa Specialty Polymers, a company of
Degussa AG.
Interest expense, net was $14.5 in 2006 compared with $15.9 in the prior year.
The decrease was primarily due to the lower amount of debt outstanding during
the third quarter of 2006 versus third quarter 2005.
The effective tax rate for the quarter ended September 30, 2006 was a tax
provision of 38.0% ($15.3) compared to a tax provision of 25.0% ($11.6) for the
quarter ended September 30, 2005. 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
underlying effective tax rate from 27.0% to 27.5% primarily due to the reduction
of earnings of divested product lines in lower tax jurisdictions.
Our effective tax rate for the third quarter of 2005 was unfavorably impacted by
the U.S. hedging gains and favorably impacted by a reduction in income tax
expense related to the decrease in the underlying annual effective tax rate for
the first six months of 2005 to 26.0% from 27.0%. This reduction in the annual
effective income tax rate did not apply to the hedge losses and MOPPRS
redemption for which taxes were recorded at higher rates and the write off of
in-process research and development costs from the acquisition which are not tax
deductible.
Earnings from discontinued operations were $0.5, net of income taxes, in 2005
and reflect the results of Surface Specialties amino resins ("SSAR") product
line. SSAR was divested on August 31, 2005.
Net earnings for 2006 were $25.0 ($0.51 per diluted share), a decrease from the
net earnings of $35.4 ($0.75 per diluted share) in 2005. Included in the quarter
for 2006 is 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.
Net earnings available to common stockholders for 2005 include an after tax gain
of $2.4 related to interest rate derivative transactions associated with the
Surface Specialties acquisition and a restructuring charge of $0.8 after tax
related to employee severance.
Segment Results
Year-to-year comparisons and analyses of changes in net sales by segment and
region are set forth below. We have previously restated segment information for
all periods presented in order to reflect our current organizational structure
as announced in October 2005.
26
Cytec Performance Chemicals
% Change Due to
Total ----------------------------------------
2006 2005 % Change Price Volume/Mix Currency
------------------------------------------------------------------------------------------------------------------------------
North America $ 85.0 $ 83.1 2% 1% 1% -
Latin America 33.2 30.7 8% 2% 5% 1%
Asia/Pacific 34.1 28.2 21% 1% 21% -1%
Europe/Middle East/Africa 80.7 69.6 16% -1% 13% 4%
------------ ------------
Total $ 233.0 $ 211.6 10% - 8% 2%
------------------------------------------------------------------------------------------------------------------------------
Overall selling volumes increased 8% with volumes up in all product lines except
specialty urethanes where customer end market product conversions lowered demand
in 2006. On a regional basis, sales volumes were up in all regions. Sales
volumes increased 13% in Europe/Middle East/Africa principally in water
treatment chemicals, mining chemicals and phosphine due to better overall
demand. The 21% sales volume increase in Asia/Pacific is primarily in mining
chemicals, phosphines and polymer additives mostly due to higher demand levels.
Overall average selling prices were flat with mining chemicals, specialty
additives and urethane specialties increasing while selling prices were down in
polymer additives and pressure sensitive adhesives due to competitive pressures.
Earnings from operations were $20.8, or 9% of sales, compared with $16.5 or 8%
of sales, in 2005. The increase in earnings is primarily attributable to the
higher sales volume and benefits of our restructuring initiatives, partially
offset by higher raw material costs of $9.3 and higher employee benefit costs.
Also included is expense of $0.9 for stock options and stock-settled SARS
related to SFAS 123R.
Cytec Surface Specialties
% Change Due to
Total ----------------------------------------
2006 2005 % Change Price Volume/Mix Currency
------------------------------------------------------------------------------------------------------------------------------
North America $ 91.3 $ 92.5 -1% 4% -5% -
Latin America 15.8 15.2 4% 2% - 2%
Asia/Pacific 66.0 57.3 15% -3% 18% -
Europe/Middle East/Africa 210.5 188.6 12% -1% 8% 5%
------------ -------------
Total $383.6 $353.6 8% - 6% 2%
------------------------------------------------------------------------------------------------------------------------------
Selling volumes increased 6% primarily due to increased sales of the Radcure
resins and powder coating resins product lines due to higher demand in Europe
and Asia plus new business. Liquid coating resins overall selling volumes were
down primarily related to the automotive sector. On a regional basis, sales
volumes were up in Europe and Asia/Pacific, flat in Latin America, and down in
North America due to lower demand levels and a major customer moving production
in-house. Selling prices overall were flat with increases in liquid coating
resins and powder coating resins, offset by lower Radcure selling prices
primarily due to competitive pressure in the lower technology products.
