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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
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Commission file number 1-12372
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CYTEC INDUSTRIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3268660
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
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(Address of principal executive offices)
973-357-3100
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(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 39,641,938 shares of common stock outstanding at October 20, 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 15
Operations
Item 3. Quantitative And Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
Part II - Other Information
Item 1. Legal Proceedings 25
Item 6. Exhibits 26
Signature 27
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 Ended Nine Months Ended
September 30, September 30,
----------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------ -------------- -------------
Net sales $ 433.5 $ 367.7 $1,270.7 $1,109.9
Manufacturing cost of sales 334.1 284.6 960.3 836.0
Selling and technical services 34.0 31.4 103.8 92.6
Research and process development 10.0 8.3 29.4 25.2
Administrative and general 22.0 11.1 49.8 36.8
Amortization of acquisition intangibles 1.3 1.1 4.1 2.7
------------- ------------ -------------- -------------
Earnings from operations 32.1 31.2 123.3 116.6
Other expenses, net (4.9) (0.2) (12.7) (3.9)
Equity in earnings of associated companies 2.2 2.3 3.0 5.3
Interest expense, net 4.7 4.8 13.0 11.9
------------- ------------ -------------- -------------
Earnings before income tax provision and cumulative
effect of accounting change 24.7 28.5 100.6 106.1
Income tax provision 5.4 6.4 19.7 29.7
------------- ------------ -------------- -------------
Earnings before cumulative effect of accounting
change 19.3 22.1 80.9 76.4
------------- ------------ -------------- -------------
Cumulative effect of accounting change,
net of taxes of $7.3 - - - (13.6)
------------- ------------ -------------- -------------
Net earnings 19.3 22.1 80.9 62.8
Premium paid to redeem preferred stock 9.9 - 9.9 -
------------- ------------ -------------- -------------
Net earnings available to common stockholders $ 9.4 $ 22.1 $ 71.0 $ 62.8
============= ============ ============== =============
Earnings available to common stockholders before cumulative
effect of accounting change, per common share
Basic $0.24 $0.56 $1.81 $1.95
Diluted $0.23 $0.55 $1.75 $1.89
Cumulative effect of accounting change, per common share
Basic - - - $(0.35)
Diluted - - - $(0.34)
Earnings available to common stockholders, per
common share
Basic $0.24 $0.56 $1.81 $1.60
Diluted $0.23 $0.55 $1.75 $1.55
Dividends per common share $0.10 - $0.30 -
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)
September 30, December 31,
2004 2003
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 285.1 $ 251.1
Trade accounts receivable, less allowance for doubtful
accounts of $7.0 and $7.6 in 2004 and 2003, respectively 253.5 217.1
Other accounts receivable 44.3 50.2
Inventories 196.9 176.0
Deferred income taxes 18.3 8.2
Other current assets 14.4 8.8
----------------------- -----------------
Total current assets 812.5 711.4
Investment in associated companies 83.7 82.1
Plants, equipment and facilities, at cost 1,570.1 1,538.3
Less: accumulated depreciation (917.9) (875.4)
----------------------- -----------------
Net plant investment 652.2 662.9
Acquisition intangibles, net of accumulated amortization 65.4 69.9
Goodwill 339.5 339.7
Deferred income taxes 66.5 85.7
Other assets 84.6 74.2
----------------------- -----------------
Total assets $ 2,104.4 $ 2,025.9
======================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 7.7 $ 9.3
Accounts payable 121.6 93.5
Accrued expenses 180.9 170.5
Income taxes payable 54.1 63.2
----------------------- -----------------
Total current liabilities 364.3 336.5
Long-term debt 419.0 416.2
Pension and other postretirement benefit liabilities 318.0 346.0
Other noncurrent liabilities 176.6 171.8
Stockholders' equity
Preferred stock, 20,000,000 shares authorized, issued
and outstanding 0 and 4,000 shares, Series C Cumulative
