Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
-------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------- SECURITIES EXCHANGE ACT OF 1934
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
-------------------------------
(Address of principal executive offices)
973-357-3100
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 39,410,250 shares of Common
Stock, par value $.01 per share, were outstanding at June 30, 2002.
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
INDEX
Page
Part I - Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
Part II - Other Information 25
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
Exhibit Index 28
2
PART I - FINANCIAL INFORMATION
Item 1. - CONSOLIDATED FINANCIAL STATEMENTS
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Millions of dollars, except per share amounts)
Three Months Six Months
Ended Ended
June 30, June 30,
----------------------------- ---------------------------
2002 2001 2002 2001
---------- ----------- ---------- -----------
Net sales $ 350.9 $ 354.1 $ 668.9 $ 730.2
Manufacturing cost of sales 264.4 269.5 512.8 564.1
Selling and technical services 30.0 28.7 61.8 57.1
Research and process development 8.3 8.5 17.1 17.1
Administrative and general 13.3 11.0 26.6 21.4
Amortization of acquisition intangibles 0.8 3.2 1.6 6.3
---------- ----------- ---------- -----------
Earnings from operations 34.1 33.2 49.0 64.2
Other income, net 0.8 6.7 0.4 6.4
Equity in earnings (losses) of associated companies 2.1 (2.8) 3.3 (2.6)
Interest expense, net 4.9 5.2 10.0 9.8
---------- ----------- ---------- -----------
Earnings before income taxes 32.1 31.9 42.7 58.2
Income tax provision 10.7 11.0 14.3 20.1
---------- ----------- ---------- -----------
Net earnings $ 21.4 $ 20.9 $ 28.4 $ 38.1
========== =========== ========== ===========
Earnings per common share
Basic $0.54 $0.52 $0.72 $0.94
Diluted $0.52 $0.50 $0.70 $0.91
See accompanying Notes to Consolidated Financial Statements.
3
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Millions of dollars, except share and per share amounts)
June 30, December 31,
2002 2001
-------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 116.9 $ 83.6
Accounts receivable, less allowance for doubtful accounts
of $8.1 and $7.8 in 2002 and 2001, respectively 242.9 211.6
Inventories 148.7 147.3
Deferred income taxes 25.6 22.1
Other current assets 52.3 45.3
-------------- -----------
Total current assets 586.4 509.9
Investment in associated companies 95.2 92.6
Plants, equipment and facilities, at cost 1,355.5 1,344.5
Less: accumulated depreciation (774.9) (746.5)
-------------- -----------
Net plant investment 580.6 598.0
Acquisition intangibles, net of accumulated amortization 41.0 45.5
Goodwill 333.6 330.6
Deferred income taxes 46.3 48.4
Other assets 24.1 25.4
-------------- -----------
Total assets $ 1,707.2 $ 1,650.4
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 80.1 $ 75.8
Accrued expenses 179.5 157.8
Income taxes payable 52.8 48.4
-------------- -----------
Total current liabilities 312.4 282.0
Long-term debt 315.3 314.7
Other noncurrent liabilities . 405.7 416.8
Stockholders' equity
Preferred stock, 20,000,000 shares authorized;
issued and outstanding 4,000 shares, Series C Cumulative,
$.01 par value at liquidation value of $25 per share 0.1 0.1
Common stock, $.01 par value per share, 150,000,000
shares authorized; issued 48,132,640 shares 0.5 0.5
Additional paid-in capital 135.0 136.7
Retained earnings 854.5 826.2
Unearned compensation (4.9) (4.0)
Accumulated other comprehensive loss (34.9) (51.9)
Treasury stock, at cost, 8,722,390 shares in 2002 and
8,511,532 shares in 2001 (276.5) (270.7)
-------------- -----------
Total stockholders' equity 673.8 636.9
-------------- -----------
Total liabilities and stockholders' equity $ 1,707.2 $ 1,650.4
============== ===========
See accompanying Notes to Consolidated Financial Statements.
4
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of dollars)
Six Months Ended
June 30,
2002 2001
----------- --------------
Cash flows provided by (used for) operating activities
Net earnings $ 28.4 $ 38.1
Adjustments to reconcile net earnings to net cash flows
provided by operating activities
Dividends from associated companies, greater (less)
than equity in earnings (2.7) 5.0
Depreciation 40.0 38.7
Amortization 2.9 5.4
Deferred income taxes (1.6) 0.5
Loss on asset write-off 7.2 -
Gain on sale of assets (1.0) (1.9)
Other - (4.9)
Changes in operating assets and liabilities
Accounts receivable (25.5) 20.1
Inventories 2.8 10.6
Accounts payable 2.4 (20.7)
Accrued expenses 26.6 (14.9)
Income taxes payable 5.6 (9.5)
Other assets (3.9) (8.5)
Other liabilities (18.2) (14.5)
----------- --------------
Net cash flows provided by operating activities 63.0 43.5
----------- --------------
Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (22.6) (32.7)
Proceeds received on sale of assets 1.0 2.8
Acquisition of businesses - (9.8)
Investment in unconsolidated affiliate - (0.5)
----------- --------------
Net cash flows used for investing activities (21.6) (40.2)
----------- --------------
Cash flows provided by (used for) financing activities
Proceeds from the exercise of stock options and warrants 1.9 7.5
Purchase of treasury stock (13.1) (29.0)
Change in long-term debt - 0.5
Proceeds received on sale of put options 0.2 0.5
----------- --------------
Net cash flows used for financing activities (11.0) (20.5)
----------- --------------
Effect of exchange rate changes on cash and cash equivalents 2.9 (2.0)
----------- --------------
Increase (decrease) in cash and cash equivalents 33.3 (19.2)
Cash and cash equivalents, beginning of period 83.6 56.8
----------- --------------
Cash and cash equivalents, end of period $ 116.9 $ 37.6
=========== ==============
See accompanying Notes to Consolidated Financial Statements.
5
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(1) Basis of Presentation
The unaudited consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. The
statements should be read in conjunction with the consolidated financial
statements and notes to the consolidated financial statements contained in the
Company's 2001 Annual Report on Form 10-K/A.
In the opinion of management, the consolidated financial statements included
herein reflect all adjustments necessary for a fair statement of the information
presented as of June 30, 2002 and for the three and six months ended June 30,
2002 and 2001. Such adjustments are of a normal, recurring nature. The
consolidated statements of income for the three and six months ended June 30,
2002 are not necessarily indicative of the results to be expected for the full
year.
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year's presentation.
(2) Acquisitions and Dispositions
On August 31, 2001, the Company acquired certain assets of the carbon fiber
business of BP plc, on March 30, 2001, the Company acquired the composite
materials business of Minnesota Mining and Manufacturing Company ("3M") and on
March 27, 2001, the Company acquired the remaining 50% interest in the assets of
the Avondale Ammonia Company manufacturing joint venture. For more information
on the 2001 transactions, refer to Note 2 to the consolidated financial
statements contained in the Company's 2001 Annual Report on Form 10-K/A, which
is incorporated by reference herein.
