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, 2008
Commission file number 1-12372
CYTEC INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3268660
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No).
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 357-3100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to 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, a non-accelerated filer, or a small reporting company. See
definition of "accelerated filer, large accelerated filer, and smaller reporting
company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Small reporting company |_|
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 47,113,947 shares of common stock outstanding at October 23, 2008.
-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 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 31
Part II - Other Information
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 6. Exhibits 33
Signature 34
Exhibit Index 35
-2-
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net sales $ 963.0 $ 875.1 $ 2,941.7 $ 2,602.6
Manufacturing cost of sales 765.8 683.8 2,334.6 2,045.6
Selling and technical services 57.4 52.3 176.1 155.3
Research and process development 19.2 18.0 62.5 55.5
Administrative and general 30.8 29.2 89.6 84.4
Amortization of acquisition intangibles 10.0 9.7 30.4 28.6
Gain on sale of assets held for sale - - - 15.7
----------- ----------- ----------- -----------
Earnings from operations 79.8 82.1 248.5 248.9
Other (expense) income, net (2.1) (1.4) 1.0 0.1
Equity in earnings of associated companies 0.4 0.5 1.4 0.9
Interest expense, net 8.7 10.4 27.8 31.9
----------- ----------- ----------- -----------
Earnings before income taxes 69.4 70.8 223.1 218.0
Income tax provision 23.1 18.4 71.1 59.1
----------- ----------- ----------- -----------
Net earnings $ 46.3 $ 52.4 $ 152.0 $ 158.9
=========== =========== =========== ===========
Basic net earnings per common share $ 0.97 $ 1.09 $ 3.17 $ 3.30
Diluted net earnings per common share $ 0.96 $ 1.06 $ 3.12 $ 3.23
Dividends per common share $ 0.125 $ 0.10 $ 0.375 $ 0.30
=========== =========== =========== ===========
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,
2008 2007
---------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 90.2 $ 76.8
Trade accounts receivable, less allowance for doubtful accounts of
$3.9 and $4.5 at September 30, 2008 and December 31, 2007,
respectively 619.7 584.4
Other accounts receivable 72.7 72.1
Inventories 609.8 520.0
Deferred income taxes 8.9 7.1
Other current assets 23.6 15.7
---------------------------------------------------------------------------------------------------------
Total current assets 1,424.9 1,276.1
---------------------------------------------------------------------------------------------------------
Investment in associated companies 22.6 23.8
Plants, equipment and facilities 2,102.9 2,022.6
Less: accumulated depreciation (1,024.9) (972.6)
---------------------------------------------------------------------------------------------------------
Net plant investment 1,078.0 1,050.0
---------------------------------------------------------------------------------------------------------
Acquisition intangibles, net of accumulated amortization of
$166.4 and $139.3 at September 30, 2008 and December 31, 2007,
respectively 449.3 484.5
Goodwill 1,091.9 1,104.8
Deferred income taxes 0.5 0.4
Other assets 126.3 122.1
---------------------------------------------------------------------------------------------------------
Total assets $ 4,193.5 $ 4,061.7
=========================================================================================================
Liabilities
Current liabilities
Accounts payable $ 363.8 $ 316.5
Short-term borrowings 39.8 42.0
Current maturities of long-term debt 1.5 101.4
Accrued expenses 216.5 204.4
Income taxes payable 15.6 7.4
Deferred income taxes 14.4 15.2
---------------------------------------------------------------------------------------------------------
Total current liabilities 651.6 686.9
---------------------------------------------------------------------------------------------------------
Long-term debt 823.5 705.3
Pension and other postretirement benefit liabilities 266.9 271.4
Other noncurrent liabilities 334.4 349.2
Deferred income taxes 139.0 134.9
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 433.8 438.0
Retained earnings 1,490.5 1,356.6
Accumulated other comprehensive income 111.8 157.5
Treasury stock, at cost, 1,094,050 shares in 2008 and 596,911 shares
in 2007 (58.5) (38.6)
---------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,978.1 1,914.0
---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 4,193.5 $ 4,061.7
=========================================================================================================
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,
---------------------------------------------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities
Net earnings $ 152.0 $ 158.9
Noncash items included in net earnings:
Depreciation 84.8 74.6
Amortization 35.1 33.3
Share-based compensation 8.5 10.0
Deferred income taxes 11.9 14.8
Gain on sale of assets held for sale - (15.7)
Other 1.0 2.5
Changes in operating assets and liabilities:
Trade accounts receivable (48.7) (51.3)
Other receivables (0.3) 16.7
Inventories (97.1) (5.0)
Other assets (10.8) (3.8)
Accounts payable 39.3 (5.9)
Accrued expenses 4.9 (0.8)
Income taxes payable 12.1 (9.2)
Other liabilities (22.2) (24.6)
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 170.5 194.5
---------------------------------------------------------------------------------------------------------
Cash flows (used in) provided by investing activities
Additions to plants, equipment and facilities (116.3) (65.7)
Net proceeds (paid)/received on sale of assets (4.7) 30.2
---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (121.0) (35.5)
---------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) financing activities
Proceeds from long-term debt 241.0 222.0
Payments on long-term debt (222.6) (319.6)
Change in short-term borrowings, net (2.9) 4.9
Cash dividends (17.9) (14.4)
Proceeds from the exercise of stock options 10.8 31.8
Purchase of treasury stock (46.4) (49.6)
Excess tax benefits from share-based payment arrangements 2.7 8.5
Other 0.6 0.1
---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (34.7) (116.3)
---------------------------------------------------------------------------------------------------------
Effect of currency rate changes on cash and cash equivalents (1.4) 2.4
---------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 13.4 45.1
Cash and cash equivalents, beginning of period 76.8 23.6
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 90.2 $ 68.7
=========================================================================================================
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 and accounting principles
generally accepted in the United States of America ("U.S. GAAP") for interim
reporting. Certain information and footnote disclosures normally included in our
annual financial statements 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. As discussed in our June 30, 2008 Form 10-Q, the tax
benefit/(cost) related to unrealized gains/(losses) on our cross currency swaps
included in accumulated other comprehensive income and deferred tax liabilities
has been revised for all prior periods presented. See Note 10 of these
Consolidated Financial Statements for additional details on the revision. 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 2007 Annual Report
on Form 10-K. Unless indicated otherwise, the terms "Company", "Cytec", "we",
"us" and "our" each refer collectively to Cytec Industries Inc. and its
subsidiaries.
2. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") EITF No. 03-6-1, "Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities". The FSP
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and therefore need to be included in
the earnings allocation in calculating earnings per share under the two-class
method described in Statement of Financial Accounting Standards ("SFAS") SFAS
No. 128, "Earnings per Share." The FSP requires entities to treat unvested
share-based payment awards that have non-forfeitable rights to dividend or
dividend equivalents as a separate class of securities in calculating earnings
per share. The FSP is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2008 and earlier application is
not permitted. We expect the effect of the adoption of FSP EITF No. 03-6-1 to be
immaterial to our consolidated financial statements and earnings per share.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133,"
("SFAS 161"), which requires enhanced disclosures about an entity's derivative
and hedging activities. In addition to disclosing the fair values of derivative
instruments and their gains and losses in a tabular format, entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years, and interim periods within those
fiscal years, beginning after November 15, 2008. SFAS 161 does not change the
accounting for derivative instruments.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations", ("SFAS
141R"), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in an acquiree,
and the recognition and measurement of goodwill acquired in a business
combination or a gain from a bargain purchase. SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51", ("SFAS 160"),
which establishes accounting and reporting standards that require the
noncontrolling interest to be identified, labeled, and presented in the
consolidated statement of financial position within equity, but separate from
the parent's equity. SFAS 160 will also require that the amount of consolidated
net income attributable to the parent and to the noncontrolling interest be
identified and presented on the face of the consolidated statement of income.
SFAS 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. We do not expect the adoption of
SFAS 160 to have a material impact on our consolidated financial statements.
-6-
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
("SFAS 157"). SFAS 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and requires additional
disclosures about fair value measurements. SFAS 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments) and is intended to
increase the consistency of those measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. On January 1, 2008, we adopted SFAS 157
for financial assets and liabilities, as well as for any other assets and
liabilities that are carried at fair value on a recurring basis in financial
statements. As of September 30, 2008, we did not have any non-financial assets
and liabilities that are carried at fair value on a recurring basis. The FASB
has issued a one-year deferral of SFAS 157's fair value measurement requirements
for non-financial assets and liabilities that are not required or permitted to
be measured at fair value on a recurring basis. Included among our non-financial
assets and liabilities that are not required to be measured at fair value on a
recurring basis are long-lived assets, goodwill, acquisition intangibles, and
asset retirement obligations for which we will provide the required disclosures
upon adoption of the remainder of SFAS 157 effective January 1, 2009. See Note
15 of the Consolidated Financial Statements for additional details on the impact
of adoption of SFAS 157.
3. DIVESTITURES
In October 2006, we completed the first of three phases of the sale of our water
treatment chemicals and acrylamide product lines to Kemira Group ("Kemira").
This first phase included the product lines themselves, the related intellectual
property, the majority of the manufacturing sites and essentially all of the
sales, marketing, manufacturing, research and development and technical services
personnel. The manufacturing sites in the first phase included Mobile, Alabama,
Longview, Washington, Bradford, UK, and the acrylamide manufacturing plant at
our Fortier, Louisiana facility, which continues to be operated by our personnel
under a long-term manufacturing agreement. The sale of our Botlek manufacturing
site in the Netherlands was completed and transferred to Kemira in January 2007
as part of the phase two closing. We continue to supply acrylonitrile to the
Kemira acrylamide plants at Fortier and Botlek under long-term supply
agreements. In addition, under various long-term manufacturing agreements, we
manufacture certain water treatment products for Kemira at several of our sites
and Kemira manufactures certain mining chemicals for us at the Mobile, Alabama
and Longview, Washington sites and various other products at the Botlek site.
These contracts were all deemed to be at estimated market value. Sales of
certain assets at subsidiaries in Asia/Pacific and Latin America were settled in
the third and fourth quarters of 2007 and the transfer of our subsidiary in
Venezuela was completed in the fourth quarter of 2007 as the last phase of the
transaction.
The timing of the flow of funds was as follows: $208.0 ($206.6 net of associated
transaction costs) was received in October 2006 for the first closing, and $21.2
was received for the second closing in January 2007. We also received $5.9 in
February 2007 for a working capital adjustment from the first phase closing per
the terms of the contract. During the third quarter of 2007, we received $3.1
from completed transfers of the assets at various subsidiaries in Asia/Pacific
and Latin America, and $8.5 was received in the fourth quarter of 2007 in
settlement of the final working capital transfers in Asia/Pacific and Latin
America and for the sale of our subsidiary in Venezuela.
At the time of the sale of the manufacturing facilities included in this
transaction, Kemira agreed to assume certain environmental liabilities related
to those sites and we agreed to compensate Kemira for the estimated costs of
required remedial actions identified in a subsequent site evaluation or to
undertake such actions on behalf of Kemira. Negotiations with Kemira over the
required remedial actions and their estimated costs were completed in the first
quarter of 2008. As a result of these negotiations, in the first quarter of 2008
we paid Kemira approximately $1.9 in exchange for their agreement to assume the
environmental liabilities related to one of the transferred sites. A final
payment to Kemira for $2.8 was made in the second quarter of 2008 in accordance
with their agreement to assume environmental liabilities related to the last of
the transferred sites (see Note 9 of the Consolidated Financial Statements).
After adjusting for these environmental settlements, final net proceeds related
to this transaction were $242.0 ($240.6 net of associated transaction costs).
We recorded a pre-tax gain of $75.5 ($59.6 after-tax) related to the first phase
closing in the fourth quarter of 2006, and a pre-tax gain of $13.6 ($13.3
after-tax) in 2007 from other closings and other activities. The 2007 gain
consists of a pre-tax gain of $15.7 ($15.3 after-tax) recorded in the first
quarter related to the phase two sale of the Botlek site, which includes a
pre-tax gain of $13.8 resulting from the recognition of accumulated translation
adjustments, and a pre-tax loss of $2.1 ($2.0 after-tax) recorded in the fourth
quarter. The fourth quarter 2007 loss included a loss on the transfer of the
Venezuela subsidiary, an accrual to increase recorded environmental liabilities
related to sites previously transferred to Kemira based on additional
information generated by updated site evaluations, and a favorable adjustment,
based on final actuarial reports, to a pension settlement loss accrued in the
first quarter of 2007 related to the sale of the Botlek site.
