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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
/ / OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period from ________ to ________
Commission File Number 1-12372
CYTEC INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3268660
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
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(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code (201) 357-3100
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
Common Stock, par value Which Registered
$.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 report(s) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of voting stock held by non-affiliates of the registrant
as of March 13, 1997, based upon the closing price of registrant's common stock
($39 7/8) on such date as reported on the composite transaction reporting system
including transactions on the New York Stock Exchange: $1,815,110,877.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of March 13, 1997: 45,520,022 shares of Common Stock, par value
$.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Part of form 10-K
Portions of Proxy Statement for 1997 Annual Meeting Parts III, IV
of Common Stockholders
PART I
Item 1. Business
The Company is a vertically integrated specialty chemicals company which
focuses on value-added specialty products. The Company develops,
manufactures and markets specialty chemicals, specialty materials and
building block chemicals serving a broad group of end users, including the
water treatment, paper, mining, coatings, plastics, aerospace, automotive
and textile industries. The Company has manufacturing facilities in six
countries and sells its products worldwide. The Company had net sales of
$1,259.6 million and earnings from operations of $136.1 million in 1996. In
addition, the Company has a 50% interest in each of five unconsolidated
associated companies with aggregate net sales of $600.7 million and
earnings from operations of $56.0 million in 1996. The Company reported
$14.9 million of equity in net earnings of these associated companies in
1996. The Company's management regularly reviews the business portfolio of
the Company in terms of strategic fit and financial performance and may
from time-to-time dispose of products or product lines and/or acquire
additional products or technologies.
The Company sells products in three general product categories: specialty
chemicals, specialty materials and building block chemicals. Specialty
chemicals principally include water treating, paper and mining chemicals,
coatings and resin products, and polymer additives. Specialty materials
principally include aerospace adhesives and advanced composites. Building
block chemicals principally include acrylonitrile, acrylamide, melamine and
methanol.
Unless indicated otherwise, the term "Company", with respect to periods
beginning on or after December 17, 1993, the effective date of the transfer
of substantially all of the assets and liabilities of the chemicals
businesses of American Cyanamid Company ("Cyanamid") to the Company (the
"Spin-off"), refers collectively to Cytec Industries Inc., and its
subsidiaries, and with respect to periods prior to the Spin-off, the term
refers to the chemicals businesses of Cyanamid. Cyanamid was acquired by
American Home Products Corporation in November 1994. Cytec was incorporated
as an independent public company in December 1993.
Specialty Chemicals
The specialty chemicals product category, which represented revenues of
approximately $744.7 million in 1996 and $731.0 million in 1995, or
approximately 59.1% and 58.0%, respectively, of the Company's net sales in
such years, include primarily water treating, paper and mining chemicals,
coatings and resin products and polymer additives.
Set forth below are the Company's primary specialty chemical product lines,
major products and their principal applications.
PRODUCT LINE MAJOR PRODUCTS PRINCIPAL APPLICATIONS
------------- ---------------- -----------------------
Water treating, paper and Organic flocculants - Industrial and municipal water treatment
mining chemicals(1) plants
- Paper manufacturing
- Mineral processing
Sizing agents, strength resins, - Fine paper, paperboard, towel and tissue
retention aids grades
Coatings and resin products(1)(2) Reagents - Mineral processing
Melamine cross-linkers - High performance automotive, coil, can
Polymer additives urethanes and wood coatings; radial tire resins
Ultraviolet absorbers - Plastics, coatings and fibers
and stabilizers
Other Antioxidants
Surfactants and specialty - Latex paints and coatings
monomers
Phosphine and phosphine - Electronics, chemical catalysts, and
derivatives mineral separation
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(1) Some sales of this product line are made by Mitsui-Cytec Ltd.
("Mitsui-Cytec"), an unconsolidated associated company owned 50% by Mitsui
Toatsu Chemicals (Japan). See "Item 3-Legal Proceedings."
(2) Some sales of this product line are made by Dyno-Cytec K.S. ("Dyno-Cytec"),
an unconsolidated associated company owned 50% by Dyno Industrier AS
(Norway).
Water Treating, Paper and Mining Chemicals
The Company's water treating, paper and mining chemicals are comprised
primarily of organic flocculants, sizing agents and other specialty paper
additives and mining reagents. Organic flocculants are synthetic water
soluble polymers utilized primarily in liquid-solid separation processes
(i.e., separating solid waste or particulate matter from water). The
Company manufactures organic flocculants at five plants in North America
and two in Europe. In addition, Mitsui-Cytec manufactures and markets
organic flocculants in Japan. The Company manufactures all basic forms of
organic flocculants in hundreds of variations, designed to industry and
customer specific application requirements. The Company's primary markets
are municipal and industrial wastewater treatment, paper manufacturing and
mineral processing.
Water treatment is the largest market for organic flocculants, which are
used as coagulants in the treatment of municipal drinking water and
industrial influent water supplies, as sludge conditioners for municipal
waste water treatment, and as treatments in industrial waste streams to
remove suspended solids. Competition is generally intense in wastewater
treatment applications, particularly for municipal accounts, where
contracts are generally awarded on a competitive bid basis, and for those
industrial applications where service is not an important factor.
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The Company is one of the leading suppliers of organic flocculants to the
U.S. paper industry. Organic flocculants are used as performance aids in
the manufacturing of paper and as part of environmental wastewater
management. In addition to flocculants, paper chemical products include wet
and dry strength resins, alkaline and surface sizing agents and other
specialty additives. The Company is the leading global supplier of alkenyl
succinic anhydride-based paper sizing used in alkaline papermaking.
Alkaline papermaking processes are considered more environmentally
friendly, and also permit the use of lower cost paper fillers while
maintaining sheet strength. The Company also sells the specialized
flocculants used to treat the large volumes of water required to wash and
remove inks in paper recycling mills. Overall demand for paper chemicals is
cyclical, varying with paper industry production. When the paper industry
nears capacity constraints, demand for paper chemicals generally rises more
rapidly than paper production since many performance and processing
chemicals can help increase effective mill capacity when used in larger
quantities.
The Company's mining chemical products include organic flocculants and
reagents, and are primarily used in applications to separate minerals from
raw ores. The Company also manufactures and sells specialty reagents with
leading positions in cobalt/nickel separation and copper sulfide recovery
applications. Demand for mining chemicals is cyclical and varies with
industry conditions for the particular minerals with respect to which the
Company's products have processing applications.
The Company generally competes in the water treating, paper and mining
chemicals areas on the basis of cost, performance and service. In many
applications, the Company's products are positioned in the middle of the
market where the Company competes both against companies which offer higher
levels of service or a broader line of products at generally higher prices
and against companies which offer lower levels of service or product
performance at generally lower prices. Each of the Company's water
treating, paper and mining chemical product lines is marketed through a
specialized sales and technical services staff and also through
distributors and resellers.
Coatings and Resin Products
The Company manufactures and markets melamine cross-linking resins
("Resins"), primarily under the CYMEL(R) trademark, for industrial coatings
applications. The Company produces Resins using melamine, one of the
Company's building block chemicals. The Company, through associated
companies in Europe and Japan, and directly elsewhere, sells Resins
worldwide to manufacturers producing coatings for automotive, marine, wood
and metal finishings, and appliances, containers, coils and general
industrial maintenance coatings. The Company believes that it is one of the
largest global suppliers of Resins.
In addition, the Company manufactures a line of adhesion promoters under
the CYREZ(R) trademark. These products are used globally in the rubber
industry, the major application being in the manufacture of steel belted
radial tires to enhance the bonding of the steel and polyester cords to the
rubber.
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Polymer Additives
The Company is a significant global supplier to the plastics industry of
specialty additives which protect plastics from the ultraviolet radiation
of sunlight and from oxidation. Typical end use applications of the
Company's products include a wide variety of polyolefins which are used in
toys, lawn furniture and automotive applications, fibers for carpets,
spandex applications, engineered plastics and automotive coatings.
Demand for light stabilizers and high performance antioxidants for plastics
and coatings has been growing rapidly for several years, primarily due to
increasing manufacturer and consumer expectations for the service life of
plastics and coatings and the replacement of metal and other materials with
plastics in certain automotive applications and in outdoor toys and lawn
furniture. Novartis is the dominant competitor in this segment. The Company
has commenced a capital investment program to improve manufacturing
efficiency, expand capacity and improve the consistency and quality of its
polymer additive products at its Willow Island manufacturing facilities in
Belmont, West Virginia and its Botlek plant in the Netherlands.
Other Specialty Chemicals
The Company sells other specialty chemicals for a variety of applications.
The major products in this category are specialty surfactants, specialty
monomers, oil field chemicals and phosphine chemicals. The Company is the
global leader in sulfosuccinate surfactants which have wide application in
wetting, emulsification, foaming, dispersing and detergency functions in
the formulation of paints, paper coatings, adhesives, binders, cleaners,
cosmetics, inks, plastics and agricultural products. The Company also is
the largest supplier of ultra-high purity phosphine gas, used in
semiconductor manufacturing operations, and has significant positions in
various phosphine derivative products.
Specialty Materials
The specialty materials product category, which represented revenues of
approximately $320.5 million in 1996 and $305.6 million in 1995, or
approximately 25.4% and 24.3%, respectively, of the Company's net sales in
such years, include primarily aerospace adhesives and advanced composites.
In January, 1997, the Company sold its acrylic fibers business, which
accounted for approximately 11%, 10% and 11% of the Company's 1996, 1995
and 1994 net sales.
- 4 -
Set forth below are the Company's primary specialty materials product
lines, major products and their principal applications.
PRODUCT LINE MAJOR PRODUCTS PRINCIPAL APPLICATIONS
-------------- ---------------- -----------------------
Aerospace adhesives and Structural film adhesives - Commercial and military aviation,
advanced composites Prepregs of graphite, aramid automotive
and glass fibers
Acrylic plastics and methyl Acrylic plastic molding - Automotive, appliances, signs
methacrylate(1) compounds
Methyl methacrylate - Acrylic sheet and molding compounds
Refinery and styrene Hydroprocessing catalysts - Oil refining
catalysts(2) Reforming catalysts
Styrene catalysts - Styrene manufacturing
Other Polyester molding - Automotive, electrical and consumer
compounds appliance applications
Amino molding - Electrical components, dinnerware
compounds(3)
(1) Product line manufactured and sold exclusively by CYRO Industries ("CYRO"),
an unconsolidated associated company owned 50% by a subsidiary of Huls
Corporation.
(2) Product line manufactured and sold exclusively by Criterion Catalyst
Company, L.P. ("Criterion Catalyst"), an unconsolidated associated company
owned 50% by subsidiaries of Royal Dutch Petroleum Company and The "Shell"
Transport and Trading Company, Public Limited Company.
(3) Product line manufactured and sold exclusively by AC Molding Compounds
("ACMC"), an unconsolidated associated company owned 50% by Creative
Moldings Ltd.
Aerospace Film Adhesives and Advanced Composites
The Company is the major global supplier of aerospace structural and
engineering adhesives. The Company also sells advanced composites with
strength-to-weight characteristics superior to traditional structural
metals such as aluminum and steel. Advanced composites are manufactured by
impregnating fabrics and tapes made from high performance fibers with
epoxy, phenolic and bismaleimide resins formulated by the Company.
The primary application for both aerospace adhesives and advanced
composites is commercial and military aerospace programs. Sales are
dependent to a large degree on the commercial and military aircraft build
rate and the number of applications and aircraft programs for which the
Company is a qualified supplier. Every current major aircraft program in
the Western world has qualified and uses the Company's adhesives. The
Company's advanced composites have also been qualified and are used on
several major aircraft programs including most Boeing aircraft programs and
the U.S. Navy's F/A-18 program.
- 5 -
The Company purchases from third parties both the fibers, usually graphite,
aramid or glass, and the raw resins used in the manufacture of composites.
The Company markets aerospace adhesives and advanced composite products
through a global sales and technical service staff which services
commercial aircraft manufacturers and their subcontractors and also markets
to U.S. and European defense programs.
Acrylic Plastics and Methyl Methacrylate
CYRO, an unconsolidated associated company, manufactures and sells acrylic
sheet and molding compound products, primarily under the ACRYLITE(R)
trademark. CYRO operates primarily in North America and manufactures its
acrylic products at three locations in the U.S. and at one location in
Canada. The Company's partner in CYRO, Huls Corporation, has an affiliate,
Rohm GmbH, which manufactures methyl methacrylate ("MMA") and acrylic sheet
products and molding compounds in Europe and makes its technological
expertise available to CYRO.
CYRO also manufactures MMA, most of which CYRO uses as a raw material in
the manufacture of acrylic sheet and molding compounds and the remainder of
which is sold to third parties. CYRO's world-scale MMA manufacturing
facilities are an integrated part of the Company's Fortier facility,
consuming substantially all the hydrocyanic acid produced by the Company in
connection with the manufacture of acrylonitrile. The Company anticipates
that over the near term it will also sell to CYRO for the production of MMA
approximately 25% of the Company's share of methanol production at the
Fortier facility. CYRO expanded its MMA annual production capacity by
approximately 25% in 1995 to 250 million pounds; at the same time the
Company expanded its acrylonitrile plant at the Fortier facility,
increasing the supply of hydrocyanic acid available to CYRO.
Refinery and Styrene Catalysts
Criterion Catalyst, an unconsolidated associated company, manufactures
primarily hydroprocessing catalysts, which are used in the refining of
crude oil. Criterion Catalyst also manufactures reforming catalysts which
are used in producing gasoline and other catalysts used in the manufacture
of styrene, a raw material for many plastics. Criterion Catalyst is the
largest global supplier of hydroprocessing catalysts. The market for
hydroprocessing catalysts has expanded rapidly in recent years as
legislation in the United States and many other countries has required, or
provided tax incentives for, removal of sulfur from diesel and gas fuel and
as "sour" crude oil with more sulfur has constituted an increasing
percentage of overall world crude supply. Accordingly, Criterion Catalyst
has commenced a global capital investment program to increase significantly
its worldwide manufacturing capacity in hydroprocessing catalysts.
Criterion Catalyst expects to continue to fund these investments without
recourse to the partners.
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Other Specialty Materials
The Company sells other specialty materials for a variety of applications,
which utilize the Company's proprietary technology and are targeted to
niche markets. The major products in this category are polyester molding
compounds, which serve in numerous automotive, consumer appliance and
electrical applications, as well as urethane systems and precision parts
produced by the Company's subsidiary, Conap, Inc. Additionally, the
Company's associated company, A. C. Molding Compounds, is the largest
manufacturer of amino molding compounds in the United States. Amino molding
compounds are mature products the primary markets for which are electrical
components and dinnerware, where price competition is intense.
Building Block Chemicals
The building block chemicals product category represented revenues of
approximately $194.4 million in 1996 and $223.5 million in 1995, or
approximately 15.4% and 17.7%, respectively, of the Company's net sales in
each year.
These chemicals are manufactured primarily at the Company's world-scale,
highly integrated Fortier facility. The Fortier facility is located on the
Mississippi River near New Orleans, Louisiana and has ready access to all
major forms of transportation and supplies of raw materials.
The Company manufactures building block chemicals that can be used as raw
materials in its specialty chemicals product category. The Company utilizes
manufacturing joint ventures and long-term sales contracts to reduce market
risks and to assist the Company in obtaining world-scale production
economics.
The Company formerly used more than half of its production of its building
block chemicals in the manufacture of specialty chemicals, specialty
materials and other building block chemicals, although the proportion used
internally is expected to decline in 1997, with the sale of the acrylic
fibers business, which was a large user of acrylonitrile. The Company
believes this integration, particularly within the Fortier facility,
provides the Company with a cost-effective, reliable and high quality
supply of significant raw materials. The integration between the Company's
building block chemicals and the Company's specialty chemicals also reduces
the Company's exposure to the commodity chemicals pricing cycles that
characterize the market for building block chemicals. When building block
prices decrease, margins in the Company's specialty chemicals product lines
manufactured from the Company's building block chemicals tend to increase
and when building block prices increase, margins in such specialty
chemicals product lines tend to decrease.
Acrylonitrile
The Company anticipates that over the near term it will use internally
approximately 25% of its current acrylonitrile annual production capacity
of 475 million pounds to produce acrylamide and that approximately 33% will
be sold pursuant to a five-year supply
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agreement with the purchaser of its acrylic fibers business. The remainder
of the Company's production is sold to third parties. During the second
quarter of 1995, the Company completed an expansion of its acrylonitrile
plant at the Fortier facility to increase the plant's annual production
capacity by approximately 35% or 125 million pounds. All of the additional
production is being sold under a long term contract at a price determined
under a cost based formula subject to increases based partially on market
pricing. The profitability of producing acrylonitrile is influenced by
supply and demand, by the cost of propylene, which is the largest component
of the cost of producing acrylonitrile, and by manufacturing efficiency
(i.e., yield and co-product recovery). Hydrocyanic acid is produced as a
co-product of the acrylonitrile process. Substantially, all of the
hydrocyanic acid produced by the Company is sold to CYRO as a raw material
for MMA. See Item 3, "Legal Proceedings."