Earnings from operations were $18.8, or 5% of sales, compared with $20.3 or 6%
of sales in 2005. The decrease in earnings is primarily attributable to
significantly higher raw material costs of $6.3 which was across all product
lines, an unfavorable product mix and higher employee benefit costs. This was
only partially offset by the benefits of our restructuring initiatives and
higher selling volumes. Also included is expense of $0.8 for stock options and
stock-settled SARS related to SFAS 123R.
Cytec Engineered Materials
% Change Due to
Total ----------------------------------------
2006 2005 % Change Price Volume/Mix Currency
------------------------------------------------------------------------------------------------------------------------------
North America $96.7 $89.0 9% 1% 8% -
Latin America(1) 0.3 0.3 - - - -
Asia/Pacific 11.7 8.5 38% 3% 35% -
Europe/Middle East/Africa 42.2 37.9 11% - 10% 1%
--------------------------
Total $150.9 $135.7 11% 1% 10% -
------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage
comparisons are not meaningful.
27
Overall selling volumes increased 10% with higher sales primarily to the large
commercial aircraft, military rotorcraft and business jet markets partially
offset by a decrease in the high performance auto market due to the completion
of a program in early 2006. Overall prices increased 1% primarily due to price
increases in North America and Asia/Pacific. Volumes increased in all regions
except Latin America, increasing 8% in North America, 10% in Europe, and 35% in
Asia/Pacific. Volume increases were primarily attributable to increased build
rates for aircraft.
Earnings from operations were $26.7, or 18% of sales, compared with $27.6, or
20% of sales, in 2005. The impact of the increased sales volumes and slightly
higher selling prices was more than offset by increased material costs of $2.7,
increased costs in manufacturing to support the higher production volumes, some
plant inefficiencies, planned higher technical service and research expenses,
lower production rates in one of our carbon fiber plants due to trial runs of
new product, start-up costs for a carbon fiber manufacturing line that was
previously idled and expense of $0.6 for stock options and stock-settled SARS
related to SFAS 123R.
Building Block Chemicals (Sales to external customers)
% Change Due to
Total ----------------------------------------
2006 2005 % Change Price Volume/Mix Currency
------------------------------------------------------------------------------------------------------------------------------
North America $ 45.1 $ 30.7 47% 17% 30% -
Latin America(1) 1.3 0.9 - - - -
Asia/Pacific 14.8 6.7 121% 52% 69% -
Europe/Middle East/Africa 34.7 21.6 61% 25% 32% 4%
---------------------------
Total $ 95.9 $ 59.9 60% 24% 35% 1%
------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage
comparisons are not meaningful.
Overall selling volumes were up 35%. This increase is primarily related to the
impact of plant shutdowns in 2005 due to the U.S. gulf coast hurricanes. Selling
prices were up 24% primarily in the acrylonitrile product line due to increased
raw material costs and tighter supply/demand conditions.
Earnings from operations were $9.9 or 10% of sales, compared with a loss of
$4.3, or (7)% of sales, in 2005. The increase in earnings was primarily due to
increased selling volumes and selling prices plus higher plant production levels
partially offset by higher raw material costs of $10.1. Included in the quarter
is an income of $4.5 pertaining to a payment from our former melamine joint
venture partner which approximates cost reimbursements we expected to receive
from our former partner for the last five months of 2006. In addition, included
in earnings from operations is expense of $0.3 for stock options and stock
appreciation rights settled in stock related to SFAS 123R.