at 2004 and 2003, respectively; - 0.1
$0.01 par value at liquidation value of $25 per share
Common stock, $0.01 par value per share,
150,000,000 shares authorized, issued 48,132,640 shares 0.5 0.5
Additional paid-in capital 120.6 122.2
Retained earnings 1,042.0 982.9
Unearned compensation (3.0) (5.3)
Minimum pension liability adjustment (96.8) (96.8)
Unrealized gain on derivative instruments 0.6 0.3
Accumulated translation adjustments 30.9 38.0
Treasury stock, at cost,
8,528,264 shares in 2004 and 9,139,897 shares in 2003 (268.3) (286.5)
----------------------- -----------------
Total stockholders' equity 826.5 755.4
----------------------- -----------------
Total liabilities and stockholders' equity $ 2,104.4 $ 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)
Nine Months Ended,
September 30,
-------------
2004 2003
---- ----
Cash flows provided by (used for) operating activities
Net earnings $ 80.9 $ 62.8
Noncash items included in earnings:
Dividends from associated companies less than earnings (1.9) (0.6)
Depreciation 64.5 64.2
Amortization 8.6 5.2
Deferred income taxes 9.2 (5.0)
Gain on sale of assets (0.6) -
Gain on recognition of insurance recoveries - (2.2)
Cumulative effect of accounting change, net of tax - 13.6
Other 0.8 0.6
Changes in operating assets and liabilities:
Trade accounts receivable (40.4) 1.9
Other receivables 4.8 0.6
Inventories (21.6) (12.6)
Accounts payable 25.0 1.5
Accrued expenses 6.6 (14.0)
Income taxes payable (1.2) 18.0
Other assets (17.0) (2.9)
Other liabilities (33.0) (41.5)
------------ ------------
Net cash flows provided by operating activities 84.7 89.6
------------ ------------
Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (54.3) (60.9)
Proceeds received on sale of assets 0.7 0.1
Acquisitions of businesses, net of cash received - (103.4)
Advance payment received on land lease 9.1 -
------------ ------------
Net cash flows used for investing activities (44.5) (164.2)
------------ ------------
Cash flows provided by (used for) financing activities
Proceeds from the exercise of stock options 20.9 11.8
Purchase of treasury stock (13.2) (19.8)
Change in short-term borrowings (1.1) -
Payments of long-term debt - (100.0)
Proceeds from long-term debt - 198.9
Proceeds from termination of interest rate swap 2.9 -
Cash dividends (11.7) -
------------ ------------
Net cash flows provided by (used for) financing activities (2.2) 90.9
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (4.0) 8.1
------------ ------------
Increase in cash and cash equivalents 34.0 24.4
Cash and cash equivalents, beginning of period 251.1 210.0
------------ ------------
Cash and cash equivalents, end of period $ 285.1 $ 234.4
============ ============
See accompanying Notes to Consolidated Financial Statements
5
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except per share amounts, unless otherwise indicated)
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements included herein
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
("US GAAP") have been condensed or omitted pursuant to such rules and
regulations. Financial statements prepared in accordance with US GAAP require
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses and other disclosures.
In the opinion of management of Cytec Industries Inc. (the "Company"), these
financial statements include all normal and recurring adjustments necessary for
a fair presentation of the financial position and the results of operations and
cash flows of the Company for the interim periods presented. The results of
operations for any interim period are not necessarily indicative of the results
of operations for the full year. 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) Pending Acquisition and Related Events
--------------------------------------
On October 1, 2004, the Company announced that it had signed a definitive
agreement to purchase the Surface Specialties business of UCB Group ("UCB"), a
Belgium biopharmaceutical and specialty chemical company, for cash and stock
valued at 1.5 billion Euros ($1.9 billion at 1.27 US dollars per Euro). The
acquisition, approved by the board of directors of both companies, is subject to
customary closing conditions including the approval of regulatory authorities
and is expected to close by December 31, 2004.