4. RESTRUCTURING OF OPERATIONS
In accordance with our policy for segment reporting, restructuring costs are
included in our corporate and unallocated operating results consistent with
management's view of its businesses.
For the three and nine months ended September 30, 2008, we recorded net
restructuring charges of $5.7 and $10.8, respectively, primarily related to the
2008 and 2007 restructuring initiatives as described below.
-7-
During the third quarter of 2008, as a cost savings and reduction initiative and
to re-align our staff levels with our latest view of the global economy, we
decided to restructure several areas primarily in our Surface Specialties
segment, resulting in the elimination of 39 positions. The restructuring charge
of $5.4 for the three and nine months ended September 30, 2008 primarily relates
to severance and was charged to expense as follows: manufacturing cost of sales
of $1.3, selling and technical services of $2.7, administrative and general of
$1.3, and research and process development of $0.1.
During the first quarter of 2008, we decided to restructure several areas
primarily in our Surface Specialties segment, resulting in the elimination of 13
positions. The restructuring charge of $1.6 for the nine months ended September
30, 2008 primarily relates to severance and was charged to expense as follows:
selling and technical services of $0.8, administrative and general of $0.3, and
research and process development of $0.5.
Details of 2007 restructuring initiatives are as follows:
We decided to cease manufacturing of several mature products at our Willow
Island, West Virginia plant. The discontinued products were part of the polymer
additives product line in our Cytec Performance Chemicals segment. As a result,
we recorded a restructuring charge of $2.6 to 2007 manufacturing cost of sales
primarily related to severance and other benefits earned through 2007 by the 63
employees who were retained through May 2008. This charge also included the
write-off of excess raw materials and spare parts. For the three and nine months
ended September 30, 2008, we recorded additional restructuring charges of $0.0
and $2.9 to manufacturing cost of sales for severance and other benefits earned.
The remaining reserve relating to this restructuring initiative is expected to
be paid by early 2009.
We also announced the restructuring of our liquid coating resins plant in
Wallingford, Connecticut in order to exit a mature product line and consolidate
and automate certain operations at the site. Liquid coating resins are part of
the Cytec Surface Specialties segment. We recorded a restructuring charge of
$1.4 to 2007 manufacturing cost of sales relating to severance and other
benefits for 31 employees. For the three and nine months ended September 30,
2008, we recorded additional restructuring charges of $0.0 and $0.3 to
manufacturing cost of sales for severance and other benefits earned. A final
restructuring charge of $0.1 is expected to be recorded in the fourth quarter of
2008, primarily related to the remainder of the severance and other benefits
which will be accrued as they are earned. The economic benefit of this
restructuring is derived from the combination of ceasing operations of one
manufacturing line and supplying the volume on a consolidated operating basis.
The remaining reserve relating to this restructuring initiative is expected to
be paid by early 2009.
Asset retirements resulting from the Willow Island and Wallingford projects are
being recorded as they are dismantled, and are charged to the composite
depreciation reserve in accordance with our accounting policy.
We also incurred additional net restructuring charges of $0.2 and $0.5 to
manufacturing cost of sales for the three and nine months ended September 30,
2008, respectively, primarily for severance and facility closing costs relating
to a restructuring initiative announced in 2006 for the shutdown of our
manufacturing operation in Dijon, France. These expenses were anticipated but
not accruable when the plans were announced.
A summary of the restructuring activity is outlined in the table below:
2005 2006 2007 2008
Restructuring Restructuring Restructuring Restructuring
Initiatives Initiatives Initiatives Initiatives Total
----------------------------------------------------------------------------------------------------------------------------------
Balance
December 31, 2006 $ 1.4 $ 13.5 $ - $ - $ 14.9
----------------------------------------------------------------------------------------------------------------------------------
2007 charges (0.2)(1) 2.4 4.0 - 6.2
Non-cash items - (0.3)(2) - - (0.3)
Cash payments (1.0) (11.5) (0.6) - (13.1)
Currency translation adjustments 0.1 0.7 - - 0.8
----------------------------------------------------------------------------------------------------------------------------------
Balance
December 31, 2007 $ 0.3 $ 4.8 $ 3.4 $ - $ 8.5
----------------------------------------------------------------------------------------------------------------------------------
1st Quarter charges - 0.3 (3) 1.6 1.6 3.5
Non-cash items - - - - -
Cash payments - (1.2) (0.6) (0.9) (2.7)
Currency translation adjustments - 0.4 - - 0.4
Balance
March 31, 2008 $ 0.3 $ 4.3 $ 4.4 $ 0.7 $ 9.7
2nd Quarter charges - - (4) 1.6 - 1.6
Non-cash items - - - - -
Cash payments - (0.8) (2.0) (0.2) (3.0)
Currency translation adjustments - (0.2) - - (0.2)
----------------------------------------------------------------------------------------------------------------------------------
Balance
June 30, 2008 $ 0.3 $ 3.3 $ 4.0 $ 0.5 $ 8.1
----------------------------------------------------------------------------------------------------------------------------------
3rd Quarter charges - 0.3 (3) 5.4 5.7
Non-cash items - - (0.3)(5) - (0.3)
Cash payments (0.1) (0.6) (1.2) (0.5) (2.4)
Currency translation adjustments - (0.2) - - (0.2)
----------------------------------------------------------------------------------------------------------------------------------
Balance
September 30, 2008 $ 0.2 $ 2.8 $ 2.5 $ 5.4 $ 10.9
----------------------------------------------------------------------------------------------------------------------------------
(1) Represents a reduction in estimated severance and other costs.
(2) Represents asset impairment charge at the Indian Orchard facility.
(3) Represents a charge for severance relating to a restructuring initiative
for the manufacturing operation in Dijon, France.
(4) Includes a $0.6 charge related to facility closing costs offset by $0.4
benefit related to a reversal of excess severance accrual relating to the
Dijon, France facility and a benefit of $0.2 for the Corporate
restructuring initiative for which all payments have been completed.
(5) Represents a write-off of excess raw materials at the Willow Island
facility.
-8-
5. SHARE-BASED COMPENSATION
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 appreciation rights that are settled
with common shares ("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, 2008 and 2007 are noted in
the following table:
------------------------------------------------------------------------
2008 2007
------------------------------------------------------------------------
Expected life (years) 6.6 6.2
Expected volatility 31.0% 27.2%
Expected dividend yield 0.76% 0.69%
Range of risk-free interest rate 2.1% - 3.7% 4.8% - 5.2%
Weighted-average fair value per option $17.65 $19.50
------------------------------------------------------------------------
The expected life of options granted is derived from the output of the option
valuation model and represents the period of time that options granted are
expected to be outstanding. Expected volatilities are based on the combination
of implied market volatility and our historical volatility. The 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 No. 123 (revised
2004), "Share-Based Payment", ("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.
-9-
A summary of stock options and stock-settled SARS activity for the nine months
ended September 30, 2008 is presented below.
Weighted Weighted
Average Average
Exercise Remaining Aggregate
Options and Stock-Settled SARS Number of Price Contractual Intrinsic
Activity: Units Per Unit Life (Years) Value
-----------------------------------------------------------------------------------------------
Outstanding at January 1, 2008 3,600,932 $38.35
Granted 556,652 52.62
Exercised (397,614) 30.29
Forfeited (68,663) 48.76
-----------------------------------------------------------------------------------------------
Outstanding at September 30, 2008 3,691,307 $41.18 5.7 $17.8
-----------------------------------------------------------------------------------------------
Exercisable at September 30, 2008 2,620,958 $35.98 4.5 $17.8
-----------------------------------------------------------------------------------------------
Weighted
Average
Grant
Nonvested Options and Stock-Settled Number of Date Fair
SARS: Units Value
----------------------------------------------------------------------
Nonvested at January 1, 2008 1,048,662 $19.09
Granted 556,652 17.65
Vested (494,152) 18.77
Forfeited (40,813) 18.80
----------------------------------------------------------------------
Nonvested at September 30, 2008 1,070,349 $18.47
----------------------------------------------------------------------
During the nine months ended September 30, 2008, we granted 556,652 shares of
stock-settled SARS and stock options. The weighted-average grant-date fair value
of the stock-settled SARS and stock options granted during the nine months ended
September 30, 2008 and 2007 was $17.65 and $19.50 per share, respectively.
Stock-settled SARS are deemed to be equity-based awards under SFAS 123R. The
total intrinsic value of stock options and stock-settled SARS exercised during
the nine months ended September 30, 2008 and 2007 was $10.7 and $24.9,
respectively. Treasury shares have been utilized for stock option and
stock-settled SARS exercises. The total fair value of stock options and
stock-settled SARS vested during the nine months ended September 30, 2008 and
2007 was $9.3 and $9.1, respectively.
As of September 30, 2008, there was $8.8 of total unrecognized compensation cost
related to stock options and stock-settled SARS. That cost is expected to be
recognized over a weighted-average period of 1.6 years as the majority of our
awards vest over three years. Compensation cost related to stock options and
stock-settled SARS capitalized in inventory as of September 30, 2008 and
December 31, 2007 was approximately $0.4 and $0.3, respectively.
Cash received (for stock options only) and the tax benefit realized from stock
options and stock-settled SARS exercised were $10.8 and $3.3 for the nine months
ended September 30, 2008 and $31.8 and $9.1 for the nine months ended September
30, 2007, respectively. Cash used to settle cash-settled SARS was $0.1 and $0.8
for the nine months ended September 30, 2008 and 2007, respectively. The
liability related to our cash-settled SARS was $2.2 at September 30, 2008 and
$4.3 at December 31, 2007.
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. During
the nine months ended September 30, 2008, we granted performance stock awards
for 47,927 shares (assuming par payout) to nine employees, which relate to the
2010 performance period. The total amount of share-based compensation expense
recognized for non-vested and performance stock for three months ended September
30, 2008 and 2007 was $0.3 and $0.1, respectively, and for nine months ended
September 30, 2008 and 2007 was $1.0 and $0.3, respectively.
As of September 30, 2008 and December 31, 2007, our additional paid-in capital
pool ("APIC Pool") was $66.5 and $63.7, respectively.
-10-
6. EARNINGS PER SHARE (EPS)
Basic earnings per common share excludes dilution and is computed by dividing
net earnings by the weighted-average number of common shares outstanding (which
includes shares outstanding, less performance and non-vested shares for which
vesting criteria have not been met) plus deferred stock awards, weighted for the
period outstanding. Diluted earnings per common share is computed by dividing
net earnings by the sum of the weighted-average number of common shares
outstanding for the period adjusted (i.e., increased) for all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued and any proceeds of the issuance had been used to repurchase
common stock at the average market price during the period. The proceeds are
assumed to be the sum of the amount to be paid to the Company upon exercise of
options, the amount of compensation cost attributed to future services and not
yet recognized and the amount of income taxes that would be credited to or
deducted from capital upon exercise.
The following shows the reconciliation of weighted-average shares:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------
2008 2007 2008 2007
---------------------------------------------------------------------------------------------
Weighted average shares outstanding: 47,818,864 48,186,403 47,925,085 48,166,828
Effect of dilutive shares:
Options and stock-settled SARS 608,625 1,118,913 745,361 1,055,141
Restricted Stock 12,517 25,267 10,826 24,145
---------------------------------------------------------------------------------------------
Adjusted average shares outstanding 48,440,006 49,330,583 48,681,272 49,246,114
=============================================================================================
Outstanding stock options to purchase 70,960 and 35,068 shares of common stock
as of September 30, 2008 and 2007, respectively, were excluded from the above
calculation because their inclusion would have had an anti-dilutive effect on
earnings per share. In addition, 998,885 and 508,945 of outstanding
stock-settled SARS as of September 30, 2008 and 2007, respectively, were
excluded from the above calculation due to their anti-dilutive effect on
earnings per share.