Acrylamide
The Company anticipates that over the near term it will use internally
approximately 40% of its acrylamide annual production capacity of 180
million pounds primarily for the production of polyacrylamides. The
remainder of the Company's production is sold to third parties. The company
manufactures acrylamide at its Fortier facility and also at its Botlek
facility in the Netherlands. The Company is one of the largest producers
and users of acrylamide in the world.
Melamine
The Company operates a melamine manufacturing plant with annual production
capacity of 150 million pounds at the Fortier facility for American
Melamine Industries ("AMEL"), a manufacturing joint venture which is owned
50% by a subsidiary of DSM N.V. The Company anticipates that over the near
term it will use internally approximately 75% of its 75 million pound share
of annual melamine production for the production of Resins. The remainder
of the Company's share of production is sold to third parties. AMEL is one
of the two North American manufacturers of melamine.
Methanol
The Company operates a methanol manufacturing plant with annual production
capacity of 190 million gallons at the Fortier facility for Fortier
Methanol Company, a manufacturing joint venture which is 70% owned by
Methanex Corporation. The Company anticipates that over the near term it
will sell to CYRO for the production of MMA approximately 25% of the
Company's share of methanol production. The remainder of the Company's
share of methanol production is sold to Methanex Corporation under a long
term contract based on market prices.
Other Building Block Chemicals
The Company also manufactures and sells ammonia and sulfuric acid. The
Company sold 50% of its ammonia plant at the Fortier facility to LaRoche
Industries in July 1994. The Company continues to operate the ammonia plant
for the manufacturing joint venture
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formed between subsidiaries of the Company and LaRoche Industries in
connection with the sale. The Company anticipates that over the near term
it will use internally approximately 90% of the Company's share of the
ammonia production from such joint venture for the production of
acrylonitrile by the Company and the production of melamine by AMEL. The
balance of the Company's share of ammonia is sold to LaRoche Industries
under a long term contract at market based prices.
The Company sells sulfuric acid to third parties and also toll converts
substantially all of CYRO's spent sulfuric acid arising from the
manufacture of MMA under a long term service contract.
Some of the Company's building block chemicals show marked seasonality,
such as ammonia, the prices of which fluctuate with agricultural planting
seasons as well as the cost of natural gas which constitutes the major
portion of the cost to manufacture ammonia. Prices of building block
chemicals also are sensitive to the stages of economic cycles, energy
prices and currency exchange rates, as well to as periods of insufficient
and excess capacity. The Company sells building block chemicals to third
parties through a direct sales force and distributors.
Competition
The Company operates in a highly competitive marketplace. It competes
against a number of other companies in each of its product lines, although
none of such companies competes with the Company in all of its product
lines. The Company's competitors are both larger and smaller than the
Company in terms of resources and market shares. Competition is generally
based on product performance, reputation for quality, price and customer
service and support. The degree and nature of competition depends on the
type of product involved.
In general, the Company competes by maintaining a broad range of products,
focusing its resources on products in which it has a competitive advantage
and fostering its reputation for quality products, competitive prices and
excellent customer service and support. Through research and development,
the Company seeks to increase margins by introducing value-added products
and products based on proprietary technologies.
Customers and Suppliers
Due to the diversity of product lines in which the Company competes, no
significant portion of the Company's sales or earnings is generated by one
customer, and the Company is not overly reliant on contracts with any one
public, private or governmental entity. See, however, the discussion under
"Acrylonitrile" above with respect to sales to the purchaser of the
Company's acrylic fibers business and Note 5 of the Notes to the
Consolidated Financial Statements in Item 8 regarding sales to CYRO and
other associated companies. With respect to suppliers, the Company's
vertical integration (i.e., its manufacture of intermediates used to
manufacture specialty chemicals) protects it from being reliant on other
companies for many significant intermediates. The only significant raw
materials required to manufacture the Company's building block chemicals
are
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natural gas, propylene, oxygen and sulfur, which are readily available from
several suppliers. For businesses which do not utilize the building block
chemicals, the Company attempts to retain multiple sources for high volume
raw materials in order to minimize its reliance on any one supplier. A
number of the Company's customers operate in cyclical industries such as
the aerospace, automotive and paper industries. As a result, demand for the
Company's products from customers in such industries is also cyclical. In
addition, the profitability of external sales of certain of the Company's
building block chemicals is cyclical due to the cyclicality typically
experienced with respect to the amount of industry wide capacity dedicated
to producing such chemicals.
International
The Company operates on a worldwide basis with manufacturing plants located
in five countries (other than the United States). Export sales from the
United States were $148.6 million for 1996, $158.8 million for 1995, and
$99.1 million for 1994.
The Company markets its products internationally through Company sales
offices, distributors and the associated companies described above. Foreign
operations (exclusive of United States export sales) accounted for
approximately 27%, 25% and 22%, in 1996, 1995, and 1994, respectively, of
net sales to unaffiliated companies.
International operations are subject to various risks which are not present
in domestic operations, including political instability, the possibility of
expropriation, restrictions on royalties, dividends and currency
remittances, instabilities of foreign currencies, requirements for
governmental approvals for new ventures and local participation in
operations such as local equity ownership and workers' councils. The
Company does not believe that there is currently any material likelihood of
a material adverse effect on the Company in connection with its existing
foreign operations.
Research and Process Development
The Company conducts research and development activities in its facility in
Stamford, Connecticut as well as in several of its production facilities.
The Company is in the process of further focusing its research and process
development efforts on its core product lines and manufacturing processes.
During the years ended December 31, 1996, 1995, and 1994, the Company
expended an aggregate of approximately $40.2 million, $44.2 million, and
$40.0 million, respectively, on Company-sponsored research and development
activities. The decrease in 1996 was the result of a reduction, completed
in late 1995, in non-value-added overhead costs at the Company's research
facilities.
Trademarks and Patents
Upon the completion of all transfers from Cyanamid, the Company and its
associated companies will have over 1,800 United States and foreign patents
and pending applications and trademark applications and registrations for
approximately 160 product names. The Company believes the loss of patent or
trademark protection on any one product or process would not have a
material adverse effect on the Company. While the
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existence of a patent is prima facie evidence of its validity, the Company
cannot assure that any of the Company's patents will not be challenged, and
it cannot predict the outcome of any challenge.
Employees
After the disposition of the acrylic fibers business in January 1997,
approximately 4,700 employees are engaged in the operations of the Company,
excluding employees of associated companies. Approximately 2,000 of the
Company's employees are covered by union contracts. The Company believes
that its relations with both employees and the related unions are good. A
number of the Company's union contracts covering approximately 50% of the
Company's unionized employees working at 10 separate Company facilities,
including Belmont (Willow Island), Botlek, Havre de Grace and Kalamazoo,
expire in the ordinary course prior to the end of 1997. Additionally, the
Coordinated Bargaining Benefit Agreement which defines the negotiated
employee benefits such as health, welfare, pension and savings plans with
all of the Company's U.S. unionized employees was renegotiated in 1996 and
now expires in December 2000. Although the Company expects that it will
reach agreement with the unions with respect to these union contracts,
there can be no assurance that this will occur.
Operating Risks
The Company's revenues are dependent on the continued operation of its
various manufacturing facilities. The operation of chemical manufacturing
plants involves many risks, including the breakdown, failure or substandard
performance of equipment, natural disasters, and the need to comply with
directives of, and maintain all necessary permits from, government
agencies. The occurrence of material operational problems, including but
not limited to the above events, may have a material adverse effect on the
productivity and profitability of a particular manufacturing facility, or
with respect to certain facilities, the Company as a whole, during the
period of such operational difficulties.
The Company's operations are also subject to various hazards incident to
the production of industrial chemicals, including the use, handling,
processing, storage and transportation of certain hazardous materials.
These hazards can cause personal injury and loss of life, severe damage to
and destruction of property and equipment, environmental damage and
suspension of operations. Claims arising from any future catastrophic
occurrence at one of the Company's locations may result in the Company
being named as a defendant in lawsuits asserting potentially large claims.
See Item 3, "Legal Proceedings."
Environmental Matters
The Company is subject to various federal, state and foreign laws and
regulations which impose stringent requirements for the control and
abatement of air and water pollutants and contaminants and the manufacture,
transportation, storage, handling and disposal of hazardous substances,
hazardous wastes, pollutants and contaminants.
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In particular, under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") and various other federal and state laws, a
current or previous owner or operator of a facility may be liable for the
removal or remediation of hazardous materials at the facility. Such laws
typically impose liability without regard to whether the owner or operator
knew of, or was responsible for, the presence of such hazardous materials.
In addition, pursuant to the Resource Conservation and Recovery Act
("RCRA") and state laws governing the generation, transportation,
treatment, storage or disposal of solid and hazardous wastes, owners and
operators of facilities may be liable for removal or remediation, or other
corrective action at areas where hazardous materials have been released at
a facility. The costs of removal, remediation or corrective action may be
substantial, and the presence of hazardous materials in the environment at
any of the Company's facilities, or the failure to abate such materials
promptly or properly, may adversely affect the Company's ability to operate
such facilities. CERCLA and analogous state laws also impose liability for
investigative, removal and remedial costs on persons who dispose of or
arrange for the disposal of hazardous substances at facilities owned or
operated by third parties. Liability for investigative, removal and
remedial costs under such laws is retroactive, strict, and joint and
several.
The Clean Air Act and similar state laws govern the emission of pollutants
into the atmosphere. The Federal Water Pollution Control Act and similar
state laws govern the discharge of pollutants into the waters of the United
States. RCRA and similar state laws govern the generation, transportation,
treatment, storage, and disposal of solid and hazardous wastes. Finally,
the Toxic Substances Control Act regulates the manufacture, processing, and
distribution of chemical substances and mixtures, as well as the
disposition of certain hazardous substances. The costs of compliance with
such laws and regulations promulgated thereunder may be substantial, and
regulatory standards under such statutes tend to evolve towards more
stringent requirements, which might, from time-to-time, make it uneconomic
or impossible to continue operating a facility. Noncompliance with such
requirements at any of the Company's facilities could result in substantial
civil penalties or the inability of the Company to operate all or part of
the facility.
In addition, certain state and federal laws govern the abatement, removal,
and disposal of asbestos-containing materials and the maintenance of
underground storage tanks and equipment which contains or is contaminated
by polychlorinated biphenyls.
Note 9 of the Notes to the Consolidated Financial Statements in Item 8 is
incorporated by reference herein.
See Item 3, "Legal Proceedings."
Item 2. Properties
The Company operates 20 manufacturing and research facilities located
primarily in the United States, the United Kingdom, The Netherlands,
Mexico, Canada and Colombia. Capital spending, exclusive of acquisitions,
for the years ended 1996, 1995, and 1994 was approximately $72.5 million,
$97.2 million, and $116.1 million, respectively, on an
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historical basis. The Company experienced a reduction in capital
expenditures in 1996, due primarily to the acrylonitrile capacity
expansion, which was completed in 1995. Capital expenditures in 1997 are
expected to be in the range of $90.0 million to $95.0 million. Such capital
expenditures are intended either to provide necessary capacity, to improve
the efficiency of production units, to modernize or replace older
facilities, or to install equipment for protection of the environment.
The Company's major facilities and the principal product lines produced or
service provided at each such facility are as follows:
FACILITY PRINCIPAL PRODUCT LINE
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Anaheim, California............................................. Aerospace adhesives and advanced composites
Atequiza, Mexico................................................ Water treating, paper and mining chemicals
Avondale (Fortier), Louisiana................................... Building block chemicals; MMA
Belmont (Willow Island), West Virginia.......................... Polymer additives; coatings and resin products; surfactants
Bogota, Colombia................................................ Coatings and resin products
Botlek, The Netherlands......................................... Water treating, paper and mining chemicals; polymer additives;
building block chemicals; surfactants; specialty monomers
Bradford, England............................................... Water treating, paper and mining chemicals
Havre de Grace, Maryland........................................ Aerospace adhesives and advanced composites
Kalamazoo, Michigan............................................. Water treating, paper and mining chemicals; coatings and resin
products
Linden (Warners), New Jersey.................................... Surfactants
Longview, Washington............................................ Water treating, paper and mining chemicals
Mobile, Alabama................................................. Water treating, paper and mining chemicals
Olean, New York................................................. Urethane systems
Perrysburg, Ohio................................................ Polyester molding compounds
Stamford, Connecticut........................................... Research
Wallingford, Connecticut........................................ Coatings and resin products; acrylic plastics; amino molding
compounds; specialty monomers
Welland, Ontario................................................ Phosphine chemicals
Woodbridge, New Jersey.......................................... Water treating, paper and mining chemicals
Wrexham, Wales.................................................. Aerospace adhesives and advanced composites
The Company owns all of the foregoing facilities and their sites except for
the site for the Botlek facility which is leased under a renewable long
term lease. In addition, the Company has one other leased regional plant
not listed above, which is related to the production of aluminum sulfate,
and it leases its corporate headquarters in West Paterson, New Jersey and
its regional headquarters in Coral Gables, Florida and Singapore. In
January, 1997 the Company announced plans to close the Linden, New Jersey
plant and to relocate manufacturing to its Belmont, West Virginia plant.
Item 3. Legal Proceedings
In connection with the Spin-off, the Company assumed from Cyanamid
substantially all liabilities for legal proceedings relating to Cyanamid's
chemicals businesses, other than any legal proceedings related to
remediation of Cyanamid's Bound Brook facility. As a result, although
Cyanamid is the named defendant in cases commenced prior to the Spin-off,
the Company is the party in interest and is herein described as the
defendant.
- 13 -
The Company is a defendant in twelve cases pending in state courts in
Jefferson, Dallas, Harrison and Hidalgo counties, Texas in which many
plaintiffs seek damages for injuries allegedly due to exposure to benzene,
butadiene, asbestos or other chemicals. Six of the cases involve several
hundred plaintiffs, while the remainder involve substantially fewer
plaintiffs; all of these cases involve multiple defendents. The Company
believes that its involvement in all but three of these cases results from
its former 50% ownership of Jefferson Chemical Company, which the Company
disposed of in 1975. It is not known at this time how many plaintiffs
eventually will assert claims against the Company.
The Company is one of many defendants in suits filed by approximately 26
former employees of Boeing-Vertol in state and federal courts in
Pennsylvania alleging exposure to asbestos-containing products. Of these
suits, 14 are inactive because plaintiffs have not yet developed any
symptoms and 12 are active. Most of these suits are still in the discovery
stage.
The Company is the defendant in a class action filed in Jefferson Parish
Court, Louisiana on behalf of persons residing in the city of Kenner,
Louisiana claiming damages allegedly caused by a sulfur dioxide emission on
August 11, 1992 from the Fortier facility. Prior to consolidation and
certification of the class, the original 29 cases had been remanded to
state court following a federal court ruling that the plaintiffs did not
individually assert damages in excess of the federal jurisdictional amount
of $50,000.
The Company is also the defendant in two class actions filed in Jefferson
Parish Court, Louisiana, on behalf of persons who allegedly sustained
injury as a result of an explosion and fire at the Company's Fortier
facility on February 21, 1996. The Company has not yet conducted any
discovery in these cases and, therefore, has no information on whether, or
to what extent, any members of the alleged class actually suffered any
injury.
The Company is one of several alleged processors of lead, lead pigments
and/or lead-based paints named as defendants in five cases pending in state
and federal courts in the states of New York and Ohio. The first suit,
filed in New York Supreme Court by the City of New York, the New York
Housing Authority, and the New York City Health and Hospitals Corporation,
seeks damages for the cost of removing lead-based paints from New York
City-owned buildings. The second suit, also filed in New York Supreme
Court, was brought on behalf of two minor children, who seek damages for
personal injuries allegedly caused by ingestion of lead-based paints. The
third suit is a class action pending in the United States District Court
for the Southern District of New York in which two minor children have
intervened and filed a complaint against the Company and six other alleged
processors of lead, lead pigments and/or lead-based paints seeking
injunctive relief, consisting of orders requiring the defendants to
contribute to courtadministered funds to (i) pay for medical monitoring of
class members; (ii) provide abatement of lead-based paint hazards in
dwellings in the city of New York where class members reside; and (iii)
provide notification to class members. The fourth case was brought in New
York Supreme Court by a single plaintiff who claims to have been injured
due to the presence of lead-based paints in buildings in which he resided.
In all four cases, the Company is named a defendant as the alleged
successor to the MacGregor Lead Company, from which the Company purchased
certain assets in 1971. The fifth
- 14 -
case is a class action brought in the Court of Common Pleas in Cuyahoga
County, Ohio on behalf of children with blood levels of lead greater than
20 micrograms per deciliter.
The EPA has brought an administrative action against the Company, alleging
certain violations of the boiler and industrial furnace regulations which
apply to the industrial furnace at the Company's Kalamazoo plant. The EPA's
complaint demands approximately $420,000 in penalties, primarily for
paperwork violations. In summary disposition proceedings, the
Administrative Law Judge ruled in favor of the Company in two of the
original six counts of the complaint; the remaining counts will be
adjudicated.