The cost of the acquisition consists of 1.275 billion Euros in cash and
5,772,857 shares of Cytec common stock valued at 225 million Euros. It is
anticipated that the cash portion of the transaction will be financed with a new
credit facility, a bridge loan, which the Company intends to refinance with
long-term debt, and existing cash. Upon closing, UCB will own approximately 12%
of the outstanding shares of the Company. UCB and the Company have also agreed
to enter into a stockholders agreement which will provide that UCB must reduce
its stake to less than 9% within 3 years, less than 7% within 4 years and less
than 5% within 5 years and contains other customary terms and provisions.
The global Surface Specialties business had revenues of $1.2 billion in 2003.
The acquisition will complement Cytec's existing product lines in the
Performance Products segment by significantly increasing Cytec's product
offering to the coatings and additives industries including the general
industrial, automotive, architectural, plastic, graphic arts and wood sectors.
Many of the Surface Specialties product lines such as UV cure, powder and
waterborne systems have above average growth rates.
Cytec intends to operate the Surface Specialties business as a separate segment
and will integrate its coating and specialty additives and performance chemicals
product lines into the new segment.
In conjunction with this transaction, the Company anticipates divesting Surface
Specialties' amino resin product line during 2005 and using the proceeds to
reduce debt. Sales of Surface Specialties' amino resin product line in 2003 were
approximately $140.0.
During October 2004, the Company entered into $238.1 of forward starting
interest rate swaps to hedge the benchmark interest rate and credit spread on a
portion of the debt that will be issued to finance the acquisition of Surface
Specialties. The weighted-average interest rate of 4.7% for the U.S dollar swaps
includes a swap credit spread of approximately 45 basis points and a premium of
approximately 17 basis points for the forward starting element of the swap. The
corresponding Euro swaps have a weighted-average interest rate of 4.13% and
include a swap credit spread of approximately 14 basis points and an 11 basis
point premium for the forward starting element of the swap. The credit spread
portion of the swaps are representative of AA rated 10 year notes and serve as a
proxy credit spread for the company. The Company's actual credit spread at the
time of debt issuance will be determined primarily based on its actual credit
rating and market conditions. The swaps, which mature in March 2005, will be
marked to market and recorded currently in earnings until maturity or
settlement. As of October 29, 2004, the Company has hedged approximately 34% of
the anticipated portion of the purchase price that will be refinanced.
6
Through October 29 2004, the Company has entered into forward contracts totaling
155 million Euros to hedge approximately 12% of the Euro exposure of 1.275
billion for the cash component of the Surface Specialties acquisition. Excluding
the hedge impact of any anticipated Euro denominated debt for the acquisition,
the Company has hedged approximately 16% of the exposure with these forward
contracts together with natural hedges of approximately $55.0. The forward
contracts, which mature in December 2004, will be marked to market and recorded
currently in earnings until maturity.
The Company filed a current report on Form 8-K dated October 6, 2004 regarding
its entry into the Purchase Agreement with UCB pursuant to which the Company
agreed to acquire Surface Specialties and its intention to transfer certain
shares of its common stock held in treasury to UCB, without registration, as
partial consideration for the acquisition.
In connection with the pending acquisition, the Company suspended its stock
buy-back program for up to two years in order to maximize the funds available
for debt service and other corporate purposes.
(3) 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 earnings,
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 options granted in 2004 by approximately
40% when compared with 2003. This was affected 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 vesting period and through the life 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 September 30, 2004, the Company has recorded
a liability relating to SARS of $0.7.