7. INVENTORIES
Inventories consisted of the following:
--------------------------------------------------------
September 30, December 31,
2008 2007
--------------------------------------------------------
Finished goods $430.1 $362.1
Work in process 46.7 35.4
Raw materials and supplies 133.0 122.5
---------------------------------------------------------
Total inventories $609.8 $520.0
---------------------------------------------------------
8. DEBT
Long-term debt, including the current portion, consisted of the following:
=====================================================================================================
September 30, 2008 December 31, 2007
-----------------------------------------------------------------------------------------------------
Face Carrying Value Face Carrying
Value
-----------------------------------------------------------------------------------------------------
Five-year revolving credit due June 2012 $ 120.0 $ 120.0 - -
6.75% Notes Due March 15, 2008 - - 100.0 99.9
5.5% Notes Due October 1, 2010 250.0 249.9 250.0 249.8
4.6% Notes Due July 1, 2013 200.0 201.1 200.0 201.2
6.0% Notes Due October 1, 2015 250.0 249.5 250.0 249.5
Other 4.5 4.5 6.3 6.3
-----------------------------------------------------------------------------------------------------
$ 824.5 $ 825.0 $ 806.3 $ 806.7
Less: Current maturities (1.5) (1.5) (101.5) (101.4)
-----------------------------------------------------------------------------------------------------
Long-term Debt $ 823.0 $ 823.5 $ 704.8 $ 705.3
=====================================================================================================
In June 2007, we amended and restated our revolving credit agreement to increase
the facility from $350.0 to $400.0 and extended the maturity date to June 2012.
Borrowings against the $400.0 unsecured five-year revolving credit facility
totaled $120.0 at September 30, 2008 and none at December 31, 2007. This
facility contains covenants that are customary for such facilities.
-11-
The weighted-average interest rate on all of our debt outstanding as of
September 30, 2008 and 2007 was 4.96% and 5.01%, respectively. The
weighted-average interest rate on short-term borrowings outstanding as of
September 30, 2008 and 2007 was 3.88% and 4.69%, respectively.
9. ENVIRONMENTAL, CONTINGENCIES AND COMMITMENTS
Environmental Matters
We are subject to substantial costs arising out of environmental laws and
regulations, which include obligations to remove or limit the effects on the
environment of the disposal or release of certain wastes or substances at
various sites or to pay compensation to others for doing so.
As of September 30, 2008 and December 31, 2007, the aggregate environmental
related accruals were $99.7 and $109.7, respectively. As of September 30, 2008
and December 31, 2007, $7.4 of the above amounts was included in accrued
expenses, with the remainder included in other noncurrent liabilities.
Environmental remediation spending for the three months ended September 30, 2008
and 2007 was $1.6 and $1.0, respectively, and for the nine months ended
September 30, 2008 and 2007 was $3.9 and $3.1, respectively.
As discussed in note 3, we divested our water treatment and acrylamide product
lines to Kemira in 2006 and 2007, including certain manufacturing facilities. At
the time of the sale of these facilities Kemira agreed to assume certain related
environmental liabilities, and we agreed to compensate Kemira for the estimated
costs of required remediation identified in subsequent site evaluations or to
undertake such actions on behalf of Kemira. In 2007, we increased our reserves
for certain of these sites based on additional information generated by such
site evaluations. Negotiations with Kemira over the required remedial actions
and their estimated costs were completed in first quarter 2008 and we adjusted
our reserves accordingly. We also adjusted our reserves for certain other sites
based on new information or changes in remedial plans during the year. Overall,
our adjustments resulted in a net increase of $0.3 and a net reduction of $0.1
in our environmental accruals for the three and nine months ended September 30,
2008, respectively.
Our environmental related accruals can change substantially due to such factors
as additional information on the nature or extent of contamination, methods of
remediation required, changes in the apportionment of costs among responsible
parties and other actions by governmental agencies or private parties or if we
are named in a new matter and determine that an accrual needs to be provided or
if we determine that we are not liable and no longer require an accrual.
A further discussion of environmental matters can be found in Note 13 of the
Notes to the Consolidated Financial Statements contained in our 2007 Annual
Report on Form 10-K.
Other Contingencies
We are the subject of numerous lawsuits and claims incidental to the conduct of
our or certain of our predecessors' businesses, including lawsuits and claims
relating to product liability, personal injury including asbestos,
environmental, contractual, employment and intellectual property matters.
During the third quarter of 2006, we completed a study of our asbestos related
contingent liabilities and related insurance receivables. These studies were
based on, among other things, detailed data for the previous ten years on the
incidence of claims, the incidence of malignancy claims, indemnity payments for
malignancy and non-malignancy claims, dismissal rates by claim and estimated
future claims. In conjunction with the 2006 asbestos study, we also conducted a
detailed update of our previous 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 for asbestos claims. We
anticipate updating the study approximately every three years or earlier if
circumstances warrant. We have completed coverage in place and commutation
agreements with several of our insurance carriers and are in the process of
negotiating similar agreements with other insurance carriers.
As of September 30, 2008 and December 31, 2007, the aggregate self-insured and
insured contingent liability was $70.7 and $70.1, respectively, and the related
insurance recovery receivable for the liability as well as claims for past
payments was $35.5 at September 30, 2008 and $37.6 at December 31, 2007. The
asbestos liability included in the above amounts at September 30, 2008 and
December 31, 2007 was $53.8 and $53.9, respectively, and the insurance
receivable related to the liability as well as claims for past payments was
$33.5 at September 30, 2008 and $35.6 at December 31, 2007. We anticipate
receiving a net tax benefit for payment of those claims for which full insurance
recovery is not realized.
-12-
The following table presents information about the number of claimants involved
in asbestos claims with us:
----------------------------------------------------------------------------------------------------
Nine
Months Ended Year Ended
September 30, December 31,
2008 2007
-------------- ------------
Number of claimants at beginning of period 8,200 8,600
Number of claimants associated with claims closed during period (200) (700)
Number of claimants associated with claims opened during period 100 300
-------------- ------------
Number of claimants at end of period 8,100 8,200
-------------------------------------------------------------------------------- ------------
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.
It should be noted that the ultimate liability and related insurance recovery
for all pending and anticipated future claims cannot be determined with
certainty due to the difficulty of forecasting the numerous variables that can
affect the amount of the liability and insurance recovery. These variables
include but are not limited to: (i) significant changes in the number of future
claims; (ii) significant changes in the average cost of resolving claims; (iii)
changes in the nature of claims received; (iv) changes in the laws applicable to
these claims; and (v) financial viability of co-defendants and insurers.
At September 30, 2008, we were among several defendants in approximately 10
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. We have not recorded a loss contingency for these cases.
In July 2005, the Supreme Court of Wisconsin held in a case in which we were one
of several defendants that Wisconsin's risk contribution doctrine applies to
bodily injury cases against manufacturers of white lead pigment. Under this
doctrine, manufacturers of white lead pigment may be liable for injuries caused
by white lead pigment based on their past market shares unless they can prove
they are not responsible for the white lead pigment which caused the injury in
question. We settled this case for an immaterial amount. Seven other courts have
previously rejected the applicability of this and similar doctrines to white
lead pigment. Although we are a defendant in approximately 5 similar cases in
Wisconsin as of September 30, 2008, which are currently stayed, and additional
actions may be filed in Wisconsin, we intend to vigorously defend ourselves if
such case(s) are filed based on what we believe to be our non-existent or
diminutive market share. In October 2007, the Wisconsin Court of Appeals
affirmed the trial court's dismissal of the plaintiff's strict liability and
negligent design defect causes of action for white lead carbonate in the case
styled Ruben Godoy et al v. E.I DuPont de Nemours et al., one of the
approximately 5 Wisconsin lead cases. The decision in this case reinforces our
belief that our liability, if any, in these cases is immaterial, both
individually and in the aggregate, and accordingly no loss contingency has been
recorded. In March 2008, the Wisconsin Supreme Court granted plaintiff's
petition for certiorari in this case.
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 to date which provide that they will pay for approximately fifty
percent (50%) of our defense costs associated with lead pigment related property
damage claims, and we are in the process of negotiating additional agreements
with other insurance carriers.
We commenced binding arbitration proceedings against SNF SA ("SNF") in 2000 to
resolve a commercial dispute relating to SNF's failure to purchase agreed
amounts of acrylamide under a long-term agreement. In July 2004, the arbitrators
awarded us damages and interest aggregating approximately (euro)11.0 plus
interest on the award at a rate of 7% per annum from July 28, 2004 until paid.
After further proceedings in France, we collected (euro)12.2 ($15.7) related to
the arbitration award including interest in the second quarter of 2006 and
recognized the gain in other income in the 2006 consolidated statement of
income. Subsequent to the arbitration award, SNF filed a complaint alleging
criminal violation of French and European Community antitrust laws relating to
the contract which was the subject of the arbitration proceedings, which
complaint was dismissed in December 2006. SNF has also filed a final appeal of
the court order which allowed us to enforce the award and a separate complaint
in France seeking compensation from Cytec for (euro)54.0 in damages it allegedly
suffered as a result of our attachment on various SNF receivables and bank
accounts to secure enforcement of the arbitration award. We believe that the
appeal and complaint are without merit. SNF also appealed the arbitration award
in Belgium where the Brussels Court of First Instance invalidated the award in
March 2007. We have appealed that decision to the Belgium Court of Appeals,
which will review the matter on a de novo basis. The Belgium decision does not
affect the enforceability of the award in France, which was subsequently upheld
by the Court de Cassation, the highest court in France, in April 2008.
-13-
While it is not feasible to predict the outcome of all pending environmental
matters, lawsuits and claims, it is reasonably possible that there will be a
necessity for future provisions for costs for environmental matters and for
other contingent liabilities that we believe will not have a material adverse
effect on our consolidated financial position, but could be material to our
consolidated results of operations or cash flows in any one accounting period.
We cannot estimate any additional amount of loss or range of loss in excess of
the recorded amounts. Moreover, many of these liabilities are paid over an
extended period, and the timing of such payments cannot be predicted with any
certainty.
From time to time, we are also included in legal proceedings as a plaintiff
involving tax, contract, patent protection, environmental and other legal
matters. Gain contingencies related to these matters, if any, are not recorded
until realized.
A further discussion of other contingencies can be found in Note 13 of the Notes
to the Consolidated Financial Statements contained in our 2007 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, 2007 are set
forth in Note 13 of the Notes to Consolidated Financial Statements contained in
our 2007 Annual Report on Form 10-K.
10. COMPREHENSIVE INCOME
The components of comprehensive income, which represents the change in equity
from non-owner sources, for the three and nine months ended September 30, 2008
and 2007 are as follows:
Three Months Ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
---------------------------------------------------------------------------------------------------------
Net earnings $ 46.3 $ 52.4 $ 152.0 $ 158.9
Other comprehensive income (loss):
Accumulated pension liability, net of tax (1) (5.9) (3.0) (5.8) 14.8
Unrealized gains/(losses) on cash flow hedges,
net of tax (18.6) 5.2 (7.2) 12.7
Foreign currency translation adjustments (93.3) 46.4 (32.7) 60.1(2)
---------------------------------------------------------------------------------------------------------
Comprehensive income $ (71.5) $ 101.0 $ 106.3 $ 246.5
=========================================================================================================
(1) 2007 includes amortization, impacts of a curtailment and remeasurement
related to certain U.S. plans, and a settlement in the Netherlands
related to the sale of the water treatment and acrylamide product
lines. For further details see Note 16 to the Consolidated Financial
Statements.
(2) 2007 includes the impact of recognizing $13.8 in net earnings as a
component of the gain on the sale of the water treatment and
acrylamide product lines.
Other comprehensive income related to the change in fair value of our cross
currency swaps as of December 31, 2007 had previously been reported on a pre-tax
basis of $40.1 in accumulated other comprehensive income on our consolidated
balance sheet in our previously filed consolidated financial statements. This
has been revised to reflect related tax effects of $15.9 with a corresponding
increase in deferred tax liabilities for the same amount. The tax benefit/(cost)
related to unrealized gains/(losses) on our cross currency swaps included in
accumulated other comprehensive income in prior periods has been revised
accordingly. This revision of prior year financial statements was immaterial and
it had no impact on reported net earnings, EPS, or cash flow from operating
activities.
11. INCOME TAXES
The effective income tax rate for the three and nine months ended September 30,
2008 was a tax provision of 33.3% ($23.1) and 31.9% ($71.1), respectively,
compared to a tax provision of 26.0% ($18.4) and 27.1% ($59.1) for the three and
nine months ended September 30, 2007. The 2008 effective tax rate for the
quarter and year to date was unfavorably impacted by a shift in our earnings to
higher tax jurisdictions, and the expiration of the U.S. R&D tax credit
effective December 31, 2007. The rate was favorably affected by the incremental
accelerated depreciation charge related to our U.S. Pampa facility. Excluding
the accelerated depreciation charge discussed above, the underlying estimated
annual tax rate for the nine months ended September 30, 2008 was 31.2% excluding
accrued interest on unrecognized tax benefits, with an underlying tax rate of
31.7% including such interest.