In February 1996, in an action brought against the Louisiana Department of
Environmental Quality ("DEQ") by the Louisiana Environmental Action
Network, the Louisiana Court of Appeals vacated and set aside a decision
(the "Decision") of the DEQ granting the Company an exemption from
Louisiana hazardous waste land disposal restrictions in order to operate
five waste disposal deep wells at the Fortier facility. The Court ruled
that the Decision was inadequate because it did not contain basic and
ultimate findings and articulate a rational connection between those
findings and the issuance of the exemption. The Court remanded the action
to the DEQ for the issuance of findings to support approval of the
exemption. Subsequently, the DEQ reissued the Decision in accordance with
the greater explanatory requirements of the Court of Appeals judgment, and
the plaintiffs have now appealed. Use of the deep wells is essential to
continued operation of the acrylonitrile plant at the Fortier facility. The
Company continues to operate the deep wells.
See also "Environmental Matters" under "Business" in Item 1, and Note 9 of
the Notes to the Consolidated Financial Statements in Item 8, which are
incorporated by reference herein.
In addition to liabilities with respect to the specific cases described
previously, because the production of certain chemicals involves the use,
handling, processing, storage and transportation of hazardous materials,
and because certain of the Company's products constitute or contain
hazardous materials, the Company has been subject to claims of injury from
direct exposure to such materials and from indirect exposure when such
materials are incorporated into other companies' products. There can be no
assurance that as a result of past or future operations, there will not be
additional claims of injury by employees or members of the public due to
exposure, or alleged exposure, to such materials. Furthermore, the Company
also has exposure to present and future claims with respect to workplace
exposure, workers' compensation and other matters, arising from events both
prior to and after the Spin-off. There can be no assurance as to the actual
amount of these liabilities or the timing thereof.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of any class during
the fourth quarter of 1996.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Company is listed on the New York Stock Exchange.
On March 13, 1997, there were approximately 20,000 holders of record of the
Common Stock of the Company.
The high and low stock prices for each quarter during 1996 and 1995, which
were restated to reflect the three-for-one stock split, were:
1Q 2Q 3Q 4Q
- --------------------------------------------------------------------------------
1996
High 29 11/24 31 5/12 39 1/2 40 7/8
Low 20 3/8 27 25 1/3 34 3/8
1995
High 13 11/12 13 11/12 20 7/24 21 5/12
Low 10 7/12 10 7/8 13 2/3 17 11/12
- -------------------------------------------------------------------------------
No dividends have been paid on the Common Stock of the Company since its
inception, and the Company currently contemplates that it will not pay cash
dividends on the Common Stock in the foreseeable future. In addition, the
Company is restricted from paying dividends in excess of certain amounts
determined in accordance with the terms of its Series C Preferred Stock and
its bank credit facility. See Notes 8 and 15 of the Notes to the
Consolidated Financial Statements in Item 8, which are incorporated by
reference herein.
Item 6. Selected Financial Data
FIVE-YEAR SUMMARY
(Dollars in millions, except per share amounts) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of operations data:
Net sales $ 1,259.6 $ 1,260.1 $ 1,101.3 $1,008.1 $1,044.7
Manufacturing cost of sales 898.1 912.2 817.9 959.9 819.9
Research and process development 40.2 44.2 40.0 42.7 34.1
Selling and technical services, and administrative and general 185.2 181.0 174.9 176.7 171.1
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations 136.1 122.7 68.5 (171.2)(1) 19.6
Interest and other income (expense), net 10.0 10.4 12.2 0.1 (7.0)
Interest expense 4.0 1.0 0.1 2.3 1.2
Income tax provision (benefit) 56.9 (136.2) 34.6 126.6(2) (7.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before earnings of associated companies 85.2 268.3 46.0 (300.0) 18.5
Equity in net earnings of associated companies 14.9 13.9 10.1 14.3 9.1
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of accounting changes 100.1 282.2 56.1 (285.7) 27.6
Cumulative effect of accounting changes -- -- -- (219.8)(3) --
Net earnings (loss) 100.1 282.2 56.1 (505.5) 27.6
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends on preferred stock -- (10.7) (14.6) (0.6) --
Excess of repurchase price over related book value of
Series A Stock and Series B Stock -- (195.2) -- -- --
Net earnings (loss) available for common stockholders $ 100.1 $ 76.3 $ 41.5 $ (506.1) $ 27.6
Net earnings per common share
Primary $ 2.01 $ 1.80 $ 1.05 $ -- $ --
Fully diluted $ 2.01 $ 1.43 $ .84 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
- 16 -
Other data
(At end of period, unless otherwise noted):
Additions to plants, equipment and facilities for the year
ended December 31 $ 72.5 $ 97.2 $ 116.1 $ 110.6 $ 100.8
Current assets 416.3 404.0 439.0 331.0 255.7
Current liabilities 312.8 317.7 320.1 262.1 203.1
Working capital 103.5 86.3 118.9 68.9 52.6
Plants, equipment and facilities 1,339.7 1,317.2 1,247.5 1,333.3 1,316.4
Net depreciated cost 582.2 605.7 586.7 581.4 576.5
Total assets 1,261.1 1,293.8 1,199.4 1,082.1 1,020.7
Long-term debt 89.0 66.0 -- -- 5.7
Other noncurrent liabilities 544.9 567.2 596.1 588.8 160.1
Redeemable preferred stock -- -- 199.9 199.9 --
Total stockholders' equity 314.4 342.9 83.3 31.4 651.8
See accompanying Notes to Consolidated Financial Statements
(1) Includes provisions for environmental remediation of $162.3 recorded in the
third quarter of 1993 and the ongoing effect of a change in accounting principle
related to postretirement benefit expenses of $24.0.
(2) In addition to the charges discussed above in Note 1, a valuation allowance
of $193.0 was recorded as part of the 1993 income tax provision relating to
certain deferred tax assets existing as of December 31, 1993.
(3) Includes charge of $230.4 related to adoption of SFAS No. 106, "Accounting
for Postretirement Benefit Obligations other than Pensions" and benefit of $10.6
related to the adoption of SFAS No. 109, "Accounting for Income Taxes."
The selected financial data should be read in conjunction with the
Consolidated Financial Statements. See Item 8.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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. See Item 8. Dollars are in millions except share and per share
amounts.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship that certain items in
the Company's Consolidated Statements of Income bear to net sales:
Years Ended December 31,
1996 1995 1994
Net sales 100.0% 100.0% 100.0%
Manufacturing cost of sales 71.3 72.4 74.3
- --------------------------------------------------------------------------------
Gross profit 28.7 27.6 25.7
Selling and technical services 11.2 10.8 11.9
Research and process
development 3.2 3.5 3.6
Administrative and general 3.5 3.6 4.0
Earnings from operations 10.8 9.7 6.2
- --------------------------------------------------------------------------------
Net earnings 7.9 22.4(1) 5.1
Excess of repurchase price
over related book value
of Series A Stock and
Series B Stock -- (15.5) --
- 17 -
Dividends on preferred stock -- (0.8) (1.3)
Net earnings available for
common stockholders 7.9% 6.1% 3.8%
- --------------------------------------------------------------------------------
(1) Includes the 15% effect of a partial reversal of the tax valuation
allowance.
NET SALES BY PRODUCT CATEGORY
The Company's net sales by product category are set forth below.
Years Ended December 31,
1996 1995 1994
-------- -------- --------
Specialty Chemicals $ 744.7 $ 731.0 $ 676.2
Specialty Materials 320.5 305.6 272.8
Building Block Chemicals(1) 194.4 223.5 152.3
$1,259.6 $1,260.1 $1,101.3
(1) More than half of the Company's production of building block chemicals were
used internally in the manufacture of specialty chemicals, specialty materials
and other building block chemicals. Such internal usage is not reflected in net
sales of building block chemicals.
The Company has a 50% interest in each of five unconsolidated associated
companies with aggregate net sales of $600.7 in 1996, $601.3 in 1995 and $500.7
in 1994, of which approximately 16.0% were sales of specialty chemicals in 1996
and 19.0% in 1995 and 1994 and approximately 84.0% were sales of specialty
materials in 1996 and 81.0% in 1995 and 1994.
YEAR ENDED DECEMBER 31, 1996, COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net sales for 1996 were $1,259.6, which was essentially flat in comparison with
1995 net sales of $1,260.1. The Company's specialty product lines grew 2.8%
principally on higher volumes. Building Block Chemical net sales decreased 13.0%
as a result of lower selling prices and selling volumes in certain products.
International net sales grew to 39.1% of total net sales in 1996 from 37.9%
of total net sales in 1995. On a regional basis, sales in the United States
declined primarily due to decreased methanol sales as a result of lower selling
prices and volumes plus the effect of divested products in 1996. Earnings from
operations were up significantly in the United States as a result of cost
reduction programs and an improved product mix. Also included in 1995 results
for the region were startup costs associated with the expanded acrylonitrile
facility. Sales and earnings from operations in the Asia/Pacific region were
down principally due to lower export acrylic fiber and acrylonitrile selling
prices.
Specialty Chemicals net sales increased $13.7, or 1.9%, with the increase
spread among all regions of the world. Also affecting net sales in 1996 was the
effect of divesting certain minor product lines, which had a negative impact on
the year to year comparison in net sales. The most significant sales increases
were in paper chemicals, where sales increased principally in North America as a
result of a rebound in paper industry production and new business. Europe and
Latin American sales also had modest increases for the year. Mining chemical net
sales improved in most regions as new customers converted over to higher
technology products. Polymer Additives net sales increased primarily in the
North American and Asia/Pacific regions. Selling prices were up less than 1.0%
for Specialty Chemicals in 1996.
Specialty Materials net sales increased $14.9, or 4.9%. Aerospace Materials
net sales increased 9.3% due to volume increases at existing accounts and new
customers. In addition, aircraft build rates started to improve in late 1996,
and this trend is expected to continue in 1997. Acrylic Fibers net sales
increased 2.0%, but volume was up 11.0%. Selling prices for acrylic fibers were
down with the bulk of the price decrease coming from export sales.
Building Block Chemical net sales decreased $29.1, or 13.0%, primarily due
to acrylonitrile and methanol. Acrylonitrile volume was up due to the expanded
plant being in service for a full year, but this was more than offset by lower
selling prices. Methanol sales decreased as a result of lower selling prices in
the first half of 1996. In addition, methanol volumes were down in the first
half of 1996 as a result of production downtime due to repairs as well as a
shutdown in January 1996 due to poor economic conditions caused by low selling
prices coupled with high natural gas costs.
Manufacturing cost of sales improved to 71.3% of net sales from 72.4% of
net sales for 1995. Much of the improvement resulted from cost reduction
programs, improved plant efficiencies in batch operation facilities, and an
improved product mix as the Company divested or de-emphasized low margin
products. Raw materials were generally lower with the exception of natural gas,
which was significantly higher than the year ago period. Natural gas prices are
expected to remain well above 1995 levels in 1997. Selling prices
- 18 -
were slightly higher in the specialty businesses with the exception of export
acrylic fibers, where prices were down significantly. The Company does not plan
on any significant price increases in 1997.
Selling and technical service expenses increased $5.0 and increased as a
percent of sales to 11.2% from the 10.8% of sales experienced in 1995. The 1996
amount reflected the full year effect of certain investments the Company made in
this area during 1995. In particular, investments in the international regions
have increased, partially offset by reduced expenses in North America, where the
Company has been able to rationalize its costs. This trend is expected to
continue in 1997.
Research and process development expenses decreased $4.0 and were 3.2% of
net sales in 1996. The decrease was the result of a reduction in non-value-added
overhead costs at our research facilities completed in late 1995. Technical
spending as it relates to our product lines increased from the prior year as
planned.
Administrative and general expenses decreased $0.8 in 1996 and decreased as
a percent of net sales to 3.5% from 3.6% in 1995. The Company continues to focus
on tight cost controls in this area and expects spending for 1997 to remain at
this level or possibly decrease.
Interest and other income (expense), net, decreased $0.4, principally as a
result of reduced interest income on lower cash balances maintained during the
year, partially offset by other income from royalties and technology sales and
fees.
Interest expense increased $3.0 due to higher levels of debt outstanding
primarily as a result of the Company's stock repurchase program.
The income tax provision for 1996 reflects an effective tax rate of 40.0%.
This was a decrease of approximately 3.0%, excluding the effect of a tax
valuation reversal in 1995. The lower effective rate was the result of a focused
tax strategy designed to reduce, where applicable, the Company's tax burden. In
addition, a one-time benefit of $1.4 was recorded in the fourth quarter to
recognize the tax effect of a noncash transaction completed in December 1996.
Equity in net earnings of associated companies, all of which are 50% owned,
represents the Company's after tax share of its associates' earnings. Such
earnings increased $1.0 from 1995. Increased earnings were reported by CYRO
Industries, reflecting the capacity expansions completed in the second half of
1995 plus lower raw material costs. Earnings of Dyno-Cytec improved over the
prior year as a result of higher sales and lower raw material costs. Partially
offsetting the above were reduced earnings from Criterion Catalyst Company. The
lower earnings were the result of several factors: the purchase of high cost
intermediate product from third parties due to capacity constraints, start-up
costs related to capacity expansions and lower hydroprocessing catalyst selling
prices.
Dividends on preferred stock were essentially eliminated as the Company
repurchased all of its Series A Cumulative Adjustable Preferred Stock ("Series A
Stock") and Series B Cumulative Convertible Preferred Stock ("Series B Stock")
in the second half of 1995. Dividends on the outstanding Series C Cumulative
Preferred Stock ("Series C Stock") were negligible.
Net earnings available for common stockholders increased $23.8, or 31.2%,
over the year ago period.
YEAR ENDED DECEMBER 31, 1995, COMPARED WITH YEAR ENDED DECEMBER 31, 1994
In 1995, net sales were $1,260.1, an increase of $158.8, or 14.4%, as compared
with 1994. The net sales increase was due primarily to improved sales volume and
higher selling prices in the majority of the Company's product lines.
International net sales grew to 37.9% of net sales in 1995 from 31.1% of net
sales in 1994.
Specialty Chemicals net sales increased $54.8, or 8.1%, with the largest
increases coming from international operations. The European net sales increase
was widely spread among most product lines and was due to improved economies,
market share gains and the favorable effect of exchange rates. Asia/Pacific net
sales gains were made primarily in Korea, Taiwan and Australia and across most
product lines. Latin American net sales increased as demand for the Company's
higher technology products continued to grow. U.S. net sales of Specialty
Chemicals increased $16.8, or 4.0%. U.S. net sales increases in the first half
of 1995 were offset in part by decreases in the second half of 1995 as a result
of what management believes to be a correction for high inventory levels by
certain customers and a slower growth rate in the U.S. economy. This
particularly impacted the polymer additives product line and coatings and resin
product lines.
Specialty Materials net sales increased $32.8, or 12.0%. Aerospace
Materials reported the largest increase in net sales principally due to new
business in the aerospace sector. Acrylic fibers reported a strong gain due
primarily to higher selling prices. Acrylic fiber selling volume was down in the
fourth quarter due to sharply reduced exports to China.
Building Block Chemicals net sales increased $71.2, or 46.7%. Methanol
sales accounted for $12.3 of the increase, since the methanol plant was still
under construction until September 1994. Partially offsetting the higher sales
volume were methanol selling prices that were much lower than during the fourth
quarter of 1994 and unscheduled maintenance downtime in the methanol
manufacturing facility in the third quarter of 1995. Acrylonitrile sales
increased due to additional capacity available from the expanded acrylonitrile
manufacturing plant, which started up in the second quarter of 1995. In
addition, acrylonitrile selling prices were well above the prior year. Partially
offsetting the higher acrylonitrile sales was unscheduled maintenance downtime
in the acrylonitrile manufacturing facility in the third quarter of 1995.
Acrylamide sales also increased over the prior year period, principally in the
United States and Europe.
Manufacturing cost of sales improved to 72.4% of net sales in 1995 as
compared with 74.3% of net sales for 1994. Much of the improvement was due to
manufacturing cost efficiencies as costs, excluding raw materials and utilities,
increased at a much lower rate than the growth in net sales. Overall, selling
prices were up for the year, but not in all product lines due to competitive
pressures. The
- 19 -
bulk of the increase in selling prices occurred in the first nine months of
1995. Raw material costs started to decline in the third quarter of 1995 and
continued through the fourth quarter, although not for all raw materials.
Selling and technical service expenses increased $4.9, but decreased as a
percent of net sales to 10.8% from 11.9% in 1994. The increase in expenses
primarily reflected the full-year effect of the increased investment in
international markets. The decrease as a percent of net sales indicates that the
Company has been able to leverage its investment in this area.
Research and process development expenses increased $4.2, but were slightly
lower as a percent of net sales in 1995 as compared with 1994. The increase in
expenses was the result of costs associated with certain patent litigation
matters and higher spending on applications technology. The increase in spending
on applications technology was in line with the Company's targeted spending for
1995.