The following table illustrates the effect on net earnings available to common
stockholders and net earnings available to common stockholders 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:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
2004 2003 2004 2003
------------- ------------ ------------- ------------
Net earnings available to common stockholders, as reported $ 9.4 $ 22.1 $ 71.0 $ 62.8
Add :
Stock-based employee compensation expense
included in reported net earnings available to common
stockholders, net of related tax effects 0.7 0.4 1.8 0.9
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects 1.7 1.9 5.2 5.8
-------- -------- --------- --------
Pro forma net earnings available to common stockholders $ 8.4 $ 20.6 $ 67.6 $ 57.9
Net earnings available to common stockholders per share:
Basic, as reported $ 0.24 $ 0.56 $ 1.81 $ 1.60
Basic, pro forma 0.21 0.53 1.72 1.48
Diluted, as reported $ 0.23 $ 0.55 $ 1.75 $ 1.55
Diluted, pro forma 0.21 0.51 1.68 1.44
- ---------------------------------------------------------------------------------------------------------------------------------
7
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 46.6 % 47.3 %
Expected dividend yield 1 % -
Risk-free interest rate 3.4 % 2.9 %
Weighted average fair value of
options granted during the year $ 16.20 $ 12.56
- ------------------------------------------------------------------------------
(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 are assumed to be the sum
of the amount to be paid to the Company upon exercise of options, the amount of
compensation cost attributed to future services and not yet recognized and the
amount of income taxes that would be credited to or deducted from capital upon
exercise.
The following shows the reconciliation of weighted average shares (the
denominator) used in the calculation of diluted earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
2004 2003 2004 2003
------------- ------------- -------------- --------------
Weighted average shares outstanding: 39,583,804 39,124,408 39,302,298 39,235,002
Effect of dilutive shares:
Options 1,352,877 1,258,593 1,098,512 1,074,096
Performance/Restricted Stock 91,560 117,192 83,367 114,748
- -----------------------------------------------------------------------------------------------------------------------
Adjusted average shares outstanding 41,028,241 40,500,193 40,484,177 40,423,846
- -----------------------------------------------------------------------------------------------------------------------
(5) Inventories
Inventories consisted of the following:
September 30, December 31,
2004 2003
- ------------------------------------------------------------------------------
Finished goods $ 131.1 $ 114.9
Work in process 22.8 21.5
Raw materials & supplies 76.6 73.2
----------------- -----------------
230.5 209.6
Less reduction to LIFO cost (33.6) (33.6)
----------------- -----------------
Total inventories $ 196.9 $ 176.0
- ------------------------------------------------------------------------------
8
(6) Equity in Earnings of Associated Companies
------------------------------------------
The Company has one associated company at September 30, 2004, 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 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
2004 2003 2004 2003
------------- ------------ ------------- ------------
Net sales $ 83.7 $ 95.0 $ 232.9 $ 260.2
Gross profit $ 11.7 $ 16.6 $ 31.2 $ 44.8
Earnings before cumulative effect of accounting change $ 4.3 $ 4.4 $ 5.9 $ 10.2
Cumulative effect of accounting change, net of tax - - - (0.2)
-------- -------- --------- --------
Net earnings $ 4.3 $ 4.4 $ 5.9 $ 10.0
-------- -------- --------- --------
The Company's equity in earnings of associated companies $ 2.2 $ 2.3 $ 3.0 $ 5.3
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 immaterial; therefore, no adjustments were made to eliminate
such profit or loss on sales to CYRO for inventory held at the balance sheet
dates.
(7) Contingencies 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 September 30, 2004 and December 31, 2003, the aggregate environmental
related accruals were $74.8 and $79.6, respectively. As of September 30, 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 nine months ended September 30, 2004
and 2003 was $6.0 and $3.5, respectively. Included in 2004 is a payment of $2.5
related to an environmental remediation lawsuit settled by the Company in June
2004 which was charged against previously established reserves for this matter.
This payment was part of a larger settlement related to several environmental
and toxic tort lawsuits in the second quarter of 2004 discussed below under
Other Contingencies.
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 or if the Company is
named in a new matter and determines an accrual needs to be provided for or if
the Company determines it is not liable and no longer requires an accrual.
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 Contingencies
The Company is the subject of numerous lawsuits and claims incidental to the
conduct of its or certain of its predecessors' businesses, including lawsuits
and claims relating to product liability, personal injury including asbestos,
environmental, contractual, employment and intellectual property matters.