(3) Restructuring of Operations
In the first quarter of 2002, the Company recorded an aggregate restructuring
charge of $16.6, which included the elimination of 144 positions worldwide. The
charge was comprised of the following initiatives: reorganization of the
Specialty Chemicals segments resulting in a reduction of 72 personnel and a
charge of $5.7 for employee related costs; alignment of the Specialty Materials
segment in connection with reduced demand in the commercial aerospace industry
resulting in a reduction of 47 personnel and a charge of $1.6 for employee
related costs; closure of the Woodbridge, New Jersey facility resulting in the
elimination of 25 positions and a charge of $1.6 for employee related and
decommissioning costs and the discontinuance of a minor unprofitable product
line resulting in a charge of $7.7 for the write-down of the net book value of
the fixed assets and costs of decommissioning the facility. The restructuring
costs were charged to the Consolidated Statement of Income as follows:
manufacturing cost of sales, $11.7; selling and technical services, $3.0;
research and process development, $1.0 and administrative and general, $0.9. As
of June 30, 2002, approximately 66 positions have been eliminated. The remaining
personnel reductions are expected to be completed by the end of 2002. As of June
30, 2002, cash payments of $3.6 had been made for these charges and the
remaining liability to be paid was $5.8. In addition, during the first quarter
of 2002 the Company recorded charges of $0.4 in equity in earnings of associated
companies for its 50% share of additional restructuring charges related to CYRO
Industries' shutdown of its Niagara Falls, Ontario, Canada facility last year.
6
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
In the second quarter of 2001, the Company recorded a restructuring charge of
$5.4 related to the mothballing of the Fortier ammonia plant and the Company's
share of the related personnel reduction of 67 positions at the Fortier
facility. The restructuring costs were charged to the Consolidated Statement of
Income as follows: manufacturing cost of sales, $4.6; and selling and technical
services, $0.8. The components of the restructuring charge included: employee
severance costs, $4.3; asset write-downs, $0.9 and other costs of $0.2. During
the first quarter of 2002, the Company reduced this restructuring accrual as a
result of incurring less costs than originally estimated. As a result, the
Company recognized a restructuring credit of $0.5 in the Consolidated Statement
of Income as follows: manufacturing cost of sales, $0.4 and selling and
technical services, $0.1. As of June 30, 2002, approximately 60 positions have
been eliminated. The majority of personnel reductions have been completed and
the remainder are expected to be completed by the end of 2002. As of June 30,
2002, cash payments of $3.1 had been made for these charges and the remaining
liability to be paid was $0.9. In addition, during the second quarter of 2001
the Company recorded charges of $2.3 in equity in earnings of associated
companies for its 50% share of CYRO Industries' 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.
In the fourth quarter of 2000, the Company recorded a restructuring charge of
$10.8, related to a workforce reduction of approximately 110 employees and the
discontinuance of a tolling operation. The restructuring costs were charged to
the Consolidated Statement of Income as follows: manufacturing cost of sales,
$3.5; selling and technical services, $5.3; research and process development,
$1.6 and administrative and general, $0.4. The components of the restructuring
charge included: employee severance costs, $8.8 and asset write-downs, $2.0.
During the first half of 2002, the Company reduced this restructuring accrual as
a result of incurring less costs than originally estimated. As a result, the
Company recognized a restructuring credit of $1.5 in the Consolidated Statement
of Income as follows: manufacturing cost of sales, $0.5 and selling and
technical services, $1.0. As of June 30, 2002, the personnel reductions have
been completed. Cash payments of $6.7 had been made for these charges through
June 30, 2002 and the remaining liability to be paid was $0.6, which primarily
relates to long-term employee severance payouts.
(4) Earnings Per Share (EPS)
Basic earnings per common share excludes dilution and is computed by dividing
net earnings less preferred stock dividends by the weighted-average number of
common shares outstanding (which includes shares outstanding, less performance
and restricted shares for which vesting criteria have not been met) plus
deferred stock awards, weighted for the period outstanding. Diluted earnings per
common share is computed by dividing net earnings less preferred stock dividends
by the sum of the weighted-average number of common shares outstanding for the
period adjusted (i.e., increased) for all additional common shares that would
have been outstanding if potentially dilutive common shares had been issued and
any proceeds of the issuance had been used to repurchase common stock at the
average market price during the period. The proceeds used to repurchase common
stock are assumed to be the sum of the amount to be paid to the Company upon
exercise of options, the amount of compensation cost attributed to future
services and not yet recognized and the amount of income taxes that would be
credited to or deducted from capital upon exercise.
7
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
The following represents the reconciliation of the numerators and denominators
of the basic and diluted EPS computations for net earnings for the three and six
months ended June 30, 2002 and 2001:
Three Months Ended June 30,
2002 2001
---- ----
Weighted Avg. Per Weighted Avg. Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS
Net earnings $21.4 39,623,876 $0.54 $20.9 40,413,966 $0.52
Effect of dilutive securities Options -- 1,159,641 -- -- 1,389,085 --
Performance/Restricted stock -- 103,214 -- -- 96,742 --
Warrants -- -- -- -- 3,335 --
Diluted EPS
Net earnings divided by the
weighted average shares plus
effects of dilutive
securities $21.4 40,886,731 $0.52 $20.9 41,903,128 $0.50
Six Months Ended June 30,
2002 2001
---- ----
Weighted Avg. Per Weighted Avg. Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS
Net earnings $28.4 39,663,454 $0.72 $38.1 40,415,161 $0.94
Effect of dilutive securities Options -- 1,012,330 -- -- 1,500,743 --
Performance/Restricted stock -- 98,128 -- -- 104,129 --
Warrants -- 1,250 -- -- 8,457 --
Diluted EPS
Net earnings divided by the
weighted average shares plus
effects of dilutive
securities $28.4 40,775,162 $0.70 $38.1 42,028,490 $0.91
(5) Recently Issued Statement of Financial Accounting Standards
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 supercedes
the accounting guidance provided by Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company is currently evaluating this Standard.
In August 2001, the FASB issued SFAS No. 143, Asset Retirement Obligations
("SFAS 143"). SFAS 143 addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of an asset. SFAS 143
requires that the fair value of the liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is settled
for other than the carrying amount of the liability the Company will recognize a
gain or loss on settlement.
SFAS 143 will become effective for the Company beginning January 1, 2003. The
Company is in the process of identifying its legal obligations for asset
retirements and reviewing the potential impact of SFAS 143 on its consolidated
results of operation and financial position.
8
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires business combinations consummated after June 30, 2001, to be accounted
for using the purchase method of accounting. It also specifies the criteria that
intangible assets must meet to be recognized apart from goodwill. SFAS 142
requires the use of a non-amortization approach to account for purchased
goodwill and intangibles with indefinite useful lives. Under this approach,
goodwill and intangibles with indefinite useful lives are not amortized, but
instead are reviewed for impairment at least annually and written down only in
the periods in which it is determined that the recorded value is greater than
the fair value. SFAS 142 also requires that intangible assets with determinable
useful lives be amortized over their respective estimated useful lives and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 142 became effective for the
Company January 1, 2002. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001, have been amortized through December
31, 2001, in accordance with the appropriate pre-SFAS 141 and 142 accounting
literature.
The Company has evaluated its goodwill and intangible assets using the new
criteria in SFAS 141, and as a result, certain intangibles that no longer met
the criteria for recognition apart from goodwill were reclassified as goodwill
effective January 1, 2002 (see Note 12). The Company has also re-evaluated the
remaining useful lives and residual values of all intangible assets with
determinable useful lives and has made all necessary amortization period
adjustments effective January 1, 2002. The change in amortization expense
related to the adjustment of remaining useful lives and residual values was
immaterial.
The Company has completed the transitional goodwill impairment tests as required
under SFAS 142 effective January 1, 2002. In connection with this test, the
Company defined its business segments as its SFAS 142 reporting units and has
determined that the fair values of those reporting units, to which goodwill has
been assigned, exceeded their recorded values and therefore, the Company did not
recognize an impairment loss as a result of adopting SFAS 142 effective January
1, 2002.