Nine months Ended September 30, 2006, Compared With Nine months Ended
September 30, 2005
Consolidated Results
Net sales for the first nine months of 2006 were $2,535.9 compared with $2,138.2
for the prior year period. In the Cytec Surface Specialties segment, sales
increased primarily as a result of the inclusion of two additional months of
Surface Specialties acquired on February 28, 2005 and higher selling volumes.
The Cytec Performance Chemicals segment experienced increased sales which were
due in part to increased volumes and selling price increase initiatives plus the
inclusion of sales of the acquired pressure sensitive adhesives and
polyurethanes product lines of Surface Specialties. The Cytec Engineered
Materials segment sales increase was primarily volume related with higher sales
to the large commercial aircraft and military rotorcraft markets and price
increases in a number of markets, partially offset by lower sales to the
performance auto and launch vehicles markets. The Building Block Chemicals
segment sales increase is split between higher selling prices and volumes. In
2005 the Building Blocks Chemical segment was unfavorably impacted by the
hurricanes in the US Gulf Coast.
For a detailed discussion on sales refer to the Segment Results section below.
Manufacturing cost of sales was $2,032.7 or 80% for the first nine months of
2006 compared with $1,679.0 or 79% of sales for the first nine months of 2005.
Most of the increase is associated with higher selling volumes, the inclusion of
two additional months of Surface Specialties acquired on February 28, 2005,
higher raw material costs of $64.5 partially offset by a favorable currency
exchange on raw materials of $1.8. The results for 2006 include an impairment
and restructuring charge of $22.1 related to the Polymer Additives business, an
impairment charge of $14.0 for an unprofitable manufacturing facility in Europe,
a $2.2 increase in asbestos contingent liabilities, a charge of $1.6 related to
stock options and stock-settled SARS due to the adoption of SFAS 123R partially
offset by a net restructuring charge reversal of $0.3. See Note 5 to the
consolidated financial statements for additional detail of the net restructuring
charges. The 2005 results include $20.8 of amortization of the excess of the
fair value of the finished goods inventory for the acquired Surface Specialties
business over normal manufacturing cost.
28
Selling and technical services was $161.8 in 2006 versus $155.9 in the prior
year. Research and process development was $54.5 in 2006 versus $50.4 in the
prior year. Administrative and general expenses were $76.7 in 2006 versus $70.7
in the prior year. The increases was primarily attributable to the inclusion of
expenses relating to Surface Specialties acquired on February 28, 2005 and
charges related to stock options and stock-settled SARS due to the adoption of
SFAS 123R of $2.4, $0.5, and $3.5 for selling and technical services, research
and development and administrative and general expenses, respectively. Also 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 restructuring charges of $0.4,
$0.5, and $0.4 for selling and technical services, research and development and
administrative and general expenses, respectively. The write-off of acquired
in-process research and development of $37.0 in the prior year was the result of
the Surface Specialties acquisition.
Amortization of acquisition intangibles was $28.7 in 2006 versus $21.6 in the
prior year. This increase was primarily attributable to the inclusion of two
additional months of expenses relating to Surface Specialties acquired on
February 28, 2005, the write-off of $1.4M related to the impaired intangibles
related to an unprofitable product line manufactured in Europe as discussed in
third quarter results, and higher amortization of Radcure trademarks.
Other income (expense), net was income of $13.0 in 2006 compared with expense of
$44.9 in the prior year. 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 11 of the consolidated
financial statements. Included in the first nine months of 2005 is a loss of
$44.2 related to derivative contracts entered to hedge currency and interest
rate exposure associated with the acquisition of Surface Specialties and a
charge of $4.4 for a settlement to resolve a dispute over an environmental
matter.
Equity in earnings of associated companies was $2.5 versus $7.4 in the prior
year. On June 1, 2005, we sold our 50% ownership stake in CYRO Industries to our
joint venture partner Degussa Specialty Polymers, a company of Degussa AG.
Interest expense, net was $43.7 in 2006 compared with $63.9 in the prior year.
The first nine months of 2005 include $21.0 of interest charges and $1.0 of
unamortized put premiums and rate lock agreements related to the optional
redemption of the Mandatory Par Put Remarketed Securities (MOPPRS) in May 2005.