Administrative and general expenses increased $1.2 in 1995, but decreased as
a percent of net sales to 3.6% from 4.0% in 1994. The increase in expenses was
the result of the full-year impact of costs added in the second half of 1994 as
the Company started up certain functions as a result of becoming an independent
public company.
Interest and other income (expense), net, decreased $1.8 principally as a
result of decreased interest income on lower cash balances and a gain from the
sale of certain assets related to a minor product line which was included in the
third quarter of 1994.
Except for the partial reversal of the tax valuation allowance of $193.0 in
the fourth quarter of 1995, the income tax provision in each period was based on
the estimated effective tax rate for the full year.
Equity in net earnings of associated companies for 1995 increased $3.8 from
1994. Increased earnings were recorded by CYRO Industries as a result of higher
selling prices and increased sales of methyl methacrylate monomer due to a plant
expansion. Earnings from Criterion Catalyst Company also improved due to higher
selling volume, particularly of new and improved products. These increases were
partially offset by losses from Mitsui-Cytec due to expenses associated with the
start-up of a new resins manufacturing facility and the shutdown of an existing
resins facility.
Dividends on preferred stock were lower than the prior year period due to
the repurchase of all of the Series A Stock and Series B Stock. The reduced
dividends, offset in part by lower interest income and higher interest expense
from these transactions as well as the reduced fully diluted common shares
outstanding, had a positive impact of approximately $0.15 for the full year on
fully diluted earnings per common share. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Financial Condition."
Net earnings available for common stockholders reflected a $195.2 reduction
recorded in the fourth quarter of 1995 upon the completion of the repurchase of
the Series B Stock. The $195.2 represented the excess of the repurchase price of
the Series A Stock and Series B Stock over the related book value.
- 20 -
LIQUIDITY AND FINANCIAL CONDITION
At December 31, 1996, the Company's cash balance was $20.4, an increase of $8.4
from year end 1995.
Net cash flows provided by operating activities totaled $170.8 for the year
ended December 31, 1996, compared with $160.8 in the same period of 1995. Cash
was favorably impacted on by increased net earnings, after adjusting for the
partial reversal of the tax valuation allowance in 1995, and improved accounts
receivable due to lower days outstanding. Inventory levels increased primarily
in the international regions as the Company expanded its presence outside of the
United States. Other liabilities decreased primarily as a result of increased
environmental spending in 1996 as more projects reached the remediation phase of
activity.
Environmental remediation spending for the years ended December 31, 1996,
1995 and 1994, was $26.8, $22.1, and $15.7, respectively. There can be no
assurances that the Company's annual cash expenditures will not be higher in the
future.
While it is not feasible to predict the outcome of all pending
environmental suits and claims, it is reasonably possible that there will be a
necessity for future provisions for environmental costs which, in management's
opinion, will not have a material effect on the financial position of the
Company, but could be material to the results of operations of the Company in
any one accounting period. The Company cannot estimate any additional amount of
loss or range of loss in excess of the recorded amount. Moreover, environmental
liabilities are paid over an extended period, and the timing of such payments
cannot be predicted with any confidence. See Note 9 of the Notes to the
Consolidated Financial Statements with respect to environmental matters.
The Company is also a party to various other claims and routine litigation
arising in the normal course of its business. Based on the advice of counsel,
management believes that the resolution of such claims and litigation will not
have a materially adverse effect on the financial position of the Company but
could be material to the results of operations of the Company in any one
accounting period.
Net cash flows used for investing activities totaled $41.0. Capital
expenditures for the year ended December 31, 1996 of $72.5 were lower than for
the corresponding period in 1995 due primarily to the acrylonitrile expansion
which was completed in 1995. Capital expenditures for the year 1997 are expected
to be in the range of $90.0 to $95.0.
During 1996, the Company received $25.0 from its associated company, CYRO
Industries, as a return of capital. CYRO Industries financed the distribution in
part by bank borrowings of $40.0. Also during the fourth quarter of 1996, the
Company sold the majority of the assets of its aluminum sulfate business and
received approximately $11.0 in cash proceeds before taxes.
The Company believes that, based on internal cash generation and current
levels of liquid assets, it will be able to fund operating cash requirements and
planned capital expenditures in 1997.
Net cash flows used for financing activities totaled $121.5 compared with
$161.0 in 1995. In 1995 the Company repurchased its Series A Stock and the
Series B Stock for a total of $395.1. Partially offsetting the above use of cash
in 1995 were proceeds from the
Company's stock offering, net of discount and expenses, of $181.2 and net
borrowings of $66.0. The reduction in preferred stock dividend payments of $14.4
favorably affected net cash flows used for financing activities in 1996. Net
cash flows used for financing activities in 1996 were principally affected by
the purchase of treasury stock of $148.7. In February 1996, the Board of
Directors approved a program to repurchase up to 1,700,000 (pre-split basis)
shares of the Company's common stock, of which approximately 885,400 shares were
repurchased prior to the Company's three-for-one stock split in July 1996. The
remaining authorized balance was adjusted for the stock split to bring the total
shares authorized for repurchase to approximately 3,329,200. Pursuant to this
program, for the year ended December 31, 1996, the Company repurchased
approximately 3,033,000 shares of its common stock on the open market
(equivalent to 4,803,800 on a post-split basis) at a cost of approximately
$148.7, leaving 296,200 shares remaining authorized to be repurchased. The
Company anticipates completing its current stock repurchase program during the
first quarter of 1997. Depending on the level, price and timing of repurchases,
borrowings may be required. In connection with the repurchase program, the
Company wrote put warrants on 1,500,000 shares of its common stock (on a
post-split basis) for which it received premiums of approximately $1.7 in cash.
At December 31, 1996, all warrants expired at no cost to the Company.
In June 1995, the Company executed a five-year (due on June 1, 2000) $150.0
unsecured revolving credit facility agreement (the "Credit Agreement"). Funds
are available for general corporate purposes including, without limitation, for
purposes of making acquisitions permitted under the Credit Agreement. At
December 31, 1996 and 1995, outstanding borrowings under the Credit Agreement
were $88.0 and $65.0, respectively. At December 31, 1996, the effective interest
rate on borrowings was 5.876%, which was based on short-term London Interbank
Offered Rate ("LIBOR") plus a .25% margin. The Credit Agreement contains
covenants customary for such facilities, including a leverage ratio and fixed
charge coverage ratio. Under the terms of the Credit Agreement, the Company had
an additional $62.0 available at December 31, 1996.
The Credit Agreement also provides that it is an event of default if any
person other than American Home Products Corporation and its subsidiaries
acquires more than 20% of the voting power of all voting stock of the Company.
The Company was in compliance with all material terms, covenants and conditions
of the Credit Agreement at December 31, 1996. Other debt was $1.0 at both
December 31, 1996 and 1995.
Under the terms of its Series C Stock, the Company must maintain a
debt-to-equity ratio of no more than 2-to-1 and must not incur more than $150.0
of debt unless the Company's equity is in excess of $200.0, in which case the
Company may incur additional debt as long as its debt-to-equity ratio is not
more than 0.75-to-1. At December 31, 1996, the Company had $89.0 in debt, $314.3
in equity, as defined in the Series C Stock covenants, and the ability to incur
up to an additional $146.7 in debt under the terms of the Series C Stock.
The Company filed with the Securities and Exchange Commission during 1996 a
shelf registration statement (which has yet to become effective) covering $300.0
of senior debt securities which may be offered by the Company from time to time.
Proceeds of any sale can be used for general corporate purposes, which may
include repayment of indebtedness and other liabilities, share repurchases,
additions to working capital, capital expenditures and acquisitions.
During 1996 and 1995, the Company made contributions to its VEBA to fund
certain employee and retiree health care benefits. The balance in the VEBA
trusts at December 31, 1996 and 1995 was $25.2 and $20.0, respectively.
The Company had foreign currency contracts at December 31, 1996 and 1995.
The contracts are utilized by the Company to hedge certain foreign currency
denominated receivables and payables and are not used for speculation. All
contracts are for periods of six months or less. At December 31, 1996, the
Company had net contracts to sell $14.7 of primarily European currencies for
U.S. dollars, and Dutch guilders having a value equivalent of $10.4 for other
European currencies. At December 31, 1995, the Company had net contracts to sell
$25.0 of primarily European currencies for U.S. dollars, and Dutch guilders
having a value equivalent of $1.5 for other European currencies. In addition,
the Company occasionally hedges to reduce its exposure to future price changes
of natural gas used in the Company's manufacturing activities. At December 31,
1996, the Company had contracts to buy natural gas at set future prices with
settlement dates through March 31, 1997. The maturity of these contracts highly
correlates to the actual purchases of the commodity. The contracts outstanding
at December 31, 1996 and 1995, were not material to the Company's consolidated
financial statements. During 1996, the Company entered into interest rate swap
agreements to manage its debt portfolio. These agreements were immaterial to the
Company's financial statements at December 31, 1996. There were no interest rate
swaps outstanding at December 31, 1995.
The impact of inflation on the Company is considered insignificant as the
rate of inflation has remained relatively low in recent years.
OTHER MATTERS
On January 31, 1997, the Company completed the sale of its Acrylic Fibers
business to a subsidiary of Sterling Chemicals, Inc. The assets transferred
include Cytec's plant located near Pensacola, Florida. The Company received
approximately $88.0 in cash, subject to certain post-closing adjustments, and
received other consideration including the assumption by Sterling of certain
contingent and other liabilities, with a value of approximately $15.0. The
Company expects to record a gain from this transaction in the first quarter of
1997. Cytec's Acrylic Fibers business had sales of approximately $138.7, $136.1
and $121.1 in 1996, 1995 and 1994, respectively.
On November 8, 1996, the Company announced a restructuring proposal for its
Botlek, Netherlands plant. The restructuring would include a major reengineering
of the plant organization, relocation of certain manufacturing operations to
other Cytec sites and staff
- 21 -
reductions. The proposal was subject to negotiations with the Works Council and
the Unions. The negotiations were completed in February and the Company is
moving forward with the restructuring. The Company expects to record a charge
against earnings in the first quarter of 1997 related to this transaction.
On January 16, 1997, the Company announced the consolidation of its
surfactant and docusate manufacturing at its Willow Island, West Virginia
facility. As a result of this consolidation, the Company will close its Linden,
New Jersey plant. The phasedown of the Linden facility will occur over
approximately the next 18 months. The Company expects to record a charge against
earnings in the first quarter of 1997 related to this transaction.
The Company believes that the impact of the above divestiture and
restructurings will have an immaterial effect on the results of operations for
1997.
COMMENTS ON
FORWARD-LOOKING STATEMENTS
A number of the statements made by the Company in this Management's Discussion
and Analysis, or in other documents, including but not limited to the Company's
Annual Report to Stockholders, its press releases and its periodic reports to
the Securities and Exchange Commission, may be regarded as "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995.
Forward-looking statements include, among others, statements concerning the
Company's outlook for 1997, pricing trends and forces within the industry, cost
reduction strategies and their results, long-term goals of the Company and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends, and similar expressions concerning matters that are not
historical facts.
All predictions as to future results contain a measure of uncertainty and,
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in the general economy, in demand for the
Company's products or in the costs and availability of its raw materials; the
actions of competitors; technological change; changes in employee relations,
including possible strikes; government regulations; litigation, including its
inherent uncertainty; difficulties in plant operations and materials
transportation; environmental matters; and other unforeseen circumstances. A
number of these factors are discussed in the Company's filings with the
Securities and Exchange Commission.
- 22 -
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars in millions, except share and per share amounts) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 20.4 $ 12.0
Accounts receivable, less allowance for doubtful accounts of $11.1 in 1996 and $11.6 in 1995 206.5 216.8
Inventories 105.6 88.1
Deferred income taxes 65.1 74.5
Other current assets 18.7 12.6
Total current assets 416.3 404.0
Equity in net assets of and advances to associated companies 143.7 155.1
- ------------------------------------------------------------------------------------------------------------------------------------
Plants, equipment and facilities, at cost 1,339.7 1,317.2
Less accumulated depreciation (757.5) (711.5)
Net plant investment 582.2 605.7
- ------------------------------------------------------------------------------------------------------------------------------------
Intangibles resulting from business acquisitions, net of accumulated amortization 17.1 18.0
Deferred income taxes 89.6 107.1
Other assets 12.2 3.9
Total assets $1,261.1 $1,293.8
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 101.3 $ 98.3
Accrued expenses 205.1 218.3
Income taxes payable 6.4 1.1
Total current liabilities 312.8 317.7
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Long-term debt 89.0 66.0
Other noncurrent liabilities 544.9 567.2
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Stockholders' equity
Preferred stock, 20,000,000 shares authorized, issued and outstanding 4,000 shares,
Series C, $.01 par value at liquidation value of $25 share 0.1 0.1
Common Stock $.01 par value per share, 75,000,000 shares authorized, issued
48,377,683 shares in 1996, 48,315,193 shares in 1995 0.5 0.2
Additional paid-in capital 229.7 222.6
Retained earnings 217.9 117.8
Unearned compensation (2.4) (2.6)
Additional minimum pension liability -- (5.4)
Accumulated translation adjustments 8.8 10.3
Treasury stock, at cost, 2,883,485 shares in 1996, 6,917 shares in 1995 (140.2) (0.1)
Total stockholders' equity 314.4 342.9
Total liabilities and stockholders' equity $1,261.1 $1,293.8
- ------------------------------------------------------------------------------------------------------------------------------------
Contingent Liabilities and Commitments (Notes 4 and 9)
See accompanying Notes to Consolidated Financial Statements.
