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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 1-12372

Cytec Industries Inc.

Registrant’s telephone number, including area code (973) 357-3100

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days.    Yes þ    No o.

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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes þ    No o.

At June 28, 2002, the aggregate market value of common stock held by non-affiliates was $1,231,616 based on the closing price ($31.44) of such stock on such date.

There were 38,845,097 shares of common stock outstanding on January 31, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

CYTEC INDUSTRIES INC. AND SUBSIDIARIES

10-K TABLE OF CONTENTS

COMMENTS ON FORWARD-LOOKING STATEMENTS

A number of the statements made by the Company in the Annual Report on Form 10-K, or in other documents, including but not limited to Chairman, President and Chief Executive Officer’s letter to Stockholders, its press releases and other periodic reports to the Securities and Exchange Commission, may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include, among others, statements concerning the Company’s (including its segments) outlook for the future, the accretiveness of acquisitions, the financial effects of divestitures, pricing trends, the effects of changes in foreign exchange rates and forces within the industry, the completion dates of and expenditures for capital projects, expected sales growth, 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 global and regional economies; the financial well-being of end consumers of the Company’s products, particularly the airline industry; changes in demand for the Company’s products or in the quality, costs and availability of its raw materials and energy; customer inventory destocking; the actions of competitors; currency exchange and interest rate fluctuations; technological change; the Company’s ability to renegotiate expiring long-term contracts; changes in employee relations, including possible strikes; government regulations; governmental funding for those military programs that utilize the Company’s products; litigation, including its inherent uncertainty; difficulties in plant operations and materials transportation; environmental matters; the results of and recoverability of investments in associated companies; returns on employee benefit plans assets and changes in the discount rates used to estimate employee benefit liabilities; changes in the medical cost trend rate; changes in accounting principles or new accounting standards; war, terrorism or sabotage; and other unforeseen circumstances. A number of these factors are discussed in this and other of the Company’s filings with the Securities and Exchange Commission.

AVAILABLE INFORMATION

The Company maintains a website that contains various information on the Company and its products. It is accessible at www.Cytec.com. Through the Company’s website, shareholders and the general public may access free of charge (other than any connection charges from internet service providers) filings the Company makes with the Securities and Exchange Commission as soon as practicable after filing. Filing accessibility in this manner includes the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K.

The Company is a global specialty chemicals and specialty materials company that focuses on value-added products. The Company serves major markets for aerospace, water treatment and mining, automotive and industrial coatings, plastics and chemical intermediates. The Company manufactures the vast majority of its products and sells its products worldwide. The Company had net sales of $1,346.2 million and earnings from operations of $117.4 million in 2002. In addition, the Company has a 50% interest in each of two unconsolidated associated companies, and a one-third interest in a third. The associated companies had aggregate net sales of $307.5 million and gross profit of $60.5 million in 2002. The Company reported $6.1 million of equity in earnings of associated companies in 2002.

The Company operates in four segments: Water and Industrial Process Chemicals, Performance Products, Specialty Materials and Building Block Chemicals. Water and Industrial Process Chemicals principally include water treating chemicals, mining chemicals and phosphine chemicals and before November 2000, paper chemicals. Performance Products principally include coating chemicals, performance chemicals and polymer additives. Specialty Materials principally include advanced composites and adhesives. Building Block Chemicals principally include acrylonitrile, acrylamide, hydrocyanic acid, melamine and sulfuric acid. The Company characterizes its businesses as platform businesses and value businesses. Platform businesses are those businesses the Company believes have a competitive advantage to grow organically and by extension through strategic acquisitions. The Company expects these businesses to have sales growth over a business cycle considerably in excess of growth in gross domestic product. The Company also expects its platform businesses will need investment in research and development and possibly in capital to

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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 or withdraw certain product lines and/or acquire additional product lines or technologies. Additionally, regular reviews are performed of the cost effectiveness and profitability of plant sites or individual facilities within such sites. In management’s opinion, the financial impact of a disposal or withdrawal of certain product lines together with the impact on plant sites 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.

The Company completed three acquisitions during 2001 and two divestitures during 2000. See Note 2 of the Notes to the Consolidated Financial Statements.

Unless indicated otherwise, the terms “Company” and “Cytec” each refer collectively to Cytec Industries Inc. and its subsidiaries. Cytec was incorporated as an independent public company in December 1993.

WATER AND INDUSTRIAL PROCESS CHEMICALS SEGMENT

The Water and Industrial Process Chemicals segment had net sales to external customers of approximately $331.2 million in 2002 and $335.0 million in 2001, or approximately 24.6% and 24.2%, respectively, of the Company’s net sales in such years. Many of the Company’s products in this segment are manufactured using acrylamide, one of the Company’s building block chemicals.

Set forth below are the Company’s primary product lines and major products in the Water and Industrial Process Chemicals segment, and their principal applications.

(1)	Sales of this product line are also made by Mitsui Cytec Ltd. (“Mitsui Cytec”), an unconsolidated associated company owned 50% by Mitsui Chemicals, Inc. See “Associated Companies.”

Water Treating Chemicals: The Company’s water treating chemicals product line consists primarily of the manufacture and sale of products for use in such applications as sewage conditioners for municipal wastewater treatment, as treatments in industrial waste streams to remove suspended solids, as treatments of municipal drinking water and industrial influent water supplies, and as drilling mud conditioners for oil service companies. Increased demand for clean water, environmental regulations and regional and global economic development have increased demand for the Company’s water treating chemicals. To support this growing demand, Cytec completed significant expansions at its Mobile, Alabama and Bradford, England plants during 2001. Although Cytec sold its paper chemicals product line in two separate transactions in late 2000, it retained all of its production facilities, which are also used in its water treating and mining chemicals product lines, and Cytec now produces paper chemicals under a long term supply agreement for the purchasers of its paper chemicals product line. Cytec also retained its paper wastewater treating product line.

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Competition is generally intense in wastewater treatment applications, particularly for municipal accounts, where contracts generally are awarded on a competitive bid basis, and for those industrial applications where technical service is not an important factor. Cytec markets its water treating chemicals through a specialized sales and technical services staff with an emphasis on sales to global full-service water treatment companies.

