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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
----------------
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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|.
There were 38,881,148 shares of common stock outstanding at March 31, 2004.
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 14
Item 3. Quantitative And Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II - Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Exhibit Index 23
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 Ended
March 31,
---------------------
2004 2003
--------- ---------
Net sales $ 415.2 $ 367.4
Manufacturing cost of sales 312.7 272.4
Selling and technical services 34.9 30.1
Research and process development 9.1 8.2
Administrative and general 13.3 11.8
Amortization of acquisition intangibles 1.4 0.8
--------- ---------
Earnings from operations 43.8 44.1
Other income (expense), net 0.9 (1.2)
Equity in earnings of associated companies 0.3 2.5
Interest expense, net 3.8 4.1
--------- ---------
Earnings before income taxes and cumulative effect
of accounting change 41.2 41.3
Income tax provision 9.9 12.4
--------- ---------
Earnings before cumulative effect of accounting change 31.3 28.9
Cumulative effect of accounting change, net of taxes
of $7.3 - (13.6)
--------- ---------
Net earnings $ 31.3 $ 15.3
========= =========
Earnings before cumulative effect of accounting change
per common share
Basic $ 0.80 $ 0.75
Diluted $ 0.78 $ 0.73
Cumulative effect of accounting change per common share
Basic $ - $ (0.35)
Diluted $ - $ (0.34)
Earnings per common share
Basic $ 0.80 $ 0.39
Diluted $ 0.78 $ 0.38
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)
March 31, December 31,
2004 2003
----------- --------------
ASSETS
Current Assets
Cash and cash equivalents $ 251.6 $ 251.1
Trade accounts receivable, less allowance for doubtful
accounts of $7.2 and $7.6 in 2004 and 2003,
respectively 242.1 217.1
Other accounts receivable 52.9 50.2
Inventories 183.6 176.0
Deferred income taxes 0.1 8.2
Other current assets 17.7 8.8
--------- ---------
Total current assets 748.0 711.4
Investment in associated companies 81.5 82.1
Plants, equipment and facilities, at cost 1,542.5 1,538.3
Less: accumulated depreciation (886.3) (875.4)
--------- ---------
Net plant investment 656.2 662.9
Acquisition intangibles, net of accumulated amortization 67.9 69.9
Goodwill 339.1 339.7
Deferred income taxes 86.5 85.7
Other assets 73.6 74.2
--------- ---------
Total assets $ 2,052.8 $ 2,025.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 9.2 $ 9.3
Accounts payable 140.7 93.5
Accrued expenses 137.4 170.5
Income taxes payable 60.4 63.2
--------- ---------
Total current liabilities 347.7 336.5
Long-term debt 418.6 416.2
Pension and other postretirement benefit liabilities 334.6 346.0
Other noncurrent liabilities 183.6 171.8
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 118.1 122.2
Retained earnings 1,010.1 982.9
Unearned compensation (3.0) (5.3)
Minimum pension liability (96.8) (96.8)
Unrealized gains on derivative instruments 0.5 0.3
Accumulated translation adjustments 29.8 38.0
Treasury stock, at cost, 9,251,492 shares in 2004, and
9,139,897 shares in 2003 (291.0) (286.5)
--------- ---------
Total stockholders' equity 768.3 755.4
--------- ---------
Total liabilities and stockholders' equity $ 2,052.8 $ 2,025.9
========= =========
See accompanying Notes to Consolidated Financial Statements.
4
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of dollars)
Three Months Ended
March 31,
2004 2003
--------- ----------
Cash flows provided by (used for) operating activities
Net earnings $ 31.3 $ 15.3
Noncash items included in net earnings:
Dividends from associated companies greater than
earnings 0.8 0.6
Depreciation 21.6 21.6
Amortization 2.7 1.2
Deferred income taxes 7.3 (10.3)
Gain on sale of assets (0.6) -
Cumulative effect of accounting change, net of tax - 13.6
Other (0.3) -
Changes in operating assets and liabilities:
Trade accounts receivable (28.9) (16.6)
Other receivables (3.8) (2.4)
Inventories (9.0) (19.5)
Accounts payable 44.0 12.3
Accrued expenses (24.6) (9.2)
Income taxes payable - 17.7
Other assets (8.0) (2.7)
Other liabilities (9.8) (11.5)
--------- ----------
Net cash flows provided by operating activities 22.7 10.1
--------- ----------
Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (16.9) (18.9)
Proceeds received on sale of assets 0.7 0.1
Advance payment received on land lease 9.1 -
--------- ----------
Net cash flows used for investing activities (7.1) (18.8)
--------- ----------
Cash flows provided by (used for) financing activities
Proceeds from the exercise of stock options 2.9 1.7
Purchase of treasury stock (13.2) (11.3)
Change in short-term borrowings (0.1) -
Change in long-term debt - (100.0)
Proceeds from termination of interest rate swap 2.7 -
Cash dividends (3.9) -
--------- ----------
Net cash flows used for financing activities (11.6) (109.6)
--------- ----------
Effect of currency rate changes on cash and cash
equivalents (3.5) 1.1
Increase (decrease) in cash and cash equivalents 0.5 (117.2)
Cash and cash equivalents, beginning of period 251.1 210.0
--------- ----------
Cash and cash equivalents, end of period $ 251.6 $ 92.8
========= ==========
See accompanying Notes to Consolidated Financial Statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except per share amounts, unless otherwise indicated)
(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 2003 Annual Report on Form 10-K.
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year's presentation.
(2) Stock-Based Compensation
------------------------
The Company accounts for its stock based compensation under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and related
Interpretations. No stock-based compensation cost is reflected in net income for
stock options, as all stock options granted had an exercise price equal to the
market value of the underlying common stock on the date of the grant.