Excluding these 2005 charges, interest expense is up slightly due to the higher
outstanding weighted-average debt balance related to the acquisition of Surface
Specialties on February 28, 2005.
The effective income tax rate for the nine months ended September 30, 2006 was a
tax provision of 26.5% ($40.7) compared to a tax benefit of 78% ($17.3) for the
nine months ended September 30, 2005. 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 underlying 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 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 offset to a lesser
extent by the December 31, 2005 expiration of the U.S. research and development
tax credit. Excluding these items, the underlying annual effective tax rate for
the nine months ended September 30, 2006 was 27.5%.
The 2005 effective tax rate was favorably impacted by hedging losses incurred in
the U.S. in connection with the Surface Specialties acquisition, the MOPPRS
redemption, and reduction in tax expense of $9.6 due to partial resolution of a
tax audit in Norway. The rate was unfavorably impacted by the write-off of
acquired in-process research and development expenses related to the Surface
Specialties acquisition, for which there is no tax benefit. Excluding these
items, the underlying annual effective tax rate for the nine months ended
September 30, 2005 was 26%.
Earnings from discontinued operations were $1.2 in 2005 and reflect the results
of Surface Specialties amino resins ("SSAR") product line. SSAR was divested on
August 31, 2005.
29
Net earnings for 2006 were $111.4 ($2.30 per diluted share) compared with net
earnings for 2005 of $40.7 ($0.88 per diluted share). Included in the 2006
results is an 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. The improvement in net earnings is
primarily related to higher selling volumes, increased selling prices, two
additional months of the Surface Specialties acquisition that was acquired on
February 28, 2005, increased production levels and the benefits of the our
recent restructuring initiatives partially offset by higher raw material costs.
Net earnings for 2005 included the write-off of $37.0 of in-process research and
development costs; interest charges and unamortized put premiums of $14.0
after-tax related to the redemption of the MOPPRS prior to their final maturity;
a $15.2 after-tax amortization charge from the write-up to fair value of the
acquired inventory that was subsequently sold; a $28.1 after-tax charge related
to currency and interest rate derivative transactions associated with the
Surface Specialties acquisition; a charge of $1.8 after-tax for settlement of a
certain litigation matter; employee restructuring costs of $1.8 after-tax; a
$3.2 settlement to resolve a dispute over an environmental matter; an income tax
benefit of $25.7 reflecting favorable resolution of tax audits with respect to
prior year tax returns; all of which was were partially offset by the higher
overall sales attributable to the acquisition.
Segment Results
Year-to-year comparisons and analyses of changes in net sales by product line
segment and region are set forth below. We have previously restated segment
information for all periods presented in order to reflect our current
organizational structure as announced in October 2005.
Cytec Performance Chemicals
% Change Due to
Total ------------------------------------------------------
2006 2005 % Change Price Volume/Mix Acquisition Currency
----------------------------------------------------------------------------------------------------------------------------------
North America $261.3 $258.2 1% 3% -5% 3% -
Latin America 100.4 90.6 11% 1% 7% - 3%
Asia/Pacific 94.6 87.5 8% 1% 6% 2% -1%
Europe/Middle East/Africa 232.3 198.6 17% 1% 12% 5% -1%
-------------------------
Total $688.6 $634.9 8% 2% 3% 3% -
----------------------------------------------------------------------------------------------------------------------------------
Overall selling volumes increased 6% with half due to the inclusion of sales
attributable to pressure sensitive adhesives and polyurethane product lines of
Surface Specialties which was acquired on February 28, 2005 and volume increases
in the mining chemicals product line due to strong demand partially offset by
lower volumes in the urethanes and water treating product lines. On a regional
basis, North America sales volumes declined primarily in water treatment
chemicals due to low demand from the paper sector and our decision to reduce
sales on low profit accounts. Sales volumes in Latin America increased 7%
primarily due to improved demand for mining chemicals from copper mining
applications. Sales volume increase in Asia/Pacific is primarily in mining
chemicals, phosphines and polymer additives mostly due to higher demand levels.
Sales volume in Europe/Middle East/Africa increased 12% as a result of overall
improved demand. Overall average price increased 2% as a result of
implementation of price increase initiatives in the mining product line and a
surcharge in the water treating product line.