Mining Chemicals: The Company’s mining chemicals product line is primarily used in applications to separate minerals from ores. The Company has leading positions in the copper processing industry, particularly in the flotation of sulfide ores, and in the alumina processing industry, where its patented HxPams are particularly effective at the flocculation of “red mud.” The Company also sells phosphine chemicals specialty reagents which have leading positions in cobalt/nickel separation and copper sulfide recovery applications. The Company strives to develop new technologies as well as new formulations tailored for specific 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’s mining chemicals product lines are marketed primarily through a specialized sales and technical services staff. Cytec expects to continue expanding its sales presence in South America, Asia and Australia, the growth markets for the Company’s mineral processing chemicals.

Phosphine Chemicals: The Company’s phosphine chemicals are utilized for a variety of applications. The Company is the largest supplier of ultra-high purity phosphine gas, used in semiconductor manufacturing and light emitting diode applications, and has significant positions in various phosphine derivative products including phosphonium salts used in pharmaceutical catalysts and biocides. The Company acquired a phosphine fumigants product line in 1999. The Company marketed phosphine fumigants in the United States as an alternative to methyl bromide, which is required to be phased out by the end of 2004 due to its ozone depleting characteristics. Sales of phosphine fumigants are dependent upon obtaining and maintaining necessary registrations and approvals from applicable regulatory agencies and the Company is seeking product registrations for its fumigants in additional countries. The Company also seeks to broaden its product line through development of additional proprietary technologies for pharmaceuticals, specialty chemicals catalysts and reactive intermediate applications. The Company recently increased its plant capacity to meet increased customer demand and will consider further increases to meet future growth opportunities.

PERFORMANCE PRODUCTS SEGMENT

The Performance Products segment had net sales to external customers of approximately $452.3 million in 2002 and $434.7 million in 2001, or approximately 33.6% and 31.3%, respectively, of the Company’s net sales in such years. Set forth below are the Company’s primary performance products product lines, major products and their principal applications.

(1)	Sales of this product line are also made by Mitsui Cytec. See “Associated Companies.”

Coatings Chemicals: The Company believes that it is the largest global supplier of amino coating resins (“Resins”), which the Company markets primarily for industrial coatings applications under the CYMEL® trademark. The Company sells Resins worldwide to manufacturers producing coatings for automotive, marine, wood and metal finishings, and appliances, containers, coils and general industrial maintenance coatings. As part of the project to consolidate and increase the flexibility of the Company’s global Resins production, the Company completed an expansion of its Resins production capacity at its Lillestrom, Norway plant in the second half of 2001. The Company transferred production to this facility from a former tolling facility near the end of 2002. Many of the Company’s Resins are manufactured using melamine, one of the Company’s building block chemicals.

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The Company markets coating chemicals through a specialized sales and technical service staff. Sales are typically made directly to large customers and through distributors to smaller customers.

Performance Chemicals: The Company’s performance chemicals have different functionalities and are sold into varied end use applications. The largest product group is a line of adhesion promoters sold under the CYREZ® trademark. Adhesion promoters are used globally in the rubber industry, the major application being in the manufacture of tires. The Company’s adhesion promoters are manufactured using melamine, one of the Company’s building block chemicals.

The Company is a leading global supplier of acrylamide based specialty monomers and sulfosuccinate surfactants. These products are used in emulsion polymers, paints, paper coatings, printing inks, and other diverse customer applications.

The Company also manufactures and markets urethane chemicals and formulated urethane and epoxy systems. The Company’s urethane chemicals are sold primarily for use in high performance coating applications and inks and adhesives and formulated urethane systems are sold primarily for use as potting compounds in electrical applications.

The Company markets its performance chemicals through several specialized sales and technical service staffs. Sales are typically made directly to large customers and through distributors to smaller customers. The Company has achieved growth in its performance chemicals sales by finding new applications for its existing products. The Company continues to seek additional new applications.

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 that are used in agricultural films, toys, lawn furniture and automotive applications, fibers for carpets, spandex applications, engineered plastics and automotive coatings. Ciba Specialty Chemicals AG is the dominant competitor in this product line. The Company seeks to enhance its position with new products based on proprietary chemistries and solutions-based technical support. In 2001 the Company launched its CYASORB THT family of light stabilizers based on the Company’s proprietary hindered amine light stabilizer and triazine chemistries. These chemistries provide much higher efficiency as ultraviolet light stabilizers than previous technologies.

The Company markets polymer additives through a dedicated sales and technical service staff. Sales are typically made directly to large customers and through distributors to smaller customers. The Company owns a one-third interest in PolymerAdditives.com, LLC, a business-to-business Internet joint venture formed by the Company, GE Specialty Chemicals, Inc. and Albemarle Corporation. PolymerAdditives.com offers customers the convenience of purchasing a variety of brand name polymer additives, including the Company’s light stabilizers and antioxidants, from one source with one order. During 2002, the Company reduced the carrying value of its net investment in this company to zero. Accordingly, the Company will no longer recognize its share of the joint venture’s expected future losses. The Company is not obligated to make any further capital contributions and is assessing the value of its distribution alternatives.

SPECIALTY MATERIALS SEGMENT

The Specialty Materials segment had net sales to external customers of approximately $395.5 million in 2002 and $450.2 million in 2001, or approximately 29.4% and 32.5%, respectively, of the Company’s net sales in such years. The specialty materials segment principally manufactures and sells aerospace materials that are used mainly in commercial and military aviation, satellite and launch vehicles, and aircraft brakes and high performance automotive applications such as F-1 racing cars.

Cytec Engineered Materials: The Company is the major global supplier of aerospace structural film adhesives and one of two major suppliers of aerospace advanced composite materials. Advanced composites are exceptionally strong and lightweight materials manufactured by impregnating fabrics and tapes made from high performance fibers (such as carbon) with epoxy, bismaleimide, phenolic, polyimide and other resins formulated or purchased by the Company. The Company acquired 3M’s composites business in 2001 to provide additional customer qualifications and new products.