Compensation cost for restricted stock is recorded based on the market value on
the date of grant, and compensation cost for performance stock is recorded based
on the quoted market price of the Company's common stock at the end of each
period through the date of vesting. The fair value of restricted and performance
stock is charged to unearned compensation in Stockholders' Equity and amortized
to expense over the requisite vesting periods.
The Company reduced the amount of stock option grants in 2004 by approximately
40% compared to the 2003 grants. This was effected by reducing the average size
of option grants and by replacing option grants to certain employees with stock
appreciation rights (SARS). SARS are accounted for as a liability under APB No.
25 and are payable in cash. Compensation cost for SARS is recognized in the
income statement over the period of the award based on changes in the current
market price of the Company's common stock over the market price at the grant
date. At March 31, 2004, the Company has not recorded a liability or any expense
associated with the SARS as the market price at March 31, 2004 was less than the
price at the grant date.
The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" to all stock-based employee compensation for the three months
ended March 31:
2004 2003
- ----------------------------------------------------------------------------
Net earnings, as reported $ 31.3 $ 15.3
Add :
Stock-based employee compensation expense
included in reported net earnings, net of
related tax effects 0.3 -
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 1.8 1.9
-------------------------
Pro forma net earnings $ 29.8 $ 13.4
Net earnings per share:
Basic, as reported $ 0.80 $ 0.39
Basic, pro forma 0.76 0.35
Diluted, as reported $ 0.78 $ 0.38
Diluted, pro forma 0.74 0.34
- ----------------------------------------------------------------------------
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except per share amounts, unless otherwise indicated)
The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
2004 2003
- ---------------------------------------------------------------------------
Expected life (years) 5.7 5.6
Expected volatility 46.7 % 47.3 %
Expected dividend yield 1.0 % -
Risk-free interest rate 3.4 % 2.9 %
Weighted average fair value of options granted
during the year $ 16.19 $ 12.52
- ---------------------------------------------------------------------------
(3) 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 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.
In calculating basic and diluted earnings per share, there are no adjustments to
income (numerator). The following shows the reconciliation of weighted average
shares (the denominator) used in the calculation of diluted earnings per share:
March 31, 2004 2003
--------------------------------------------------------------
Weighted average shares
outstanding: 39,098,953 38,734,611
Effect of dilutive shares:
Options 914,323 912,603
Performance/Restricted Stock 86,690 116,808
--------------------------------------------------------------
Adjusted average shares
outstanding 40,099,966 39,764,022
--------------------------------------------------------------
(4) Recently Issued Statements of Financial Accounting Standards
------------------------------------------------------------
In December 2003, Congress passed the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (Medicare Act). In January 2004, the Financial
Accounting Standards Board (FASB) issued Financial Staff Position No. 106-1 (FSP
FAS 106-1), "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (FSP). The FASB is
in the process of amending the FSP by issuing proposed FSP 106-b. The proposed
FSP is effective for the first interim or annual period beginning after June 15,
2004. The FSP provides guidance on the accounting for the effects of the
Medicare Act for employers that sponsor postretirement health care plans that
provide prescription drug benefits. The Company is currently evaluating the
effects of the Medicare Act on its existing postretirement health care plans and
has not determined the amount of any subsidy that may be available to the
Company from the Medicare Act. While the Company is evaluating the effects of
the Medicare Act, the Company has elected under the provisions of the FSP to
defer the recognition of any potential subsidy from the Medicare Act.
In March 2004, the FASB issued the exposure draft, "Share-Based Payment". The
proposed Statement would require all equity-based awards to employees to be
recognized in the income statement based on their fair value for fiscal years
beginning after December 15, 2004. The new standard, if accepted in its present
form, would apply to all awards granted, modified or settled after the effective
date. The Company is in the process of analyzing the potential impact of this
proposed standard on its consolidated results of operations and financial
position.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except per share amounts, unless otherwise indicated)
(5) Inventories
-----------
The inventories consisted of the following:
March 31 December 31
2004 2003
- ----------------------------------------------------------------------------
Finished goods $ 120.8 $ 114.9
Work in process 21.8 21.5
Raw materials & supplies 74.6 73.2
-------------- -----------------
217.2 209.6
Less reduction to LIFO cost (33.6) (33.6)
-------------- -----------------
Total inventories $ 183.6 $ 176.0
-------------- -----------------
LIFO inventories as a % of total
inventories 56% 55%
- ----------------------------------------------------------------------------
(6) Equity in Earnings of Associated Companies
------------------------------------------
The Company has one associated company, CYRO Industries ("CYRO"), a 50% owned
joint venture. The 2003 associated companies' information below includes the
results of the former Mitsui-Cytec ("MCY") joint venture which was dissolved on
September 30, 2003. The Company now owns 100% of MCY's coating resins product
line and the associated assets and liabilities of the product line. Results are
recorded as part of the Performance Products segment.
Summarized financial information for the Company's equity in earnings of
associated companies for the three months ended March 31 is as follows:
2004 2003
- ---------------------------------------------------------------------------
Net sales $ 72.4 $ 79.5
Gross profit 9.7 15.6
Earnings before cumulative effect of
accounting change 0.6 4.5
Cumulative effect of accounting
change, net of tax - (0.2)
------- --------
Net earnings $ 0.6 $ 4.3
- ---------------------------------------------------------------------------
The Company's equity in earnings
of associated companies $ 0.3 $ 2.5
- ---------------------------------------------------------------------------
The Company's equity in cumulative effect
of adoption of SFAS 143, net of tax,
of associated companies $ - $ (0.1)
- ---------------------------------------------------------------------------
The Company sells certain products to CYRO and has determined that the sales and
related profit are not material; therefore, no adjustments have been made to
eliminate such profit or loss on sales to CYRO for inventory held at the balance
sheet dates.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except per share amounts, unless otherwise indicated)
(7) Environmental Matters and Other Contingent Liabilities and Commitments
----------------------------------------------------------------------
Environmental Matters
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.