9
As of September 30, 2004 and December 31, 2003, the aggregate self-insured and
insured contingent liability was $70.9 and $72.5, respectively, and the related
insurance receivable was $28.7 at September 30, 2004 and $29.3 at December 31,
2003. The asbestos liability included in the above amounts at September 30, 2004
and December 31, 2003 was $53.1 and $54.0, respectively, and the related
insurance receivable was $28.4 at September 30, 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:
Nine Months Ended Year Ended
September 30, December 31,
2004 2003
---------------------- ----------------
Claims closed in period 2,759 7,601
Claims filed in period 3,542 7,648
Claims open at end of period 27,738 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, insurers and other
indemnifying parties.
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 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 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 expense, net 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.
During the second quarter of 2004, the Company recorded a pre-tax charge of $6.1
in connection with the settlement of several environmental and toxic tort
lawsuits which were all related to a single manufacturing site operated by the
former American Cyanamid Company ("Cyanamid") prior to 1963. Cytec was spun-off
from Cyanamid in 1993. The full settlement which was paid in the second quarter
was $8.6, of which $2.5 was charged against a previously established
environmental remediation reserve for these matters. While the Company felt its
defenses were strong, developments in the second quarter led it to accelerate
negotiations and increase the value of the settlement which ultimately the
Company felt was the best option for the Company and its shareholders.
During the third quarter of 2004, the Company signed a stipulation of settlement
with plaintiffs in a federal class action lawsuit on behalf of purchasers of
carbon fiber. While Company management denied any charges of wrongdoing and in
fact believed the Company would have been a victim of any conspiracy among
carbon fiber manufacturers, management believed the costs of further defense
outweighed the costs of settlement. As a result of this and several other minor
litigation matters, the Company recorded a pre-tax charge of $8.0 which is
reflected in administrative and general expense in the third quarter of 2004.
Periodically, the Company enters into settlement discussions for lawsuits or
claims for which it has meritorious defenses and for which an unfavorable
outcome against the Company is not probable. In such instances, no loss
contingency is recorded since a loss is not probable and it is the Company's
policy to accrue defense costs as incurred. Typically, the Company considers
these types of settlements in fairly limited circumstances usually related to
the avoidance of future defense costs and/or the elimination of any risk of an
unfavorable outcome. Such settlements, if any, are recorded when it is probable
a liability has been incurred, typically upon entering into a settlement
agreement.
10
While it is not feasible to predict the outcome of all pending environmental
matters, lawsuits and claims or any settlement discussions related thereto, 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 and cash flows 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 other contingencies 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.
From time to time the Company is also included in legal proceedings as a
plaintiff involving tax, contract, patent protection, environmental and other
legal matters. Gain contingencies, if any, are recorded when they are realized.
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, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ---------------------------------
2004 2003 2004 2003
---------------- --------------- -------------- --------------
Net earnings $ 19.3 $ 22.1 $ 80.9 $ 62.8
Other comprehensive income (loss):
Unrealized gain (loss) on cash flow hedges 0.5 (0.3) 0.3 (0.4)
Foreign currency translation adjustments 9.4 5.6 (7.1) 30.7
----------- ----------- ---------- ----------
Comprehensive income $ 29.2 $ 27.4 $ 74.1 $ 93.1
- ------------------------------------------------------------------------------------------------------------------------------
(9) Income Taxes
The Company's effective tax rate for the three months ended September 30, 2004
was 22%. For the nine months ended September 30, 2004, the effective tax rate
was 19.6% which reflects an underlying 22% annual effective tax rate and a
reduction to the income tax provision of $2.4 related to a favorable outcome of
the completion of several years of tax audits in an international tax
jurisdiction. For the nine months ended September 30, 2003, the effective tax
rate was 28%.
In the second quarter of 2004, the Company received a final audit report issued
by the Norwegian tax authorities disclosing an income adjustment with respect to
a 1999 restructuring of the Company's European operations. The tax liability
attributable to this adjustment, excluding interest and possible penalties, is
equivalent to approximately $15.0. The Company has retained tax counsel to
assist in the defense of this assessment since the issue will likely be
litigated given the Company's vigorous defense in protesting the additional tax.