The primary applications for both aerospace adhesives and advanced composites are commercial airliners, regional and business jets, military aircraft, satellites and launch vehicles, high performance automotive and specialty applications. 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 major commercial program in the Western world has qualified and uses certain of the Company’s products. Current military programs such as the F/ A-22 and

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Advanced composites generally account for a higher percentage of the structural weight on military aircraft than on commercial aircraft. They also account for a higher percentage of the structural weight on newer design commercial aircraft than older design commercial aircraft as technology progresses and manufacturers design planes to achieve greater fuel efficiency. Advanced composites made from carbon fibers and epoxy or bismaleimide resins are primarily used for structural aircraft applications such as wing, tail and rudder components, engine housings, and fuselage components while advanced composites made from fiberglass and phenolic resins are primarily used for secondary structure applications such as fairings and interior aircraft applications such as sidewall, ceiling and floor panels and storage and cargo bins. In addition, the Company’s ablatives are used in manufacturing rocket nozzles and the Company’s carbon/carbon products are used in manufacturing aircraft and other high performance brakes.

The Company’s aerospace adhesives and advanced composites also have various applications in industrial, high performance automotive and selected recreational products. The Company is seeking to leverage its engineered materials portfolio with customers in these and other new markets.

The Company purchases from third parties all of the aramid and glass fibers and much of the carbon fibers and base resins used in the manufacture of composites. Other carbon fibers are sourced directly from Cytec Carbon Fibers as discussed below. See “Customers and Suppliers” and Item 3, “Legal Proceedings.”

The Company markets aerospace materials through a dedicated sales and technical service staff typically direct to customers.

Cytec Carbon Fibers: In 2001 the Company acquired BP’s carbon fibers business to enhance its ability to maintain a high quality, low cost supply of carbon fiber for its advance composite products.

The Company manufactures and sells various high performance grades of both PAN (polyacrylonitrile) type and pitch type carbon fibers. Carbon fibers are mainly used as a reinforcement material for plastics used in the aerospace and certain other industries and have many advantageous characteristics such as light weight, tensile strength and heat resistance.

Over 50% of the Company’s carbon production is utilized internally as reinforcement in producing certain of the Company’s advanced composites. The remainder is sold to third parties through a direct sales force.

BUILDING BLOCK CHEMICALS SEGMENT

The Building Block Chemicals segment had net sales to external customers of approximately $167.2 million in 2002 and $167.2 million in 2001, or approximately 12.4% and 12.1%, respectively, of the Company’s net sales in each year.

Building block chemicals are manufactured primarily at the Company’s world-scale, highly integrated Fortier facility. The Fortier facility is located on the bank of the Mississippi River near New Orleans, Louisiana and has ready access to all major forms of transportation and supplies of raw materials.

Acrylonitrile and Hydrocyanic Acid: 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 up to approximately 25% will be sold pursuant to a long term supply agreement and 25% through a long term distribution agreement, the first of which provides for a cost based price through the first quarter of 2005 and the second of which provides for a market based price. 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 Industries (“CYRO”), an unconsolidated associated company, as a raw material for methyl methacrylate (“MMA”) under two long-term contracts, one of which expires in mid 2003. The Company is in the process of negotiating an extension of this agreement. The

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Other Building Block Chemicals: The Company also manufactures and sells acrylamide, melamine and sulfuric acid. The Company anticipates that over the near term it will use internally approximately 40% of its acrylamide annual production capacity of 200 million pounds for the production of certain products for the Company’s water treating chemicals, mining chemicals and performance chemicals product lines. The remainder of the Company’s production is sold to third parties. The Company manufactures acrylamide at its Fortier facility and at its Botlek facility in The Netherlands.

American Melamine Industries (“AMEL”), a 50% owned manufacturing joint venture with a subsidiary of DSM N.V., operates a melamine manufacturing plant with annual production capacity of approximately 160 million pounds at the Fortier facility. DSM, which is the world’s leading manufacturer of melamine, makes its melamine expertise available to AMEL under a license agreement. The Company anticipates that over the near term it will use internally up to 80% of its 50% share of AMEL’s annual melamine production, primarily for the production of Resins. The remainder of the Company’s share of production is sold to third parties. AMEL is the only North American manufacturer of melamine.

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. This agreement is scheduled to expire at the end of 2003 and the Company is currently in the process of negotiating an extension.

The Company mothballed its only ammonia plant in 2001. The ammonia plant had been using higher cost, domestic natural gas as a raw material and consequently was not competitive with foreign sourced material. It is unlikely that the plant will restart.

Prices of building block chemicals are sensitive to the stages of economic cycles, energy prices and currency exchange rates, as well as to periods of insufficient and excess capacity. The production of building block chemicals is generally capital intensive, which may cause strong downward pressure on prices in poor market environments as producers tend to operate their plants at capacity even in poor market environments. The Company sells building block chemicals to third parties through a direct sales force and distributors.

ASSOCIATED COMPANIES

The Company has an ownership interest in three unconsolidated associated companies as described below.

CYRO Industries (50% owned): CYRO manufactures and sells acrylic sheet and molding compound products, primarily under the ACRYLITE® trademark and MMA. CYRO operates primarily in North America and manufactures its acrylic products at four locations in the U.S. CYRO closed its Canadian manufacturing plant in 2001 in order to enhance its overall manufacturing efficiency. The Company’s partner in CYRO, an indirect subsidiary of Degussa A.G., has an affiliate, Rohm GmbH and Co. KG., that manufactures and sells acrylic sheet and molding compounds products and MMA primarily in Europe and makes its technological expertise available to CYRO.

CYRO uses much of the MMA it manufactures as a raw material in the manufacture of acrylic sheet and molding compounds and it sells the remainder to third parties. CYRO’s world-scale MMA manufacturing facility is 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. CYRO’s annual MMA production capacity is approximately 290 million pounds.

Mitsui Cytec (50% owned): Mitsui Cytec manufactures and sells Resins in Japan and manufactures certain water treating and mining chemicals in Japan that it sells throughout Asia. The Company has licensed certain of its technologies to Mitsui Cytec on an exclusive basis in Japan and on an exclusive and non-exclusive basis in other parts of Asia.

PolymerAdditives.com LLC (33 1/3% owned): Cytec, GE Specialty Chemicals, Inc. and Albemarle Corporation each own a one-third interest in this business-to-business Internet joint venture which distributes a broad line of polymer additive products. See “Performance Products Segment – Polymer Additives.”