-14-
On October 3, 2008, the U.S. Government signed into law the Emergency Economic
Stabilization Act of 2008 (Division A), the Energy Improvement and Extension Act
of 2008 (Division B), and the Tax Extenders and Alternative Minimum Tax Relief
Act of 2008 (Division C) (collectively "the Act"). The Act reinstated the U.S.
R&D tax credit retroactively to January 1, 2008. However, since this legislation
was not officially enacted until October 3, 2008, we excluded the benefits of
the U.S. R&D tax credit in our tax provision for three and nine months ended
September 30, 2008. The reinstatement of the R&D tax credit will likely reduce
our underlying tax rate for ongoing operations to a range of 31.0% to 31.5%.
The 2007 effective rate for the quarter and year to date includes a benefit of
$3.5 as a result of enacted tax legislation that lowered the 2008 German
corporate tax rate which led to a corresponding adjustment to our deferred tax
liabilities. It also included a French restructuring charge for which no tax
benefit was given due to the unlikely utilization of related net operating
losses. In addition, the year to date rate was favorably affected by the
relatively low tax expense of $0.4 with respect to a $15.7 gain recorded on the
second phase of the water business divestiture and changes in U.S. tax laws
regarding manufacturing incentives.
In January 2008, the Norwegian Supreme Court ("NSC") denied our request to
reconsider a tax assessment with respect to a 1999 restructuring of certain
European operations. The tax liability attributable to this assessment was
approximately 84.0 Norwegian krone ($14.5). After giving effect for payments
previously remitted with respect to this issue, we have a remaining tax
liability of Norwegian krone 18.4 ($3.2) on our balance sheet of which
approximately 7.0 Norwegian krone ($1.2) relates to pre-2005 taxable periods
which is expected to be paid within twelve months, with the balance to be paid
in subsequently filed tax returns.
In 2006, the state of Maryland assessed a tax deficiency against a U.S.
subsidiary asserting nexus with the state. We subsequently filed a judicial
notice to proceed to trial with the Maryland Tax Court in opposing the
deficiency. In the third quarter of 2008, we settled this case and paid a final
assessment of $1.0 plus accrued interest against a previously recorded liability
for this matter.
The amount of unrecognized tax benefits at December 31, 2007 was $42.4 (gross)
of which $23.9 would impact our effective tax rate, if recognized. As of
September 30, 2008, the amount of unrecognized tax benefits is $39.7 (gross) of
which $19.8 would impact our effective tax rate, if recognized. During the first
nine months of 2008, our unrecognized tax benefits were reduced by approximately
$5.2 as result of the aforementioned Norway decision and Maryland settlement,
and increased by approximately $2.5 due to current year tax accruals and the
impact of foreign exchange.
We recognize interest and penalties related to unrecognized tax benefits in
income tax expense in the consolidated statements of income. As of December 31,
2007, we had recorded a liability for the payment of interest and penalties,
(gross), of approximately $6.3 which increased by $0.4 due to current year
activity and the impact of foreign exchange, thus resulting in a liability for
the payment of interest and penalties of $6.7 as of September 30, 2008.
12. OTHER FINANCIAL INFORMATION
On July 17, 2008 the Board of Directors declared a $0.125 per common share cash
dividend, paid on August 25, 2008 to shareholders of record as of August 11,
2008. Cash dividends paid in the third quarter of 2008 and 2007 were $6.0 and
$4.8, respectively, and for the nine months ended September 30, 2008 and 2007
were $17.9 and $14.4, respectively. On October 16, 2008 the Board of Directors
declared a $0.125 per common share cash dividend, payable on November 25, 2008
to shareholders of record as of November 10, 2008.
Income taxes paid for the nine months ended September 30, 2008 and 2007 were
$53.0 and $45.4, respectively. Interest paid for the nine months ended September
30, 2008 and 2007 was $28.8 and $31.5, respectively. Interest income for the
nine months ended September 30, 2008 and 2007 was $1.8 and $1.1, respectively.
-15-
13. SEGMENT INFORMATION
Summarized segment information for our four segments for the three and nine
months ended September 30 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2008 2007 2008 2007
---------- ---------- ----------- ----------
Net sales
---------
Cytec Surface Specialties $ 434.0 $ 413.0 $ 1,356.6 $ 1,237.0
Cytec Performance Chemicals
Sales to external customers 198.9 180.7 583.0 544.6
Intersegment sales 0.3 1.1 1.1 4.8
Cytec Engineered Materials 191.2 162.2 584.5 492.3
Building Block Chemicals
Sales to external customers 138.9 119.2 417.6 328.7
Intersegment sales 3.6 8.8 15.9 26.8
--------- --------- ---------- ---------
Net sales from segments 966.9 885.0 2,958.7 2,634.2
Elimination of intersegment revenue (3.9) (9.9) (17.0) (31.6)
--------- --------- ---------- ---------
Net sales $ 963.0 $ 875.1 $ 2,941.7 $ 2,602.6
===============================================================================================
% of % of % of % of
sales sales sales sales
------- ------- ------- -------
Earnings (loss) from operations
-------------------------------
Cytec Surface Specialties (1) $ 22.2 5% $ 31.2 8% $ 64.6 5% $ 79.7 6%
Cytec Performance Chemicals 28.2 14% 18.3 10% 62.9 11% 54.9 10%
Cytec Engineered Materials 37.9 20% 28.8 18% 124.2 21% 96.2 20%
Building Block Chemicals (1.3) -1% 9.4 7% 11.1 3% 16.6 5%
--------- --------- --------- ---------
Earnings from segments 87.0 9% 87.7 10% 262.8 9% 247.4 9%
Corporate and Unallocated (2) (7.2) (5.6) (14.3) 1.5
--------- --------- --------- ---------
Earnings from operations $ 79.8 8% $ 82.1 9% $ 248.5 8% $ 248.9 10%
================================================================================================================
(1) 2008 includes pre-tax charges of $1.4 and $4.2 for the three and nine
months ended September 30, 2008, respectively, for incremental
accelerated depreciation in relation to our planned exit of Radcure
manufacturing assets at our leased facility in Pampa, Texas.
(2) For the three and nine months ended September 30, 2008, Corporate and
Unallocated includes pre-tax charges of $5.7 and $10.8, respectively,
for additional restructuring costs primarily associated with various
organizational restructuring initiatives across the Specialty
Chemicals segments. In the third quarter of 2007 Corporate and
Unallocated includes a net restructuring charge of $2.8 for costs
related to the shut down of a manufacturing facility in France and
restructuring of our polymer additive manufacturing facility in Willow
Island and our liquid coating resins manufacturing facility in
Wallingford. For nine months 2007, Corporate and Unallocated includes
a restructuring charge of $5.4 for the aforementioned items and a
$15.7 gain as a result of completion of the second phase of the sale
of our water treatment chemicals and acrylamide product lines to
Kemira.
14. GOODWILL AND OTHER ACQUISITION INTANGIBLES
The following is the activity in the goodwill balances for each segment.
----------------------------------------------------------------------------------------------------
Cytec Cytec
PerformanceCytec Surface Engineered
Chemicals Specialties Materials Corporate Total
----------------------------------------------------------------------------------------------------
Balance, December 31, 2007 $ 93.3 $ 769.7 $ 241.1 $ 0.7 $ 1,104.8
Currency exchange (5.3) (7.6) - - (12.9)
----------------------------------------------------------------------------------------------------
Balance, September 30, 2008 $ 88.0 $ 762.1 $ 241.1 $ 0.7 $ 1,091.9
====================================================================================================
-16-
Other acquisition intangibles consisted of the following major classes:
Weighted
average Gross carrying value Accumulated amortization Net carrying value
useful ------------------------------------------------------------------------------------------
life September 30, December 31, September 30, December 31, September 30, December 31,
(years) 2008 2007 2008 2007 2008 2007
------------------------------------------------------------------------------------------------------------------------
Technology-based 15.1 $ 55.7 $ 57.2 $ (27.4) $ (25.1) $ 28.3 $ 32.1
Marketing-related < 2.0 2.1 2.1 (2.1) (2.1) - -
Marketing-related 15.5 65.2 65.7 (20.5) (17.7) 44.7 48.0
Marketing-related 40.0 47.9 48.9 (2.7) (1.8) 45.2 47.1
Customer-related 15.0 444.8 449.9 (113.7) (92.6) 331.1 357.3
------------------------------------------------------------------------------------------------------------------------
Total $ 615.7 $ 623.8 $ (166.4) $ (139.3) $ 449.3 $ 484.5
========================================================================================================================
Amortization of acquisition intangibles for the three months ended September 30,
2008 and 2007 was $10.0 and $9.7, respectively, and for the nine months ended
September 30, 2008 and 2007 was $30.4 and $28.6, respectively. Assuming no
change in the gross carrying amount of acquisition intangibles and the currency
exchange rates remain constant, the estimated amortization of acquisition
intangibles for the fiscal years 2008 and 2009 is $40.5, for the years 2010 and
2011 is $40.4, and for the years 2012 and 2013 is $40.3 and $39.5, respectively.
15. DERIVATIVE FINANCIAL INSTRUMENTS AND COMMODITY HEDGING ACTIVITIES
Derivative Financial Instruments
We periodically enter into currency forward contracts primarily to hedge
currency fluctuations of transactions denominated in currencies other than the
functional currency of the respective entity. At September 30, 2008, the
principal transactions hedged involved accounts receivable, accounts payable and
intercompany loans. When hedging currency exposures, our practice is to hedge
such exposures with forward contracts denominated in the same currency and with
similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction.
At September 30, 2008, net contractual amounts of forward contracts outstanding
translated into U. S. dollar amounts of $80.8. Of this total, $68.1 was
attributed to the net exposure in forward selling of U.S. dollars. The remaining
$12.7 was the net exposure in forward selling of Euros, translated into U. S.
dollar equivalent amounts. The net (unfavorable)/favorable fair values of
currency contracts, based on forward exchange rates at September 30, 2008 and
December 31, 2007 were $(2.3) and $1.3, respectively.
We use cross currency swaps to hedge the changes in the cash flows of certain
Euro denominated intercompany loans receivable (Euro loans) held by U.S.
entities. The loan amounts are (euro)207.9 and (euro)207.9 due October 1, 2010
and October 1, 2015, respectively. Because the Euro loans are denominated in
Euros, we have foreign exchange exposure upon remeasurement to the U.S. dollar
("USD"). We hedged this foreign exchange exposure by entering into cross
currency swaps with notional amounts of (euro)207.9 ($250.0) that settle on
October 1, 2010 and October 1, 2015, respectively. At the initial principal
exchange, we paid $500.0 and received (euro)415.8 from counterparties. At the
final exchanges we will pay (euro)207.9 and receive $250.0 on October 1, 2010
and October 1, 2015. The swaps have fixed interest rates on both legs. On the
five year swaps, we pay 3.78% interest per annum on the Euro notional amount and
we receive 5.5% interest per annum on the USD notional amount. On the ten year
swaps, we pay 4.52% interest per annum on the Euro notional amount and we
receive 6.0% interest per annum on the USD notional amount. The interest payment
dates (April 1 and October 1) and Euro rates coincide with the Euro loans.
The swaps fix the U.S. dollar equivalent cash flows of the Euro loans and
eliminate foreign exchange variability since the notional amounts of the swaps
equal that of the loans, and all cash flow dates and interest rates coincide
between the swaps and the loans, therefore no ineffectiveness is expected. These
swaps have been designated as cash flow hedges. Each period we record the change
in the swaps' fair value, net of income taxes to accumulated other comprehensive
income. We reclassify an amount out of accumulated other comprehensive income to
the income statement equal to the foreign currency gain or loss on the
remeasurement to USD of the Euro loans which offsets the foreign currency gain
or loss. We also accrue for the periodic net swap payments each period in the
income statement. We monitor the counterparty credit risk and the continued
probability of the hedged cash flows as to amount and timing.