As of March 31, 2004 and December 31, 2003, the aggregate environmental related
accruals were $79.5 and $79.6, respectively. As of March 31, 2004 and December
31, 2003, $11.0 of the above amounts was included in accrued expenses, with the
remainder included in other noncurrent liabilities. Environmental remediation
spending for the three months ended March 31, 2004 and 2003 was $1.1 and $1.5,
respectively.
These accruals can change substantially due to such factors as additional
information on the nature or extent of contamination, methods of remediation
required, changes in the apportionment of costs among responsible parties and
other actions by governmental agencies or private parties.
A further discussion of environmental matters can be found in Note 10 of the
Notes to the Consolidated Financial Statements contained in the Company's 2003
Annual Report on Form 10-K.
Other Contingent Liabilities
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 including asbestos,
environmental, contractual, employment and intellectual property matters.
As of March 31, 2004 and December 31, 2003, the aggregate self-insured and
insured contingent liability was $72.0 and $72.5, respectively. The asbestos
liability included in the above amounts at March 31, 2004 and December 31, 2003
was $53.6 and $54.0, respectively, and the related insurance receivable was
$28.9 at March 31, 2004 and $29.1 at December 31, 2003. The Company anticipates
receiving a net tax benefit for payment of those claims to which full insurance
recovery is not realized.
The following table presents information about the asbestos claims against the
Company:
Three Months Ended Year Ended
March 31, December 31,
2004 2003
- -----------------------------------------------------------------------------
Claims closed in period 156 7,601
Claims filed in period 1,734 7,648
Claims open at end of period 28,533 26,955
- -----------------------------------------------------------------------------
It should be noted that the ultimate liability and related insurance recovery
for all pending and anticipated future claims cannot be determined with
certainty due to the difficulty of forecasting the numerous variables that can
affect the amount of the liability and insurance recovery. These variables
include but are not limited to: (i) significant changes in the number of future
claims; (ii) significant changes in the average cost of resolving claims; (iii)
changes in the nature of claims received; (iv) changes in the laws applicable to
these claims; and (v) financial viability of co-defendants and insurers.
The Company is among several defendants in approximately 35 cases 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 the use in buildings. The different suits variously seek
compensatory and punitive damages and/or injunctive relief, including funds for
the cost of monitoring, detecting and removing lead based paint from buildings
and for medical monitoring; for personal injuries allegedly caused by ingestion
of lead based paint; and plaintiffs' attorneys' fees. The Company believes that
the suits are without merit and is vigorously defending against all such claims.
Accordingly, no loss contingency has been recorded. The Company has access to a
substantial amount of primary and excess general liability insurance for
property damage, and believes that these policies are available to cover a
significant portion of both its defense costs and indemnity costs, if any, for
lead pigment-related
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except per share amounts, unless otherwise indicated)
property damage claims. The Company has not recorded an insurance receivable
relating to its defense costs although it continues to pursue an agreement with
various of its insurers concerning coverage with respect to these matters. In
the first quarter of 2004, the Company received a "good-faith" payment of $1.0
from one of its insurance carriers that it recorded in other income (expense)
and expects to recognize additional recoveries in future periods as negotiations
with its insurers proceed. However, until a cost-sharing arrangement with one or
more of its insurers has been determined, the Company will continue to expense
its lead defense costs as incurred without provision for potential insurance
recoveries.
While it is not feasible to predict the outcome of all pending environmental
matters, lawsuits and claims, it is reasonably possible that there will be a
necessity for future provisions for costs for environmental matters and for
other contingent liabilities that in management's opinion, will not have a
material adverse effect on 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, many of
these liabilities are paid over an extended period, and the timing of such
payments cannot be predicted with any certainty.
A further discussion of contingent liabilities can be found in Note 10 of the
Notes to the Consolidated Financial Statements contained in the Company's 2003
Annual Report on Form 10-K.
Commitments
The Company frequently enters into long-term contracts with customers with terms
that vary depending on specific industry practices. The Company's business is
not substantially dependent on any single contract or any series of related
contracts. Descriptions of the Company's significant sales contracts are set
forth in Note 10 of the Notes to Consolidated Financial Statements contained in
the Company's 2003 Annual Report on Form 10-K.
(8) Comprehensive Income
--------------------
The components of comprehensive income, which represents the change in equity
from non-owner sources, for the three months ended March 31 is as follows:
2004 2003
- -----------------------------------------------------------------------------
Net earnings $ 31.3 $ 15.3
Other comprehensive income (loss):
Unrealized gain (loss) on derivative
instruments 0.2 (0.2)
Foreign currency translation adjustments (8.2) 5.5
------------------------------
Comprehensive income $ 23.3 $ 20.6
- -----------------------------------------------------------------------------
(9) Other Financial Information
---------------------------
On January 22, 2004 the Board of Directors approved the initiation of a common
stock quarterly cash dividend program and declared a $0.10 per share cash
dividend, paid on February 25, 2004 to shareholders of record as of February 10,
2004. Cash dividends paid in the first quarter of 2004 were $3.9.
Taxes paid for the three months ended March 31, 2004 and 2003 were $1.3 and
$6.1, respectively. Interest paid for the three months ended March 31, 2004 and
2003 was $4.4 and $6.6, respectively.
During the first quarter of 2004 and 2003, the Company repurchased 388,300 and
384,100 shares of stock at a cost of $13.2 and $11.3, respectively.
During the quarter, the Company received, net of expenses, $9.1 as a prepayment
for a long term lease on a certain property for future development by a third
party with an option to purchase later. The net proceeds are being amortized
over the life of the lease and the impact of amortization in any one period is
not material.