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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 technical service and customer 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

The Company has a diversity of product lines and in 2002, no customer accounted for more than 10% of the Company’s net sales. Sales to the Boeing Company and its subcontractors for commercial and military aerospace and other components were approximately $150 million, or 11% of consolidated net sales, in 2001, and approximately $153 million, or 10% of consolidated net sales, in 2000. See also the discussion above of the acrylonitrile long-term contracts under “Building Block Chemicals – Acrylonitrile” and the discussion of sales to CYRO and other associated companies in Note 5 of the Notes to the Consolidated Financial Statements.

With respect to suppliers, the Company’s vertical integration (i.e., its manufacture of intermediates used to manufacture certain water treating chemicals, mining chemicals, coating chemicals and performance chemicals and its manufacture of carbon fibers for advanced composites) helps protect it from being reliant on other companies for many significant intermediates. The significant raw materials required to manufacture the Company’s building block chemicals are natural gas, propylene, and sulfur, which are readily available. Natural gas is an important indirect raw material for many of the Company’s products, including Resins. Because natural gas is not easily transported, the price may vary widely between geographic regions. The price of natural gas in the United States has been volatile during the past few years and is significantly above the price in many other parts of the world. While the Company has not had any problems obtaining the natural gas that it needs, because many of the Company’s products compete with similar products made with less expensive natural gas available elsewhere, the Company may not be able to recover any or all of the increased cost of gas in manufacturing its products. The Fortier facility is served by a single propylene pipeline owned by a supplier, although the Company has made arrangements to allow other suppliers to use part of the pipeline’s capacity.

The Company generally attempts to retain multiple sources for high volume raw materials, other than its own building block chemicals, in order to minimize its reliance on any one supplier. The Company sources its requirements of cationic monomers from a single supplier under a long-term agreement. Cationic monomers are important raw materials in the water treating chemicals and mining chemicals product lines. The Company is dependent on a limited number of suppliers for carbon fibers that are used in many of the Company’s advanced composite products. Availability of certain carbon fibers has occasionally been quite limited, although availability has recently been adequate. The risk of future carbon fiber supply limitations is reduced now that the Company manufactures some of its own carbon fibers.

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 sales of certain of the Company’s building block chemicals varies due to the cyclicality typically experienced with respect to the amount of industry wide capacity dedicated to producing such chemicals and the amount of end user demand.

INTERNATIONAL

The Company operates on a worldwide basis with manufacturing plants located in eight countries (other than the United States). Export sales to unaffiliated customers from the United States were $164.7 million for 2002, $185.3 million for 2001 and $188.8 million for 2000 or approximately 12%, 13% and 12% of net sales in such years, respectively.

The Company markets its products internationally through Company sales offices, distributors and one associated company as described above. Foreign sales were approximately 49% in 2002, 47% in 2001 and 46% in 2000, of net sales to unaffiliated customers.

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The Company’s identifiable assets located outside of the United States, by geographical region, at year end 2002 and 2001 are set forth in Note 17 of the Notes to the Consolidated Financial Statements.

International operations are subject to various risks which may not be 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 currently believe that it is likely to suffer a material adverse effect on its results of operations in connection with its existing foreign operations.

RESEARCH AND PROCESS DEVELOPMENT

During 2002, 2001 and 2000, the Company expended an aggregate of approximately $33.7 million, $32.4 million and $38.6 million, respectively, on Company-sponsored research and process development activities. Company research and process development expenses declined in 2001 primarily as the result of the divestiture of the Company’s paper chemicals business in late 2000.

TRADEMARKS AND PATENTS

The Company has approximately 1,500 United States and foreign patents and also has trademark applications and registrations for approximately 150 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 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

Approximately 4,250 employees are engaged in the operations of the Company, excluding employees of associated companies. Approximately 2,100 of the Company’s employees are covered by union contracts. The Company believes that its relations with both employees and the related union leaderships are generally good.

OPERATING RISKS

The Company’s revenues are largely 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. In addition, the Company’s operations can be adversely affected by raw material or energy supply disruptions, labor force shortages or work stoppages and events impeding or increasing the cost of transporting the Company’s products. 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. Under certain circumstance, these hazards could 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.

The Company utilizes third party insurance to cover portions of certain of these risks to the extent that coverage is available and can be obtained on terms the Company believes are economically justifiable. After September 11, 2001, the availability of property insurance in particular became much tighter. The Company declined to obtain coverage for terrorist acts since it was not available at economic rates, and in response to an approximate tripling in proposed rates, the Company increased certain of its deductibles and self-retention amounts primarily in the area of property insurance.

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. 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. 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.

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. Non-compliance 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.

Note 10 of the Notes to the Consolidated Financial Statements is incorporated by reference herein.

The Company operates manufacturing and research facilities located in the United States, the United Kingdom, the Netherlands, Mexico, Canada, Colombia, Germany, Norway and Chile. Capital spending, exclusive of acquisitions, for the years ended 2002, 2001 and 2000 was approximately $62.2 million, $63.9 million, and $76.5 million, respectively. Capital expenditures in 2003 are expected to be in the range of $90.0 to $100.0 million. The anticipated increase in spending from 2002 levels is due primarily to a multi-year project to significantly upgrade and modernize the Stamford, Connecticut specialty chemicals research facility. The Company’s capital expenditures are intended to provide increased capacity, to improve the efficiency of production units, to improve the quality of the Company’s products, to modernize or replace older facilities, or to install equipment for protection of employees, neighboring communities and the environment.

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The Company’s major facilities and the segments served by each such facility are as follows:

The Company owns all of the foregoing facilities and their sites except for the land at the Botlek, Lillestrom and Rock Hill facilities which is leased under long term leases. The Company leases its corporate and Specialty Chemicals headquarters in West Paterson, New Jersey and its Specialty Materials headquarters located in Tempe, Arizona.