(6) Inventories
The components of inventories at June 30, 2002 and December 31, 2001 consisted
of the following:
June 30, December 31,
2002 2001
---- ----
Finished goods $ 88.7 $ 96.0
Work in process 20.9 18.0
Raw materials & supplies 70.9 65.1
------ ------
180.5 179.1
Less reduction in LIFO cost (31.8) (31.8)
------ ------
$148.7 $147.3
====== ======
(7) Equity in Earnings of Associated Companies
Summarized financial information for the Company's equity in earnings of
associated companies for the three and six months ended June 30, 2002 and 2001
was as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $78.4 $80.8 $146.1 $159.0
Gross profit 15.5 11.5 29.6 24.3
Net earnings (loss) 3.9 (6.2) 6.1 (6.9)
----- ----- ------ ------
The Company's equity in earnings (losses) of
associated companies $ 2.1 $(2.8) $ 3.3 $ (2.6)
===== ===== ====== ======
9
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(8) Environmental Matters and Other Contingent Liabilities
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 or to pay compensation to others for doing so. The Company's most
significant environmental liabilities relate to remediation and regulatory
closure obligations at manufacturing sites now or formerly owned by the Company.
The Company is also involved in legal proceedings directed at the cleanup of
various other sites, including a number of federal or state Superfund sites.
Since the laws pertaining to Superfund sites generally impose retroactive,
strict, joint and several liability, a governmental plaintiff could seek to
recover all remediation costs at any such site from any 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. In many cases, the nature of future environmental expenditures
cannot be quantified with 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, additional sites that may be environmentally impaired
and for which the Company may be responsible.
As of June 30, 2002 and December 31, 2001, the aggregate environmental related
accruals were $89.7 and $93.9, respectively, of which $20.0 was included in
accrued expenses as of both dates, with the remainder included in other
noncurrent liabilities. Environmental remediation spending for the six months
ended June 30, 2002 and 2001 was $6.2 and $4.6, respectively. All accruals have
been recorded without giving effect to any possible future insurance proceeds.
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 that, in management's opinion, will
not have a material adverse effect on the consolidated financial position of the
Company, but could be material to the consolidated 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.
(9) Comprehensive Income
The components of comprehensive income, which represents the change in equity
from non-owner sources, for the three and six months ended June 30, 2002 and
2001 was as follows:
10
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
Three Months Six Months
Ended Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net earnings $21.4 $20.9 $ 28.4 $ 38.1
Other comprehensive income (loss):
Unrealized gains on derivative
instruments -- -- 0.1 --
Foreign currency translation adjustments 19.9 (1.8) 16.9 (12.8)
----- ----- ------ ------
Comprehensive income $41.3 $19.1 $ 45.4 $ 25.3
===== ===== ====== ======
(10) Other Financial Information
Taxes paid for the six months ended June 30, 2002 and 2001 were approximately
$7.0 and $29.4, respectively. Included in the six months ended June 30, 2001
were taxes of approximately $26.6 related to the gain on the sale of the Paper
Chemicals business, which occurred in the fourth quarter of 2000. Interest paid
for the six months ended June 30, 2002 and 2001 was approximately $10.7 and
$10.7, respectively.
At June 30, 2002 and December 31, 2001, the Company's long-term debt consisted
of public debt in the amounts of $315.3 and $314.7, respectively. The Company
has the intent and ability to refinance on a long-term basis the $100.0
principal amount of 6.50% Notes due March 15, 2003.
On April 11, 2002, the Company executed a $100.0, three-year unsecured revolving
credit agreement and a $100.0, 364-day unsecured revolving credit agreement with
a one-year term out option. These two agreements replaced a $200.0 unsecured
revolving credit agreement that was due to expire in July 2002. Revolving loans
under the new agreements are available for the general corporate purposes of the
Company and its subsidiaries, including without limitations, for purposes of
making acquisitions permitted under the agreements. The credit agreements
contain covenants customary for such facilities.
On November 2, 2000, the Company announced an authorization of $100.0 to
repurchase shares of its outstanding common stock. The repurchases are made from
time to time on the open market or in private transactions and the shares
obtained under this authorization are utilized for stock option plans, benefit
plans and other corporate purposes. Through June 30, 2002, the Company had
repurchased 2,318,473 shares at a cost of $70.9 under this authorization.
In connection with the Company's stock repurchase program, the Company may sell
put options to institutional investors in private placements exempt from
registration under Section 4(2) of the Securities Act of 1933. During the three
months ended June 30, 2002 the Company sold 100,000 put options that expire in
September 2002 at an exercise price of $29.505 per share. The Company received
premiums of approximately $0.2 on the sale of such options. Last year, during
the three months ended March 31, 2001 the Company sold 100,000 put options at an
exercise price of $31.528 per share and 100,000 put options at an exercise price
of $31.347 per share. The Company received premiums of approximately $0.5 on the
sale of such options. Subsequently, during the third quarter of 2001, 140,000 of
those put options expired unexercised and the holder elected to exercise the
remaining 60,000 put options, which were settled by the Company purchasing
60,000 shares of its common stock at an exercise price of $31.347 per share,
which was slightly "out of the money" at the time.
(11) Segment Information
Summarized segment information for the Company's four segments for the three and
six months ended June 30, 2002 and 2001 is as follows:
11
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net sales
Water and Industrial Process Chemicals $ 83.6 $ 85.1 $159.2 $173.2
Performance Products 117.7 115.3 226.2 227.7
Specialty Materials 103.4 117.2 206.5 233.2
Building Block Chemicals
Sales to external customers 46.2 36.5 77.0 96.1
Intersegment sales 14.1 13.0 25.7 26.8
------ ------ ------ ------
Net sales from segments 365.0 367.1 694.6 757.0
Elimination of intersegment revenue (14.1) (13.0) (25.7) (26.8)
------ ------ ------ ------
Total consolidated net sales $350.9 $354.1 $668.9 $730.2
====== ====== ====== ======
% of % of %of %of
Earnings from operations Sales Sales Sales Sales
- ------------------------ ----- ----- ----- -----
Water and Industrial Process Chemicals $ 4.9 6% $ 6.7 8% $10.0 6% $14.9 9%
Performance Products 13.2 11% 6.3 5% 19.4 9% 10.2 4%
Specialty Materials 17.9 17% 30.2 26% 37.9 18% 58.3 25%
Building Block Chemicals (0.9) -2% (2.9) -6% (1.6) -2% (11.2) -9%
----- ----- ----- -----
Earnings from segments 35.1 10% 40.3 11% 65.7 10% 72.2 10%
Corporate and Unallocated(1) (1.0) (7.1) (16.7) (8.0)
----- ----- ----- -----
Total consolidated earnings from operations $34.1 10% $33.2 9% $49.0 7% $64.2 9%
===== ===== ===== =====
(1) Six months ended June 30, 2002 includes net restructuring charges of
$14.6 and three and six months ended June 30, 2001 includes
restructuring charges of $5.4 (see Note 3 and further discussions
contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations).