Due to the liquidity provided by the Company's cash balances and the
availability of $100.0 under an unsecured revolving credit agreement that
expires April 11, 2005, the $100.0, 364-day unsecured revolving credit agreement
was allowed to expire on its scheduled maturity date of April 9, 2004.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except per share amounts, unless otherwise indicated)
(10) Segment Information
-------------------
Summarized segment information for the Company's four segments for the three
months ended March 31, 2004 and 2003 is as follows:
2004 2003
- --------------------------------------------------------------------------
Net Sales:
Water and Industrial Process
Chemicals $ 92.4 $ 85.8
Performance Products
Sales to external customers 139.9 119.8
Intersegment sales 1.3 -
Specialty Materials 120.3 108.1
Building Block Chemicals
Sales to external customers 62.6 53.7
Intersegment sales 19.3 16.4
-------------- --------------
Net sales from segments 435.8 383.8
Elimination of intersegment revenue (20.6) (16.4)
-------------- --------------
Total consolidated net sales $ 415.2 $ 367.4
- --------------------------------------------------------------------------
% of % of
Sales Sales
- -------------------------------------------------------------------------------
Earnings (loss) from operations:
Water and Industrial Process
Chemicals $ 3.6 4 % $ 6.9 8 %
Performance Products 13.5 10 % 11.8 10 %
Specialty Materials 23.2 19 % 22.3 21 %
Building Block Chemicals 5.3 6 % 4.3 6 %
------------ ------------
Earnings from segments 45.6 10 % 45.3 12 %
Corporate and Unallocated (1.8) (1.2)
------------ ------------
Total consolidated earnings from
operations $ 43.8 11 % $ 44.1 12 %
- -------------------------------------------------------------------------------
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except per share amounts, unless otherwise indicated)
(11) Goodwill and Other Acquisition Intangibles
------------------------------------------
The following is the activity in the goodwill balances for each segment:
Water and
Industrial
Process Performance Specialty
Chemicals Products Materials Corporate Total
---------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 36.3 $ 55.2 $ 247.5 $ 0.7 $ 339.7
Purchase adjustment - (0.2) - - (0.2)
Currency exchange (0.7) 0.2 0.1 - (0.4)
---------------------------------------------------------------------------------------
Balance, March 31, 2004 $ 35.6 $55.2 $ 247.6 $ 0.7 $ 339.1
---------------------------------------------------------------------------------------
Other acquisition intangibles as of March 31, 2004 and December 31, 2003,
consisted of the following major classes:
Accumulated
Gross carrying value amortization Net carrying value
- --------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2004 2003 2004 2003 2004 2003
-------------------------------------------------------------------------------- ---------------
Technology-based $40.4 $41.0 $(9.7) $(9.3) $30.7 $31.7
Marketing-related 10.9 11.0 (3.2) (3.0) 7.7 8.0
Customer-related 34.3 34.5 (4.8) (4.3) 29.5 30.2
------------------------------------------------------------------------------------------------
Total $85.6 $86.5 $(17.7) $(16.6) $67.9 $69.9
==========================================================================================================================
Amortization of acquisition intangibles for the three months ended March 31,
2004 and 2003 was $1.4 and $0.8, respectively. Assuming no change in the gross
carrying amount of acquisition intangibles, the estimated amortization of
acquisition intangibles for the fiscal years 2004 and 2005 is $5.2, for the year
2006 is $5.1 and for the years 2007 and 2008 is $5.0. The Company does not have
intangibles with indefinite useful lives other than goodwill.
(12) Restructuring of Operations
---------------------------
The following table shows the cumulative activity of the restructuring charge
the Company recorded in 2002. A detailed description of the restructuring charge
is set forth in Note 3 of the Notes to the Consolidated Financial Statements
contained in the Company's 2003 Annual Report on Form 10-K. This restructuring
is expected to be completed during the second quarter of 2004.
Plant Asset
Severance Decommissioning Write-downs Total
- ---------------------------------------------------------------------------------------------------------------
2002 charges $ 7.5 $ 0.8 $ 7.7 $16.0
Cash expenditures (6.0) (0.1) (0.2) (6.3)
Non-cash write off - - (7.2) (7.2)
Balance December 31, 2002 $ 1.5 $ 0.7 $ 0.3 $ 2.5
Cash payments (1.3) (0.2) - (1.5)
Balance December 31, 2003 $ 0.2 $ 0.5 $ 0.3 $ 1.0
Cash payments - (0.1) - -
------------------------------------------------------------------------------
Balance March 31, 2004 $ 0.2 $ 0.4 $ 0.3 $ 0.9
===============================================================================================================
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except per share amounts, unless otherwise indicated)
(13) Commodity and Derivative Financial Instruments
----------------------------------------------
As of March 31, 2004, the Fortier facility's 2004 remaining forecasted natural
gas utility requirements were 54% hedged. At March 31, 2004, the Company had
$8.3 of natural gas forward contracts with April through October 2004 delivery
dates outstanding.
At March 31, 2004, the Company had outstanding natural gas swaps with a fair
value gain of $0.5, net of taxes.
During March 2004, the Company terminated its two interest rate swap agreements
that had effectively converted the interest cost on a total of $50.0 of the
Company's 4.60% Notes to a floating rate basis for the life of the Notes due
July 1, 2013. Upon termination, the Company received approximately $3.0 in cash
of which $0.3 represented accrued interest through the termination date. The net
gain of $2.7 recorded upon termination is being amortized over the life of the
4.60% Notes as a decrease to interest expense of such Notes. The amount of
unamortized swap settlement included in long-term debt was $2.7 at March 31,
2004.
In April 2004, the Company entered into a $50.0 interest rate swap to
effectively convert $50.0 of its 4.60% Notes to a floating rate basis for the
remaining life of the Notes.