- 23 -
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(Dollars in millions, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,259.6 $ 1,260.1 $ 1,101.3
Manufacturing cost of sales 898.1 912.2 817.9
Selling and technical services 140.9 135.9 131.0
Research and process development 40.2 44.2 40.0
Administrative and general 44.3 45.1 43.9
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Earnings from operations 136.1 122.7 68.5
Interest and other income (expense), net 10.0 10.4 12.2
Interest expense 4.0 1.0 0.1
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 142.1 132.1 80.6
Income tax provision (benefit) 56.9 (136.2) 34.6
Earnings before earnings of associated companies 85.2 268.3 46.0
Equity in net earnings of associated companies 14.9 13.9 10.1
Net earnings 100.1 282.2 56.1
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Dividends on preferred stock -- (10.7) (14.6)
Excess of repurchase price over related book value of
Series A Stock and Series B Stock -- (195.2) --
Net earnings available for common stockholders $ 100.1 $ 76.3 $ 41.5
Earnings per common share
Primary $ 2.01 $ 1.80 $ 1.05
Fully diluted $ 2.01 $ 1.43 $ .84
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See accompanying Notes to Consolidated Financial Statements
- 24 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(Dollars in millions) 1996 1995 1994
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Cash flows provided by (used for) operating activities
Net earnings $ 100.1 $ 282.2 $ 56.1
Noncash items included in net earnings:
Equity in undistributed net earnings of associated companies (14.6) (17.2) (9.9)
Depreciation 79.7 83.0 78.1
Amortization 9.3 6.9 7.9
Deferred income taxes 23.7 (181.6) (7.9)
Other -- -- (1.2)
Changes in operating assets and liabilities:
Accounts receivable 7.6 6.3 (18.7)
Inventories (18.4) (12.4) 0.5
Accounts payable 3.7 4.8 (10.8)
Accrued expenses (3.2) (9.4) 60.1
Income taxes payable 10.5 (4.2) 5.8
Other assets (5.9) 11.1 4.4
Other liabilities (21.7) (8.7) (1.9)
Net cash flows provided by operating activities 170.8 160.8 162.5
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Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (72.5) (97.2) (116.1)
Proceeds from dispositions of businesses and sale of assets 13.5 -- 31.1
Return of capital from associated companies 25.0 -- --
Change in other assets (7.0) 11.4 (11.2)
Net cash flows used for investing activities (41.0) (85.8) (96.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used for) financing activities
Purchase of treasury stock (148.7) -- (0.1)
Change in long-term borrowings 23.0 66.0 --
Proceeds from exercise of stock options 2.5 1.3 --
Proceeds received on sale of put warrants 1.7 -- --
Proceeds from stock offering, net of discounts and expenses -- 181.2 --
Purchase of Series A Stock -- (90.0) --
Purchase of Series B Stock -- (305.1) --
Dividend payments on preferred stock -- (14.4) (11.5)
Net cash flows used for financing activities (121.5) (161.0) (11.6)
Effect of exchange rate changes on cash and cash equivalents 0.1 0.3 (0.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 8.4 (85.7) 54.2
Cash and cash equivalents, beginning of year 12.0 97.7 43.5
Cash and cash equivalents, end of year $ 20.4 $ 12.0 $ 97.7
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
- 25 -
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994,
Additional
Preferred Common Paid-In Retained
(Dollars in millions) Stock Stock Capital Earnings
- -----------------------------------------------------------------------------------------
Balance at December 31, 1993 $ 0.1 $ 0.1 $ 23.7 $ --
Net earnings -- -- -- 56.1
Dividends on preferred stock -- -- -- (14.6)
Award of, and changes in, per-
formance and restricted stock -- -- 10.5 --
Amortization of performance
and restricted stock -- -- -- --
Purchase of treasury stock -- -- -- --
Translation adjustment -- -- -- --
- -----------------------------------------------------------------------------------------
Balance at December 31, 1994 0.1 0.1 34.2 41.5
Net earnings -- -- -- 282.2
Dividends on preferred stock -- -- -- (10.7)
Award of, and changes in, per-
formance and restricted stock -- -- 4.9 --
Amortization of performance
and restricted stock -- -- -- --
Issuance of common stock
from stock offering -- 0.1 181.1 --
Excess of repurchase price over
related book value of Series A
Stock and Series B Stock -- -- -- (195.2)
Proceeds received from stock options -- -- 1.3 --
Tax benefit on stock options -- -- 1.1 --
Additional minimum
pension liability -- -- -- --
Translation adjustment -- -- -- --
- -----------------------------------------------------------------------------------------
Balance at December 31, 1995 0.1 0.2 222.6 117.8
Net earnings -- -- -- 100.1
Award of, and changes in, per-
formance and restricted stock -- -- 7.7 --
Amortization of performance and
restricted stock -- -- -- --
Three-for-one stock split -- 0.3 (0.3) --
Purchase of treasury stock -- -- -- --
Exercise of employee stock options -- -- (8.5) --
Proceeds received from stock
options and put warrants -- -- 4.2 --
Tax benefit on stock options -- -- 4.0 --
Additional minimum pension
liability -- -- -- --
Translation adjustment -- -- -- --
Balance at December 31, 1996 $ 0.1 $ 0.5 $ 229.7 $ 217.9
- -----------------------------------------------------------------------------------------
Minimum Accumulated
Unearned Pension Translation Treasury
(Dollars in millions) Compensation Liability Adjustments Stock Total
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $ -- $ -- $ 7.3 $ -- $ 31.2
Net earnings -- -- -- -- 56.1
Dividends on preferred stock -- -- -- -- (14.6)
Award of, and changes in, per-
formance and restricted stock (10.5) -- -- -- --
Amortization of performance
and restricted stock 6.4 -- -- -- 6.4
Purchase of treasury stock -- -- -- (0.1) (0.1)
Translation adjustment -- -- 4.3 -- 4.3
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 (4.1) -- 11.6 (0.1) 83.3
Net earnings -- -- -- -- 282.2
Dividends on preferred stock -- -- -- -- (10.7)
Award of, and changes in, per-
formance and restricted stock (4.9) -- -- -- --
Amortization of performance
and restricted stock 6.4 -- -- -- 6.4
Issuance of common stock
from stock offering -- -- -- -- 181.2
Excess of repurchase price over
related book value of Series A
Stock and Series B Stock -- -- -- -- (195.2)
Proceeds received from stock options -- -- -- -- 1.3
Tax benefit on stock options -- -- -- -- 1.1
Additional minimum
pension liability -- (5.4) -- -- (5.4)
Translation adjustment -- -- (1.3) -- (1.3)
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 (2.6) (5.4) 10.3 (0.1) 342.9
Net earnings -- -- -- -- 100.1
Award of, and changes in, per-
formance and restricted stock (8.2) -- -- 0.1 (0.4)
Amortization of performance and
restricted stock 8.4 -- -- -- 8.4
Three-for-one stock split -- -- -- -- --
Purchase of treasury stock -- -- -- (148.7) (148.7)
Exercise of employee stock options -- -- -- 8.5 --
Proceeds received from stock
options and put warrants -- -- -- -- 4.2
Tax benefit on stock options -- -- -- -- 4.0
Additional minimum pension
liability -- 5.4 -- -- 5.4
Translation adjustment -- -- (1.5) -- (1.5)
Balance at December 31, 1996 $ (2.4) $ -- $ 8.8 $(140.2) $314.4
- ----------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- 26 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share amounts, unless otherwise indicated)
1. GENERAL
On December 17, 1993 (the "Effective Date"), Cytec Industries Inc. (the
"Company") was formed and became an independent public company. American
Cyanamid Company ("Cyanamid") distributed all of the Company's common stock to
existing Cyanamid stockholders (the "Distribution"). Cyanamid retained 100% of
the preferred stock issued by the Company. In 1995, the Company repurchased all
of its Series A Cumulative Adjustable Preferred Stock ("Series A Stock") and
Series B Cumulative Convertible Preferred Stock ("Series B Stock"). Prior to the
Effective Date, the Company was operated as Cytec Industries, a business unit of
Cyanamid. In connection with the Distribution, the Company assumed substantially
all of the assets and liabilities (including certain liabilities pertaining to
environmental matters, retiree health care and life insurance obligations and
pension liabilities) of Cyanamid's global chemicals businesses. During 1994
Cyanamid was acquired by American Home Products Corporation.
2. SUMMARY OF
ACCOUNTING POLICIES
Principles of Consolidation. The financial statements include the accounts of
the Company and its subsidiaries on a consolidated basis. All significant
intercompany transactions and balances have been eliminated. Operations outside
the United States, Canada and Europe are generally included on a fiscal year
basis ending November 30. In prior years, European operations were also reported
on a November 30 fiscal year basis. The effect of the change to current month
reporting is reflected in other income for 1996 and is not considered material
to the results of operations. The equity method of accounting is used for
investments in associated companies (all 50% owned).
Foreign Currency Translation. For most of the Company's international
operations, all elements of financial statements are translated into U.S.
dollars using current exchange rates, with translation adjustments accumulated
in stockholders' equity. For other international operations, certain financial
statement amounts are translated at historical exchange rates with all other
assets and liabilities translated at current exchange rates and the resultant
translation adjustments for these operations recorded in earnings. These
international operations are generally in hyperinflationary economies, all of
which are in Latin America.
Depreciation and Amortization. Depreciation is provided primarily on a
straight-line composite method over the estimated useful lives of various
classes of assets. When such depreciable assets are sold or otherwise retired
from service, their cost, less amounts realized on sale or salvage, is charged
or credited to the accumulated depreciation account. Expenditures for
maintenance and repairs are charged to current operating expenses. Acquisitions,
additions and betterments either to provide necessary capacity, improve the
efficiency of production units, modernize or replace older facilities or install
equipment for protection of the environment, are capitalized. Intangibles
resulting from business acquisitions are carried at cost and amortized over a
period of up to 40 years unless, in the opinion of management, their lives are
limited, or they have sustained a permanent diminution in value, in which case
they are either immediately charged to operations or amortized over lesser
periods.
Cash and Cash Equivalents. Securities with maturities of three months or less
when purchased are considered to be cash equivalents.
Financial Instruments. The carrying values of financial instruments (principally
cash and cash equivalents, accounts receivable, other assets, accounts payable
and long-term debt) included in the Company's consolidated balance sheets
approximated fair values at December 31, 1996 and 1995. Fair values were
determined through a combination of management estimates and information
obtained from independent third parties using the latest available market data.
The Company also uses derivative, or off-balance sheet, financial instruments to
manage exposure to fluctuations in interest rates, foreign exchange rates and
certain raw material prices. Derivative financial instruments currently utilized
by the Company include interest rate swaps, foreign currency exchange contracts
and forward commodity contracts. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes.
Interest rate swap agreements are used to manage the Company's debt
portfolio and involve the exchange of fixed and floating rate interest payments
periodically over the life of the agreements without the exchange of the
underlying principal amounts. The interest differential to be paid or received
on the Company's indebtedness is accrued as interest rates change and recognized
as an adjustment to interest expense in the statement of income.
- 27 -
Foreign currency exchange contracts are utilized by the Company to hedge
receivables and payables, primarily intercompany accounts denominated in a
currency other than the functional currency of the business. The financial
impact of contracts involving intercompany accounts are eliminated in
consolidation. Other transactions' gains or losses are deferred and included in
the basis of the transaction when it is settled.
Forward commodity contracts consist of natural gas contracts traded on
organized exchanges for the purpose of hedging anticipated natural gas
purchases. Gains and losses on these contracts are offset and are recognized as
an adjustment of the purchase price of the hedged inventory item.
Inventories. Inventories are carried at the lower of cost or market. Cost is
determined on the last-in, first-out (LIFO) method for substantially all
inventories in the United States with all other inventories determined on the
first-in, first-out (FIFO) or average cost method.
Income Taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Income taxes have been provided for, assuming repatriation of substantially
all of the undistributed earnings of the Company's foreign subsidiaries and
associated companies.
Postretirement and Postemployment Benefits. The Company sponsors postretirement
and postemployment benefit plans. The net periodic costs are recognized for
these plans as employees render the service necessary to earn the related
benefits.
Earnings per Share. Primary earnings per share are based on earnings after
preferred stock dividend requirements and in 1995, the excess of the repurchase
price over the related book value of Series A Stock and Series B Stock. The
resulting net earnings available for common stockholders is divided by the
weighted average number of shares of common stock outstanding adjusted for
dilutive common stock equivalents (based on 49,678,000 in 1996, 42,368,000 in
1995 and 39,450,477 in 1994). Fully diluted earnings per share are computed as
above, except that in 1995 the Series B Stock (through the date of redemption)
was assumed to be converted into common stock as of the beginning of each period
presented and the related dividend is added back to the primary earnings (based
on 49,913,000 in 1996, 56,903,000 in 1995 and 57,116,100 in 1994).
Stock-Based Compensation. Effective as of January 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") 123, "Accounting For
Stock-Based Compensation." SFAS 123 encourages, but does not require, companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees," and
related Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price at the date of the
grant over the amount an employee must pay to acquire the stock. Because the
Company grants options at a price equal to the market price of the stock at the
date of grant, no compensation expense is recorded. Compensation cost for
performance and restricted stock is recorded based on the quoted market price of
the Company's common stock at the end of the period through the date of vesting.
The fair value of the stock is charged to stockholders' equity and amortized to
expense over the performance periods. Compensation cost for stock appreciation
rights payable in cash is amortized to expense over the maturity period. The
Company, as required, has provided pro forma disclosures of compensation expense
as determined under the provisions of SFAS 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. The
Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as of January
1, 1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the cost to sell. Adoption of this Statement did not have an impact on the
Company's financial position or results of operations as the Company previously
followed the basic tenets of this statement.
- 28 -
Risks and Uncertainties. The Company is engaged primarily in the manufacture and
sale of a highly diversified line of chemical products throughout the world. The
Company's revenues are dependent on the continued operation of its various
manufacturing facilities. The operation of chemical manufacturing plants
involves many risks, including the breakdown, failure or substandard performance
of equipment, natural disasters and the need to comply with directives of
government agencies. The occurrence of material operational problems, including
but not limited to the above events, may have a materially adverse effect on the
productivity and profitability of a particular manufacturing facility, or with
respect to certain facilities, the Company as a whole, during the period of such
operational difficulties.
The Company's operations are also subject to various hazards incidental to
the production of industrial chemicals, including the use, handling, processing,
storage and transportation of certain hazardous materials. These hazards can
cause personal injury and loss of life, severe damage to and destruction of
property and equipment, environmental damage and suspension of operations.
Claims arising from any future catastrophic occurrence involving the Company may
result in the Company being named as a defendant in lawsuits potentially
asserting large claims.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. No single
customer accounted for more than 5% of the Company's net sales. The Company is
exposed to credit losses in the event of nonperformance by counterparties on
interest rate swaps and other risk management instruments. The counterparties to
these transactions are major financial institutions and organized exchanges,
thus the Company considers the risk of default to be minimal. The Company does
not require collateral or other security to support the financial instruments
with credit risk.
In conformity with generally accepted accounting principles, management of
the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosures of contingent
liabilities and pro forma compensation expense to prepare the Company's
consolidated financial statements. Actual results could differ from these
estimates.
3.DISPOSITIONS AND
OTHER TRANSACTIONS
In April of 1994, the Company and its partner ("Partner") in its former
phosphate mining business negotiated the early buyout of certain notes
receivable from a third party, in which the Company received $18.3 for its
share. In June of 1994, the Company and its Partner also sold certain assets
related to the Company's former phosphate mining business.The Company received
$22.3 as its share of the proceeds in the third quarter of 1994. In July of
1994, the Company received $13.3 from LaRoche Industries for a 50% interest in
the Company's ammonia manufacturing facility. The result of this transaction was
to create a manufacturing joint venture between subsidiaries of LaRoche
Industries and the Company. These transactions did not have a material effect on
the Company's 1994 operating results.
On December 6, 1996, the Company completed the sale of the majority of the
assets of its aluminum sulfate business to GEO Specialty Chemicals, Inc., of
Cleveland, Ohio. The transaction included seven manufacturing plants in the
Southeast and a kaolin calcining plant and associated reserves in Andersonville,
Georgia. The Company received cash proceeds of approximately $11.0 from the
sale. This transaction did not have a material effect on the Company's 1996
operating results.
4. FINANCIAL INSTRUMENTS
The Company occasionally utilizes derivative, or off-balance sheet, financial
instruments to manage its exposure to fluctuations in interest rates, foreign
exchange rates and certain raw material prices. The Company does not hold or
issue financial instruments for trading or speculative purposes. While these
instruments are subject to the risk of loss from changes in exchange and
interest rates, and commodity prices, these losses would generally be offset by
gains on the related exposures.
Interest rate swap agreements are used to reduce the Company's exposure to
fluctuations in interest rates. As of December 31, 1996, the Company was party
to four interest rate swap agreements, each with notional values of $20.0 and
maturity dates during 2001. Two of the swaps related to the debt on the
Company's consolidated balance sheet and effectively changed its variable rate
interest obligations to fixed rate interest obligations. The fixed rates were
set at 6.25% and 6.16%, respectively. The two remaining swaps related to the
Company's unconsolidated pro rata share of debt under the CYRO Industries joint
venture. The first of these swaps changed its fixed interest rate exposure to
floating interest rate and was subsequently offset by a swap that converted the
variable rate debt back to a fixed rate of 6.37%. The variable interest rate
employed on each of the swaps is equal to one-month London Interbank Offered
Rate ("LIBOR") plus a margin. The latter two swaps are marked to market on a
current basis. The notional amounts of interest rate swaps do not represent
amounts exchanged by the parties and are not a measure of the Company's exposure
to credit or market risk. The amounts exchanged are calculated on the basis of
the notional amounts and the other terms of the agreements. Notional amounts are
not included in the consolidated balance sheet. There were no interest rate
swaps outstanding at December 31, 1995.
Foreign currency exchange contracts are utilized by the Company to hedge
receivables and payables, primarily intercompany accounts denominated in
currencies other than the functional currency of the business. At December 31,
1996, the Company had net contracts to sell $14.7 of primarily European
currencies for U.S. dollars, and Dutch guilders having a value equivalent of
$10.4 for other
- 29 -
European currencies. All contracts are for periods of six months or less. At
December 31, 1995, the Company had net contracts to sell $25.0 of primarily
European currencies for U.S. dollars, and Dutch guilders having a value
equivalent of $1.5 for other European currencies.
Forward commodity contracts consist of natural gas contracts traded on
organized exchanges for the purpose of hedging anticipated natural gas
purchases. The maturity of these contracts highly correlate to the actual
purchases of the commodity. Any gains or losses on the contracts will be
reflected in the cost of the commodity as it is actually purchased. The
contracts outstanding at December 31, 1996 and 1995, were not material to the
Company's consolidated financial statements.
The carrying amounts of derivative financial instruments were immaterial to
the Company's consolidated financial statements at December 31, 1996 and 1995.
The fair values of these financial instruments and the methods and assumptions
used to determine such values are as follows:
Interest Rate Swaps: The fair values of the Company's interest rate swaps were
estimated based on valuations from financial institutions and represent the
estimated amounts that the Company would receive or pay to terminate the
agreement at December 31. At December 31, 1996, these fair value valuations were
immaterial to the Company's consolidated financial statements. There were no
swaps outstanding at December 31, 1995.
Foreign Currency Exchange Contracts: The fair values of short-term foreign
currency exchange contracts were $25.0 and $26.5 at December 31, 1996 and 1995,
respectively, based on exchange rates at December 31.
Forward Commodity Contracts: The fair values of the Company's forward commodity
contracts were estimated based on available quoted market prices at December 31.
The fair values at December 31, 1996 and 1995 were immaterial to the Company's
consolidated financial statements.
5. EQUITY IN NET ASSETS OF AND ADVANCES TO ASSOCIATED COMPANIES
The Company has a 50% interest in each of five associated companies: CYRO
Industries, Criterion Catalyst Company, Mitsui-Cytec, Dyno-Cytec and AC Molding
Compounds.