Notwithstanding the Company's meritorious defenses in this matter, in prior
years as this matter developed, the Company accrued for the potential
unfavorable outcome of this dispute. Assuming the dispute resolution process
follows a normal course, final resolution of the matter, and the impact, if any,
on the cash flows of the Company will probably occur within one to two years.
11
(10) Other Financial Information
---------------------------
On July 23, 2004 the Board of Directors declared a $0.10 per common share cash
dividend, paid on August 25, 2004 to shareholders of record as of August 10,
2004. Cash dividends paid in the third quarter of 2004 were $3.9 and for the
nine months ended September 30, 2004 were $11.7. No cash dividends were paid on
common shares in 2003. On October 21, 2004 the Board of Directors declared a
quarterly cash dividend of $0.10 per common share, payable on November 26, 2004
to shareholders of record as of November 10, 2004
Taxes paid for the nine months ended September 30, 2004 and 2003 were $10.4 and
$17.2, respectively. Interest paid for the nine months ended September 30, 2004
and 2003 was $15.7 and $14.1, respectively.
For the nine months ended September 30, 2004 and 2003, the Company repurchased
388,300 and 613, 200 shares of stock at a cost of $13.2 and $19.8, respectively.
On September 30, 2004, the Company redeemed its Series C Cumulative Preferred
Stock (the "Series C Stock") for $10 million in cash which had a liquidation
value of $25 per share. As a result, a charge to net earnings available to
common stockholders of $9.9 was recorded as a premium paid to redeem preferred
stock during the quarter. The Series C Stock was originally issued in 1993 in
conjunction with Cytec's spin-off from Cyanamid. Wyeth became beneficial owner
of the Series C Stock following its acquisition of Cyanamid in 1994. The $10.0
was recorded in accrued expenses at September 30, 2004 and was paid during
October, 2004. The Company also settled a series of disputed matters with Wyeth
at a cost of $2.0 which is recorded in other expenses, net.
The Company filed a current report on Form 8-K dated October 6, 2004 regarding
the redemption of all of its outstanding Series C Preferred Stock and the
contractual termination of a director in accordance with the terms of the
Preferred Stock Repurchase Agreement, as amended.
(11) Segment Information
-------------------
Summarized segment information for the Company's four segments is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -----------------------------------
2004 2003 2004 2003
----------- ------------ ------------- -------------
Net sales
Water and Industrial Process Chemicals $ 106.9 $ 90.8 $ 299.3 $ 265.7
Performance Products
Sales to external customers 145.2 125.1 427.6 368.0
Intersegment sales 1.3 - 3.4 -
Specialty Materials 121.2 95.9 369.6 312.0
Building Block Chemicals
Sales to external customers 60.2 55.9 174.2 164.2
Intersegment sales 19.6 15.8 59.7 50.2
------- --------- --------- ---------
Net sales from segments 454.4 383.5 1,333.8 1,160.1
Elimination of intersegment revenue (20.9) (15.8) (63.1) (50.2)
------- --------- --------- ---------
Total consolidated net sales $ 433.5 $ 367.7 $ 1,270.7 $ 1,109.9
- ----------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of
sales sales sales sales
------- ------- ------- --------
Earnings (loss) from operations
- -------------------------------
Water and Industrial Process Chemicals $ 5.8 5% $ 4.4 5% $ 14.2 5% $ 15.0 6%
Performance Products 15.2 10% 7.8 6% 46.2 11% 30.6 8%
Specialty Materials 19.8 16% 13.1 14% 69.9 19% 55.4 18%
Building Block Chemicals 1.4 2% 5.2 7% 7.3 3% 17.8 8%
------- --------- --------- ---------
Earnings from segments 42.2 9% 30.5 8% 137.6 10% 118.8 10%
Corporate and Unallocated (10.1) 0.7 (14.3) (2.2)
------- --------- --------- ---------
Total consolidated earnings from operations $ 32.1 7% $ 31.2 8% $ 123.3 10% $ 116.6 11%
- ------------------------------------------------------------------------------------------------------------------------------------
12
(12) Goodwill and Other Acquisition Intangibles
------------------------------------------