For more information, refer to Note 4 to the Consolidated Financial Statements
contained in the Company's 2003 Annual Report on Form 10-K.
(14) Employee Benefit Plans
----------------------
Net periodic cost for the Company's pension and postretirement benefit plans for
the three months ended March 31 was as follows:
Pension Plans Postretirement Plans
2004 2003 2004 2003
- -----------------------------------------------------------------------------
Service cost $ 3.7 $ 3.2 $ 0.5 $ 0.3
Interest cost 8.7 8.0 4.3 4.1
Expected return on plan assets (9.4) (8.8) (1.3) (1.3)
Net amortization and deferral 1.6 1.1 (2.7) (2.7)
--------------------- ---------------------
Net periodic cost $ 4.6 $ 3.5 $ 0.8 $ 0.4
- -----------------------------------------------------------------------------
The Company previously disclosed in its notes to the consolidated financial
statements for the year ended December 31, 2003, that it expected to contribute
$17.0 to its U.S. pension plans in 2004. As of March 31, 2004, $13.3 of
contributions have been made. While the Company was not obligated to make any
contribution in 2004, it currently anticipates contributing an additional $4.2
to $12.7 to fund its U.S. pension plans in 2004 for a total range of $17.5 to
$26.0. The Company makes these voluntary contributions as a part of its normal
financial planning.
The net periodic cost above for the postretirement plans does not reflect any
amount associated with a potential subsidy under the Medicare Act.
The Company also sponsors various defined contribution retirement plans in the
United States and a number of other countries, consisting primarily of savings
and profit growth sharing plans. Contributions to the savings plans are based on
matching a percentage of employees' contributions. Contributions to the profit
growth sharing plans are generally based on the Company's financial performance.
Amounts expensed related to these plans for the three months ended March 31,
2004 and 2003 were $4.0 and $3.1, respectively.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements. Dollars are in millions, except per share amounts. Percentages are
approximate.
GENERAL
Cytec Industries Inc. is a global specialty chemicals and materials company and
sells its products to diverse major markets for aerospace, water treatment,
mining, automotive, industrial coatings, plastics and chemical intermediates.
With slightly over half of its sales outside of the U. S., sales volume by
region is an important metric to management and is detailed by segment as well
as the impact of changes in currency rates. 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. The Company also reports its net sales in four
geographic regions: North America, Latin America, Asia/Pacific and Europe/Middle
East/Africa. The destination of the sale determines the region under which it is
reported consistent with management's view of the business. North America
consists of the United States and Canada. Latin America includes Mexico, Central
America, South America and the Caribbean Islands. Asia/Pacific is comprised of
Asia, Australia and the islands of the South Pacific Rim.
Raw material cost changes year on year are an important factor in profitability
especially in years of high volatility. Key raw materials for the Specialty
Chemical and Building Block Chemicals segments are propylene, ammonia, methanol
derivatives and natural gas for utilities. Discussion of the year to year impact
for raw materials and energy is provided in our segment discussion.
In the course of the Company's ongoing operations, a number of strategic product
line 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. A further
discussion of acquisitions and dispositions can be found in Note 2 to the Notes
to the Consolidated Financial Statements contained in the Company's 2003 Annual
Report on Form 10-K.
Results of Operations
- ---------------------
First Quarter of 2004 versus First Quarter of 2003
- --------------------------------------------------
Net sales for the first quarter of 2004 were $415.2 compared with $367.4 for the
first quarter of 2003. All segments reported increased sales. In the two
Specialty Chemical segments sales increased primarily due to the acquisitions
completed in the second half of 2003 and favorable exchange rate changes. The
Specialty Materials sales increase was volume related and comes from the
military, rotorcraft and high performance automotive sectors. Building Block
Chemical sales were up principally due to price increases which were driven by
higher raw material and energy costs.
Manufacturing cost of sales was $312.7, or 75.3 % of net sales, in the first
quarter of 2004, compared to $272.4, or 74.1% of sales, for the prior year
period. Cost of sales was primarily impacted by higher raw material and energy
costs of $11.0. Absorption of fixed costs was $1.5 lower than the prior year
period principally due to lower production levels in the Building Block
Chemicals segment. However, the favorable overall impact of exchange rate
changes and higher selling prices offset much of the increase in raw material
and energy costs as a percent of sales. Thus, gross margin percent was down only
1.2%.
Selling and technical services increased $4.8 primarily due to ongoing costs of
the acquired businesses in the Specialty Chemical segments completed in the
second half of 2003, the impact of exchange rate changes for operations in
countries outside of the United States and higher costs in the Specialty
Materials segment where the Company has added personnel for its growth
initiatives.
Research and process development increased $0.9 primarily as a result of ongoing
costs of the acquired businesses of the Specialty Chemical segments completed in
the second half of 2003.
Administrative and general increased $1.5 with the primary drivers being ongoing
costs of the acquired businesses of the Specialty Chemical segments completed in
the second half of 2003 of approximately $0.4, an increase in certain litigation
costs of $0.3 and the impact of exchange rate changes for operations in
countries outside of the United States.
Other income (expense), net improved $2.1 principally due to a gain of $2.0
related to the sale in 1999 of the Company's share of its methanol joint venture
14
where the Company would receive additional proceeds if the market price of
methanol stayed above an agreed upon index over a predetermined period of time.
This agreement ended in February 2004 and methanol prices remained above the
indexed price. Payment was received before the end of the quarter. In the first
quarter of 2004, the Company received a "good-faith" payment of $1.0 from one of
its insurance carriers related to lead defense costs that it recorded in other
income (expense).
Equity in earnings of associated companies decreased $2.2 as a result of lower
earnings of $1.7 from CYRO Industries, (CYRO), the Company's 50% owned acrylic
plastics joint venture. Raw material costs were significantly higher for CYRO in
the quarter. In addition, results for 2003 include earnings of $0.5 from the
Company's former 50% owned Mitsui-Cytec joint venture. See Note 6 of the Notes
to Consolidated Financial Statements.