Earnings from operations were $56.8, or 8% of sales, compared with $39.6 or 6%
of sales in 2005. The increase in earnings is primarily attributable to
increased selling volumes, benefits of restructuring initiatives and the
inclusion of the Surface Specialties pressure sensitive adhesive and
polyurethanes product lines which were acquired on February 28, 2005. Partially
offsetting these was higher raw material costs of $28.4 and expense of $2.7 for
stock options and stock-settled SARS related to SFAS 123R. 2005 results also
included $2.6 for the excess of the fair value of the finished goods inventory
over normal manufacturing cost related to the Surface Specialties acquisition
and $7.0 of in-process research and development cost write-offs related to the
Surface Specialties acquisition.
30
Cytec Surface Specialties
% Change Due to
Total ------------------------------------------------------
2006 2005 % Change Price Volume/Mix Acquisition Currency
----------------------------------------------------------------------------------------------------------------------------------
North America $ 284.5 $239.5 19% 4% -3% 18% -
Latin America 45.2 35.8 26% 2% 1% 19% 4%
Asia/Pacific 194.0 140.6 38% -4% 25% 18% -1%
Europe/Middle East/Africa 624.6 477.2 31% -1% 8% 24% -
-------------------------
Total $1,148.3 $893.1 29% - 7% 22% -
----------------------------------------------------------------------------------------------------------------------------------
For all regions, selling volumes increased 29% of which 22% relates to the
inclusion of sales attributable to Surface Specialties which was acquired on
February 28, 2005. The remaining volume increase was across all product lines.
In North America volumes declined excluding the acquisition due to reduced
demand levels from the automotive sector in the liquid coating resin product
line. In Asia/Pacific and Europe/Middle East/Africa volumes increased 25% and
8%, respectively, due to improved demand and new business. Selling prices
declined in Asia and Europe primarily due to price competition in lower
technology products.
Earnings from operations were $78.0, or 7% of sales, compared with earnings from
operations of $8.0, or 1% of sales in 2005. The increase in earnings is
primarily attributable to the increased selling volumes, the benefits of
restructuring initiatives and the inclusion of results from Surface Specialties
which was acquired on February 28, 2005. Partially offsetting these are higher
raw material costs of $11.5 and expense of $2.4 for stock options and
stock-settled SARS related to SFAS 123R. 2005 results include the write-off of
in-process research and development costs of $30.1 and a charge of $18.2 for the
excess of the fair value of the finished goods inventory over normal
manufacturing cost related to the Surface Specialties acquisition.
Cytec Engineered Materials
% Change Due to
Total ----------------------------------------
2006 2005 % Change Price Volume/Mix Currency
--------------------------------------------------------------------------------------------------------------------------------
North America $276.9 $261.2 6% 2% 4% -
Latin America(1) 0.9 1.1 - - - -
Asia/Pacific 32.5 22.1 47% 4% 43% -
Europe/Middle East/Africa 131.3 120.1 9% 2% 8% -1%
--------------------------
Total $441.6 $404.5 9% 2% 7% -
------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 7% primarily from higher sales to the large
commercial aircraft, military rotorcraft and business jet markets partially
offset by lower sales in the high performance auto market due to the completion
of a program in early 2006 and lower sales to the launch vehicle market. Net
selling prices increased 2% due to price increases in all regions and across a
number of markets. North America, Europe, and Asia/Pacific sales volumes
increased 4%, 8%, and 43%, respectively, with the increases coming primarily
from the large commercial aircraft and military segments due to increased
aircraft build rates.
Earnings from operations were $78.8, or 18% of sales, compared with $76.3, or
19% of sales, in 2005. The impact of the increased sales volume and prices on
operating earnings was partially offset by increased raw material costs of $4.7,
increased costs in manufacturing to support the higher production volumes, some
plant inefficiencies, planned higher technical service and research expenses,
lower production rates in one of our carbon fiber plants due to trial runs of
new product and costs to startup a carbon fiber manufacturing line that was
previously idled. Also included is expense of $1.8 for stock options and
stock-settled SARS related to SFAS 123R.