Item 3. LEGAL PROCEEDINGS

The Company is the subject of numerous lawsuits and claims incidental to the conduct of its or its predecessors’ businesses, including lawsuits and claims relating to product liability, personal injury, environmental, contractual, employment and intellectual property matters. Many of the matters relate to the use, handling, processing, storage, transport or disposal of hazardous materials. The Company believes that the resolution of such lawsuits and claims, including those described below, will not have a material adverse effect on the financial position of the Company, but could be material to the results of operations of the Company in any one accounting period.

Cytec and/or American Cyanamid Company (“Cyanamid”), the Company’s former parent company, are among several defendants in more than 35 cases, pending in various state and federal courts, in which plaintiffs assert claims for personal injury, property damage, and other claims for relief relating to lead pigment that was used as an ingredient decades ago in paint for use in buildings. Cytec has an agreement to indemnify Cyanamid in connection with such suits. The different suits were brought by government entities and individual plaintiffs, on behalf of themselves and others. The suits variously seek injunctive relief and compensatory and punitive damages, including funds for the cost of monitoring, detecting and removing lead based paint from buildings; for personal injuries allegedly caused by ingestion of lead based paint; and plaintiffs’ attorneys’ fees. The Company and Cyanamid believe that the suits against them are without merit and are vigorously defending against all such claims.

The Company has access to a substantial amount of primary and excess general liability insurance for property damage under the policies of Cyanamid. The Company believes these policies are available to cover a significant portion of both its defense costs and indemnity costs, if any, for lead related property damage. The Company is currently pursuing an agreement with various of its insurers concerning coverage with respect to the claims asserted in these suits.

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In January 1999 the Company received a subpoena to testify before, and provide documents to, a federal grand jury in California investigating the carbon fiber and prepreg industry. The Company manufactures prepregs as part of its advanced composites product line. The Company has no reason to believe that it is a target of the grand jury investigation. After the grand jury investigation was commenced, the Company and the other companies subpoenaed to testify before the grand jury were named as defendants in two civil antitrust class actions in state and federal courts in California on behalf of purchasers of carbon fiber, which the complaints defined to include prepregs manufactured from carbon fiber. In each case the complaint alleges that the defendants, manufacturers of carbon fiber and/or prepregs manufactured therefrom, conspired to fix the prices of their products. The Company and other companies have also been named as defendants in a state civil antitrust action in the state court in Massachusetts. The Company denies that it conspired to fix prices. In connection with its acquisition of BP’s carbon fibers business, the Company was indemnified by BP on various matters including any liabilities BP’s carbon fibers business may have in these proceedings. The indemnity does not cover any liability the Company may have in its own right and not as a successor to BP’s carbon fibers business.

See also the first four paragraphs of “Environmental Matters” under “Business” in Item 1 and Note 10 of the Notes to the Consolidated Financial Statements.

In addition to liabilities with respect to the specific cases described above, because the production of certain chemicals involves the use, handling, processing, storage, transportation and disposal of hazardous materials, and because certain of the Company’s products constitute or contain hazardous materials, the Company has been subject to claims of injury from direct exposure to such materials and from indirect exposure when such materials are incorporated into other companies’ products. There can be no assurance that, as a result of past or future operations, there will not be additional claims of injury by employees or members of the public due to exposure, or alleged exposure, to such materials.

Furthermore, the Company also has exposure to present and future claims with respect to workplace exposure, workers’ compensation and other matters arising from past events.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

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Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock of the Company is listed on the New York Stock Exchange. On February 1, 2003, there were approximately 12,640 holders of record of the Common Stock of the Company.

The high and low stock prices for each quarter were:

The Company has not paid a cash dividend on its common stock. If consistent with its strategic direction, the Company may consider the appropriateness of paying a dividend among its alternative uses of cash. However, the Company is restricted from paying dividends in excess of certain amounts determined in accordance with the terms of its Series C Cumulative Preferred Stock. See Note 15 of the Notes to the Consolidated Financial Statements, which is incorporated by reference herein.

From time to time in connection with its stock repurchase program, the Company has sold unregistered put options entitling the holders to sell shares of the Company’s common stock to the Company. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Financial Condition.

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Item 6. SELECTED FINANCIAL DATA

FIVE-YEAR SUMMARY

(1)	Includes net restructuring charges of $10.3.
(2)	Includes net restructuring charges of $1.0.
(3)	Includes net restructuring charges of $2.4 and a charge of $1.7 for costs associated with a tax refund related to the prior years’ research and development tax credit.
(4)	Includes restructuring charges of $0.4.
(5)	Includes $2.0 of interest income related to the research and development tax credit.
(6)	Includes a $6.0 reduction in income tax expense related to a refund associated with prior years’ research and development tax credits.
(7)	Includes a restructuring charge of $4.6.
(8)	Includes a restructuring charge of $0.8 and $9.7 of goodwill amortization that is no longer amortized under Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.”
(9)	Includes a restructuring charge of $2.3 related to the Company’s 50% share of restructuring charges recorded by CYRO Industries.

(10)	Includes a net restructuring charge of $3.3 and a charge of $1.4 for receivables due the Company from its former ammonia joint venture.
(11)	Includes net restructuring charges of $1.1.
(12)	Includes net restructuring charges of $5.7 and $9.4 of goodwill amortization that is no longer amortized under SFAS 142.
(13)	Includes a gain of $88.3 from the divestiture of the paper chemicals business, a gain of $13.3, discounted and net of expenses, from an environmental remediation insurance settlement, a gain of $7.1 from the sale of real estate at a former plant site and a charge of $4.8 for the write-down of receivables from the AC Molding Compounds joint venture.
(14)	Includes $8.5 of goodwill amortization that is no longer amortized under SFAS 142.
(15)	Includes a credit of $8.0 related to the utilization of prior years’ tax credits.
(16)	Includes $8.3 of goodwill amortization that is no longer amortized under SFAS 142.
(17)	Includes a gain of $4.4 related to the sale of the bulk molding compounds product line.

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Item 7. 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. Dollars are in millions, except per share amounts. Percentages are approximate.

GENERAL

In the course of the Company’s ongoing operations, a number of strategic business acquisitions and dispositions have been made. All acquisitions have been recorded using the purchase method of accounting. Accordingly, the results of operations of the acquired companies have been included in the Company’s consolidated results from the dates of the respective acquisitions. (For further information about the Company’s acquisitions and dispositions, see Note 2 of the Notes to Consolidated Financial Statements.)