The Company's effective tax rate for the first quarter of 2004 is 24% compared
to 30% for the first quarter of 2003. This reduction reflects the Company's
continued growth of earnings in lower tax jurisdictions and, to a lesser extent,
a favorable international tax ruling. In the second quarter of 2003, the Company
lowered its effective tax rate to 28%.
Net earnings were $30.9 or $0.77 per diluted share compared to $28.9 million or
$0.73 per diluted share before the cumulative effect of the change in accounting
principle in the first quarter of 2003.
In the first quarter of 2003 the Company recorded an after-tax, non-cash charge
of $13.6 million ($0.34 per diluted share) reported as a cumulative effect of
accounting change. This applies to the adoption of Financial Accounting Standard
No. 143 (FAS 143), "Accounting for Asset Retirement Obligations" which became
effective January 1, 2003. Net earnings in 2003, after the cumulative effect of
accounting change as a result of adopting FAS 143, were $15.3 or $0.38 per
diluted share.
Segment Results
- ---------------
First quarter 2004 to first quarter 2003 comparisons and analyses of changes in
net sales by business segment and region are set forth below.
Water and Industrial Process Chemicals:
=======================================================================================
First First % Change Due to
Quarter Quarter Total ----------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------
North America $35.2 $34.8 1% 0% 1% 0%
Latin America 19.8 14.4 38% -5% 37% 6%
Asia/Pacific Rim 11.0 10.9 1% -3% -8% 12%
Europe/Middle East/Africa 26.4 25.7 3% -2% -6% 11%
---------------------
Total $92.4 $85.8 8% -2% 4% 6%
=======================================================================================
Overall selling volumes improved 4% although acquisitions added 10%. Excluding
acquisitions selling volumes decreased 6% due to reduction in mining chemicals
volumes as a result of reduced production at two major mines undergoing repairs
in Asia and in water treatment due to the Company's decision to exit certain low
profit business. On a regional basis, approximately half of the higher sales
volumes in Latin America were due to acquisitions and the remainder due to
higher demand from both copper and alumina customers. In Asia-Pacific,
acquisitions added 13% to selling volumes but this was more than offset by the
impact of the reduced mine production discussed above. In Europe, acquisitions
added 4% but base business was down in mining chemicals and in water treatment.
Selling prices in Latin America and Asia-Pacific were down offsetting the
favorable impact of exchange rate changes as much of the sales in these regions
are tied to the U.S. dollar.
Earnings from operations were $3.6, or 4% of sales, compared to $6.9, or 8% of
sales, in the first quarter of 2003. The decrease was primarily due to higher
raw material costs, primarily propylene and ammonia, and energy costs of
approximately $2.7, plus the lower base selling volumes. These more than offset
the favorable impact from acquisitions.
15
Performance Products:
=============================================================================================
First First % Change Due to
Quarter Quarter Total --------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------------
North America $67.7 $61.6 10% -2% 11% 1%
Latin America 8.8 7.2 22% 3% 20% -1%
Asia/Pacific Rim 26.6 20.3 31% 0% 28% 3%
Europe/Middle East/Africa 36.8 30.7 20% 2% 5% 13%
---------------------
Total $139.9 $119.8 17% 0% 13% 4%
=============================================================================================
Overall selling volumes improved 13% with acquisitions adding 11%. Excluding
acquisitions, selling volumes improved 2% primarily in the coating chemicals
product line. On a regional basis, North American selling volumes grew 11% with
acquisitions accounting for 7%. Latin American sales volumes were up 20% with
acquisitions accounting for 1%. All product lines in the region had higher
volumes due to improved demand. Asia-Pacific selling volumes were up 28% with
acquisitions accounting for 34% while base volumes were down 6% due to low
demand. Selling volumes in Europe were up 5% with acquisitions accounting for
4%.
Earnings from operations were $13.5, or 10% of sales, compared to $11.8, or 10%
of sales, in the first quarter of 2003. The favorable impact from acquisitions
plus higher base sales volumes and net favorable exchange rate changes were only
partially offset by increased raw material and energy costs of $1.6.
Specialty Materials:
============================================================================================
First First % Change Due to
Quarter Quarter Total -------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- --------------------------------------------------------------------------------------------
North America $80.8 $78.3 3% -1% 4% 0%
Latin America (1) 0.4 0.5 - - - -
Asia/Pacific Rim 4.5 4.0 13% -1% 14% 0%
Europe/Middle East/Africa 34.6 25.3 37% -2% 33% 6%
----------------------
Total $120.3 $108.1 11% -1% 11% 1%
============================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes were up 11% with the increases coming from the military,
rotorcraft and high performance automotive sectors. Selling volumes in Europe
represent increased sales to Airbus plus sales to the high performance
automotive sector. Selling volumes in North America reflected higher sales to
military applications offset somewhat by reduced sales to the commercial
aircraft sectors.
Earnings from operations were $23.2, or 19% of sales, compared to $22.3, or 21%
of sales, in the first quarter of 2003. The impact of the higher sales volumes
was mostly offset by increased manufacturing costs to meet the higher demand
levels, unfavorable exchange rate changes and increased selling and technical
services of $1.7 for continued investments for the segment's growth initiatives.
16
Building Block Chemicals:
=============================================================================================
First First % Change Due to
Quarter Quarter Total --------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------------
North America $30.7 $20.9 47% 24% 23% 0%
Latin America (1) 0.6 1.5 - - - -
Asia/Pacific Rim 18.5 14.1 31% 13% 18% 0%
Europe/Middle East/Africa 12.8 17.2 -26% -4% -28% 6%
---------------------
Total $62.6 $53.7 17% 12% 3% 2%
=============================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall sales volumes are up 3% principally due to acrylonitrile and its
derivative product, hydrocyanic acid. North American selling volumes were up 23%
primarily due to acrylonitrile as a result of new business and improved demand.