Building Block Chemicals (Sales to external customers)
% Change Due to
Total ----------------------------------------
2006 2005 % Change Price Volume/Mix Currency
--------------------------------------------------------------------------------------------------------------------------------
North America $ 131.3 $ 110.3 19% 10% 9% -
Latin America(1) 4.1 2.9 - - - -
Asia/Pacific 26.8 38.1 -30% 3% -33% -
Europe/Middle East/Africa 95.2 54.4 75% 21% 55% -1%
---------------------------
Total $ 257.4 $ 205.7 25% 12% 13% -
--------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
31
Overall sales volumes are 13% higher and selling prices are 12% higher, both
primarily related to acrylonitrile. In addition, selling volumes were favorably
impacted due to plant shutdowns in 2005 as a result of the hurricanes in the US
gulf coast in the third quarter of 2005 On a regional basis selling volumes in
Asia/Pacific are down due to sluggish demand for acrylonitrile and poor margin
spreads, which discouraged us from moving product there. Selling volumes in
Europe/Middle East/Africa improved due to increased demand for imported
acrylonitrile and margin spreads while still low were higher than those in
Asia-Pacific. Selling prices were up overall due to acrylonitrile and acrylamide
as they trended with increases in raw material costs.
Earnings from operations were $15.8, or 6% of sales, compared with $9.7, or 5%
of sales, in 2005. The increase in earnings reflects the higher selling volumes
(some due to the impact of the aforementioned hurricanes in 2005), higher
selling prices and income of $4.5 pertaining to a payment from our former
melamine joint venture partner which approximates cost reimbursements we
expected to receive from our former partner for the last five months of 2006.
This was partially offset by higher raw material costs of $19.8 million,
inefficiencies on lower melamine production as a result of our manufacturing
joint venture partner requesting no production in the first half of 2006,
difficulties in our sulfuric acid plant operations and higher costs due to a two
week scheduled acrylonitrile plant outage in the first quarter of 2006. Also
included is expense of $0.9 for stock options and stock-settled SARS related to
SFAS 123R.
LIQUIDITY AND FINANCIAL CONDITION
At September 30, 2006 our cash balance was $29.3 compared with $68.6 at year end
2005. This decrease was primarily attributable to the use of cash to reduce
debt.
Cash flows provided by operating activities were $161.2 in 2006 compared with
$173.4 in 2005. The decrease in operating cash flows reflects the higher working
capital in line with the increase in sales and additional pension contributions
in 2006 offset in part by the increase in earnings. During the nine months of
2006, pension contribution of $38.5 were made compared to $8.2 through the nine
months of 2005. The additional pension contributions in 2006 were primarily made
to improve the funded status of our U.S. pension plans and simultaneously reduce
the minimum required contributions in 2007. Pension liabilities are included in
other liabilities in our consolidated statements of cash flows. Trade accounts
receivable increased $58.4 reflecting the increase in sales and inventory
increased $48.4 due to higher raw material cost and higher inventory levels to
meet increasing demand. Accrued expenses decreased $8.3 primarily due to
insurance premium payment of $6.6 for our global policy and a payment of $4.3
related to a previously recognized environmental litigation accrual. Other
liabilities decreased $5.0 primarily due to payments of $13.2 for our
postretirement benefits plans in excess of accruals offset in part by $9.0
increase to our asbestos related claims reserves. Partially offsetting these
were an increase in restructuring accruals of $4.3 and increase in accounts
payable of $10.5.
Cash flows used in investing activities were $62.2 for 2006 compared with
$1,355.8 for 2005. This decrease was primarily attributable to $1,509.0 of cash
used for the Surface Specialties acquisition offset in part by $101.4 cash
provided by the sale of assets in 2005 including SSAR. Capital spending for the
2006 nine months was $62.2 compared to $74.7 in 2005. Capital spending for the
full year is expected to approximate $100.0.
Net cash flows used in financing activities were $140.9 in 2006 compared with
net cash flows provided by financing activities of $1,044.1 in 2005. This change
is primarily due to proceeds received for debt incurred in 2005 related to the
purchase of Surface Specialties. During the nine months of 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.