The Company expects to adopt Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”) effective January 1, 2003 and SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”) effective January 1, 2003. SFAS 143 addresses the accounting and reporting requirements for legal obligations associated with the retirement of tangible long-lived assets, and SFAS 146 addresses the recognition and measurement of costs associated with an exit or disposal activity. In addition, the Company has adopted SFAS No. 141, “Business Combinations” (“SFAS 141”) effective July 1, 2001 and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) effective January 1, 2002, and SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) effective January 1, 2001. (For further information on these current and pending accounting changes, see Note 1 of the Notes to Consolidated Financial Statements.)

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:

NET SALES BY BUSINESS SEGMENT AND GEOGRAPHIC AREA

The Company reports its net sales in four segments: Water and Industrial Process Chemicals, Performance Products, Specialty Materials and Building Block Chemicals. The Water and Industrial Process Chemicals and Performance Products segments are collectively referred to as Specialty Chemicals. (See Item 1. Business.)

The Company reports its net sales in four geographic regions: North America, Latin America, Asia/ Pacific Rim and Europe/ Middle East/ Africa. The destination of the sale determines the region under which it is reported consistent with management’s view of the business. North America consists of the United States and Canada. Latin America includes Mexico, Central America, South America and the Caribbean Islands. Asia/ Pacific Rim is comprised of Asia, Australia and the islands of the South Pacific Rim.

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Net Sales to unaffiliated customers by business segment and geographic area are set forth below.

(1)	On November 1, 2000, the Company substantially divested its paper chemicals business, which had net sales of $97.9 in 2000. Sales for the retained portion of the paper chemicals business were $26.8 and $32.0 in 2002 and 2001, respectively.

Net sales in the United States were $685.8, $736.9 and $798.8 for 2002, 2001 and 2000, respectively. International net sales were $660.4, $650.2, and $693.7, or 49.1%, 46.9% and 46.5% of total net sales, for 2002, 2001 and 2000, respectively.

(For more information on the Company’s segments, see Note 17 of the Notes to the Consolidated Financial Statements and further discussions in the Segment Results section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.)

YEAR ENDED DECEMBER 31, 2002, COMPARED WITH YEAR ENDED DECEMBER 31, 2001

Net sales for 2002 were $1,346.2, compared with $1,387.1 for 2001. The decrease was primarily due to a significant decrease in demand for commercial aircraft in the Specialty Materials segment that was partially offset by sales increases in the Performance Products segment.

Manufacturing cost of sales was $1,022.4, or 75.9% of net sales, for 2002 and included net restructuring charges of $10.3 for plant closure and employee related costs and expenses associated with discontinuing a product line. Excluding these charges, manufacturing cost of sales was $1,012.1, or 75.2% of net sales, for 2002. Manufacturing cost of sales was $1,070.1, or 77.1% of net sales for 2001, and included a restructuring charge of $4.6 related to the mothballing of the Fortier ammonia plant and the Company’s share of the related personnel reductions at the Fortier facility. Excluding these charges, manufacturing cost of sales was $1,065.5, or 76.8% of net sales, for 2001. The adjusted period-over-period increase in gross profit margins was due to lower raw material and energy costs, particularly natural gas, that was partially offset by lower selling volumes in the Specialty Materials segment.

Selling and technical services expenses increased $8.3, research and process development expenses increased $1.3 and administrative and general expenses increased $2.2. Included in 2002 were net restructuring charges of $1.6, $1.0 and $0.8 in selling and technical services, research and process development and administrative and general expenses, respectively, which primarily related to employee reductions in the Specialty Chemicals and Specialty Materials segments. Also included in administrative and general expenses for 2002 were charges of $1.7 for fees incurred in connection with a favorable cash settlement of a prior years’ research and development tax credit claim with the IRS. Included in selling and technical services expenses for 2001 was a restructuring charge of $0.8, which related to the Company’s share of personnel reductions at the Fortier facility. After adjusting for these items in both years,

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Amortization of acquisition intangibles was $3.1, down $9.7 from the prior year period as goodwill is no longer amortized, effective January 1, 2002, under SFAS 142.

Other income, net, was $3.2 for 2002 and included foreign exchange gains of $2.8. Other income, net, was $7.9 for 2001 and included gains of $7.0 related to the sale of reclaimed land in Florida and the settlement of a royalty issue concerning mineral rights associated with a former phosphate rock mining joint venture also in Florida.

Equity in earnings of associated companies was $6.1 for 2002, compared with $0.1 for 2001. Included in 2002 and 2001 were restructuring charges of $0.4 and $2.3, respectively, related to CYRO’s shutdown of its Niagara Falls, Ontario, Canada facility, and CYRO’s share of infrastructure restructuring at the Company’s Fortier facility. Excluding these charges, equity in earnings of associated companies was $6.5 for 2002, compared with $2.4 for 2001. The increase in equity earnings of associated companies reflects higher sales and the benefits of the restructuring initiatives at CYRO. Sales at associated companies were $307.5 for 2002, an increase of 5% after excluding sales of the former AC Molding Compounds joint venture, which was shut-down in November 2001. Included in 2002 was a charge of $1.7 to reduce to zero the carrying value of the Company’s net investment in the one-third owned Polymer Additives.com, LLC joint venture. Accordingly, the Company will no longer recognize its share of the joint venture’s expected future losses. The terms of the joint venture agreement required the Company to make an additional contribution of $0.5 during 2002, and this required contribution was included in the amount of the charge recognized in 2002. The Company is not obligated to make any further capital contributions.

Interest expense, net, was $16.5 for 2002, compared with $19.6 for 2001. Included in 2002 was interest income of $2.0 received in connection with a favorable cash settlement of prior years’ research and development tax credit claims with the IRS. The remainder of the decrease was due to increased interest income attributable to higher cash balances during 2002.

The income tax provision was $30.9 for 2002 and included a reduction of $6.0 in connection with a cash settlement of prior years’ research and development tax credit claims. Excluding this item, the effective tax rate was 33.5%, down from 34.5% for the prior year period.