At September 30, 2008, the unfavorable fair values of the five and ten year
swaps were $36.0 and $25.0, respectively, and at December 31, 2007, the
unfavorable fair values of the five and ten year swaps were $39.8 and $31.4,
respectively. As long as the Euro loans remain outstanding, we will reclassify
amounts out of accumulated other comprehensive income to the income statement to
offset the amount of foreign exchange gain or loss on the remeasurement of the
Euro loans recorded each period. The amount of such reclassification will depend
on changes in the USD/Euro exchange rate occurring during the period. There were
no amounts reclassified out of accumulated other comprehensive income during the
nine months ended September 30, 2008 and during the fiscal year 2007 relating to
discontinuance of this hedging relationship.
-17-
Commodity Hedging Activities
At September 30, 2008, we held natural gas swaps with an unfavorable fair value
of $10.5 included in accrued expenses, which will be reclassified into
Manufacturing Cost of Sales through September 2009 as the hedged natural gas
purchases affect earnings.
Fair Value Measurements
On January 1, 2008 we adopted SFAS 157 for financial assets and liabilities, as
well as for any other assets and liabilities that are carried at fair value on a
recurring basis in financial statements. Under SFAS 157, a company must
determine the appropriate level in the fair value hierarchy for each fair value
measurement. The fair value hierarchy in SFAS 157 prioritizes the inputs, which
refer broadly to assumptions market participants would use in pricing an asset
or liability, into three levels. It gives the highest priority to quoted prices
in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The level in the fair value hierarchy within which a fair
value measurement in its entirety falls is determined based on the lowest level
input that is significant to the fair value measurement in its entirety. Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date.
Level 2 inputs are inputs other than quoted prices within Level 1 that are
observable for the asset or liability, either directly or indirectly, such as
quoted prices for similar assets or liabilities in active markets, interest
rates, exchange rates, and yield curves observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability.
All of our derivatives are valued based on level 2 inputs. Our gas swaps and
currency forwards are valued based on readily available published indices for
commodity prices and currency exchange rates. Our cross currency swaps are
valued using an income approach based on industry-standard techniques. This
model includes a discounted cash flow analysis that nets the discounted future
cash receipts and the discounted expected cash payments resulting from the swap.
The analysis is based on the contractual terms of the swaps including the period
to maturity and observable market-based inputs that include time value, interest
rate curves, foreign exchange rates, implied volatilities, as well as other
relevant economic measures. We incorporate credit valuation adjustments to
appropriately reflect both our own nonperformance risk and the counterparty's
nonperformance risk in the fair value measurements.
Although we have determined that the majority of the inputs used to value our
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with our derivatives utilize Level 3 inputs,
such as estimates of current credit spreads, to evaluate the likelihood of
default by us and our counterparties. However, as of September 30, 2008, we have
assessed the significance of the impact of the credit valuation adjustments on
the overall valuation of our derivative positions and have determined that the
credit valuation adjustments are not significant to the overall valuation of our
derivatives. As a result, we have determined that our derivative valuations in
their entirety are classified in Level 2 of the fair value hierarchy.
A summary of the fair value measurements for each major category of derivatives
is outlined in the table below:
Description September 30, Significant Other
2008 Observable Inputs
Total (Level 2)
------------------------------------------------------------
Currency forwards $(2.3) $(2.3)
Cross currency swap (61.0) (61.0)
Natural gas swap (10.5) (10.5)
------------------------------------------------------------
Total $(73.8) $(73.8)
------------------------------------------------------------
As of September 30, 2008, we did not have any non-financial assets and
liabilities that are carried at fair value on a recurring basis in the financial
statements. For more information regarding our hedging activities and derivative
financial instruments, refer to Note 8 to the Consolidated Financial Statements
contained in our 2007 Annual Report on Form 10-K.
-18-
16. 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,
-------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------------------
Service cost $ 2.6 $ 4.5 $ 0.3 $ 0.3
Interest cost 12.1 10.4 3.0 3.0
Expected return on plan assets (11.6) (11.6) (1.0) (0.8)
Net amortization and deferral 4.4 3.1 (2.6) (2.5)
----------- ----------- ---------- -----------
Net periodic cost $ 7.5 $ 6.4 $ (0.3) $ 0.0
=====================================================================================
Nine months ended September 30,
-------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------------------
Service cost $ 7.9 $ 14.6 $ 0.9 $ 0.9
Interest cost 35.7 32.8 9.1 10.2
Expected return on plan assets (35.7) (33.4) (3.0) (3.2)
Net amortization and deferral 9.5 11.0 (7.8) (7.7)
Curtailments/settlements (1) - 3.3 - -
----------- ------------ ----------- ------------
Net periodic cost $ 17.4 $ 28.3 $ (0.8) $ 0.2
=====================================================================================
(1) Primarily represents a settlement charge related to the transfer of
plan assets and liabilities in the Netherlands related to the sale of
the water treatment and acrylamide product lines, which was charged
against the gain on sale.
We disclosed in our 2007 Annual Report on Form 10-K that we expected to
contribute $32.6 and $16.6, respectively, to our pension and postretirement
plans in 2008. Through September 30, 2008, $18.0 and $11.2 in contributions were
made, respectively.
In September 2008, using updated demographic data, our actuaries revised the
estimated funded status of our U.S. pension plans as of January 1, 2008, as well
as the related 2008 pension expense. As a result, we recorded a charge of $2.4
to our third quarter 2008 consolidated statement of income to reflect the
year-to-date increase in expense, and we also recorded an increase of $9.5 to
our U. S. pension liabilities, with a corresponding decrease of $5.8 in
accumulated other comprehensive income ("AOCI") and an adjustment to deferred
taxes for $3.7 to reflect the revised funded status.
In March 2007, we announced a change to our U.S. salaried pension plans from
defined benefit plans to defined contribution plans effective December 31, 2007.
A related plan curtailment was estimated and recorded in the first quarter 2007,
and adjusted later in the year, resulting in a decrease in our pension
liabilities of $12.2, with a corresponding increase in AOCI of $7.5 and an
adjustment to deferred taxes of $4.7. The curtailment had an immaterial effect
on our 2007 consolidated statement of income. We considered these plan changes
to be significant events as contemplated by SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Benefits, an amendment of
SFAS 87, 88, 106 and 132(R)" ("SFAS 158") and accordingly, the liabilities and
assets for the affected plans were remeasured as of March 31, 2007. The
remeasurement resulted in a further decrease to pension liabilities of
approximately $6.1, with a corresponding increase of $3.7 in AOCI, and an
adjustment to deferred taxes for $2.4. The remeasurement was driven by a change
in the discount rate assumption for the affected plans (from 5.85% at December
31, 2006 to 6.00% at March 31, 2007), and slightly better than expected returns
on plan assets for the three months ended March 31, 2007. Finally, in September
2007, using updated demographic data, our actuaries revised the estimated funded
status of our U.S. pension plans as of January 1, 2007. As a result, we recorded
an increase of $6.8 to our U.S. pension liabilities, with a corresponding
decrease of $4.1 in AOCI and an adjustment to deferred taxes for $2.7, to
reflect the funded status at January 1, 2007 as determined by the actuarial
valuation.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Benefits, an amendment of SFAS
87, 88, 106 and 132(R)" ("SFAS 158"), which we adopted in the fourth quarter of
2006 except for the measurement date requirement. Until January 1, 2008, we used
a measurement date of November 30 for the majority of our non-U.S. defined
benefit pension plans. The provisions of SFAS 158 requiring that the measurement
date be the same as the date of the consolidated balance sheet became effective
as of January 1, 2008 and requires us to change our measurement date for certain
non-U.S. defined benefit pension plans to December 31 from November 30. SFAS 158
allows employers to choose one of two transition methods to adopt the
measurement date requirement. We chose to adopt the measurement date requirement
in 2008 using the 13-month approach. Under this approach, we will record an
additional one month of net periodic benefit cost covering the period between
the previous measurement date of November 30, 2007 and December 31, 2007 as an
adjustment to equity in the fourth quarter of 2008. We do not expect the
adjustment to equity to have a material impact on our consolidated financial
statements.
-19-
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. In conjunction with the above mentioned change to
our U.S. salaried pension plans, we discontinued the U.S. profit growth sharing
plan effective December 31, 2007 for all U.S. salaried and nonbargaining unit
employees. All such employees participated in an enhanced savings plan effective
on the same date. 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, 2008 and 2007
were $6.4 and $4.2, respectively, and for the nine months ended September 30,
2008 and 2007 were $21.4 and $15.2, respectively.
-20-
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 and sell our products
to diverse major markets for aerospace, adhesives, automotive and industrial
coatings, chemical intermediates, inks, mining and plastics. We operate in four
major segments: Cytec Surface Specialties, Cytec Performance Chemicals, Cytec
Engineered Materials and Building Block Chemicals. Sales price and volume by
region and the impact of exchange rates on our reporting segments are important
measures that are analyzed by management and are provided in our segment
analysis.
In the course of our ongoing operations, a number of strategic product line
acquisitions and dispositions have been made. The results of operations of the
acquired businesses have been included in our consolidated results from the
dates of the respective acquisitions.
We also report net sales in four geographic regions: North America, Latin
America, Asia/Pacific and Europe/Middle East/Africa. The destination of the sale
determines the region under which it is reported consistent with management's
view of the business. North America consists of the United States and Canada.
Latin America includes Mexico, Central America, South America and the Caribbean
Islands. Asia/Pacific is comprised of Asia, Australia and the islands of the
South Pacific Rim.
Raw material cost changes year on year are an important factor in profitability
especially in years of high volatility. Global oil and natural gas costs in
certain countries are highly volatile and many of our raw materials are derived
from these two commodities. Discussion of the year to year impact of raw
materials 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.
Quarter Ended September 30, 2008, Compared With Quarter Ended September 30, 2007
Consolidated Results
Net sales for the third quarter of 2008 were $963.0 compared with $875.1 for the
third quarter of 2007. Overall, sales were up 10% with volumes declining 4%,
price increases of 10%, and changes in exchange rates increasing sales 4%. Cytec
Surface Specialties sales were up 5% primarily due to the favorable impact of
exchange rate changes and higher selling prices partially offset by lower
volumes. Cytec Performance Chemicals sales were up 10% primarily due to higher
selling prices and changes in exchange rates partially offset by slightly lower
volumes. Cytec Engineered Materials sales were up 18% primarily due to higher
volumes and selling price increases. Building Block Chemicals sales increased
17% primarily due to higher selling prices partially offset by lower volumes.
For a detailed discussion on revenues refer to the Segment Results section
below.
Manufacturing cost of sales was $765.8 or 79.5% of sales in the third quarter of
2008, compared with $683.8, or 78.1% of sales in the third quarter of 2007. The
$82.0, or 1.4% increase in manufacturing cost as a percent of sales, is
primarily due to $78.4 of higher raw material prices, $11.9 due to higher
manufacturing costs primarily due to inflation, and $24.8 due to changes in
exchange rates partially offset by $25.6 due to the lower selling volumes and
$7.9 related to higher fixed cost absorption into inventory as production
exceeded demand. The third quarter of 2008 includes $1.4 of incremental
accelerated depreciation on assets at our Pampa, Texas site that we have decided
to exit and consolidate production. The third quarter of 2008 includes a
restructuring charge of $1.5 primarily related to restructuring our Specialty
Chemical segments. The third quarter of 2007 includes a restructuring charge of
$2.7 related to our Specialty Chemical segments. See Note 4 to the consolidated
financial statements for additional detail.
Selling and technical services was $57.4 in the third quarter of 2008 versus
$52.3 in the third quarter of 2007. Most of the increase was due to inflationary
costs, changes in exchange rates of $1.9, and restructuring costs of $2.7.
Research and process development was $19.2 versus $18.0 in the prior year which
includes increased technology spending of $0.8 in our Cytec Engineered Materials
segment and changes in exchange rates of $0.6.
Administrative and general expenses were $30.8 versus $29.2 in the prior year.
The increase is primarily attributable to restructuring costs of $1.4 and
changes in exchange rates of $1.0.
-21-
Amortization of acquisition intangibles was $10.0 in the third quarter of 2008
versus $9.7 in the third quarter of 2007 with the increase due to changes in
exchange rates.
Other income (expense), net was expense of $2.1 in the third quarter of 2008
compared with expense of $1.4 in the third quarter of 2007. The increase in
expense is primarily due to unfavorable foreign currency transaction exchange of
$0.4 and increased legal spending of $0.7 versus the third quarter of 2007.