(12) Goodwill and Other Intangibles
On January 1, 2002, the Company adopted SFAS 142 and certain transition
provisions of SFAS 141 (see Note 5). Application of these standards required
that the Company assess its recorded intangibles, and effective January 1, 2002,
reclassify to goodwill those intangibles which no longer meet the criteria for
recognition apart from goodwill. The Company's acquisition intangibles, net of
accumulated amortization, before and after such reclassifications were as
follows:
12
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
Goodwill Intangibles Total
-------- ----------- -----
Before reclassifications:
Water and Industrial Process Chemicals
Process Chemicals $ 31.3 $ 3.8 $ 35.1
Performance Products 49.1 26.7 75.8
Specialty Materials 250.2 15.0 265.2
Building Block Chemicals -- -- --
------ ----- ------
Total $330.6 $45.5 $376.1
====== ===== ======
Goodwill Intangibles Total
-------- ----------- ------
After reclassifications:
Water and Industrial Process Chemicals
Process Chemicals $ 31.1 $ 4.0 $ 35.1
Performance Products 50.1 25.7 75.8
Specialty Materials 252.6 12.6 265.2
Building Block Chemicals -- -- --
------ ----- ------
Total $333.8 $42.3 $376.1
====== ===== ======
At June 30, 2002, the gross carrying value of acquisition intangibles was $51.1,
less accumulated amortization of $10.1, which consisted of the following major
classes:
Gross Acquisition
carrying Accumulated intangibles,
value amortization net
----- ------------ ---
Technology-based $ 29.9 $(6.0) $ 23.9
Marketing-related 9.3 (1.8) 7.5
Customer-related 11.9 (2.3) 9.6
------ ----- ------
Total $ 51.1 $(10.1) $ 41.0
====== ===== ======
Amortization of acquisition intangibles for the three and six months ended June
30, 2002 was $0.8 and $1.6, respectively. Assuming no change in the gross
carrying amount of acquisition intangibles, the estimated amortization of
acquisition intangibles for the twelve months ended December 31, 2002 and for
each of the next four succeeding years is $3.1. At June 30, 2002, there were no
acquisition intangibles with indefinite useful lives as defined by SFAS 142.
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective January 1, 2002 (see Note 5). A reconciliation of previously
reported net earnings and earnings per share to the amounts adjusted for the
exclusion of goodwill amortization and the related income tax impact is as
follows:
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
As As
Reported Adjusted Reported Adjusted
-------- -------- -------- --------
Net Sales $354.1 $354.1 $730.2 $730.2
Amortization of acquisition intangibles 3.2 0.8 6.3 1.5
Earnings from operations 33.2 35.6 64.2 69.0
Earnings before income taxes 31.9 34.3 58.2 63.0
Net earnings 20.9 22.5 38.1 41.3
Earnings per common share
Basic $0.52 $0.56 $ 0.94 $ 1.02
Diluted $0.50 $0.54 $ 0.91 $ 0.98
13
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(13) Commodity and Derivative Financial Instruments
The Company uses natural gas forward contracts, which are physically settled, to
hedge the utility requirements at the Fortier manufacturing facility. Because
the Company takes physical delivery of the commodity, realized gains and losses
on these contracts are included in the cost of the commodity upon settlement of
the contract. As of June 30, 2002, 85% of the Fortier facility's 2002 forecasted
natural gas utility requirements have been hedged. At June 30, 2002, the Company
had natural gas forward contracts with a notional value of $11.4 outstanding and
July 2002 through February 2003 delivery dates.
Beginning February 2002, the Company expanded its hedging program to include the
use of natural gas swaps to hedge utility requirements at certain of its other
facilities. These swaps, which are financially settled, are highly effective at
achieving offsetting cash flows of the underlying natural gas purchases and have
been designated as cash flow hedges as defined by SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The swaps are reported on the
Consolidated Balance Sheet at fair value, with offsetting amounts included in
Accumulated Other Comprehensive Loss ("AOCL") on an after-tax basis. Gains and
losses are reclassified into earnings, as a component of Manufacturing Cost of
Sales in the period the hedged natural gas purchases affect earnings. As of June
30, 2002, the fair value of these swaps was $0.2, which will be reclassified
into Manufacturing Cost of Sales during the six months ending December 31, 2002
as these swaps are settled. For more information on the Company's derivative
accounting policies, refer to the Financial Instrument section of Note 1 to the
consolidated financial statements contained in the Company's 2001 Annual Report
on Form 10-K/A, which is incorporated by reference herein.
(14) Subsequent Events
In July 2002, the Company was notified by a Joint Committee of the IRS that its
claim for a refund related to prior years' research and development tax credits
was approved. As a result, the Company expects to record in the third quarter of
2002 a reduction of $6.0 million ($0.15 per diluted share) in income tax expense
offset by a charge of $1.7 million ($1.1 million after-tax or $0.03 per diluted
share) in administrative and general expenses for external costs associated with
such tax planning. The net benefit will be approximately $0.12 per diluted
share. The Company expects to receive the $6.0 million refund before December
31, 2002.
14
(Millions of dollars, except share and per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Second Quarter of 2002 versus Second Quarter of 2001
Net sales for the second quarter of 2002 were $350.9, compared with $354.1 for
the second quarter of 2001. Declining market conditions for commercial aircraft
in the Specialty Materials segment offset the higher demand for coatings and
polymer additives in the Performance Products segment, increased acrylonitrile
sales in the Building Block Chemicals segment and the favorable impacts of
changes in exchange rates.
Net sales in the United States were $178.0 for the second quarter of 2002,
compared with $190.5 for the second quarter of 2001. International net sales
were $172.9 for the second quarter of 2002, or 49.3% of total net sales,
compared with $163.6, or 46.2% of total net sales for the second quarter of
2001.
In the North America region (i.e., United States and Canada), net sales were
$192.8 for the second quarter of 2002, down 7.2% from the prior year period.
Overall, selling volumes decreased 4.5% in the region. Selling volumes in Water
and Industrial Process Chemicals decreased 12.6%, Performance Products increased
2.3%, Specialty Materials decreased 6.5% and Building Block Chemicals decreased
0.7%. Overall, selling prices decreased 2.8% in the region with the segment
breakdown as follows: Water and Industrial Process Chemicals increased 0.5%,
Performance Products decreased 1.9%, Specialty Materials decreased 1.3% and
Building Block Chemicals decreased 18.5%. For the region overall, the favorable
effect of exchange rate changes increased sales approximately 0.1%.
In the Europe/Mideast/Africa region, net sales were $82.9 for the second quarter
of 2002, down 0.7% from the prior year period. Overall, selling volumes
decreased 2.2% in the region. Selling volumes in Water and Industrial Process
Chemicals increased 11.2%, Performance Products increased 3.4%, Specialty
Materials decreased 24.5% and Building Block Chemicals increased 33.3%. Overall,
selling prices decreased 2.5% in the region with the segment breakdown as
follows: Water and Industrial Process Chemicals decreased 4.7%, Performance
Products decreased 2.4%, Specialty Materials were flat and Building Block
Chemicals decreased 7.4%. For the region overall, the favorable effect of
exchange rate changes increased sales approximately 4.0%.
In the Asia/Pacific region, net sales were $54.8 for the second quarter of 2002,
up 38.7% from the prior year period. Overall, selling volumes increased 50.8% in
the region. Selling volumes in Water and Industrial Process Chemicals increased
37.6%, Performance Products increased 11.1%, Specialty Materials decreased 0.7%
and Building Block Chemicals increased 151.5%. Overall, selling prices decreased
13.3% in the region with the segment breakdown as follows: Water and Industrial
Process Chemicals decreased 5.6%, Performance Products decreased 6.4%, Specialty
Materials were flat and Building Block Chemicals decreased 36.9%. For the region
overall, the favorable effect of exchange rate changes increased sales
approximately 1.2%.