Asia-Pacific selling volumes were up 18% due to higher acrylonitrile demand in
the region. In the first quarter of 2003, more acrylonitrile was shipped to
Europe where spot pricing was improved over Asia-Pacific. As a result, European
selling volumes declined 28%. Selling prices are up overall due to improved
demand and recovery of higher raw material costs.
Earnings from operations were $5.3, or 6% of sales, compared to $4.3, or 6% of
sales, for the comparable period of 2003. Raw material and energy costs,
primarily propylene, ammonia and natural gas, increased approximately $6.9 but
this was mostly offset by higher selling prices of $6.1. The manufacturing
facilities ran well although the acrylonitrile plant ran below capacity due to
lack of propylene availability, a key raw material for acrylonitrile. In
addition, the melamine plant was down for 24 days for its scheduled maintenance
turnaround. Much of the melamine produced is used internally so there was little
impact on sales. Offsetting much of the impact from reduced production levels
was the net favorable impact of exchange rate changes.
Liquidity and Financial Condition
- ---------------------------------
At March 31, 2004 the Company's cash balance was $251.6 compared to $251.1 from
year end 2003.
Net cash flow provided by operating activities were $22.7 for the first quarter
of 2004 compared to $10.1 for the same period of 2003.
Trade accounts receivable dollars increased $28.9 as a result of the higher
level of sales but days outstanding decreased approximately three days from year
end. Inventories increased $9.0 due to higher demand levels in certain product
lines. However, inventory days decreased by approximately seven days. Accounts
payable increased $44.0 due to increased raw material purchases and timing of
payments versus those made at year end. Accrued expenses decreased $24.6. The
Company pays its incentive compensation and profit sharing payouts in the first
quarter of the year for prior year performance. These accounted for $13.8 of the
decline. In addition, the Company paid down a significant amount of accrued
expenses in the quarter. There were higher than normal accrued expenses at
year-end as invoices were accrued in December in anticipation of the cutover to
new computer systems on January 1; after the cutover, invoices were paid through
the new system. Other Assets increased due to payment of insurance premiums
which will be amortized over the life of the policy periods. Other Liabilities
reflect spending of $13.3 for funding of U.S. pension plans.
Net cash flows used for investing activities were $7.1 for the first quarter of
2004 compared to $18.8 for the same period of 2003.
Capital spending was $16.9 compared to $18.9 for the comparable period of 2003.
The decline is attributable to lower spending on the Specialty Chemicals
research building renovation project and the expansion of the Specialty
Materials advanced composites manufacturing facility in Germany. Also during the
quarter, the Company received $9.1, net of expenses, as a prepayment for a long
term lease on a certain property for future development by a third party with an
option to purchase later. The development of the property is not connected with
Company operations. The net proceeds are being amortized to income over the life
of the lease.
The Company believes that, based on its expected operating results for the next
twelve months, it will be able to fund operating cash requirements and planned
capital expenditures and dividends through the next twelve months from its
internal cash generation.
Net cash flows used for financing activities totaled $11.6 in the first quarter
of 2004 compared to $109.6 in the same period of 2003.
17
During the quarter, the Company repurchased 388,300 shares of stock at a cost of
$13.2. This compares to the repurchase of 384,100 shares of stock at a cost of
$11.3 for the same period of 2003. In March 2003, the Company repaid $100.0 of
its 6.5% debt then due. The Company also received $2.7 for the early termination
of two interest rate swaps which is being amortized over the life of the debt
outstanding and being recorded as a reduction of interest expense. The Company
also paid its first quarterly cash dividend of $0.10 per share which aggregated
$3.9. This was approved by the Board of Directors and announced in January 2004.
OTHER
- -----
2004 Outlook
In its April 22, 2004 press release, which was also filed as an exhibit to a
current report on Form 8-K, the Company set forth its assumptions and
management's best estimate of the second quarter and full year 2004 earnings at
that time based on various assumptions set forth in its press release. The
Company's April 22, 2004 updated forecast of diluted earnings per share is a
range of $2.65 to $2.75 for the year, a 17% to 21% increase over 2003's diluted
earnings per share of $2.27, before the cumulative effect of the accounting
change, and second quarter diluted earnings per share is a range of $0.60 to
$0.65.
The Company's guidance for 2004 outlook will be updated when it reports second
quarter 2004 earnings in July 2004. There can be no assurance that sales or
earnings will develop in the manner projected. Actual results may differ
materially. See "Comments on Forward Looking Statements."
Significant Accounting Estimates
- --------------------------------
See "Significant Accounting Estimates" under Item 7 of the Company's 2003 Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on
February 26, 2004 and incorporated by reference herein.
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 accretive effects
of acquisitions, the financial effects of divestitures, pricing trends, the
effects of changes in currency rates and forces within the industry, the
completion dates of and expenditures for capital projects, expected sales
growth, operational excellence 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 include, but are not limited to: 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 reduction; the actions of competitors; currency rates
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; including those related to
taxation and those particular to the purchase, sale and manufacture of chemicals
or operation of chemical plants, governmental funding for those military
programs that utilize the Company's products; litigation, including its inherent
uncertainty and changes in the number or severity of various types of claims
brought against the Company; difficulties in plant operations and materials
transportation; environmental matters; the results of and recoverability of
investments in associated companies; returns on employee benefit plan assets and
changes in the discount rates used to estimate employee benefit liabilities;
changes in the medical cost trend rate; changes in accounting principles or new
accounting standards; war, terrorism or sabotage; epidemics; 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.