The aggregate cost of investments in associated companies accounted for
under the equity method was $40.4 at December 31, 1996 and 1995. Summarized
financial information for the Company's investments in and advances to
associated companies as of and for the years ended December 31, 1996, 1995 and
1994, is as follows:
Years Ended December 31,
1996 1995 1994
Net sales $ 600.7 $ 601.3 $ 500.7
Gross profit 154.1 146.8 123.1
Net earnings 52.2 50.9 33.3
The Company's share of net
earnings, less taxes
provided by the Company $ 14.9 $ 13.9 $ 10.1
- ------------------------------------------------------------------------------------------------------------------------------------
Current assets $ 292.3 $ 268.7 $ 251.5
Noncurrent assets 304.4 265.2 228.5
Total assets $ 596.7 $ 533.9 $ 480.0
- ------------------------------------------------------------------------------------------------------------------------------------
Current liabilities $ 144.9 $ 114.9 $ 106.0
Noncurrent liabilities 153.4 103.3 96.4
Equity 298.4 315.7 277.6
Total liabilities and equity $ 596.7 $ 533.9 $ 480.0
The Company's share of equity $ 149.2 $ 157.9 $ 138.8
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to associated companies (primarily CYRO Industries) amounted to
$40.0, $34.0 and $23.8 in 1996, 1995 and 1994, respectively. Purchases from
associated companies were immaterial.
- 30 -
6. INVENTORIES
At December 31, 1996 and 1995, LIFO inventories comprised approximately 59% and
62%, respectively, of consolidated inventories.
1996 1995
Finished goods $ 85.7 $ 77.4
Work in progress 16.9 15.4
Raw materials and supplies 53.7 51.7
- --------------------------------------------------------------------------------
156.3 144.5
Less reduction to LIFO cost (50.7) (56.4)
Total inventories $ 105.6 $ 88.1
- --------------------------------------------------------------------------------
7. PLANTS, EQUIPMENT AND FACILITIES
1996 1995
Land and land improvements $ 42.6 $ 41.5
Buildings 143.8 149.0
Machinery and Equipment 1,093.3 1,059.4
Construction in progress 60.0 67.3
Plants, equipment and facilities, at cost $1,339.7 $1,317.2
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT
In June 1995, the Company executed a five-year (due on June 1, 2000) $150.0
unsecured revolving credit facility agreement (the "Credit Agreement"). Funds
are available for general corporate purposes of the Company and its subsidiaries
including, without limitation, for purposes of making acquisitions permitted
under the Credit Agreement. At December 31, 1996 and 1995, outstanding
borrowings under the Credit Agreement were $88.0 and $65.0, respectively. At
December 31, 1996, the effective interest rate on borrowings was 5.876%, which
was based on short-term LIBOR rates plus a .25% margin. The Credit Agreement
contains covenants customary for such facilities, including a leverage ratio and
fixed charge coverage ratio. Under the terms of the Credit Agreement, the
Company had an additional $62.0 available at December 31, 1996. The Credit
Agreement also provides that it is an event of default if any person other than
American Home Products Corporation and its subsidiaries acquires more than 20%
of the voting power of all voting stock of the Company. The Company was in
compliance with all material terms, covenants and conditions of the Credit
Agreement at December 31, 1996. Other debt was $1.0 at both December 31, 1996
and 1995. The aggregate fair value of the Company's debt approximates its
carrying value due to the variable nature and frequent repricing of the debt
which is based on market conditions.
Under the terms of its Series C Cumulative Preferred Stock ("Series C
Stock"), the Company must maintain a debt-to-equity ratio of no more than 2-to-1
and must not incur more than $150.0 of debt unless the Company's equity is in
excess of $200.0, in which case the Company may incur additional debt as long as
its debt-to-equity ratio is not more than 0.75-to-1. At December 31, 1996, the
Company had $89.0 in debt, $314.3 in equity, as defined in the Series C Stock
covenants, and the ability to incur up to an additional $146.7 in debt under the
terms of the Series C Stock.
9. ENVIRONMENTAL MATTERS
AND OTHER CONTINGENT LIABILITIES AND COMMITMENTS
The Company is subject to substantial costs arising out of environmental laws
and regulations, which include obligations to remove or limit the effects on the
environment of the disposal or release of certain wastes or substances at
various sites. Liability for investigative, removal and remedial costs under
certain federal and state laws is retroactive, strict and joint and several. The
Company is currently a party to, or otherwise involved in, legal proceedings
directed at the cleanup of approximately 65 Superfund sites. Since the laws
pertaining to these sites provide for joint and several liability, a
governmental plaintiff could seek to recover all remediation costs at a waste
disposal site from any one of the potentially responsible parties ("PRPs") for
such site, including the Company, despite the involvement of other PRPs. In some
cases, the Company is one of several hundred identified PRPs, while in others it
is the only one or one of only a few. Generally, where there are a number of
financially solvent PRPs, liability has been apportioned, or the Company
believes, based on its experience with such matters, that liability will be
apportioned based on the type and amount of waste disposed by each PRP at such
disposal site and the number of financially solvent PRPs. The Company
- 31 -
is conducting remediation at, or is otherwise responsible for, a number of
non-Superfund sites. Proceedings involving environmental matters, such as
alleged discharge of chemicals or waste material into the air, water or soil,
are pending against the Company in various states. In many cases, future
environmental-related expenditures cannot be quantified with a reasonable degree
of accuracy. In addition, from time to time in the ordinary course of its
business, the Company is informed of, and receives inquiries with respect to,
new sites which may contain environmental contamination for which the Company
may be responsible.
It is the Company's policy to accrue and charge against earnings,
environmental cleanup costs when it is probable that a liability has been
incurred and an amount is reasonably estimable. As assessments and cleanups
proceed, these accruals are reviewed periodically and adjusted, if necessary, as
additional information becomes available. These accruals can change
substantially due to such factors as additional information on the nature or
extent of contamination, methods of remediation required, and other actions by
governmental agencies or private parties. Cash expenditures often lag behind the
period in which an accrual is recorded by a number of years.
In accordance with the above policies, as of December 31, 1996 and 1995,
the aggregate environmental related accruals were $177.5 and $198.3,
respectively, of which $25.0 was included in accrued expenses in 1996 and $23.0
in 1995, with the remainder included in other noncurrent liabilities.
Environmental remediation spending for the years ended December 31, 1996, 1995
and 1994, was $26.8, $22.1 and $15.7, respectively. All accruals have been
recorded without giving effect to any possible future insurance proceeds.
Various environmental matters are currently being litigated and potential
insurance recoveries are unknown at this time but are considered unlikely.
While it is not feasible to predict the outcome of all pending
environmental suits and claims, it is reasonably possible that there will be a
necessity for future provisions for environmental costs which, in management's
opinion, will not have a material effect on the financial position of the
Company, but could be material to the results of operations of the Company in
any one accounting period. The Company cannot estimate any additional amount of
loss or range of loss in excess of the recorded amounts. Moreover, environmental
liabilities are paid over an extended period and the timing of such payments
cannot be predicted with any confidence.
The Company is also a party to various other claims and routine litigation
arising in the normal course of its business. Based on the advice of counsel,
management believes that the resolution of such claims and litigation will not
have a material adverse effect on the financial position of the Company, but
could be material to the results of operations of the Company in any one
accounting period.
Rental expense under property and equipment leases was $12.5 in 1996, $13.3
in 1995 and $13.4 in 1994. Estimated future minimum rental expenses under
property and equipment leases that have initial or remaining noncancelable lease
terms in excess of one year as of December 31, 1996, are:
Operating
Leases
1997 $ 8.5
1998 7.0
1999 6.5
2000 6.1
2001 5.7
Thereafter 6.1
Total minimum lease payments $39.9
- --------------------------------------------------------------------------------
At December 31, 1996 and 1995, the Company had $13.9 and $15.3,
respectively, of letters of credit outstanding for environmental and insurance
related matters.
- 32 -
10. INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 1996, 1995
and 1994, is based on earnings before income taxes as follows:
1996 1995 1994
Domestic $116.8 $107.8 $ 61.8
Foreign 25.3 24.3 18.8
Total $142.1 $132.1 $ 80.6
- --------------------------------------------------------------------------------
The components of the provision (benefit) for the years ended December 31,
1996, 1995 and 1994, are composed of the following:
1996 1995 1994
Current:
Federal $20.2 $ 25.2 $28.1
Foreign 6.6 9.3 10.1
Other, principally state 2.2 6.9 6.3
Total $29.0 $ 41.4 $44.5
- --------------------------------------------------------------------------------
Deferred:
Federal $22.2 $(157.9) $(8.4)
Foreign 1.3 1.1 (0.6)
Other, principally state 4.4 (20.8) (0.9)
Total $27.9 $(177.6) $(9.9)
Total income tax
provision (benefit) $56.9 $(136.2) $34.6
- --------------------------------------------------------------------------------
Domestic and foreign earnings of consolidated companies before income taxes
include all earnings derived from operations in the respective U.S. and foreign
geographic areas, whereas provisions (benefits) for income taxes include all
income taxes payable to (receivable from) U.S., foreign and other governments as
applicable, regardless of the situs in which the taxable income (loss) is
generated.
The temporary differences which give rise to a significant portion of
deferred tax assets and liabilities as of December 31, 1996 and 1995, are as
follows:
1996 1995
Deferred tax assets:
Allowance for bad debts $ 4.7 $ 6.7
Employee benefit accruals 6.9 8.1
Insurance accruals 9.8 9.0
Operating accruals 23.7 25.1
Inventory 8.8 8.2
Environmental accruals 66.9 78.0
Postretirement obligations 157.0 157.4
Other 12.0 14.2
Gross deferred tax assets 289.8 306.7
Valuation allowance (24.4) (24.4)
Net deferred tax assets 265.4 282.3
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Plants, equipment and facilities (99.3) (89.3)
Other (11.4) (11.4)
Gross deferred tax liabilities (110.7) (100.7)
Net deferred tax assets $154.7 $181.6
- --------------------------------------------------------------------------------
- 33 -
In the fourth quarter of 1995, the Company made a partial reversal of
$193.0 of the previously established valuation allowance. The amount of this
reversal represented the Company's best estimate of the tax benefits which, more
likely than not, will be realized in future periods. Based on the Company's most
recent review of its tax position, no adjustment of the valuation allowance was
made in 1996.
A reconciliation between the Company's effective tax rate and the U.S.
federal income tax rate is as follows:
1996 1995 1994
Federal income tax rate 35.0% 35.0% 35.0%
Valuation allowance adjustment -- (146.3) --
Income subject to other than
the federal income tax rate 0.2 1.8 1.3
State taxes, net of
federal benefits 2.4 4.1 4.6
Tax on undistributed
foreign earnings -- 0.2 3.0
Other, net 2.4 2.1 (0.9)
Effective tax rate 40.0% (103.1)% 43.0%
- --------------------------------------------------------------------------------
11. RETIREMENT PLANS
The Company has defined benefit pension plans that cover employees in the United
States and a number of foreign countries. A separate pension plan is maintained
from which benefits solely attributable to Cyanamid service will be paid (the
"Past Service Retirement Plan"). Under certain circumstances, the Company is
obligated by the terms of the Series C Stock to make an annual contribution to
the Past Service Retirement Plan.The Company has met the funding requirements
for 1996 and 1995 and expects to fund the Past Service Retirement Plan in
accordance with the terms of the Series C Stock.
Net periodic pension expense for the years ended December 31, 1996, 1995 and
1994, included the following components:
1996 1995 1994
Service cost $ 9.0 $ 7.4 $ 8.3
Interest cost on projected
benefit obligation 15.5 14.2 11.7
Actual (return) loss on
plan assets (20.8) (23.5) 3.5
Net amortization and deferral 7.3 10.5 (14.5)
Net periodic pension expense $ 11.0 $ 8.6 $ 9.0
The funded status as of December 31, 1996 and 1995, for the Company's
retirement plans are shown below.
Funded Status 1996 1995
Actuarial present value of benefit obligations:
Vested benefit obligations $ 174.3 $ 156.7
Accumulated benefit obligation 188.5 171.0
- --------------------------------------------------------------------------------
Projected benefit obligation 221.6 203.7
Plan assets at fair value, primarily
marketable securities 192.0 162.2
- --------------------------------------------------------------------------------
Projected benefit obligation
over plan assets 29.6 41.5
Unrecognized net loss (24.1) (37.0)
Unrecognized prior service cost (3.3) (3.8)
Unrecognized transition asset 2.2 2.5
Adjustment required to recognize
minimum liability -- 9.8
- --------------------------------------------------------------------------------
Accrued pension cost recognized on
the Company's balance sheet $ 4.4 $ 13.0
- --------------------------------------------------------------------------------
- 34 -
The provisions of SFAS No. 87, "Employers' Accounting for Pensions,"
requires recognition in the balance sheet of an additional minimum liability
when accumulated benefits are in excess of plan assets. In the fourth quarter of
1995, the Company recorded a $9.8 adjustment, to recognize the minimum liability
required primarily under the Past Service Retirement Plan. The adjustment, which
had no effect on 1995 earnings, was offset by recording a separate reduction to
stockholders' equity of $5.4, net of taxes of $4.4. At December 31, 1996, the
minimum liability adjustment of $9.8 was not needed and, accordingly was
eliminated since the plan assets exceeded the accumulated benefits.
The following table sets forth the major assumptions used to determine the
above information:
1996 1995 1994
Assumed discount rate 7.50% 7.25% 8.25%
Assumed rates for
future compensation
increases 4.0-10.0% 3.0-10.0% 4.0-10.0%
Expected long-term rate
of return on plan assets 9.0% 9.0% 9.0%
- --------------------------------------------------------------------------------
12. POSTRETIREMENT BENEFITS
OTHER THAN PENSIONS
The Company sponsors postretirement and postemployment benefit plans. The
postretirement plans provide medical and life insurance benefits to retirees who
meet minimum age and service requirements. The postemployment plans provide
salary continuation, disability related benefits, severance pay and continuation
of health costs during the period after employment but before retirement.
Net periodic postretirement benefit costs for the years ended December 31,
1996, 1995 and 1994, included the following components:
1996 1995 1994
Service cost $ 1.6 $ 1.7 $ 1.1
Interest cost 22.1 26.3 25.2
Actual return on plan assets (0.5) (0.6) (0.2)
Net amortization and deferral (4.7) (4.5) (4.2)
$ 18.5 $ 22.9 $ 21.9
- --------------------------------------------------------------------------------
The accrued postretirement benefit cost recognized in the Company's
consolidated balance sheets at December 31, 1996 and 1995, includes $20.0 in
accrued expenses and $364.7 and $364.6, respectively, in other noncurrent
liabilities. The following table presents the plan's funded status at December
31, 1996 and 1995:
1996 1995
Accumulated postretirement benefit obligation:
Retirees and surviving spouses $ 271.5 $ 300.5
Fully eligible active plan participants 38.0 32.5
Other active plan participants 8.7 9.2
- --------------------------------------------------------------------------------
Total accumulated postretirement
benefit obligation 318.2 342.2
Fair value of plan assets 11.5 10.5
- --------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation over fair value of
plan assets 306.7 331.7
Unrecognized net gain (loss) 18.9 (10.6)
Unrecognized negative prior service cost 59.1 63.5
Accrued postretirement benefit cost $ 384.7 $ 384.6
- --------------------------------------------------------------------------------
- 35 -
Measurement of the accumulated postretirement benefit obligations ("APBO")
was based on actuarial assumptions, including a discount rate of 7.50%, 7.25%
and 8.25% at December 31, 1996, 1995 and 1994, respectively. The assumed rate of
future increases in the per capita cost of health care benefits (health care
cost trend rate) is 9.50% in 1997, decreasing evenly over 5 years to 5.0%, and
remaining at that level thereafter. The health care cost trend rate has a
significant effect on the reported amounts of APBO and related expense. For
example, increasing the health care cost trend rate by one percentage point in
each year would increase the APBO at December 31, 1996, and the 1997 aggregate
service and interest cost by approximately $26.4 and $2.2, respectively.
13. OTHER FINANCIAL INFORMATION
Accrued expenses at December 31, 1996 and 1995, included the following:
1996 1995
Pensions and other employee benefits $ 27.7 $ 32.9
Other postretirement employee benefits 20.0 20.0
Salaries and wages 7.8 9.4
Environmental 25.0 23.0
Other 124.6 133.0
$ 205.1 $ 218.3
- --------------------------------------------------------------------------------
Cash payments during the years ended December 31, 1996, 1995 and 1994,
included interest of $4.0, $0.5 and $0.1, respectively. Income taxes paid in
1996, 1995 and 1994 were $49.2, $57.2 and $46.6, respectively. Income taxes paid
include foreign taxes paid in 1996 and 1995 of $10.7 and $7.2, respectively.
Foreign taxes paid in 1994 were considered immaterial.
Included in accounts receivable at December 31, 1996 and 1995, are
miscellaneous receivables of approximately $32.2 and $41.6, respectively.
14. STOCKHOLDERS' EQUITY
Stock Split. In June 1996, the Company declared a three-for-one stock split of
the Company's common stock effected in the form of a stock dividend. All share
and per share data, including stock option information but excluding treasury
shares through the date of the distribution of the stock dividend on July 23,
1996, have been restated to reflect the stock split.