Net earnings for 2002 were $79.3, or $1.96 per diluted share, compared with $71.1, or $1.59 per diluted share, for 2001. Included in 2002 were after-tax net restructuring charges of $9.4, or $0.23 per diluted share, and a net credit of $6.2, or $0.15 per diluted share, related to prior year research and development tax credits broken down as follows: a reduction of $6.0, or $0.15 per diluted share, in income tax expense, after-tax interest income of $1.3, or $0.03 per diluted share, and an after-tax charge of $1.1 million, or $0.03 per diluted share, in administrative expenses for external costs associated with such tax planning. Excluding these items, adjusted net earnings for 2002 were $82.5, or $2.04 per diluted share. Included in 2001 were after-tax restructuring charges of $5.0, or $0.12 per diluted share, an after-tax extraordinary gain of $4.9, or $0.12 per diluted share, related to the acquisition of the assets of the carbon fibers business of BP, and after-tax goodwill amortization of $6.4, or $0.15 per diluted share, that is no longer required under SFAS 142. Excluding these items, adjusted net earnings for 2001 were $77.6, or $1.86 per diluted share. The adjusted period-over-period increase in net earnings and earnings per diluted share reflect lower raw material costs, higher selling volumes in the Performance Products and Building Block Chemicals segments, the benefits of the Company’s various rationalization and operational excellence efforts, higher interest income and the favorable effect of the Company’s stock repurchase program.

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SEGMENT RESULTS

Water and Industrial Process Chemicals

The decreases in selling volumes were due to lower water treatment sales in the North American municipal water market that the Company is de-emphasizing in favor of industrial markets. The paper and oilfield markets reflect lower levels of economic activity. Selling volumes for mining chemicals in the North and Latin American regions were also lower due to lower economic activity, while in the Asia/ Pacific Rim region selling volumes for mining chemicals were up due to increased demand in the copper and cobalt nickel markets. Phosphine sales were lower as a result of a certain customer experiencing reduced demand in their end market that resulted in lower purchases of the Company’s products.

Earnings from operations were $26.7, or 8.1% of net sales, in 2002, compared with $25.7, or 7.7% of net sales, in 2001. The improvement in earnings from operations was primarily the result of lower overall raw material costs and operating costs, and lower amortization expense of $1.1 from adopting SFAS No. 142.

Performance Products

Sales volumes increased in all product lines, particularly in the Asia/Pacific Rim region where sales benefited from improved market conditions. In the United States, demand in the automotive and general industrial markets improved as compared with 2001. The lower selling prices were primarily in the polymer additives product line.

Earnings from operations were $39.5, or 8.7% of net sales, in 2002, compared with $16.3, or 3.7% of net sales, in 2001. The improvement in earnings from operations is the result of the leverage achieved from higher selling volumes and lower raw material and operating costs. Also benefiting earnings was lower amortization expense of $1.2 from adopting SFAS No. 142.

Specialty Materials

(1)	Due to the level of sales in this geographic region, percentage comparisons are not meaningful.

The overall decrease in selling volume, which includes a 2.7% increase from acquisitions, reflects the significant decrease in demand for commercial aircraft. This affected sales in all regions and was partially offset by higher growth in the military (North America) and high performance auto sectors (primarily Europe).

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Earnings from operations were $64.9, or 16.4% of net sales, in 2002, compared with $95.9, or 21.3% of net sales, in 2001. The decline in earnings from operations reflects the decrease in selling volumes, which were partially offset by efforts to keep costs aligned with demand and lower amortization expense of $7.4 from adopting SFAS No. 142.

Building Block Chemicals (Sales to external customers)

(1)	Due to the level of sales in this geographic region, percentage comparisons are not meaningful.

The overall decrease in selling prices was primarily due to lower acrylonitrile and acrylamide selling prices during the first half of 2002. Demand for acrylonitrile improved with the recovery of certain of the Asia/ Pacific Rim economies and acrylamide sales were higher in Europe. Sales volumes in the North America region were negatively impacted by 6.7% due to the idling of the ammonia plant in April 2001.

Earnings from operations were $5.3 in 2002, compared with losses from operations of $18.7 in 2001. The improvement was due to higher acrylonitrile margins driven by increased demand in the export markets for acrylonitrile, by competitor’s supply disruptions, and by lower energy costs, principally natural gas in the United States and lower fixed expenses due to restructuring.

YEAR ENDED DECEMBER 31, 2001, COMPARED WITH YEAR ENDED DECEMBER 31, 2000

Net sales for 2001 were $1,387.1, compared with $1,492.5 for 2000. The decrease was due to sales decreases in the Water and Industrial Process Chemicals, Performance Products and Building Block Chemicals segments of $68.1, $39.3 and $36.6, respectively, that were partially offset by a sales increase in the Specialty Materials segment of $38.6. Excluding the effects of the November 1, 2000, paper chemicals business divestiture, sales in the Water and Industrial Process Chemicals segment decreased $2.2.

Manufacturing cost of sales was $1,070.1, or 77.1% of net sales, for 2001 and included a restructuring charge of $4.6 related to the mothballing of the Fortier ammonia plant and the Company’s share of the related personnel reduction at the Fortier facility. Excluding these charges, manufacturing cost of sales was $1,065.5, or 76.8% of net sales, for 2001. Manufacturing cost of sales was $1,078.7, or 72.3% of net sales, for 2000 and included net restructuring charges of $3.3 and a charge of $1.4 against receivables due to the Company from its 50%-owned ammonia joint venture. Excluding these charges, manufacturing cost of sales was $1,074.0, or 72.0% of net sales, for 2000. The adjusted period-over-period increase in manufacturing costs as a percentage of sales is due to lower production levels resulting from weaker demand in the Performance Products and Building Block Chemicals segments, the net adverse effects of exchange rate changes and higher raw material prices, particularly in the first quarter of 2001, that were partially offset by the benefits from higher selling prices.