18
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
2003 Annual Report on Form 10-K for the year ended December 31, 2003, filed with
the Securities and Exchange Commission on February 26, 2004 and incorporated by
reference herein. During 2004, the Company executed various foreign exchange
transactions that do not materially alter the market risk assessment performed
as of December 31, 2003. Other 2004 financial instrument transactions include:
Commodity Price Risk:
At March 31, 2004, the Company had $8.3 of natural gas forward contracts with
April 2004 through October 2004 delivery dates outstanding and natural gas swaps
with a fair value of $0.8, which will be reclassified into Manufacturing Cost of
Sales through October 2004 as these swaps are settled.
Interest Rate Risk:
At March 31, 2004, the outstanding borrowings of the Company consisted of $9.2
short-term borrowings and fixed rate long-term debt, which had a carrying value
of $418.6, a face value of $420.0 and a fair value, based on dealer quoted
values of approximately $436.2.
During March 2004, the Company terminated its two interest rate swap agreements
that had effectively converted the interest cost on a total of $50.0 of the
Company's 4.60% notes to a floating rate basis for the life of the Notes due
July 1, 2013. Upon termination, the Company received approximately $3.0 in cash
of which $0.3 represented accrued interest through the termination date. The net
gain of $2.7 recorded upon termination is being amortized over the life of the
4.60% Notes as a decrease to interest expense of such Notes. The amount of
unamortized swap settlement included in long-term debt was $2.7 at March 31,
2004.
Assuming other factors are held constant, interest rate changes generally affect
the fair value of fixed rate debt. Accordingly, assuming a March 31, 2004
hypothetical increase of 1% in interest rates and all other variables remaining
constant, interest expense would not change; however, the fair market value of
the fixed rate long-term debt would decrease by approximately $19.4
In April, the Company entered into a $50.0 interest rate swap agreement to
effectively convert $50.0 of its 4.60% Notes to a floating
rate basis for the remaining life of the Notes.
Item 4. Controls and Procedures
-----------------------
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the Company's disclosure controls and procedures as
defined in Exchange Act Rule 13a-14 as of the period ended March 31, 2004. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that the Company's current disclosure controls and procedures are
reasonably effective. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of the evaluation by the Chief Executive Officer
and Chief Financial Officer.
19
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 including asbestos,
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 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, in this section, includes predecessor
entities being indemnified by Cytec.
Set forth below are updates to the legal proceedings section found in the
Company's Annual Report on Form 10-K.
The Company is among several defendants in approximately 35 cases, 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. The different suits were brought by government
entities and/or individual plaintiffs, on behalf of themselves and others. The
suits variously seek compensatory and punitive damages and/or injunctive relief,
including funds for the cost of monitoring, detecting and removing lead based
paint from buildings and for medical monitoring; for personal injuries allegedly
caused by ingestion of lead based paint; and plaintiffs' attorneys' fees. The
Company believes that the suits are without merit and is vigorously defending
against all such claims. Accordingly, no loss contingency has been recorded. The
Company has access to a substantial amount of primary and excess general
liability insurance for property damage, and believes that these policies are
available to cover a significant portion of both its defense costs and indemnity
costs, if any, for lead pigment-related property damage claims. The Company is
pursuing an agreement with various of its insurers concerning coverage with
respect to these matters. The Company has not recorded an insurance receivable
relating to defense costs although it continues to pursue an agreement with
various of its insurers concerning coverage with respect to these matters. In
the first quarter of 2004, the Company received a "good-faith" payment of $1.0
from one of its insurance carriers that it recorded in other income (expense)
and expects to recognize additional recoveries in future periods as negotiations
with its insurers proceed. However, until a cost-sharing arrangement with one or
more of its insurers has been determined, the Company will continue to expense
its lead defense cost as incurred, without provision for potential insurance
carriers.
The Company, like many other industrial companies, has been increasingly named
as one of hundreds of defendants in a number of lawsuits filed throughout the
United States by persons alleging bodily injury as a result of exposure to
asbestos. The claimants allege exposure to asbestos at facilities formerly or
currently owned by the Company or in products formerly manufactured by the
Company for specialized applications. Most of these cases involve numerous
defendants, sometimes as many as several hundred. Historically, most of the
closed asbestos claims against the Company have been dismissed without any
indemnity payment by the Company, and the Company has no information that this
pattern will change.
The following table presents information about the asbestos claims against the
Company.
Three Months Ended Year Ended
March 31, December 31,
2004 2003
- --------------------------------------------------------------------------------
Claims closed in period 156 7,601
Claims filed in period 1,734 7,648
Claims open at end of period 28,533 26,955
================================================================================
See also the "Legal Proceedings" section in Item 3 of Part 1 and the first four
paragraphs of "Environmental Matters" under "Business" in Item 1 of Part 1 of
the Company's 2003 Annual Report on Form 10-K, and Note 6 of the Notes to
Consolidated Financial Statements, herein.
20
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a). Exhibits
--------
See Exhibit Index on page 23 for exhibits filed with this Quarterly Report on
Form 10-Q.
(b). Reports on Form 8-K
-------------------
On January 23, 2004, the Company filed a report on Form 8-K attaching its press
release announcing financial results for the quarter and year-ended December 31,
2003.
21
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
May 4, 2004
22
Exhibit Index
-------------
12 Computation of Ratio of Earnings to Fixed Charges for the three months
ended March 31, 2004 and 2003.
31.1 Certification of David Lilley, Chief Executive Officer, Pursuant to
Rule 13a-14(a) of the Securities Exchange Act
31.2 Certification of James P. Cronin, Chief Financial Officer, Pursuant to
Rule 13a-14(a) of the Securities Exchange Act
32.1 Certification of David Lilley, Chief Executive Officer Pursuant To 18
U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002
32.2 Certification of James P. Cronin, Chief Financial Officer Pursuant To
18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002