Common Stock. The Company is authorized to issue 75 million shares of common
stock with a par value of $.01 per share, of which 45,494,198 shares were
outstanding at December 31, 1996. On January 27, 1997, the Board of Directors
approved, subject to a vote of the stockholders, a proposal to increase the
number of authorized shares of common stock to 150 million shares. At December
31, 1996, the Company had reserved approximately 11,714,355 shares for issuance
under the 1993 Stock Award and Incentive Plan (the "1993 Plan") described below.
Stock Award and Incentive Plan. The 1993 Plan is administered by a committee of
the Board of Directors (the "Committee"). The 1993 Plan provides for grants of a
variety of awards, such as stock options (including incentive stock options and
nonqualified stock options), stock appreciation rights (including limited stock
appreciation rights), restricted stock (including performance shares),
restricted stock units, deferred stock awards and dividend equivalents, and
other stock or cash-based awards, to be made to selected employees and
independent contractors of the Company and its subsidiaries and affiliates at
the discretion of the Committee. In addition, automatic formula grants of
restricted stock and nonqualified stock options are awarded to non-employee
directors.
The stock option component of the 1993 Plan provides for the granting of
nonqualified stock options to officers, directors and certain key employees at
100% of the market price on the date the option was granted. Options are
generally exercisable in cumulative installments of 331/3% per year commencing
one year after the date of grant and annually thereafter, with contract lives of
generally 10 years from the date of grant. A summary of the status of the
Company's stock options as of December 31, 1996, 1995 and 1994, and changes
during the year ended on those dates is presented below.
- 36 -
1996 1995 1994
---------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Under Option:
Outstanding at beginning of year 4,487,037 $ 6.86 3,924,900 $ 5.44 -- $--
Granted 876,130 25.14 850,800 13.16 4,093,440 5.47
Exercised (429,059) 5.78 (245,877) 5.47 -- --
Forfeited (27,912) 14.12 (42,786) 9.62 (168,540) 5.42
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 4,906,196 $10.18 4,487,037 $ 6.86 3,924,900 $5.44
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 2,374,586 $ 6.39 1,239,306 $ 5.46 21,810 $5.42
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $10.65 $ 5.94
- ------------------------------------------------------------------------------------------------------------------------------------
The fair value of each stock option granted during 1996 and 1995 is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
1996 1995
Expected life (years) 6.0 6.0
Expected volatility 30.69% 30.69%
Expected dividend yield -- --
Risk-free interest rate 5.87% 7.11%
The following table summarizes information about stock options outstanding
at December 31, 1996:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------------------------------
$ 4.75-10.00 3,237,519 7.12 years $ 5.44 2,084,389 $ 5.43
11.67-19.58 802,297 8.14 years 13.16 288,097 13.16
25.08-37.75 866,380 9.13 years 25.16 2,100 25.08
- ------------------------------------------------------------------------------------------------------------------------------------
4.75-37.75 4,906,196 7.64 years $10.18 2,374,586 $ 6.39
- ------------------------------------------------------------------------------------------------------------------------------------
The Company has issued performance stock, a form of restricted stock, with
restrictions related to the Company's financial performance for the applicable
periods. Awards made in 1994 were for the 1994, 1995 and 1996 performance
periods, while awards made in 1995 and 1996 were for the 1997 and 1998
performance periods, respectively. Restrictions lapse on the stock upon the
attainment of performance criteria established by the Committee which, under
certain circumstances, may be revised. The amount of unearned compensation
recognized as expense was $8.4 in 1996 and $6.4 in 1995 and 1994, respectively.
A summary of restricted stock award activity is as follows:
1996 1995 1994
Outstanding awards -
beginning of year 357,936 568,872 --
New awards granted 58,107 74,226 840,900
Shares with restrictions
lapsed (255,123) (252,825) (252,678)
Restricted shares forfeited (29,616) (32,337) (19,350)
Outstanding awards -
end of year 131,304 357,936 568,872
- --------------------------------------------------------------------------------
Weighted average market
value of stock
on award date $ 23.26 $ 13.13 $ 5.47
- --------------------------------------------------------------------------------
Included within "Shares with restrictions lapsed" in 1996 above, are
193,935 shares which were forfeited by certain participants. The Company issued
these participants equivalent deferred stock awards which will be distributed in
the form of shares of common stock, generally, following termination of
employment.
- 37 -
In late 1995, the Company implemented a stock appreciation plan for all
eligible active employees which excluded those employees who customarily receive
stock options. The stock appreciation units represent a potential payout to
employees, in cash, of the difference between the base price of the Company's
stock of $20.00 per share and the lesser of the price at term, or $33.33. The
stock appreciation units mature 50% at December 31, 1997 and December 31, 1999.
In December 1996, the plan was amended to provide for the immediate payout of
five hundred dollars per participant which represented 25.0% of the total
maximum payout. The compensation cost related to 1996 was $2.2 and was
considered immaterial in 1995.
A summary of changes in common stock issued and treasury stock for the
years ended December 31, 1996, 1995 and 1994 follows:
Common Treasury
Stock Stock
Balance at December 31, 1993 36,842,377 --
Award of performance stock, net
of forfeitures 791,550 --
Award of restricted stock 30,000 --
Purchase of treasury stock -- 6,917
- --------------------------------------------------------------------------------
Balance at December 31, 1994 37,663,927 6,917
Issuance pursuant to public offering 10,363,500 --
Issuance pursuant to stock option plan 245,877 --
Award of performance stock,
net of forfeitures 41,889 --
- --------------------------------------------------------------------------------
Balance at December 31, 1995 48,315,193 6,917
Purchase of treasury stock -- 3,033,000
Issuance pursuant to stock option plan 235,389 (153,676)
Award of performance stock
and restricted stock 50,652 (2,485)
Forfeitures and performance
stock deferrals (223,551) (271)
- --------------------------------------------------------------------------------
Balance at December 31, 1996 48,377,683 2,883,485
Shares held in treasury prior to July 23, 1996 were not subject to the
stock split.
There were no dividends declared on common stock in 1996 and 1995.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation plans.
Accordingly, no compensation costs have been recognized for its stock option
plan. The compensation costs that have been charged against income for its
restricted stock awards and stock appreciation plan were noted above. Set forth
as follows are the Company's net earnings and earnings per share,presented both
"as reported" and "pro forma," as if compensation cost had been determined
consistent with the provisions of SFAS 123:
1996 1995
Net earnings available for common stockholders:
As reported $ 100.1 $ 76.3
Pro forma 98.0 75.3
Primary earnings per share:
As reported $ 2.01 $ 1.80
Pro forma 1.97 1.77
Fully diluted earnings per share:
As reported $ 2.01 $ 1.43
Pro forma 1.97 1.42
- --------------------------------------------------------------------------------
- 38 -
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply for awards prior to 1995,
and the Company anticipates granting additional awards in future years.
15. PREFERRED STOCK -
REDEEMABLE AND NON-REDEEMABLE
The Company is authorized to issue 20 million shares of preferred stock with a
par value of $.01 per share in one or more classes or series with rights and
privileges as adopted by the Board of Directors. As of the Effective Date, the
Company had issued to Cyanamid 8 million shares of preferred stock having an
aggregate liquidation and redemption value of $200.0, which included shares of
Series A Stock, par value $.01 per share, Series B Stock, par value $.01 per
share, and Series C Stock, par value $.01 per share. During 1995, the Company
repurchased all of its outstanding Series A Stock and Series B Stock (see
"Preferred Stock Repurchase" below).
The Series C Stock, of which 4,000 shares are issued and outstanding, is
perpetual, has a liquidation and redemption value of $0.1, an annual dividend of
$1.83 per share (7.32%) and is redeemable at the Company's option under certain
limited circumstances. Shares of Series C Stock are not transferable except to a
subsidiary of Cyanamid. The Series C Stock provides Cyanamid with the right to
elect one director to the Company's Board of Directors and contains certain
covenants requiring the Company to satisfy its environmental remediation
obligations, retiree health care and life insurance obligations and certain
pension contribution obligations in a timely and proper manner, and certain
other covenants requiring the Company to maintain specified financial ratios and
restricting the Company from taking certain actions, including paying dividends
on its common stock in certain circumstances, merging or consolidating or
selling all or substantially all of the Company's assets or incurring
indebtedness in violation of certain covenants, without the consent of Cyanamid
as the holder of the Series C Stock. In the event that the Company fails to
comply with certain of such covenants, Cyanamid, as the holder of the Series C
Stock, will have additional rights which may include approval of the Company's
capital expenditures and, in certain more limited circumstances, appointing
additional directors to the Company's Board of Directors, which together with
Cyanamid's existing representative, would constitute a majority of the Company's
Board of Directors. The Company agreed with Cyanamid in the preferred stock
repurchase agreement that it would not redeem the Series C Stock prior to
December 16, 1999.
Preferred Stock Repurchase. In August 1995, the Company entered into a preferred
stock repurchase agreement with Cyanamid pursuant to which the Company agreed to
repurchase all outstanding shares of its Series A Stock and its Series B Stock
from Cyanamid. The Company repurchased the Series A Stock on August 23, 1995,
for $90.0 plus $1.2 of accrued dividends. On November 7, 1995, the Company
repurchased the Series B Stock for $305.1 plus $0.6 of accrued dividends, which
was financed by the proceeds of a stock offering of 9.6 million shares of the
Company's common stock, $100.0 in borrowings under the Company's Credit Facility
and available cash.
The Series A Stock had an aggregate liquidation value of $95.5 and an
aggregate annual dividend of $8.4. The Series B Stock had an aggregate
liquidation value of $104.4, an aggregate annual dividend of $6.3, and was also
convertible at a conversion price of $6.26 per share into 16,660,611 shares of
common stock, or approximately 29.6% of the common stock outstanding on a fully
diluted basis (assuming conversion of the Series B Stock) prior to the
repurchase.
The Company also agreed to pay to Cyanamid an additional amount if, during
the two-year period commencing on November 7, 1995, any person announces an
offer to acquire and thereafter acquires more than 50% of the Company's issued
and outstanding common stock (a "Transaction").
The additional amount will be payable within 30 days following consummation
of a Transaction and will equal, subject to antidilution adjustments, 6,297,111
multiplied by the excess, if any, of the purchase price per share of common
stock paid in the Transaction over the greater of the average price of common
stock during a defined period of time preceding announcement of the Transaction
and $17.66. The additional amount payable will be proportionately reduced if the
Transaction and any related transactions collectively constitute an offer to
acquire less than 100% of the Company. In order to induce the Company to agree
to pay such additional amount, Cyanamid agreed on behalf of itself and American
Home Products Corporation that, during such two-year period, neither company
would directly or indirectly take any action having the purpose of inducing any
person to seek to acquire the Company, and Cyanamid further agreed that it would
reject any request for a waiver, consent or approval in connection with an offer
or possible offer to acquire the Company made to it, including any waiver,
consent or approval under the Series C Stock.
After the repurchase, the shares of the Series A Stock and Series B Stock
were retired and assumed the status of authorized but unissued shares of
preferred stock, and the Company is not currently authorized to issue any
additional shares of Series A Stock or Series B Stock.
- 39 -
16. SUBSEQUENT
EVENTS (UNAUDITED)
On January 31, 1997, the Company completed the sale of its Acrylic Fibers
business to a subsidiary of Sterling Chemicals, Inc. The assets transferred
include Cytec's plant located near Pensacola, Florida. The Company received
approximately $88.0 in cash, subject to certain post-closing adjustments, and
received other consideration, including the assumption by Sterling of certain
contingent and other liabilities, with a value of approximately $15.0. The
Company expects to record a gain from this transaction in the first quarter of
1997. Cytec's Acrylic Fibers business had sales of approximately $138.7, $136.1
and $121.1 in 1996, 1995 and 1994, respectively.
On November 8, 1996, the Company announced a restructuring proposal for its
Botlek, Netherlands plant. The restructuring would include a major reengineering
of the plant organization, relocation of certain manufacturing operations to
other Cytec sites and staff reductions. The proposal was subject to negotiations
with the Works Council and the Unions. The negotiations were completed in
February and the Company is moving forward with the restructuring. The Company
expects to record a charge against earnings in the first quarter of 1997 related
to this transaction.
On January 16, 1997, the Company announced the consolidation of its
surfactant and docusate manufacturing at its Willow Island, West Virginia
facility. As a result of this consolidation, the Company will close its Linden,
New Jersey plant. The phasedown of the Linden facility will occur over
approximately the next 18 months. The Company expects to record a charge against
earnings in the first quarter of 1997 related to this transaction.
The Company believes that the impact of the above divestiture and
restructurings will have an immaterial effect on the results of operations for
1997.
17. OPERATIONS
BY GEOGRAPHIC AREAS
The Company is engaged primarily in the manufacture and sale of a highly
diversified line of chemical products.
Net sales to unaffiliated customers presented below are based upon the sales
destination which is consistent with management's view of the business.
U.S. exports included in net sales are also based upon the sales
destination and represent direct sales of U.S.-based entities to unaffiliated
customers outside the United States.
Earnings from operations are also based upon destination and consist of total
net sales less operating expenses.
Identifiable assets are those assets used in the Company's operations in each
geographic area. Unallocated assets are primarily miscellaneous receivables,
construction in progress, and cash and cash equivalents.
- 40 -
OPERATIONS BY GEOGRAPHIC AREAS
1996 1995 1994
- ---------------------------------------------------------------------------------------------
Net sales
United States $ 766.6 $ 782.2 $ 758.7
Other Americas 110.9 100.3 94.5
Europe, Mideast, Africa 219.7 207.1 142.5
Asia/Pacific Rim 162.4 170.5 105.6
Total $1,259.6 $1,260.1 $1,101.3
- ---------------------------------------------------------------------------------------------
U.S. exports included in net sales above
Other Americas $ 34.3 $ 28.3 $ 20.7
Europe, Mideast, Africa 13.9 21.8 23.6
Asia/Pacific Rim 100.4 108.7 54.8
Total $ 148.6 $ 158.8 $ 99.1
- ---------------------------------------------------------------------------------------------
Earnings from operations
United States $ 91.9 $ 52.6 $ 28.8
Other Americas 19.7 13.2 12.5
Europe, Mideast, Africa 21.2 22.3 11.0
Asia/Pacific Rim 3.3 34.6 16.2
Total $ 136.1 $ 122.7 $ 68.5
- ---------------------------------------------------------------------------------------------
Interest, and other income (expense), net $ 10.0 $ 10.4 $ 12.2
Interest expense 4.0 1.0 0.1
Earnings before income taxes $ 142.1 $ 132.1 $ 80.6
Equity in net earnings of associated companies $ 14.9 $ 13.9 $ 10.1
- ---------------------------------------------------------------------------------------------
Identifiable assets
United States $ 574.1 $ 591.1 $ 529.8
Other Americas 106.1 101.2 95.9
Europe, Mideast, Africa 117.4 108.1 95.1
Asia/Pacific Rim 21.6 19.1 16.8
Total $ 819.2 $ 819.5 $ 737.6
Equity in net assets of and advances to associated companies $ 143.7 $ 155.1 $ 137.6
Unallocated assets $ 298.2 $ 319.2 $ 324.2
Total assets $1,261.1 $1,293.8 $1,199.4
- ---------------------------------------------------------------------------------------------
MANAGEMENT STATEMENT
Your management has prepared and is responsible for the accompanying
Consolidated Financial Statements. These statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and necessarily include some amounts based on management's
estimates and judgments. All financial information in this annual report is
consistent with that in the Consolidated Financial Statements.
The Company's accounting systems include internal controls designed to
provide reasonable assurance of the reliability of its financial records and the
proper safeguarding and use of its assets. Such controls are based on
established policies and procedures, and are implemented by trained, skilled
personnel with an appropriate segregation of duties. The internal controls are
complemented by the Company's internal auditors who conduct regular and
extensive internal audits.
The Company's independent auditors, KPMG Peat Marwick LLP, have audited the
Consolidated Financial Statements. Their audits were conducted in accordance
with generally accepted auditing standards as indicated in their report.
- 41 -
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, composed solely of nonmanagement
directors, which meets periodically with management, the internal auditors and
the independent auditors to review internal accounting control, auditing and
financial reporting matters. The independent auditors and the internal auditors
have full and free access to the Audit Committee.