Selling and technical services expenses decreased $24.2, research and process development expenses decreased $6.2 and administrative and general expenses decreased $2.9 primarily as a result of the divestiture of the paper chemicals business and the Company’s continuing cost control efforts. Amortization of acquisition intangibles increased $0.4 due to the additional amortization expense resulting from the acquisition of the composite materials business of 3M on March 30, 2001. Included in selling and technical services expenses for 2001 was a restructuring charge of $0.8 related to the Company’s share of the personnel reductions at the Fortier facility. Excluding this charge, selling and technical services expenses were $113.5 for 2001. Included in selling and technical service expenses for 2000 was a net restructuring charge of $5.4 primarily related to a workforce reduction and the discontinuance of a tolling operation. Excluding this charge, selling and technical services expenses were $133.1 for 2000. Excluding these items from both years, selling and technical service expenses decreased $19.6 year over year.

Other income, net, was $7.9 for 2001 and included gains of $7.0 related to the sale of reclaimed land in Florida and the favorable settlement of a royalty issue concerning mineral rights associated with a former phosphate rock mining

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Equity in earnings of associated companies was $0.1 for 2001 and included a charge of $2.3 for the Company’s 50% share of the CYRO’s restructuring charges, which included $3.7 related to the shutdown of CYRO’s manufacturing facility in Niagara Falls, Ontario, Canada, and $0.8 related to CYRO’s share of the infrastructure restructuring at the Company’s Fortier facility. Excluding this charge, equity in earnings of associated companies was $2.4 for 2001, down $12.6 from 2000. The decrease was due to lower sales at associated companies, primarily CYRO, and the fact that 2000 included earnings of $4.2 from the Criterion Catalyst joint venture, which was divested on July 10, 2000. Associated company sales were $306.9 in 2001, compared with $496.3 in 2000. Excluding sales of the divested Criterion Catalyst joint venture, 2001 sales of associated companies decreased 15% from 2000. Sales at CYRO decreased 14%, primarily due to lower selling volumes resulting from lower demand, especially in North America where the economy has been soft. For 2001 CYRO posted a small loss due to the restructuring charges previously mentioned. Excluding the restructuring charges, CYRO’s 2001 earnings decreased 73% from 2000. However, earnings in the second half of 2001 improved relative to the first half of 2001 as the restructuring benefits began to be realized.

Interest expense, net, was $19.6 for 2001, a decrease of $5.5 from 2000. The decrease reflects the lower outstanding debt levels during 2001.

The income tax provision was $34.9 for 2001 and $93.5 for 2000, which reflects an underlying effective tax rate of 34.5% for both years.

Earnings before extraordinary item were $66.2, or $1.59 per diluted share, for 2001, compared with $177.6, or $4.15 per diluted share, for 2000. Included in 2001 was $7.7 ($5.0 after-tax, or $0.12 per diluted share) from restructuring charges. Excluding these charges, adjusted earnings before extraordinary item for 2001 were $71.2, or $1.71 per diluted share. Included in 2000 was a gain of $88.3 ($57.8 after-tax, or $1.35 per diluted share) from the divestiture of the paper chemicals business and a gain of $13.3 ($8.7 after-tax, or $0.20 per diluted share) from an insurance settlement with a group of insurance carriers for an environmental remediation coverage suit. Also included in 2000 were charges of $11.5 ($7.5 after-tax, or $0.18 per diluted share) from net restructuring and other charges and a charge of $4.8 ($3.1 after-tax, or $0.07 per diluted share) for the write-down of receivables due from the AC Moldings Compounds joint venture. Excluding these items, adjusted earnings before extraordinary item for 2000 were $121.7, or $2.85 per diluted share. The adjusted year-over-year decline in earnings before extraordinary item of $50.5, or $1.14 per diluted share, was primarily due to lower sales volumes in the Performance Products and Building Block Chemicals segments, the adverse effects of unfavorable exchange rate changes and higher raw material prices, particularly in the first quarter of 2001. This was partially offset by increased sales volumes in the Specialty Materials segment, the benefits from higher selling prices in the Specialty Chemical segments (i.e., Water and Industrial Process Chemicals and Performance Products) and the favorable effect of the Company’s stock repurchase program.

During 2001 the Company recognized an extraordinary gain, net of taxes, of $4.9, or $0.12 per diluted share, related to its August 31, 2001, acquisition of the BP carbon fibers business. Taxes recorded on the transaction were $2.6. (For further information, see Note 2 of the Notes to Consolidated Financial Statements.)

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SEGMENT RESULTS

Year-to-year comparisons and analyses of changes in net sales by business segment and region are set forth below.

Water and Industrial Process Chemicals

The decreases in selling volumes were the result of a 16% decrease due to the divestiture of the paper chemicals business on November 1, 2000. The impact on each region was as follows: North America, 18%; Latin America, 11%; Asia/ Pacific Rim, 21% and Europe/ Middle East/ Africa, 12%.

Earnings from operations were $25.7, or 7.7% of net sales, in 2001, compared with $40.2, or 10.0% of net sales, in 2000. The decrease in earnings was primarily the result of lower selling volumes, higher raw material costs and the net adverse effects of exchange rate changes that were slightly offset by the benefits from higher selling prices and lower operating costs.

Performance Products

Overall sales volumes decreased as weakening economies around the world impacted demand from a broad base of industrial markets (e.g., automotive, industrial and plastic markets) served by the Performance Products segment.

Earnings from operations were $16.3, or 3.7% of net sales, in 2001, compared with $56.8, or 12.0% of net sales, in 2000. The decrease in earnings from operations reflects the impact of reduced sales and production levels resulting from weak demand, higher raw material costs and the net adverse effects of exchange rate changes that were partially offset by the benefits of higher selling prices.

Specialty Materials

(1)	Due to the level of sales in this geographic region, percentage comparisons are not meaningful.

The overall sales volume increases include a 2% increase resulting from the acquisition of the 3M composite materials business on March 30, 2001, and the acquisition of the BP carbon fibers business on August 31, 2001. (For further information on these acquisitions, see Note 2 of the Notes to Consolidated Financial Statements). The remaining sales volume increase was attributable to strong demand in aerospace applications (i.e., large commercial aircraft, regional jets and military aircraft).

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Earnings from operations were $95.9, or 21.3% of net sales, in 2001, compared with $85.9, or 20.9%, of net sales, in 2000. The increase in earnings from operations reflects the increase in selling volumes and lower fixed costs per unit, which resulted from leveraging the segment’s manufacturing operations.

Building Block Chemicals (Sales to external customers)