Equity in earnings of associated companies was $0.4 versus $0.5 in the prior
year.
Interest expense, net was $8.7 compared with $10.4 in the prior year. The
decrease resulted primarily from lower average outstanding debt balances and
lower cost of borrowing versus 2007.
The effective tax rate for the quarter ended September 30, 2008 was a tax
provision of 33.3% ($23.1) compared to 26.0% ($18.4) for the quarter ended
September 30, 2007. The 2008 effective tax rate was unfavorably impacted by a
shift in our earnings to higher tax jurisdictions and the expiration of the U.S.
R&D tax credit effective December 31, 2007. The rate was favorably affected by
the incremental accelerated depreciation charge related to our U.S. Pampa
facility. Excluding the impact of the accelerated depreciation charge discussed
above, the underlying estimated annual tax rate for the quarter ended September
30, 2008 was 31.2% excluding accrued interest on unrecognized tax benefits, with
an underlying tax rate of 31.7% including such interest.
On October 3, 2008, the U.S. Government signed into law the Emergency Economic
Stabilization Act of 2008 (Division A), the Energy Improvement and Extension Act
of 2008 (Division B), and the Tax Extenders and Alternative Minimum Tax Relief
Act of 2008 (Division C) (collectively "the Act"). The Act reinstated the U.S.
R&D tax credit retroactively to January 1, 2008. However, since this legislation
was not officially enacted until October 3, 2008, we excluded the benefits of
the U.S. R&D tax credit in our tax provision for three months ended September
30, 2008. The reinstatement of the R&D tax credit will likely reduce our
underlying tax rate for ongoing operations to a range of 31.0% to 31.5%.
The effective tax rate for the quarter ended September 30, 2007 includes a
benefit of $3.5 as a result of enacted tax legislation that lowered the 2008
German corporate tax rate which led to a corresponding adjustment to our
deferred tax liabilities. Partially offsetting this benefit was a French
restructuring charge for which no tax benefit was given due to the unlikely
utilization of related net operating losses. Excluding the impact of these two
items, the underlying rate for the three months ended September 30, 2007 was
29.7% excluding accrued interest on unrecognized tax benefits, with an
underlying rate of 30.25% including such interest.
Net earnings for the third quarter of 2008 were $46.3 ($0.96 per diluted share),
a $6.1 decrease from net earnings of $52.4 ($1.06 per diluted share) in the same
period in 2007. Included in the third quarter of 2008 was $4.0 of after-tax
restructuring costs primarily related to our Surface Specialties segment and a
$0.9 after-tax charge related to incremental accelerated depreciation on our
Pampa, Texas Surface Specialties manufacturing site that we have decided to exit
and relocate the manufacturing to one of our other existing facilities. Included
in the third quarter of 2007 was $2.8 after-tax restructuring charge principally
related to manufacturing costs of sales with $1.3 related to restructuring of
our Performance Chemicals polymer additive manufacturing operations in West
Virginia, $0.8 related to restructuring our Surface Specialties liquid coating
resins manufacturing facility in Connecticut and $0.7 related to the shutdown of
our Surface Specialties manufacturing operations in Dijon, France facility.
Segment Results
In accordance with our policy for segment reporting, restructuring costs are
included in our corporate and unallocated operating results consistent with
management's view of its businesses.
Year-to-year comparisons and analyses of changes in net sales to external
customers by product line segment and region are set forth below.
Cytec Surface Specialties
---------------------------------------------------------------------------------------
% Change Due to
Total ------------------------------
2008 2007 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------
North America $89.0 $89.0 - 9% -9% -
Latin America 20.9 18.1 15% 7% 2% 6%
Asia/Pacific 85.7 72.6 18% 7% 4% 7%
Europe/Middle East/Africa 238.4 233.3 2% - -7% 9%
------------------------------------------------------------
Total $434.0 $413.0 5% 3% -5% 7%
=======================================================================================
-22-
Overall sales were up 5%. Selling volumes declined 5% with volumes up in Latin
America and Asia/Pacific but were more than offset by declines in North America
and Europe where we experienced weaker demand especially in the automotive and
construction market sectors. Volumes were down in all product lines except
Radcure which was flat. Overall selling prices were up 3% with increases in all
product lines except powders where they were flat primarily due to price
competition. Changes in exchange rates increased sales by 7%.
Earnings from operations were $22.2, or 5% of sales in 2008, down from $31.2, or
8% of sales, in 2007. Earnings were positively impacted $14.0 due to higher
selling prices, $2.5 by changes in exchange rates, and $1.3 due to higher fixed
cost absorption into inventory due to the lower demand at the end of the
quarter. Earnings were negatively impacted $15.4 due to higher raw material
costs, $8.6 due to lower selling volumes, $1.3 higher manufacturing and
operating costs, and $1.4 of incremental accelerated depreciation on assets at
our Pampa, Texas site that we have decided to exit and consolidate production.
Cytec Performance Chemicals
---------------------------------------------------------------------------------------
% Change Due to
Total ------------------------------
2008 2007 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------
North America $68.9 $65.7 5% 7% -2% -
Latin America 32.9 31.8 3% 12% -10% 1%
Asia/Pacific 39.0 30.7 27% 18% 6% 3%
Europe/Middle East/Africa 58.1 52.5 11% 6% -3% 8%
------------------------------------------------------------
Total $198.9 $180.7 10% 9% -2% 3%
=======================================================================================
Overall sales increased 10%. Selling volumes decreased 2% with lower volume
across all businesses except mining chemicals which had a 16% increase due to
continued strong demand, sales of new products and new business. Selling volumes
were down in all regions except Asia/Pacific where we had strong mining chemical
sales. Overall selling prices increased 9% with increases across all product
lines and regions. Changes in exchange rates increased sales by 3%.
Earnings from operations were $28.2, or 14% of sales in 2008, up from $18.3, or
10% in 2007. Earnings were positively impacted $16.7 by higher selling prices,
$0.5 by positive product mix, $2.1 due to higher fixed cost absorption into
inventory principally due to the timing of production campaigns, $0.9 due to
lower operating costs, and $1.5 due to changes in exchange rates. Earnings were
negatively impacted $11.6 due to higher raw material costs.
Cytec Engineered Materials
---------------------------------------------------------------------------------------
% Change Due to
Total ------------------------------
2008 2007 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------
North America $117.4 $104.9 12% 2% 10% -
Latin America(1) 0.4 0.2 - - - -
Asia/Pacific 14.6 12.9 13% - 13% -
Europe/Middle East/Africa 58.8 44.2 33% 4% 29% -
------------------------------------------------------------
Total $191.2 $162.2 18% 3% 15%
=======================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall sales were up 18% primarily due to a 15% increase in selling volumes
with increases in all regions and across most market sectors principally lead by
volume increases in the business/regional jet and large commercial aircraft
sectors. Selling prices were up 3% overall with increases across most market
sectors and regions.
Earnings from operations were $37.9 or 20% of sales in 2008, up from $28.8, or
18% of sales in 2007. The $9.1 increase in earnings was positively impacted
$13.0 due to higher volumes, $4.2 due to higher selling prices, and $1.7 due to
higher fixed cost absorption into inventory due to increased production levels.
Earnings were negatively impacted by $1.5 due to higher raw material costs, $6.8
due to higher manufacturing costs primarily related to the higher production
volumes, and $1.0 due to higher operating costs primarily related to increased
investments in research and development. Earnings were negatively impacted $0.5
due to changes in exchange rates.
-23-
Building Block Chemicals
---------------------------------------------------------------------------------------
% Change Due to
Total ------------------------------
2008 2007 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------
North America $109.1 $65.6 66% 73% -7% -
Latin America(1) 1.7 1.3 - - - -
Asia/Pacific - 11.7 -100% -100% -
Europe/Middle East/Africa 28.1 40.6 -31% 19% -50% -
------------------------------------------------------------
Total $138.9 $119.2 17% 47% -30% -
=======================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall sales increased 17% primarily due to higher selling prices of 47% to
offset raw material price increases. Overall selling volumes were down 30%
primarily due to significantly lower acrylonitrile volumes. We are seeing demand
destruction in acrylic fibers primarily in Asia and Europe due to high costs for
acrylonitrile. In North America, selling volumes were impacted by weak demand
and the effect of hurricane activity on our customers.
Loss from operations was $1.3 compared to earnings of $9.4 or 8% of sales in
2007. Loss was positively impacted by a $56.0 increase in selling prices and
$3.0 of higher fixed cost absorption into inventory due to higher production
than demand primarily in the acrylonitrile product line. Earnings in 2008 were
negatively impacted $50.0 due to higher raw material costs, $15.7 related to
lower selling volumes, and $4.3 of higher manufacturing costs primarily due to
lower acid regeneration operations and costs related to hurricane Gustav.
Nine months ended September 30, 2008, Compared With Nine months ended September
30, 2007
Consolidated Results
Net sales for the first nine months of 2008 were $2,941.7 compared with $2,602.6
for the prior year period. Overall, sales were up 13% with volumes up 1%, price
increases of 7%, and changes in exchange rates increasing sales 5%. In the Cytec
Surface Specialties segment, sales increased 10% primarily as a result of
changes in exchange rates and selling price increases partially offset by lower
selling volumes. The Cytec Performance Chemicals segment sales increased 7% due
to higher selling prices and changes in exchange rates partially offset by lower
selling volumes due to the completion of a resale agreement related to the sale
of the water treating chemicals product line in the prior year period. In Cytec
Engineered Materials segment, sales increased 19% primarily due to higher
selling volumes and prices. Building Block Chemical segment sales were up 27%
primarily due to higher selling prices partially offset by lower volumes.
For a detailed discussion on sales refer to the Segment Results section below.
Manufacturing cost of sales was $2,334.6 or 79.4% of sales for the first nine
months of 2008 compared with $2,045.6 or 78.6% of sales for the first nine
months of 2007. The $289.0 increase in manufacturing costs, or 0.8% increase in
manufacturing cost as a percent of sales, is primarily due to $163.0 of higher
raw material prices, $112.0 due to changes in exchange rates, and $40.6 related
to higher fixed costs due to inflationary increases. These increases were
partially offset by $11.4 of higher fixed cost absorption into inventory as
production exceeded demand and $13.6 of lower costs related to the completion of
the resale agreement for the divestiture of the water treatment product line in
the prior year period. The first nine months of 2008 includes $4.2 of
incremental accelerated depreciation on assets at our Pampa, Texas site that we
have decided to exit and consolidate production. Included in the first nine
months of 2008 was a $5.0 pre-tax restructuring charge primarily related to
restructuring charges for various organization restructuring initiatives across
both Specialty Chemical segments and restructuring costs at our West Virginia,
Connecticut, and French manufacturing operations. Included in the first nine
months of 2007 was a $5.0 pre-tax restructuring charge primarily related to
restructuring of our French, West Virginia, and Connecticut manufacturing
operations. See Note 4 to the consolidated financial statements for additional
detail.
Selling and technical services was $176.1 in the first nine months of 2008
versus $155.3 in the first nine months of 2007. Most of the increase was due to
inflation, exchange rate changes of $9.3, increased spending in our Cytec
Engineered Materials segment related to the higher demand levels of $4.2, and a
restructuring charge of $3.5.
Research and process development was $62.5 versus $55.5 in the prior year with
most of the increase due to inflation, exchange rate changes of $3.0, higher
spending in the Cytec Engineered Materials segment of $3.2, and a restructuring
charge of $0.6.
Administrative and general expenses were $89.6 versus $84.4 in the prior year
with most of the increase due to inflation, exchange rate changes of $4.6, and a
restructuring charge of $1.7. The first nine months of 2007 includes a net
restructuring charge of $0.4 for administrative and general.
-24-
Amortization of acquisition intangibles was $30.4 in the first nine months of
2008 versus $28.6 in the first nine months of 2007 with the increase due to
changes in exchange rates.
In the first nine months of 2007 the gain on sale of assets held for sale of
$15.7 was attributable to the phase two closing of the water treatment and
acrylamide product lines. See Note 3 of the Consolidated Financial Statements
for further information.
Other income (expense), net was income of $1.0 in the first nine months of 2008
compared with income of $0.1 in the first nine months of 2007. The increase is
primarily due to favorable foreign currency transaction exchange, partially
offset by increased legal spending versus the first nine months of 2007.