In the Latin America region, net sales were $20.4 for the second quarter of
2002, down 12.4% from the prior year period. Overall, selling volumes decreased
10.9% in the region. Selling volumes in Water and Industrial Process Chemicals
decreased 10.1% and Performance Products decreased 14.1%. Sales in the Specialty
Materials and Building Block Chemicals segments are relatively small in this
region and, accordingly, comparisons are not meaningful. Overall, selling prices
increased 1.4% in the region. Water and Industrial Process Chemicals increased
1.4% and Performance Products increased 4.1%. For the region overall, the
adverse effect of exchange rate changes reduced sales approximately 2.9%.
Manufacturing cost of sales was $264.4 or 75.3% of net sales in the second
quarter of 2002, compared to $269.5, or 76.1% of net sales for the prior year
15
(Millions of dollars, except share and per share amounts)
period. Included in the second quarter of 2001 was 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 $264.9 or 74.8% of net sales in
the second quarter of 2001. The slight increase in manufacturing cost of sales
as a percentage of net sales was due to sales mix. Specifically, sales in the
Specialty Materials segment, which has higher gross profit margins, were down
significantly due to lower aircraft build rates, while sales in the Building
Block Chemicals segment, which has lower gross profit margins, were up
significantly. Manufacturing cost of sales as a percentage of net sales was also
negatively impacted by unscheduled down time at the Fortier facility. Overall,
raw material costs remained lower than the prior year period, thereby favorably
impacting manufacturing cost of sales as a percentage of net sales.
Selling and technical services expenses increased $1.3, research and process
development expenses decreased $0.2 and administrative and general expenses
increased $2.3. Selling and technical services expenses for the second quarter
of 2001 included a restructuring charge of $0.8 related to the Company's share
of personnel reduction at the Fortier facility. After adjusting for this item,
selling and technical services expenses increased $2.1 due to increased accruals
for incentive-based compensation and an increase of approximately $1.0 of bad
debt expense primarily related to the water treatment and mining chemical
product lines in Latin America. Administrative expenses were up in the second
quarter of 2002 due to a number of items including increased accruals for
incentive-based compensation and fees associated with certain state tax audits,
work on an R&D tax credit filing and fees associated with the new credit
facilities negotiated in April 2002. Incentive-based compensation expense is
performance based and for the second quarter of 2002 reflects accruals assuming
the Company will achieve its annual targets. In the early part of 2001, it
became apparent that economic conditions would prevent the Company from
attaining several of its performance targets and incentive-based compensation
accruals were reduced accordingly.
Amortization of acquisition intangibles was $0.8, down $2.4 from the prior year
period as goodwill is no longer amortized under Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangibles" ("SFAS
142").
Other income, net was $0.8 for the second quarter of 2002 and included $1.0 from
three minor land sales. Other income, net was $6.7 for the second quarter of
2001 and included pre-tax 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.
The Company continues to seek opportunities to monetize excess assets, but does
not expect any transactions significantly affecting other income for the
remainder of 2002.
Equity in earnings (losses) of associated companies was $2.1 for the second
quarter of 2002, compared to a loss of $2.8 for the prior year period. Included
in the second quarter of 2001 was a charge of $2.3 for the Company's 50% share
of the CYRO Industries 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 these charges, equity in earnings (losses)
of associated companies was a loss of $0.5 for the second quarter of 2001. The
increase in equity earnings (losses) of associated companies reflects cost
reduction efforts and lower raw material costs at CYRO. Sales at associated
companies were $78.4 for the second quarter of 2002, an increase of 1.8% from
last year, after excluding sales of the former AC Molding Compounds joint
venture. Sales at CYRO were essentially flat.
Interest expense, net was $4.9 for the second quarter of 2002, a decrease of
$0.3 from the prior year period.
16
(Millions of dollars, except share and per share amounts)
The income tax provision was $10.7 for the second quarter of 2002, which
reflects an underlying effective tax rate of 33.5% down from 34.5% for the prior
year period.
Net earnings for the second quarter of 2002 were $21.4, or $0.52 per diluted
share, compared to $20.9, or $0.50 per diluted share for the prior year period.
Included in the prior year period was after-tax goodwill amortization of $1.6,
or $0.04 per diluted share that is no longer required under SFAS 142. Also
included in the prior year period were after-tax restructuring charges of $5.0,
or $0.12 per diluted share. Excluding these items net earnings for the prior
year period were $27.5, or $0.66 per diluted share.
Segment Results
Water and Industrial Process Chemicals:
Water and Industrial Process Chemicals net sales were $83.6 a decrease of 1.8%
from the prior year period. Selling volumes decreased 1.7% due to lower water
treatment and phosphine sales partially offset by increased mining sales.
Exchange rate changes increased sales 1.1%, while selling prices decreased 1.2%
principally in water treatment.
Lower sales and an unfavorable product mix more than offset the benefits of
lower overall raw material costs, which included higher propylene costs, and
lower amortization expense from adopting SFAS 142. As a result, earnings from
operations for the second quarter of 2002 were $4.9 or 5.9% of net sales,
compared to $6.7 or 7.9% of net sales for the same period last year.
Performance Products:
Performance Products net sales were $117.7, an increase of 2.1% from the prior
year period. Selling volumes increased 2.9%, exchange rates changes increased
sales 1.5% and selling prices decreased 2.3%. The lower selling prices were
primarily in the polymer additives product line. Demand from automotive and
general industrial markets improved versus prior year period.
Earnings from operations improved to $13.2 or 11.2% of net sales, compared to
$6.3 or 5.5% of net sales for the prior year period. The improvement in earnings
from operations is the result of lower raw material prices, improved operating
costs, the leverage achieved from increasing sales volumes while maintaining a
reduced cost base and lower amortization expense from adopting SFAS 142.
Specialty Materials:
Specialty Materials net sales were $103.4, a decrease of 11.8% from the previous
year period. Selling volumes decreased 14.3%, excluding a 3.2% increase from
acquisitions. The effect of exchange rate changes were negligible, while selling
prices were down 0.9%. The decrease in selling volumes reflects the decline in
the commercial aircraft market post-September 11, 2001.
Earnings from operations for the second quarter of 2002 were $17.9 or 17.3% of
sales, compared to $30.2 or 25.8% of sales for the prior year period. The
decline in earnings from operations reflects the decrease in selling volumes as
noted above partially offset by the benefit of lower amortization expense from
adopting SFAS 142.
Building Block Chemicals:
Building Block Chemicals net sales to external customers were $46.2, an increase
of 26.6% from the prior year period. Selling volumes increased 51.4%, excluding
a 4.1% reduction resulting from the shutdown of the ammonia facility in July of
2001. Selling prices decreased 21.9%, while exchange rate changes increased
17
(Millions of dollars, except share and per share amounts)
sales 1.2%. Selling volumes of acrylonitrile increased, as export markets
continued to recover, but its selling prices remained below the prior year
period. The cost of propylene, the key raw material for acrylonitrile, increased
also, thereby keeping margins low. During the second quarter of 2002, the
acrylonitrile facility encountered production difficulties and lost
approximately ten reactor days of production.
The operating loss improved to $0.9, as compared to the prior year period
operating loss of $2.9. The improvement was due to lower natural gas prices in
the United States and reduced manufacturing costs as a result of the full effect
of the restructuring efforts implemented in the second quarter of last year.
First Half of 2002 versus First Half of 2001
Net sales for the first half of 2002 were $668.9, compared with $730.2 for the
first half of 2001. All segments reported lower sales. Specifically, sales were
negatively impacted by lower demand in the Water and Industrial Process
Chemicals segment, lower commercial aircraft build rates in the Specialty
Materials segment and lower selling prices in the Building Block Chemicals
segment.
Net sales in the United States were $348.7 for the first half of 2002, compared
with $392.7 for the first half of 2001. International net sales were $320.2 for
the first half of 2002, or 47.9% of total net sales, compared with $337.5, or
46.2% of total net sales for the first half of 2001.