Darryl D. Fry
Chairman and Chief Executive Officer
James P. Cronin
Executive Vice President and Chief Financial Officer
West Paterson, NJ
January 27, 1997
- -------------------------------------------------------------------------------
INDEPENDENT
AUDITOR'S REPORT
The Board of Directors
and Stockholders
Cytec Industries Inc.:
We have audited the accompanying consolidated balance sheets of Cytec Industries
Inc. and subsidiaries, as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cytec
Industries Inc. and subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Short Hills, NJ
January 27, 1997
- 42 -
QUARTERLY DATA
(Dollars in millions, except per share amounts) 1Q 2Q 3Q 4Q Year
- ------------------------------------------------------------------------------------------------------------------------------------
1996
Net sales $ 304.5 $ 318.1 $ 321.7 $ 315.3 $ 1,259.6
Gross profit1 86.9 91.7 92.1 90.8 361.5
Net earnings 22.6 25.4 26.0 26.1 100.1
Earnings per common share2
Primary $ .44 $ .51 $ .53 $ .54 $ 2.01
Fully diluted $ .44 $ .51 $ .53 $ .54 $ 2.01
- ------------------------------------------------------------------------------------------------------------------------------------
1995
Net sales $ 310.7 $ 333.1 $ 320.3 $ 296.0 $ 1,260.1
Gross profit1 87.2 87.2 85.3 88.2 347.9
Net earnings3 22.1 22.6 22.4 215.1 282.2
Dividends on preferred stock 3.7 3.7 2.8 0.5 10.7
Excess of repurchase price over related
book value of Series A Stock and
Series B Stock4 -- -- -- 195.2 195.2
Earnings per common share2
Primary $ .46 $ .47 $ .48 $ .41 $ 1.80
Fully diluted $ .35 $ .36 $ .37 $ .37 $ 1.43
- ------------------------------------------------------------------------------------------------------------------------------------
1 Gross profit is derived by subtracting manufacturing cost of sales from net
sales.
2 The sum of the quarters may not equal the full year primary and fully
diluted earnings per share as each period is calculated separately.
3 See Note 10 to the Consolidated Financial Statements for a discussion of
the partial reversal of the deferred income tax valuation allowance
recorded in the fourth quarter 1995.
4 See Note 15 to the Consolidated Financial Statements for a discussion of
the repurchase of Series A Stock and Series B Stock.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
- 43 -
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers
Set forth below is certain information concerning the
executive officers of the Company. Each such person was first
elected to the indicated office with the Company on December
17, 1993 unless otherwise specified, and serves at the
pleasure of the Board of Directors of the Company.
Name Age Positions
---- --- -----------------------------------------------------------------------------------------
D. D. Fry 58 Mr. Fry is Chairman of the Board and Chief Executive Officer of the Company, having also
served as President of the Company from its inception until January 7, 1997. From
January 1991 to December 1993, he was an Executive Vice President of Cyanamid and
President of the Chemicals Group of Cyanamid.
D. Lilley 50 Mr. Lilley was elected President and Chief Operating Officer and a member of the Board of
Directors effective January 8, 1997. From 1994 until that date, he was a Vice President of
American Home Products Corporation, responsible for the Global Medical Device business.
Prior to that time, he was Vice President and a member of the Executive Committee of
Cyanamid.
S. M. Crum 45 Mr. Crum is an Executive Vice President of the Company. From March 1992 to December
1993, he was a Group Vice President of the Chemicals Group of Cyanamid. From April
1991 to March 1992, he was a Vice President, Polymer Products Division of Cyanamid.
J. P. Cronin 43 Mr. Cronin is Executive Vice President and Chief Financial Officer of the Company, having
previously served as Vice President and Chief Financial Officer of the Company from its
inception until he was elected an Executive Vice President in September 1996. From
October 1992 to December 1993, he was Controller and Chief Financial Officer of the
Chemicals Group of Cyanamid. From March 1991 to October 1992, he was Group
Controller, Chemicals Group of Cyanamid.
E. F. Jackman 51 Mr. Jackman is Vice President, General Counsel and Secretary of the Company. From July
1992 to December 1993, he was General Counsel of the Chemicals Group of Cyanamid.
From January 1991 to July 1992, he was a Manager of the Legal Department of Cyanamid.
H. Porosoff 51 Mr. Porosoff was elected Vice President and Chief Technology Officer of the Company in
June 1995. From December 1993 to June 1995, he was Vice President, Research and
Development of the Company. From March 1992 to December 1993, he was Vice President
and Director of Research for the Chemicals Group of Cyanamid. From January 1989 to
March 1992, he was Director of Chemicals Research for Cyanamid.
J. W. Hirsch 54 Mr. Hirsch is Vice President, Employee Resources of the Company. From January 1991
to December 1993, he was the Personnel Director of the Chemicals Group of Cyanamid.
K. Shah 48 Mr. Shah was elected Vice President - Corporate Planning and Business Development and
Investor Relations of the Company in December 1995, having previously served as Director,
Corporate Planning and Business Development and Investor Relations since December 1993.
Prior to 1993, he served the Chemicals Group of Cyanamid since 1979 in a number of
capacities (primarily planning and business development) including as Director, Planning and
Business Development of the Chemicals Group from 1991 to 1993.
D. M. Drillock 39 Mr. Drillock was elected Controller of the Company in December 1995, having previously
served as Controller in a non-officer capacity since December 1993. Prior to this, he served
the Chemicals Group of Cyanamid as Division Controller.
T. P. Wozniak 43 Mr. Wozniak is Treasurer of the Company, having joined the Company in November 1993.
Prior to joining the Company, he served since 1987 as Assistant Treasurer of AMAX Inc.
- 44 -
The remainder of the information required by this Item is incorporated
by reference from pages 1, 2, 8 and 9 of the Registrant's definitive
Proxy Statement for its 1997 Annual Meeting of Common Stockholders
filed pursuant to Regulation 14A.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference
from pages 11 through 14 down to "COMPENSATION AND MANAGEMENT
DEVELOPMENT COMMITTEE REPORT," and from pages 18 and 19 down to
"INFORMATION CONCERNING INDEPENDENT PUBLIC ACCOUNTANTS" of the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Common Stockholders filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference
from pages 8 and 9 of the Registrant's definitive Proxy Statement for
its 1997 Annual Meeting of Common Stockholders filed pursuant to
Regulation 14A.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference
from page 10 of the Registrant's definitive Proxy Statement for its
1997 Annual Meeting of Common Stockholders filed pursuant to
Regulation 14A.
- 45-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) List of Financial Statements:
Cytec Industries Inc. and Subsidiaries Consolidated Financial
Statements (See Item 8):
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(a)(2) Cytec Industries Inc. and Subsidiaries Financial Statement Schedules
for the Years Ended December 31, 1996, 1995, and 1994
Independent Auditors' Report
Schedule II - Valuation and Qualifying Accounts
All schedules, other than indicated above, are omitted because of the
absence of the conditions under which they are required or because the
information required is shown in the financial statements or notes thereto.
(a)(3) Exhibits:
Exhibit No. Description
----------- -----------
2.1 Transfer and Distribution Agreement**
2.2 Preferred Stock Repurchase Agreement****
2.3 Amendment No. 1 to Preferred Stock Repurchase Agreement****
3.1 Certificate of Incorporation (incorporated by reference to
correspondingly numbered exhibit in Quarterly Report on Form
10-Q for Quarter ended September 30, 1996)
3.2 By-laws (incorporated by reference to correspondingly
numbered exhibit in Quarterly Report on Form 10-Q for
Quarter ended September 30, 1996)
4.1 Form of Common Stock Certificate*
- 46 -
4.4 Certificate of Designations, Preferences and Rights of
Series C Preferred Stock**
4.7 Form of Series C Preferred Stock Certificate*
10.1 Environmental Matters Agreement**
10.2 OPEB Matters Agreement**
10.3 Tax Sharing Agreement**
10.4 Corporate Services Agreement**
10.6(a) Cytec Services Agreement**
10.6(b) Consulting Services Agreement**
10.7 Intellectual Property Agreements (consisting of (i)
Assignment of U.S. Patents, (ii) Assignment of U.S. Patent
Applications, (iii) Assignment of Foreign Patents and Patent
Applications, (iv) Assignment of Records of Invention, (v)
Exclusive Patent and Knowhow License, (vi) Option Agreement
for Non-Exclusive Patent and Knowhow License, (vii) Non-
Exclusive Patent and Knowhow License, (viii) Agreement re
access to CL File and (ix) Assignment of Knowhow)**
10.8 Trademark and Copyright Assignment Agreement**
10.9(a) Aminonitrile Manufacturing Services Agreement**
10.10 Shared Facility and Distribution Agreements** (consisting of
(i) Willow Island Services Agreement, (ii) Willow Island
Services Agreement - Cytec to Cyanamid and (iii) Willow
Island Ground Lease).
10.12 Amended and Restated Credit Agreement
10.13 Executive Compensation Plans and Arrangements
10.13(a) 1993 Stock Award and Incentive Plan, as amended
(incorporated by reference to Exhibit I to the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of
Common Stockholders filed pursuant to Regulation 14A.)
10.13(b) Form of Performance Stock Award/Performance Cash Award Grant
Letter
10.13(c) Rule No. 1 under 1993 Stock Award and Incentive Plan
10.13(d) Form of Stock Option Grant Letter
10.13(e) Rule No. 2, as amended, under 1993 Stock Award and Incentive
Plan
- 47 -
10.13(f) Rule No. 3 under 1993 Stock Award and Incentive Plan*****
10.13(g) Executive Income Continuity Plan (incorporated by reference
to correspondingly numbered exhibit to Quarterly Report on
Form 10-Q for quarter ended September 30, 1996)
10.13(h) Key Manager Income Continuity Plan (incorporated by
reference to correspondingly numbered exhibit to Quarterly
Report on Form 10-Q for quarter ended September 30, 1996)
10.13(i) Employee Income Continuity Plan******
10.13(j) Cytec Excess Retirement Benefit Plan***
10.13(k) Cytec Supplemental Employees Retirement Plan******
10.13(l) Cytec Executive Supplemental Employees Retirement Plan******
10.13(m) Compensation Tax Equalization Plan***
10.13(n) Cytec Supplemental Savings and Profit Sharing Plan******
10.13(p) Trust Agreement effective as of January 1, 1994 between
Cytec Industries Inc. and First Fidelity Bank N.A.
(Exhibit 10.13(p) incorporated by reference to corresponding
exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1995.)
10.13(q) Deferred Compensation Plan*****
10.13(r) Deferred Compensation Agreement with F. W. Armstrong*****
10.14 Acrylonitrile Supply agreement between Cyanamid and
Manhattan Chemical Inc., dated January 29, 1993*
10.15 Master Agreement between American Cyanamid Company, et. al.
and Shell Oil Company, et. al., dated April 1, 1988*
10.16 Limited Partnership Agreement between Mivida Corporation,
et. al. and Shell Polymers and Catalysts Enterprises, Inc.,
et. al., dated April 1, 1988*
10.17 Partnership Agreement between Cyanamid Plastics, Inc., and
Rohacryl, Inc., dated July 1, 1976*
10.18(a) Joint Venture Agreement between Cyanamid Melamine, Inc., and
DCP Melamine North America, Inc., dated April 15, 1986*
- 48 -
10.18(b) Agreement dated April 15, 1986 between Cyanamid and DSM
Chemische Production BV, as amended October 24, 1994
(Exhibit 10.18(b) incorporated by reference from
corresponding exhibit to Annual Report on Form 10-K for year
ended December 31, 1994.)
10.19 Mineral Rights Agreement between Cyanamid, Kerr-McGee
Corporation, Brewster Phosphates and International Minerals
& Chemical Corporation, dated May 7, 1986*
10.20 Mineral Lease between Cyanamid, Kerr-McGee Corporation,
Brewster Phosphates and International Minerals & Chemical
Corporation, dated October 10, 1986*
10.21(a) Joint Venture Agreement dated as of February 23, 1984 among
Cyanamid Overseas Corporation and Dyno Industrier A.S.
10.21(b) Amendment to Joint Venture Agreement dated as of December
16, 1993, among Cyanamid Overseas Corporation, Dyno
Industrier A.S. and Cytec Overseas Corporation
(Exhibits 10.21(a) and (b) incorporated by reference from
corresponding Exhibit in quarterly report on Form 10-Q for
the quarter ended March 31, 1994.)
10.22(a) Joint Venture Agreement between Cyanamid Methanol, Inc. and
MG Fortier, Inc.
10.22(b) Methanol Sales Agreement between Cyanamid Methanol, Inc. and
MG Fortier, Inc.
10.22(c) Methanol Sales Contract between Fortier Methanol Company and
Cyanamid Methanol, Inc.
(Exhibits 10.22(a), (b) and (c) incorporated by reference
from Exhibits 10(i), 10(j) and 10(k) to quarterly report on
Form 10-Q for the quarter ended September 30, 1994.)
10.23 Asset Purchase Agreement dated as of December 23, 1996
between Sterling Fibers, Inc., Sterling Chemicals, Inc.,
Sterling Chemicals Holdings, Inc., Cytec Acrylic Fibers
Inc., Cytec Technology Corp. and Cytec Industries, Inc.
11(a) Historical Earnings Per Share computations for the year
ended December 31, 1996
11(b) Historical Earnings Per Share computations for the year
ended December 31, 1995
- 49 -
11(c) Historical Earnings Per Share computations for the year
ended December 31, 1994
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Company
23 Consent of KPMG Peat Marwick LLP (related to the
consolidated financial statements of Cytec Industries Inc.
and Subsidiaries)
24(a-f) Powers of Attorney of F. W. Armstrong, G. W. Burns, L. L.
Hoynes, Jr., D. Lilley, W. P. Powell, and J. R. Satrum
27 Financial Data Schedule
----------
* Incorporated by reference to corresponding exhibit to
Registrant's Registration Statement on Form 10, as amended.
** Incorporated by reference to corresponding exhibit to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993.
*** Incorporated by reference to Exhibit 10(a) through (h),
respectively, to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.
**** Incorporated by reference to Exhibits 2(b), (Exhibit 2.2)
and 2(c) (Exhibit 2.3) and 99(a) (Exhibit 10.12) to
Registrant's Registration Statement on Form S-3,
Registration No. 33-97328.
***** Incorporated by reference to corresponding exhibits to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
****** Incorporated by reference to exhibits 10.13(i), 10.13(k),
10.13(l) and 10.13(n) to Registrant's Report on Form 10-Q
for the quarter ended June 30, 1996.
- 50 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
DATE: March 27, 1997 By:/s/D. D. Fry
-------------------------
D. D. Fry
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
DATE: March 27, 1997 /s/D. D. Fry
-------------------------
D. D. Fry
Chairman and Chief Executive Officer
F. W. Armstrong, Director }
G. A. Burns, Director }
D. Lilley, Director } By:/s/E. F. Jackman
-------------------------
Attorney in Fact
L. L. Hoynes, Jr., Director }
W. P. Powell, Director }
J. R. Satrum, Director }
DATE: March 27, 1997 /s/J. P. Cronin
---------------------------------------
J. P. Cronin, Executive Vice President,
Chief Financial and Accounting Officer
- 51 -
Independent Auditors' Report
The Board of Directors and Stockholders
Cytec Industries Inc.
Under date of January 27, 1997 we reported on the consolidated balance sheets of
Cytec Industries Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996, as
contained in the 1996 annual report to stockholders. These consolidated
financial statements and our report thereon are included in the annual report on
Form 10-K for the year 1996. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedules based on our audits.
In our opinion, such financial statements schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 27, 1997
- 52 -
Schedule II
Cytec Industries Inc.
Valuation and Qualifying Accounts
Year-ended December 31, 1996
(Millions of dollars)
Additions or (deductions) Other
Balance charged or (credited) to Additions or Balance
Description 12/31/95 expenses (deductions) 12/31/96
- ----------- -------- ------------------------- ----------- --------
Reserves deducted
from related assets:
Doubtful
accounts $11.6 -- $(0.5)(1) $11.1
Total investments
and advances and
other assets $ 7.2 -- -- $ 7.2
Additions or (deductions) Other
Balance charged or (credited) to Additions or Balance
Description 12/31/94 expenses (deductions) 12/31/95
- ----------- -------- ------------------------- ----------- --------
Reserves deducted
from related assets:
Doubtful
accounts $11.6 -- -- $11.6
Total investments
and advances and
other assets $ 7.2 -- -- $ 7.2
Additions or (deductions) Other
Balance charged or (credited) to Additions or Balance
Description 12/31/93 expenses (deductions) 12/31/94
- ----------- -------- ------------------------- ----------- --------
Reserves deducted
from related assets:
Doubtful
accounts $ 9.5 $ 2.6 $(0.5)(1) $11.6
Total investments
and advances and
other assets $ 7.2 -- -- $ 7.2
(1) Principally bad debts written off, less recoveries and exchange
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Exhibit Index
-------------
Page Herein
-----------
2.1 *
2.2 *
2.3 *
3.1 *
3.2 *
4.1 *
4.4 *
4.7 *
10.1 *
10.2 *
10.3 *
10.4 *
10.6(a) *
10.6(b) *
10.7 *
10.8 *
10.9(a) *
10.10 *
10.12
10.13(a) *
10.13(b)
10.13(c)
10.13(d)
10.13(e)
10.13(f) *
10.13(g) *
10.13(h) *
10.13(i) *
10.13(j) *
10.13(k) *
10.13(l) *
10.13(m) *
10.13(n) *
10.13(p) *
10.13(q) *
10.13(r) *
10.14 *
10.15 *
10.16 *
10.17 *
10.18(a) *
10.18(b) *
10.19 *
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Page Herein
-----------
10.20 *
10.21(a) *
10.21(b) *
10.22(a) *
10.22(b) *
10.22(c) *
10.23
11(a)
11(b)
11(c)
21
23
24 (a-f)
27
* Denotes exhibit incorporated by reference
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