Equity in earnings of associated companies was $1.4 in the first nine months of
2008 versus $0.9 in the first nine months of 2007.
Interest expense, net was $27.8 in the first nine months of 2008 compared with
$31.9 in the first nine months of 2007. The decrease resulted primarily from
lower average outstanding debt balances and lower cost of borrowing versus 2007.
The effective tax rate for the nine months ended September 30, 2008 was a tax
provision of 31.9% ($71.1) compared to 27.1% ($59.1) for the nine months ended
September 30, 2007. The effective tax rate for the nine months ended September
30, 2008 was unfavorably impacted by a shift in our earnings to higher tax
jurisdictions, and the expiration of the U.S. R&D tax credit effective December
31, 2007. The effective tax rate was favorably affected by the incremental
accelerated depreciation charge related to our U.S. Pampa facility. Excluding
the accelerated depreciation charge discussed above, the underlying estimated
annual tax rate for the nine months ended September 30, 2008 was 31.2% excluding
accrued interest on unrecognized tax benefits, with an underlying tax rate of
31.7% including such interest.
On October 3, 2008, the U.S. Government signed into law the Emergency Economic
Stabilization Act of 2008 (Division A), the Energy Improvement and Extension Act
of 2008 (Division B), and the Tax Extenders and Alternative Minimum Tax Relief
Act of 2008 (Division C) (collectively "the Act"). The Act reinstated the U.S.
R&D tax credit retroactively to January 1, 2008. However, since this legislation
was not officially enacted until October 3, 2008, we excluded the benefits of
the U.S. R&D tax credit in our tax provision for nine months ended September 30,
2008. The reinstatement of the R&D tax credit will likely reduce our underlying
tax rate for ongoing operations to a range of 31.0% to 31.5%.
The effective tax rate for the nine months ended September 30, 2007 includes a
benefit of $3.5 as a result of enacted tax legislation that lowered the 2008
German corporate tax rate which led to a corresponding adjustment to our
deferred tax liabilities. Partially offsetting this benefit was a French
restructuring charge for which no tax benefit was given due to the unlikely
utilization of related net operating losses. In addition, the effective tax rate
was favorably affected by the relatively low tax expense of $0.4 with respect to
a $15.7 gain recorded in the first quarter of 2007 on the second phase of the
water business divestiture and changes in U.S. tax laws regarding manufacturing
incentives. Excluding these items, the underlying estimated annual tax rate for
the nine months ended September 30, 2007 was 29.7% excluding accrued interest on
unrecognized tax benefits, with an underlying rate of 30.25% including such
interest.
Net earnings for the first nine months of 2008 were $152.0 ($3.12 per diluted
share) compared with net earnings for 2007 of $158.9 ($3.23 per diluted share).
Included in the first nine months of 2008 was a $7.6 after-tax restructuring
charge for various organizational restructuring initiatives across both Surface
Specialties and Performance Chemical segments and restructuring costs at our
Performance Chemicals manufacturing facility in West Virginia and Surface
Specialties manufacturing facilities in Connecticut and France. Included in our
2008 results was a $2.7 after-tax charge related to incremental accelerated
depreciation on our Pampa, Texas Surface Specialties manufacturing site that we
have decided to exit and relocate the manufacturing to one of our other existing
facilities. Included in the first nine months of 2007 was $4.8 after-tax expense
of restructuring costs primarily related to restructuring of our Surface
Specialties manufacturing operations in France and Connecticut and Performance
Chemical manufacturing operations located in West Virginia, as well as a $15.3
after-tax gain related to the second phase of the sale of our water treatment
chemicals and acrylamide product lines to Kemira.
Segment Results
In accordance with our policy for segment reporting, restructuring costs are
included in our corporate and unallocated operating results consistent with
management's view of its businesses.
Year-to-year comparisons and analyses of changes in net sales to external
customers by product line segment and region are set forth below.
-25-
Cytec Surface Specialties
---------------------------------------------------------------------------------------
% Change Due to
Total ------------------------------
2008 2007 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------
North America $269.7 $269.1 - 5% -5% -
Latin America 59.8 52.6 14% - 5% 9%
Asia/Pacific 246.0 205.6 20% 3% 7% 10%
Europe/Middle East/Africa 781.1 709.7 10% - -3% 13%
------------------------------------------------------------
Total $1,356.6 $1,237.0 10% 2% -2% 10%
=======================================================================================
Overall sales were up 10%. Sales volumes were up in Latin America and
Asia/Pacific but were more than offset by declines in North America and Europe
where we experienced weaker demand especially in the automotive and construction
market sectors. Volumes were down in all product lines except Radcure which was
up 3%. Overall selling prices increased 2% with higher prices in liquid coating
resins and flat pricing in Radcure, which were partially offset by lower selling
prices in powder coating resins due to competitive challenges. Changes in
exchange rates increased sales by 10%.
Earnings from operations were $64.6, or 5% of sales in 2008, down from $79.7, or
6% of sales in 2007. Earnings were positively impacted $21.0 by increases in
selling prices, $8.1 by changes in exchange rates and $1.6 due to higher fixed
cost absorption into inventory due to the lower demand. Earnings were negatively
impacted $16.6 due to higher raw material costs, $11.2 due to lower selling
volumes, $8.5 due to higher manufacturing costs primarily related to inflation
and freight costs, and $5.4 due to higher operating costs also due to inflation.
Earnings were also negatively impacted in 2008 by $4.2 in incremental
accelerated depreciation on assets at our Pampa, Texas site that we have decided
to exit and consolidate production.
Cytec Performance Chemicals
% Change Due to
Total ------------------------------
2008 2007 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------
North America $201.8 $198.4 2% 6% -4% -
Latin America 96.5 93.4 3% 4% -2% 1%
Asia/Pacific 107.9 97.2 11% 9% -1% 3%
Europe/Middle East/Africa 176.8 155.6 14% 4% - 10%
------------------------------------------------------------
Total $583.0 $544.6 7% 5% -2% 4%
---------------------------------------------------------------------------------------
Overall sales were up 7%. Selling volumes were down 2% primarily due to the
completion of a resale agreement related to the sale of the water treating
chemicals product line in the prior year and lower volumes across all businesses
except mining chemicals which had a 12% increase. Selling volumes were down in
most regions except for mining chemicals, which had volume increases across all
regions due to strong demand, new products and new business. Overall selling
prices increased 5% with increases across all product lines and regions to
offset raw materials price increases. Changes in exchange rates increased sales
by 4%.
Earnings from operations were $62.9, or 11% of sales in 2008, up from $54.9 or
10% of sales in 2007. Earnings were positively impacted $27.9 by higher selling
prices, $3.6 by favorable product mix, $3.2 due to changes in exchange rates,
and $1.0 due to higher fixed cost absorption into inventory due to a combination
of lower demand and the timing of production campaigns. Earnings were negatively
impacted $24.6 due to higher raw material costs, $1.4 due to higher
manufacturing costs related to inflation and $1.5 higher operating costs due to
increased commercial efforts in mining chemicals and inflation.
Cytec Engineered Materials
---------------------------------------------------------------------------------------
% Change Due to
Total ------------------------------
2008 2007 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------
North America $361.2 $311.8 16% 3% 13% -
Latin America(1) 1.1 0.9 - - - -
Asia/Pacific 44.5 36.9 21% 1% 20% -
Europe/Middle East/Africa 177.7 142.7 25% 2% 22% 1%
------------------------------------------------------------
Total $584.5 $492.3 19% 3% 16% -
=======================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall sales increased 19%. Selling volumes increased 16% from higher volumes
to the business/regional jet and rotorcraft commercial transport market sectors.
Net selling prices increased 3% due to price increases across most market
sectors and regions.
-26-
Earnings from operations were $124.2, or 21% of sales in 2008, up from $96.2, or
20% of sales in 2007. The $28.0 increase in earnings included $46.9 due to
higher selling volumes, $12.4 due to higher selling prices, and $3.5 due to
increased fixed cost absorption as a result of higher production levels.
Earnings were negatively impacted by $6.2 due to higher raw material costs,
$18.8 due to higher manufacturing costs primarily related to the higher
production volumes, and $8.1 due to higher operating costs of which
approximately $5.3 related to increased investments in research and development
and technical service costs. Earnings were negatively impacted $1.7 due to
changes in exchange rates.
Building Block Chemicals
---------------------------------------------------------------------------------------
% Change Due to
Total ------------------------------
2008 2007 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------
North America $295.7 $178.3 66% 60% 6% -
Latin America(1) 5.0 2.4 - - - -
Asia/Pacific 12.9 23.4 -45% 8% -53% -
Europe/Middle East/Africa 104.0 124.6 -17% 19% -36% -
------------------------------------------------------------
Total $417.6 $328.7 27% 41% -14% -
=======================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall sales were up 27%. Selling volumes were down 14% primarily due to lower
volumes of acrylonitrile. We are seeing demand destruction in acrylic fibers
primarily in Asia and Europe due to high costs for acrylonitrile. Overall
selling prices increased 41% to offset higher raw material price increases
across all products.
Earnings from operations were $11.1, or 3% of sales in 2008, down from $16.6, or
5% of sales in 2007. Earnings were positively impacted by a $133.6 increase in
selling prices and $5.3 of higher fixed cost absorption into inventory due to
higher production than demand primarily in acrylonitrile product line. Earnings
in 2008 were negatively impacted $115.5 due to higher raw material costs, $17.8
related to lower selling volumes, and $11.7 of higher manufacturing costs of
which $3.0 was related to hurricane Gustav and $8.0 was related to lower acid
regeneration operations and a maintenance turn-around.
LIQUIDITY AND FINANCIAL CONDITION
At September 30, 2008 our cash balance was $90.2 compared with $76.8 at December
31, 2007.
Cash flows provided by operating activities were $170.5 in 2008 compared with
$194.5 in 2007. Trade accounts receivable increased $48.7 reflecting the
increase in sales while our days sales outstanding remained flat. Inventory
increased $97.1 primarily due to higher raw material costs and higher days of
inventory on hand. The inventory days was influenced primarily by a slowdown in
demand in our Specialty Chemical and Building Block Chemical segments at the
latter part of the third quarter for which our operations were not able to
adjust production levels to the lower demand by the end of the reporting period.
Other liabilities decreased $22.2 which includes pension and other
postretirement benefit contributions of $29.2 partially offset by current year
accruals of $16.5 and environmental remediation spending of $3.9. Accounts
payable increased $39.3 primarily reflecting the increased raw material costs.
Cash flows used in investing activities were $121.0 compared with $35.5 for
2007. In 2007, we received $30.2 related to the divestiture of our water
treatment and acrylamide product lines. Capital spending for the first nine
months of 2008 was $116.3 mostly related to work on a new carbon fiber line, a
prepreg plant in China, and capacity expansions for waterborne and Radcure
resins. Total capital spending for 2008 is forecasted to be in a range of $180
to $200.
Net cash flows used by financing activities were $34.7 in 2008 compared with
$116.3 in 2007. During the first nine months of 2008, we had net debt borrowings
of $15.5, treasury stock repurchases of 908,400 shares for $46.4, and cash
dividends of $17.9, which was partially offset by proceeds received on the
exercise of stock options of $10.8.
Approximately $45.0 remained authorized under our stock buyback program as of
September 30, 2008. We anticipate repurchases will be made from time-to-time on
the open market or in private transactions and will be utilized for share-based
compensation plans and other corporate purposes.
At September 30, 2008, we have $280.0 of borrowing capacity available under our
$400.0 revolving credit facility.
On July 17, 2008 the Board of Directors declared a $0.125 per common share cash
dividend, which was paid on August 25, 2008 to shareholders of record as of
August 11, 2008. Cash dividends paid in the third quarter of 2008 and 2007 were
$6.0 and $4.8, respectively, and for the nine months ended September 30, 2008
and 2007 were $17.9 and $14.4, respectively. On October 16, 2008 the Board of
Directors declared a $0.125 per common share cash dividend, which is payable on
November 25, 2008 to shareholders of record as of November 10, 2008.
-27-
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
internal cash generation and/or available borrowing capacity.
We have not guaranteed any indebtedness of our unconsolidated associated
company.
Excluding the impact of increasing raw materials prices, inflation at this time
is not considered significant although higher costs for energy and commodities
could impact our future operating expenses and capital spending. The impact of
increasing raw material costs are discussed under "Customers and Suppliers" in
"Business" in Item 1 in our 2007 Annual Report on Form 10-K.