At September 30, 2006, we can borrow up to an additional $295.0 under our $350.0
revolving credit facility. Borrowing against this facility totaled $55.0 at
September 30, 2006.
On July 20, 2006 the Board of Directors declared a $0.10 per common share cash
dividend, paid on August 25, 2006 to shareholders of record as of August 12,
2006. Cash dividends paid during the nine months of 2006 and 2005 were $14.1 and
$13.2, respectively. On October 20, 2006 the Board of Directors declared a $0.10
per common share cash dividend, payable on November 27, 2006 to shareholders of
record as of November 10, 2006.
32
In July 2006, we announced we had reached a definitive agreement to sell our
water treatment chemicals and acrylamide product lines to Kemira Group
("Kemira"). In October 2006, we completed the first of three phases of the sale,
which include the entire product lines with the exception of our Botlek
manufacturing site in the Netherlands, which is expected to close in early 2007,
and certain assets at various subsidiaries in Asia/Pacific and Latin America
which are expected to close within the next six months. The timing of the flow
of funds is approximately $208.0 received in October for the first closing, an
estimated $20.0 upon the Botlek closing, and an estimated $12.0 upon completion
of the transfer of the assets at the various subsidiaries for an estimated total
of $240.0. The first payment received in October was used to pay down our debt.
In connection with the Surface Specialties acquisition, we suspended our stock
buy-back program and do not anticipate making future stock buy-backs for at
least two years from the closing date in order to maximize the funds available
for debt service and other corporate purposes.
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, pension contributions or other investments, it may continue to 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 material costs, 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 2005 Annual
Report on Form 10-K.
OTHER
2006 OUTLOOK
In our October 19, 2006 press release, which was also filed as an exhibit to a
current report on Form 8-K, we presented our best estimate of the full year 2006
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 2005 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on February 28,
2006. Except as follows, there have been no changes to our critical accounting
policies during the nine months ended September 30, 2006.
Share-based Compensation
On January 1, 2006 we adopted SFAS 123R which supersedes Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
and 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.
See Note 6 of the Consolidated Financial Statements for additional details on
and the impact of adoption of SFAS 123R.
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 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.
33
The following factors, among others, could affect the anticipated results: the
ability to complete the successful integration of Surface Specialties, including
realization of anticipated synergies within the expected timeframes or at all,
and the ongoing operations of the business; 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, 2005, filed with the
Securities and Exchange Commission on February 28, 2006 and incorporated by
reference herein. Other 2006 financial instrument transactions include:
Commodity Price Risk: At September 30, 2006, the Building Block Chemicals
segment Fortier plant's 2006 remaining forecasted natural gas utility
requirements were 34% hedged utilizing natural gas forward contracts at an
average cost of $9.69 per MMBTU. These contracts had a total fair value of $1.1
and delivery dates ranging from October, 2006 to December, 2006. Due to market
conditions, we are transitioning from natural gas forward contracts to natural
gas swaps to hedge the plant's future utility requirements. At September 30,
2006, 58% of the plant's 2006 remaining forecasted natural gas utility
requirements were hedged through natural gas swaps and forwards.
At September 30, 2006, we held natural gas swaps, including the gas swaps for
Fortier plant, with an unfavorable fair value of $6.8, which will be
reclassified into Manufacturing cost of sales through June 2007 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 $0.1 in the value of the contracts referred to above.
Interest Rate Risk: At September 30, 2006, our outstanding borrowings consisted
of short-term borrowings of $35.3 and long-term debt, including the current
portion, which had a carrying value of $1,121.0, a face value of $1,121.2 and a
fair value, based on dealer quoted values, of approximately $1,101.7.
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, 2006, interest expense would increase/decrease
by approximately $0.9 for the next fiscal quarter.
For a discussion of the interest rate derivative activities entered into as part
of the acquisition of Surface Specialties, refer to "Liquidity and Financial
Condition" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in our 2005 Annual Report on Form
10-K
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, 2006, 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.