In the North America region (i.e., United States and Canada), net sales were
$376.8 for the first half of 2002, down 11.5% from the prior year period.
Overall, selling volumes decreased 9.2% in the region. Selling volumes in Water
and Industrial Process Chemicals decreased 15.1%, Performance Products increased
0.5%, Specialty Materials decreased 6.7% and Building Block Chemicals decreased
31.0%. Overall, selling prices decreased 2.3% in the region with the segment
breakdown as follows: Water and Industrial Process Chemicals decreased 0.1%,
Performance Products decreased 1.5%, Specialty Materials decreased 1.1% and
Building Block Chemicals decreased 11.7%. For the region overall, the effect of
exchange rate changes was immaterial.
In the Europe/Mideast/Africa region, net sales were $159.1 for the first half of
2002, down 7.0% from the prior year period. Overall, selling volumes decreased
5.5% in the region. Selling volumes in Water and Industrial Process Chemicals
increased 2.1%, Performance Products increased 0.1%, Specialty Materials
decreased 20.7% and Building Block Chemicals increased 12.5%. Overall, selling
prices decreased 2.4% in the region with the segment breakdown as follows: Water
and Industrial Process Chemicals decreased 3.2%, Performance Products decreased
2.0%, Specialty Materials were flat and Building Block Chemicals decreased
11.9%. For the region overall, the favorable effect of exchange rate changes
increased sales approximately 0.9%.
In the Asia/Pacific region, net sales were $93.7 for the first half of 2002, up
10.6% from the prior year period. Overall, selling volumes increased 19.2% in
the region. Selling volumes in Water and Industrial Process Chemicals increased
19.6%, Performance Products increased 14.0%, Specialty Materials decreased 15.0%
and Building Block Chemicals increased 35.4%. Overall, selling prices decreased
8.7% in the region with the segment breakdown as follows: Water and Industrial
Process Chemicals decreased 2.1%, Performance Products decreased 6.9%, Specialty
Materials were flat and Building Block Chemicals decreased 17.7%. For the region
overall, the favorable effect of exchange rate changes increased sales
approximately 0.1%.
In the Latin America region, net sales were $39.3 for the first half of 2002,
down 18.6% from the prior year period. Overall, selling volumes decreased 16.6%
in the region. Selling volumes in Water and Industrial Process Chemicals
decreased 13.0% and Performance Products decreased 14.1%. Sales in the Specialty
18
(Millions of dollars, except share and per share amounts)
Materials and Building Block Chemicals segments are relatively small in this
region and, accordingly, comparisons are not meaningful. Overall, selling prices
increased 3.2% in the region. Water and Industrial Process Chemicals increased
4.0% and Performance Products increased 4.5%. For the region overall, the
adverse effect of exchange rate changes reduced sales approximately 5.2%.
Manufacturing cost of sales was $512.8 or 76.7% of net sales in the first half
of 2002 and included net restructuring charges of $10.8 for plant closure and
expenses associated with discontinuing a product line. Excluding these charges,
manufacturing cost of sales was $502.0 or 75.0% of net sales in the first half
of 2002. Manufacturing cost of sales was $564.1 or 77.3% of net sales in the
first half of 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 $559.5 or 76.6% of net sales in the first half
of 2001. The decrease in manufacturing costs as a percentage of net sales after
excluding net restructuring charges from both periods was primarily due to lower
raw material and energy costs, particularly natural gas, partially offset by
unfavorable product mix.
Selling and technical services expenses increased $4.7, research and process
development expenses remained unchanged and administrative and general expenses
increased $5.2. Included in the first half of 2002 were net restructuring
charges of $1.9, $1.0 and $0.9 in selling and technical services, research and
process development and administrative and general, respectively, which
primarily related to employee reductions in the Specialty Chemical and Specialty
Material segments. Included in the first half of 2001 was a restructuring charge
of $0.8 in selling and technical service expenses, which related to the
Company's share of personnel reductions at the Fortier facility. After adjusting
for these items, selling and technical services expenses increased $3.6,
research and process development expenses decreased $1.0 and administrative and
general expenses increased $4.3. Selling and technical services expenses were up
due to increased accruals for incentive-based compensation and an increase of
approximately $1.0 of bad debt expense primarily related to the water treatment
and mining chemical product lines in Latin America. Administrative and general
expenses also were up due to increased accruals for incentive-based compensation
expense. Incentive-based compensation expense is performance based and for the
first half of 2002 reflects accruals assuming the Company will achieve its
annual targets. In the early part of 2001, it became apparent that economic
conditions would prevent the Company from attaining several of its performance
targets and incentive-based compensation accruals were reduced accordingly.
Amortization of acquisition intangibles was $1.6, down $4.7 from the prior year
period as goodwill is no longer amortized under SFAS 142.
Other income, net was $0.4 for the first half of 2002 and included $1.0 from
three minor land sales. Other income, net was $6.4 for the first half of 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. The Company
continues to seek opportunities to monetize excess assets, but does not expect
any transactions significantly affecting other income for the remainder of 2002.
Equity in earnings (losses) of associated companies was $3.3 for the first half
of 2002, compared to a loss of $2.6 for the prior year period. Included in the
first half of 2002 was an additional restructuring charge of $0.4 related to
CYRO Industries' shutdown of its Niagara Falls, Ontario, Canada facility last
year. Included in the prior year period were aggregate restructuring charges of
$2.3 related to the shutdown of CYRO's manufacturing facility in Niagara Falls,
Ontario, Canada and CYRO's share of the infrastructure restructuring at the
Company's Fortier facility. Excluding these charges, equity in earnings (losses)
of associated companies was $3.7 for the first half of 2002, compared
19
(Millions of dollars, except share and per share amounts)
to a loss of $0.3 for the prior year period. The increase in equity earnings
(losses) of associated companies reflects cost reduction efforts and lower raw
material costs at CYRO. Sales at associated companies were $146.1 for the first
half of 2002, a decrease of 3.5% from the prior year period, after excluding
sales of the former AC Molding Compounds joint venture. Sales at CYRO were down
2.8%.
Interest expense, net was $10.0 for the first half of 2002, an increase of $0.2
from the prior year period. Included in the prior year period was $0.5 of income
resulting from the termination of an interest rate swap agreement.
The income tax provision was $14.3 for the first half of 2002, which reflects an
underlying effective tax rate of 33.5% down from 34.5% for the prior year
period.
Net earnings for the first half of 2002 were $28.4, or $0.70 per diluted share,
compared to $38.1, or $0.91 per diluted share for the prior year period.
Included in the first half of 2002 were after-tax net restructuring charges of
$10.0, or $0.25 per diluted share. Included in the first half of 2001 were
after-tax restructuring charges of $5.0, or $0.12 per diluted share and
after-tax goodwill amortization of $3.2, or $0.07 per diluted share. Excluding
these items, net earnings for the first half of 2002 were $38.4, or $0.94 per
diluted share, compared to $46.3, or $1.10 for the prior year period.
Segment Results
Water and Industrial Process Chemicals:
Water and Industrial Process Chemicals net sales were $159.2 for the first half
of 2002, a decrease of 8.1% from the prior year period. Selling volumes
decreased 6.9%, selling prices decreased 0.4% and the adverse effects of
exchange rate changes decreased sales 0.8%. The decreases in selling volumes
were due to lower North American water treatment sales, lower Latin American
mining chemical sales and, to a lesser extent, lower global phosphine sales.