The portion of our pension and postretirement plan assets invested in equity
securities have experienced negative returns in line with the decline in the
market. If returns from equity securities remain at the current level,
contributions to our pension and other postretirement plans in 2009 could double
from the expected full year 2008 contributions of $49.2 million, or could
increase further if returns from equity securities continue to deteriorate from
current valuation levels.
There were no material changes in contractual obligations from December 31, 2007
to September 30, 2008. Reference is also made to Note 11 in the Notes to
Consolidated Financial Statements included herein which describes certain gross
liabilities totaling $39.7 for unrecognized tax benefits that will be resolved
at some point over the next several years.
OTHER
2008 OUTLOOK
In our October 9 and October 16, 2008 press releases, which were also furnished
as exhibits to current reports on Form 8-K, we presented our best estimate of
the full year 2008 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.
The press releases noted above also discussed that our chemical operations are
being impacted by weakening market conditions in Europe, North America and Asia.
In response to these conditions, we are accelerating our review of company-wide
operations to ensure our organization and asset base is consistent with our
latest view of the global economy.
In addition, we are expecting to see a slowdown in orders as a result of a
strike at one of our major customers in the Engineered Materials segment,
although we believe the long-term outlook for the markets served by this segment
remain strong.
See "Comments on Forward Looking Statements."
SIGNIFICANT ACCOUNTING ESTIMATES / CRITICAL ACCOUNTING POLICIES
See "Critical Accounting Policies" under Item 7A of our 2007 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on February 28,
2008 and incorporated by reference herein. There were no changes to our critical
accounting policies except as follows.
Fair Value Measurements
During the first quarter of 2008, we adopted SFAS No. 157, "Fair Value
Measurements", ("SFAS 157") for financial assets and liabilities, as well as for
any other assets and liabilities that are carried at fair value on a recurring
basis in financial statements. SFAS 157 establishes a single authoritative
framework for measuring fair value, and requires additional disclosures about
fair value measurements. The fair value hierarchy in SFAS 157 prioritizes the
inputs, which refer broadly to assumptions market participants would use in
pricing an asset or liability, into three levels. It gives the highest priority
to quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities that the
Company has the ability to access at the measurement date. Level 2 inputs are
inputs other than quoted prices within Level 1 that are observable for the asset
or liability, either directly or indirectly, such as quoted prices for similar
assets or liabilities in active markets, interest rates, exchange rates, and
yield curves observable at commonly quoted intervals. Level 3 inputs are
unobservable inputs for the asset or liability.
All of our derivatives are valued based on level 2 inputs. Our gas swaps and
currency forwards are valued based on readily available published indices for
commodity prices and currency exchange rates. Our cross currency swaps are
valued using an income approach based on industry-standard techniques. This
model includes a discounted cash flow analysis that nets the discounted future
cash receipts and the discounted expected cash payments resulting from the swap.
The analysis is based on the contractual terms of the swaps including the period
to maturity and observable market-based inputs that include time value, interest
rate curves, exchange rates, implied volatilities, as well as other relevant
economic measures. We incorporate credit valuation adjustments to appropriately
reflect both our own nonperformance risk and the counterparty's nonperformance
risk in the fair value measurements.
-28-
At September 30, 2008, the unfavorable fair values of the five and ten year
swaps were $36.0 and $25.0, respectively. The following table summarizes the
approximate impact that a change in certain critical inputs would have on the
fair values of our cross currency swaps in total. The approximate impact of the
change in each critical input assumes all other inputs and factors remain
constant. See Note 15 of the Consolidated Financial Statements for additional
details on SFAS 157 disclosures.
---------------------------------------------------------------------------
Approximate
Impact On
Five and Ten Year Swaps
Critical Factors Change Favorable/(Unfavorable)
Fair Value Combined
---------------------------------------------------------------------------
Euro interest rate curve +10% $11.2
---------------------------------------------------------------------------
Euro interest rate curve -10% (11.5)
---------------------------------------------------------------------------
USD interest rate curve +10% (8.4)
---------------------------------------------------------------------------
USD interest rate curve -10% 8.6
---------------------------------------------------------------------------
Euro/USD exchange rate +10% (64.4)
---------------------------------------------------------------------------
Euro/USD exchange rate -10% 64.3
---------------------------------------------------------------------------
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 or
any of our segments outlooks for the future, anticipated results of acquisitions
and divestitures, selling price and raw material cost trends, the effects of
changes in currency rates and forces within the industry, anticipated costs, the
completion dates of and anticipated expenditures for capital projects, expected
sales growth, operational excellence strategies and their results, expected
annual underlying tax rates, our long-term goals, future legal settlements and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that are
not historical facts. Such statements are based upon our current beliefs and
expectations and are subject to significant risks and uncertainties. Actual
results may vary materially from those set forth in the forward-looking
statements.
The following factors, among others, could affect our anticipated results: our
ability to successfully complete planned or ongoing restructuring and capital
expansion projects, including realization of the anticipated results from such
projects; our ability to maintain or improve current ratings on our debt;
worsening conditions in the financial markets that may affect us, our customers,
and suppliers; timely access to capital markets; 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; our ability to raise our selling
prices when our product costs increase; changes in employee relations, possible
strikes or work stoppages at our facilities or at the facilities of our
customers or suppliers; changes in laws and regulations or their interpretation,
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 and changes in the laws applicable to
these claims; quality problems with our products; 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.
-29-
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, 2007, filed with the
Securities and Exchange Commission on February 28, 2008 and incorporated by
reference herein. Other 2008 financial instrument transactions include:
Commodity Price Risk: At September 30, 2008, we held natural gas swaps, with an
unfavorable fair value of $10.5 included in accrued expenses, which will be
reclassified into Manufacturing Cost of Sales through September 2009 as the
hedged natural gas purchases affect earnings.
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 $2.9 in the value of the swaps.
Interest Rate Risk: At September 30, 2008, our outstanding borrowings consisted
of $39.8 of short-term borrowings and $825.0 of long-term debt, including the
current portion. The long-term debt had a carrying and face value of $825.0 and
$824.5, respectively, and a fair value of approximately $786.5.
Assuming other factors are held constant, a hypothetical increase/decrease of 1%
in the weighted-average prevailing interest rates on our variable rate debt
outstanding as of September 30, 2008, interest expense would increase/decrease
by approximately $0.4 for the next fiscal quarter.
Currency Risk: We periodically enter into currency forward contracts primarily
to hedge currency fluctuations of transactions denominated in currencies other
than the functional currency of the respective entity. At September 30, 2008,
the principal transactions hedged involved accounts receivable, accounts payable
and intercompany loans. When hedging currency exposures, our practice is to
hedge such exposures with forward contracts denominated in the same currency and
with similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction.
At September 30, 2008, the net contractual amounts of forward contracts
outstanding translated into U. S. dollar equivalent amounts totaled $80.8. The
net unfavorable fair value of currency contracts, based on forward exchange
rates at September 30, 2008, was approximately $2.3. 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, 2008 would
decrease by approximately $12.4. However, since these contracts hedge specific
transactions, any change in the fair value of the contracts would be offset by
changes in the underlying value of the item or transaction being hedged.
In September, 2005, we entered into (euro)207.9 of five year cross currency
swaps and (euro)207.9 of ten year cross currency swaps to effectively convert
the five-year notes and ten-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 and (euro)207.9 on each settlement date of
the five-year and ten-year notes (October 1, 2010 and October 1, 2015),
respectively. 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 3.78% 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 4.52% per annum on each April 1 and October 1,
through the maturity date of the ten year swaps. The cross currency swaps have
been designated as cash flow hedges of the changes in value of the future Euro
interest and principal receipts that results from changes in the U.S. dollar to
Euro exchange rates on certain Euro denominated intercompany receivables we have
with one of our subsidiaries. At September 30, 2008, the unfavorable fair values
of the five and ten year swaps were $36.0 and $25.0, respectively. Assuming
other factors are held constant, a hypothetical increase of 10% in the euro
exchange rate would have an adverse effect of approximately $64.4 on the
combined settlement value of the cross-currency swaps.
A portion of an intercompany Euro denominated loans payable naturally hedges 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, 2008, we had no
designated forward Euro contracts.
-30-
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, 2008. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective.
We continue the process of implementing our Cytec Specialty Chemicals global
enterprise-wide planning systems for the acquired business of Surface
Specialties. The world-wide implementation is expected to be completed in 2010
and includes changes that involve internal control over financial reporting.
Although we expect this implementation to proceed without any material adverse
effects, the possibility exists that the migration to our global enterprise-wide
planning systems could adversely affect our internal control, our disclosure
control and procedures or our results of operations in future periods. We are
reviewing each system and site as they are being implemented and the controls
affected by the implementation. Appropriate changes have been or will be made to
any affected internal control during the implementation. We will test all
significant modified controls resulting from the implementation to ensure they
are functioning effectively.
As of August 1, 2008, we began utilizing the aforementioned global systems for
the acquired Surface Specialties subsidiary in Brazil. We have reviewed the
results of the systems implementation and have concluded that it did not have a
negative impact on our internal control over financial reporting.
With the exception of the matters discussed above, there were no other changes
in internal control over financial reporting that occurred during the quarter
ended September 30, 2008 that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
-31-
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Information regarding legal proceedings is included in Note 9 to the
Consolidated Financial Statements herein and in Note 13 to the Consolidated
Financial Statements contained in our 2007 Annual Report on Form 10-K.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report on Form 10-Q, you
should carefully consider the factors discussed in Part I, Item 1A. Risk Factors
in our Annual Report on Form 10-K for the year ended December 31, 2007 and the
factors noted below, which could materially affect our business, financial
condition or future results.
The current global economic weakness coupled with a lack of credit availability
from the credit markets could adversely impact our customers and, their ability
to pay their accounts receivable to us. The current market conditions could also
adversely impact our suppliers and their ability to supply our materials
requirements.
We regularly review our customers and suppliers financial viability to determine
where we are at risk if they were unable to secure the financing necessary to
continue as a going concern. See "Item 1. Business - Customers and Suppliers in
our annual report on Form 10-K for the year ended December 31, 2007.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (Currencies
in millions, except per share amounts)
During the nine months ended September 30, 2008, we repurchased common stock for
$46.4 under our stock buyback program. Approximately $45 remained authorized
under the buyback program as of September 30, 2008. Pursuant to this program,
shares can be repurchased in open market transactions or privately negotiated
transactions at our discretion.
Total Number Approximate
of Shares Dollar Value
Purchased as of Shares That
Part of May Yet Be
Total Number Publicly Purchased
of Shares Average Price Announced Under the
Period Purchased Per Share Program Program
--------------------------------------------------------------------------------
March 1, 2008 -
March 31, 2008 100,900 $53.62 100,900 $86.0
--------------------------------------------------------------------------------
May 1, 2008 -
May 31, 2008 142,500 $61.84 142,500 $77.0
--------------------------------------------------------------------------------
June 1, 2008 -
June 30, 2008 90,000 $58.46 90,000 $72.0
--------------------------------------------------------------------------------
August 1, 2008 -
August 31, 2008 155,000 $51.36 155,000 $64.0
--------------------------------------------------------------------------------
September 1, 2008 -
September 30, 2008 420,000 $45.12 420,000 $45.0
--------------------------------------------------------------------------------
Total 908,400 908,400
--------------------------------------------------------------------------------
-32-
Item 6. EXHIBITS
(a). Exhibits
See Exhibit Index on page 35 for exhibits filed with this Quarterly Report on
Form 10-Q.
-33-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYTEC INDUSTRIES INC.
By: /s/ David M. Drillock
-------------------------
David M. Drillock
Vice President and
Chief Financial Officer
October 30, 2008
-34-
Exhibit Index
-------------
12 Computation of Ratio of Earnings to Fixed Charges for the three and
nine months ended September 30, 2008 and 2007
31.1 Certification of David Lilley, Chairman of the Board and Chief Executive
Officer, Pursuant to Rule 13a-14(a) of the Securities Exchange Act
31.2 Certification of David Drillock, Chief Financial Officer, Pursuant to
Rule 13a-14(a) of the Securities Exchange Act
32.1 Certification of David Lilley, Chairman of the Board and Chief Executive
Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
32.2 Certification of David Drillock, Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-
Oxley Act of 2002
-35-