34
At September 30, 2006, the currency and net contractual amounts of forward
contracts outstanding translated into U. S. dollar equivalent amounts totaled
$121.0. Of this total, $110.2 was attributed to the net exposure in forward
selling of U. S. dollar. The remaining $10.8 was the net exposure in forward
buying of Euro, translated into U. S. dollar equivalent amount. The unfavorable
fair value of currency contracts, based on forward exchange rates at September
30, 2006, was approximately $0.8. 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, 2006 would decrease by
approximately $13.6. 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 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 US 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 US dollar to euro exchange rates on
certain euro denominated intercompany loans receivable we have with one of our
subsidiaries. At September 30, 2006, the unfavorable fair value of the five and
ten year swaps were $7.1 and $8.2, respectively. Assuming other factors are held
constant, a hypothetical increase of 10% in the euro exchange rate would have an
adverse effect of approximately $51.5 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, 2006, 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 euro
exchange rate would have an adverse impact of approximately $7.4 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
September 30, 2006. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective.
There were no changes in internal control over financial reporting that occurred
during the nine months ended September 30, 2006 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
We are in the process of implementing our Cytec Specialty Chemicals global
enterprise-wide planning systems for the acquired businesses of Surface
Specialties. The world-wide implementation is expected to be completed in early
2009 and includes changes that involve internal controls 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
controls, our disclosure controls 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
will be made to any affected internal controls during the implementation and we
will test all modified controls to insure they are functioning effectively.
35
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 2005 Annual Report
on Form 10-K and 2006 Quarterly Reports on Form 10-Q are set forth below.
The following table presents information about asbestos claims activity:
---------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
2006
---------------------------------------------------------------------------------------------
Number of claimants at beginning of period 18,100
Number of claimants associated with claims closed during period (11,900)
Number of claimants associated with claims opened during period 2,900
---------------------------------------------------------------------------------------------
Number of claimants at end of period 9,100
---------------------------------------------------------------------------------------------
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. The significant decline in the number of claimants during 2006 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.
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. We obtained a court order in France to enforce the award, which order was
appealed by SNF. In March, 2006, the Court of Appeal of Paris denied SNF's
appeal and affirmed the court order. In the second quarter of 2006, we collected
(euro)12.2 ($15.6) related to the arbitration award including interest which was
included in other income, expense (net) in the second quarter. 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 and has also filed a final appeal of the
appellate court's order. SNF has also filed a complaint in France seeking
compensation from Cytec for (euro)54.0 alleging 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 both complaints and
the appeal are without merit.
See also the Note 11 of the Notes to the Consolidated Financial Statements
herein.
Item 6. EXHIBITS
(a). Exhibits
--------
See Exhibit Index on page 38 for exhibits filed with this Quarterly Report on
Form 10-Q.
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYTEC INDUSTRIES INC.
By: /s/ James P. Cronin
------------------------
James P. Cronin
Executive Vice President and
Chief Financial Officer
November 2, 2006
37
Exhibit Index
-------------
3.1(a) Certificate of Incorporation (incorporated by reference to
exhibit 3.1(a) to our quarterly report on Form 10-Q for the
quarter ended September 30, 1996).
3.1(b) Certificate of Amendment to Certificate of Incorporation
dated May 13, 1997 (incorporated by reference to exhibit
3.1(a) to our quarterly report on Form 10-Q for the quarter
ended June 30, 1997).
3.1(c) Conformed copy of Certificate of Incorporation, as amended
(incorporated by reference to exhibit 3(c) to our
registration statement on Form S-8, registration number
333-45577).
3.2 By-laws, as amended through January 22, 2002 (incorporated
by reference to exhibit 3.2 to our Annual Report on Form
10-K for the year ended December 31, 2002).
12 Computation of Ratio of Earnings to Fixed Charges for the
three and nine months ended September 30, 2006 and 2005
31.1 Certification of David Lilley, Chief Executive Officer,
Pursuant to Rule 13a-14(a) of the Securities Exchange Act
31.2 Certification of James P. Cronin, Chief Financial Officer,
Pursuant to Rule 13a-14(a) of the Securities Exchange Act
32.1 Certification of David Lilley, Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
32.2 Certification of James P. Cronin, Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
38