Earnings from operations were $10.0 or 6.3% of net sales for the first half of
2002, compared to $14.9 or 8.6% of net sales for the prior year period. The
lower earnings from operations were primarily the result of lower sales and an
unfavorable product mix offset by lower overall raw material costs and lower
amortization expense from adopting SFAS 142.
Performance Products:
Performance Products net sales were $226.2 for the first half of 2002, a
decrease of 0.7% from the prior year period. Selling volumes increased 1.4%,
selling prices decreased 2.1% and the effects of exchange rate changes were
negligible. Demand from automotive and general industrial markets improved
versus prior year period. The lower selling prices were primarily in the polymer
additives product line.
Earnings from operations for the first half of 2002 were $19.4 or 8.6% of net
sales, compared to $10.2 or 4.5% of net sales for the prior year period. The
improvement in earnings from operations is the result of lower raw material
prices, improved operating costs and lower amortization expense from adopting
SFAS 142.
Specialty Materials:
Specialty Materials net sales were $206.5 for the first half of 2002, a decrease
of 11.4% from the prior year period. Selling volumes decreased 13.6%, excluding
a 3.0% increase from acquisitions. The effect of exchange rate changes were
negligible, while selling prices were down 0.8%. The decrease in selling
20
(Millions of dollars, except share and per share amounts)
volumes reflects the decline in the commercial aircraft market post-September
11, 2001.
Earnings from operations for the first half of 2002 were $37.9 or 18.4% of net
sales, compared to $58.3 or 25.0% for the prior year period. The decline in
earnings from operations reflects the decrease in selling volumes as noted above
partially offset by lower raw material prices and the benefit of lower
amortization expense from adopting SFAS 142.
Building Block Chemicals:
Building Block Chemicals net sales to external customers were $77.0 for the
first half of 2002, a decrease of 19.9% from the prior year period. Selling
volumes increased 3.3%, excluding a 10.2% reduction resulting from the shutdown
of the ammonia facility in July of 2001. Selling prices decreased 13.2%, while
exchange rate changes increased sales 0.2%. The decrease in selling prices was
primarily due to lower acrylonitrile and acrylamide selling prices.
The operating loss improved to $1.6, as compared to the prior year period
operating loss of $11.2. The improvement was due to lower natural gas prices in
the United States and reduced manufacturing costs as a result of the full effect
of the restructuring efforts implemented in the second quarter of last year.
In the second quarter of 2001 the Company recorded a restructuring charge of
$5.4 related to the mothballing of the Fortier ammonia plant and the Company's
share of the related reduction of infrastructure costs at the Fortier facility.
For further information on this restructuring charge see Note 3 of the Notes to
Consolidated Financial Statements.
Liquidity and Financial Condition
At June 30, 2002, the Company's cash balance was $116.9, an increase of $33.3
from year-end 2001.
Net cash flows provided by operating activities were $63.0 for the six months
ended June 30, 2002, compared with net cash flows provided by operating
activities of $43.5 for the six months ended June 30, 2001.
Accounts receivable increased from year-end levels, but days outstanding
remained essentially unchanged from year-end. With respect to inventories, the
Company continues to drive inventory reductions through its supply chain
initiatives. However, short-term inventory level increases may be expected for
safety stock as an initiative aimed at reducing the number of finished goods
warehouses is implemented. As of June 30, 2001 there was a pay-down of accounts
payable resulting from reduced production levels in the first quarter versus the
fourth quarter of 2000, principally in the acrylonitrile and coating and resins
product lines. Accrued expenses as of June 30, 2001, reflected incentive
payments for 2000 performance and substantially lower accruals for the 2001
performance period in recognitin of the economic slowdown and its impact on 2001
results versus performance targets. Current year accrued expenses reflect higher
restructuring accruals, more normalized accruals for incentive-based
compensation and profit sharing and the impact of lower incentive payments for
2001 performance and the timing of certain payroll tax payments.
Net cash flows used for investing activities totaled $21.6 for the six months
ended June 30, 2002, compared with $40.2 for the six months ended June 30, 2001.
Included in 2001 was $9.8 funding for three small acquisitions. Capital spending
for the six months ended June 30, 2002 was $22.6, compared with $32.7 for the
six months ended June 30, 2001. The Company will continue to manage capital
spending closely. For the full year 2002, the Company expects capital spending
to be in the range of $65.0 to $70.0 as expenditures for the Specialty Chemical
research laboratory renovations ramp up.
The Company believes that, based on its expected operating results for 2002, it
will be able to fund operating cash requirements and planned capital
expenditures through the end of 2002. For further discussion on risks, see
Quantitative and Qualitative Disclosures about Market Risk, Significant
Accounting Estimates and Comments on Forward-Looking Statements below.
21
(Millions of dollars, except share and per share amounts)
Net cash flows used for financing activities totaled $11.0 for the six months
ended June 30, 2002, compared with net cash flows used for financing activities
of $20.5 for the six months ended June 30, 2001. In connection with the stock
repurchase program discussed below, during the six months ended June 30, 2002,
the Company purchased 445,682 shares of common stock at a cost of $13.1. During
the six months ended June 30, 2001 the Company purchased 881,400 shares of
common stock at a cost of $29.0.
On November 2, 2000, the Company announced an authorization of $100.0 to
repurchase shares of its outstanding common stock. The repurchases are made from
time to time on the open market or in private transactions and the shares
obtained under this authorization are utilized for stock option plans, benefit
plans and other corporate purposes. Through June 30, 2002, the Company had
repurchased 2,318,473 shares at a cost of $70.9 under this authorization.
In connection with the Company's stock repurchase program, the Company may sell
put options to institutional investors in private placements exempt from
registration under Section 4(2) of the Securities Act of 1933. During the three
months ended June 30, 2002 the Company sold 100,000 put options that expire in
September 2002 at an exercise price of $29.505 per share. The Company received
premiums of approximately $0.2 on the sale of such options. During the prior
year period, the Company sold 100,000 put options at an exercise price of
$31.528 per share and 100,000 put options at an exercise price of $31.347 per
share. The Company received premiums of approximately $0.5 on the sale of such
options. Subsequently, during the third quarter of 2001, 140,000 of those put
options expired unexercised and the holder elected to exercise the remaining
60,000 put options, which were settled by the Company purchasing 60,000 shares
of its common stock at an exercise price of $31.347 per share, which was
slightly "out of the money" at the time.
On April 11, 2002, the Company executed a $100.0, three-year unsecured revolving
credit agreement and a $100.0, 364-day unsecured revolving credit agreement with
a one-year term out option. These two agreements replaced a $200.0 unsecured
revolving credit agreement that was due to expire in July 2002. Revolving loans
under the new agreements are available for the general corporate purposes of the
Company and its subsidiaries, including without limitations, for purposes of
making acquisitions permitted under the agreements. The credit agreements
contain covenants customary for such facilities.
The Company has the intent and ability to refinance on a long-term basis the
$100.0 principal amount of 6.50% Notes due March 15, 2003.
Other
Research and Development Tax Credit:
In July 2002, the Company was notified by a Joint Committee of the IRS that its
claim for a refund related to prior years' research and development tax credits
was approved. As a result, the Company expects to record in the third quarter of
2002 a reduction of $6.0 million ($0.15 per diluted share) in income tax expense
offset by a charge of $1.7 million ($1.1 million after-tax or $0.03 per diluted
share) in administrative and general expenses for external costs associated with
such tax planning. The net benefit will be approximately $0.12 per diluted
share. The Company expects to receive the $6.0 million refund before December
31, 2002.
2002 Outlook:
Based on better than expected first half results and the current forecast for
the second half of 2002, the Company expects third quarter net earnings to be in
the range of $0.40 to $0.45 per diluted share, excluding the net benefit of the
prior years' research and development tax credits mentioned above and full year
2002 net earnings to be in the range of $1.65 to $1.75 per diluted share,
excluding net restructuring charges from the first half of 2002 and the net
benefit of the prior years' research and development tax credits.
22
(Millions of dollars, except share and per share amounts)
In the Specialty Chemical segments, the Company does not expect further
improvements in its markets for the remainder of 2002. Cost and efficiency
initiatives continue to take hold but raw material costs are increasing and
there is still reduced demand. In the Water and Industrial Process Chemicals
segment the Company still expects flat sales and now expects low single digit
improvement in earnings for all of 2002. Absent a sustained recovery in demand,
the Company expects full year sales for the Performance Products segment to
increase about 3% and earnings to nearly double over the prior year.
In Specialty Materials, build rates for commercial aircraft are declining in
line with the Company's original guidance which, was based on production
forecasts that aircraft manufacturers have provided. Based on this, the Company
reiterates its original guidance of full year sales to be 10% to 15% lower and
earnings to be 30% to 35% lower than 2001.
In Building Block Chemicals, the Company expects propylene costs to peak and
then moderate downward. Natural gas costs are expected to be higher than first
half 2002 levels. Acrylonitrile pricing is expected to increase slightly from
second quarter 2002 levels thereby improving margins. The net result should be
earnings close to breakeven for the full year.
Recently Issued Statements of Financial Accounting Standards:
For information on recent accounting pronouncements see Note 5 of the Notes to
Consolidated Financial Statements.
Significant Accounting Estimates:
See "Significant Accounting Estimates" under Item 7 of the Company's 2001 Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on March
25, 2002 and incorporated by reference herein.
Comments on Forward-Looking Statements
A number of the statements made by the Company in the Quarterly Report on Form
10-Q, or in other documents, including but not limited to the Company's Annual
Report 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 2002 and beyond, 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; changes
in demand for the Company's products or in the costs and availability of its raw
materials; customer inventory destocking; the actions of competitors; exchange
rate fluctuations; the success of our customers' demands for price decreases;
technological change; our ability to renegotiate expiring long-term contracts;
changes in employee relations, including possible strikes; government
regulations; litigation, including its inherent uncertainty; difficulties in
plant operations and materials transportation; environmental matters; the
23
(Millions of dollars, except share and per share amounts)
results of and recoverability of investments in associated companies; energy
costs; 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of market risks at year-end, refer to Item 7A of the Company's
2001 Annual Report on Form 10-K for the year ended December 31, 2001, filed with
the Securities and Exchange Commission on March 25, 2002 and incorporated by
reference herein. During 2002, the Company executed various foreign exchange and
natural gas derivative instrument transactions that do not materially alter the
market risk assessment performed as of December 31, 2001. Other 2002 financial
instrument transactions include:
On April 11, 2002, the Company executed a $100.0, three-year unsecured revolving
credit agreement and a $100.0, 364-day unsecured revolving credit agreement with
a one-year term out option. These two agreements replaced a $200.0 unsecured
revolving credit agreement that was due to expire in July 2002. Revolving loans
under the new agreements are available for the general corporate purposes of the
Company and its subsidiaries, including, without limitation, for purposes of
making acquisitions permitted under the agreements. The credit agreements
contain covenants customary for such facilities.
During the three months ended June 30, 2002 the Company sold 100,000 put options
that expire in September 2002 at an exercise price of $29.505 per share. The
Company received premiums of approximately $0.2 on the sale of such options. In
lieu of purchasing the shares from the put option holder, the Company has the
right to elect settlement by paying the holder of the put options the excess of
the strike price over the then market price of the shares in either cash or
additional shares of the Company's common stock (i.e., physical, net cash or net
share settlement).
24
Part II - Other Information
Item 1. 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") are among several defendants
in 36 lead-based paint cases pending in various state and federal courts. Cytec
has an agreement to indemnify Cyanamid in connection with such suits and,
accordingly, for purposes of this paragraph only, the Company means Cytec and
Cyanamid collectively. The suits have been 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 for the
cost of monitoring, detecting and removing lead-based paints from buildings; for
personal injuries allegedly caused by ingestion of lead-based paints; and
plaintiffs' attorneys' fees. Historically, the Company was sued primarily as the
alleged successor to MacGregor Lead Company from which the Company purchased
certain assets in 1971. MacGregor Lead Company manufactured and sold white lead
pigments, the predominant lead pigment used in paints. The Company denies it is
a successor to MacGregor Lead Company. The Company has won summary judgment
motions in three cases requiring dismissal of those claims against the Company
that were based on the theory that the Company was a successor to MacGregor Lead
Company and plaintiffs have agreed to the entry of a consent order dismissing
such claims against the Company in a fourth case. More recently, there are
claims that the Company is liable in its own right. Cytec never sold any
lead-based paint or lead pigments and has no definitive information that
Cyanamid sold any lead-based paints or lead pigments for any of the uses at
issue in these cases.
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, the other companies, and certain defense
contractors have also been named as defendants in a qui tam proceeding brought
by four individuals on behalf of the United States government seeking to recover
for the submission by the defendants of alleged false or fraudulent claims for
payment to the United States government arising from alleged fraudulently fixed
carbon fiber and prepreg prices. 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 from 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.
25
See also the first four paragraphs of "Environmental Matters" under Item 1 of
the Company's 2001 Annual Report on Form 10-K, which is incorporated by
reference herein, and Note 8 of the Notes to the Consolidated Financial
Statements (unaudited) on Part I, item (1).
In addition to liabilities with respect to the specific cases described
previously, 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 2. Changes in Securities and Use of Proceeds
See Note 10 of the Notes to Consolidated Financial Statements contained in Part
I, Item 1 for a description of certain put options sold by the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of Common Stockholders on May 13, 2002. At
this meeting, the only substantive matter voted on was the election of
Directors.
J. R. Satrum and D. Lilley were elected Directors at the Annual Meeting for a
three-year term ending in 2005 by the following margins:
Name Votes For Votes Withheld
- ---- --------- --------------
J. R. Satrum 33,781,488 1,467,189
D. Lilley 34,167,299 1,081,378
In addition, L. L. Hoynes, Jr. was re-elected to the Board by the unanimous
written consent of the sole holder of the Company's Series C Cumulative
Preferred Stock.
The terms of office as a Director of J. E. Akitt, F. W. Armstrong, J. R.
Stanley, C.A. Davis and W. P. Powell continued after the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
See Exhibit Index on page 28 for exhibits filed with this Quarterly Report on
Form 10-Q.
(b). Reports on Form 8-K
The Company has not filed a current report on Form 8-K during the second quarter
of 2002.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYTEC INDUSTRIES INC.
By: /S/James P. Cronin
---------------------------------
James P. Cronin
Executive Vice President and Chief Financial
Officer
August 9, 2002
27
Exhibit Index
10.12(a) 1993 Stock Award and Incentive Plan as amended and readopted on
April 11, 2002
10.12(h) Key Manager Income Continuity Plan as amended through June 14, 2002
12 Computation of Ratio of Earnings to Fixed Charges for the three and
six months ended June 30, 2002 and 2001
99 Material Incorporated by reference from the 2001 Annual Report on
Form 10-K and with respect to Item 8 on Form 10-K/A
99.1 Certification of David Lilley, Chief Executive Officer Pursuant To
18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002
99.2 Certification of James P. Cronin, Chief Financial Officer Pursuant
To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002
28