The following is the activity in the goodwill balances for each segment:
Water and
Industrial Performance Specialty
Process
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 (0.3) 0.3 - - -
----------------- ---------------- ---------------- ----------------- -----------------
Balance, September 30, 2004 $35.8 $55.5 $247.5 $0.7 $339.5
- ---------------------------------- ----------------- ---------------- ---------------- ----------------- -----------------
Other acquisition intangibles as of September 30, 2004 and December 31, 2003,
consisted of the following major classes:
Weighted
average
useful life Accumulated
(years) Gross carrying value amortization Net carrying value
- -------------------------------------------------------------------------------------------- ----------------------
September 30, December 31, September 30, December 31, September 30, December 31,
2004 2003 2004 2003 2004 2003
-------------------------------------------------------------------------------------
Technology-based 16.9 $40.8 $41.0 $(11.1) $(9.3) $29.7 $31.7
Marketing-related 17.3 10.9 11.0 (3.6) (3.0) 7.3 8.0
Customer-related 15.4 34.3 34.5 (5.9) (4.3) 28.4 30.2
-------------------------------------------------------------------------------------
Total $86.0 $86.5 $(20.6) $(16.6) $65.4 $69.9
- -------------------------------------------------------------------------------------------- ----------------------
Amortization of acquisition intangibles for the three months ended September 30,
2004 and 2003 was $1.3 and $0.8, respectively and for the nine months ended
September 30, 2004 and 2003 was $4.1 and $2.7, 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
$5.4 and for the years 2006 through 2009 is $5.3. The Company does not have
intangibles with indefinite useful lives other than goodwill.
(13) Commodity and Derivative Financial Instruments
----------------------------------------------
At September 30, 2004, the Building Block Chemicals segment Fortier plant's 2004
remaining forecasted natural gas utility requirements were 84% hedged utilizing
natural gas forward contracts. These contracts were valued at $5.5 and have
delivery dates ranging from October 2004 to December 2004. Additionally, the
plant's 2005 gas utility requirements were 25% hedged at September 30, 2004, and
these contracts were valued at $6.8 and have delivery dates ranging from January
to September 2005.
At September 30, 2004, the Company held natural gas swaps with a favorable fair
value of $0.6, net of taxes, which will be reclassified into Manufacturing Cost
of Sales through September 2005 as these swaps are settled.
At September 30, 2004, the outstanding borrowings of the Company consisted of
$7.7 short-term borrowings and fixed rate long-term debt, which had a carrying
value of $419.0, a face value of $420.0 and a fair value, based on dealer quoted
values of approximately $424.9.
During the nine months ended September 30, 2004, the Company terminated all
$100.0 of interest rate swaps which had been designated as cash flow hedges. The
net gain thereon of $0.2 and $2.9 for the three and nine months then ended 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 $2.8 at September 30, 2004.
Subsequent to September 30, 2004, the Company entered into forward starting
interest rate swaps and forward currency contracts related to its pending
acquisition of Surface Specialties. Refer to Note 2.
For more information, refer to Note 4 to the Consolidated Financial Statements
contained in the Company's 2003 Annual Report on Form 10-K.
13
(14) Employee Benefit Plans
----------------------
Net periodic cost for the Company's pension and postretirement benefit plans was
as follows:
Pension Plans Postretirement Plans
--------------------------------- -----------------------------
Three Months Ended September 30,
----------------------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------
Service cost $ 3.5 $ 2.9 $ (0.1) $ 0.3
Interest cost 8.5 8.2 2.2 4.2
Expected return on plan assets (10.3) (9.0) (1.1) (1.2)
Net amortization and deferral 2.7 0.4 (2.7) (2.6)
----------- ----------- ------------ ----------
Net periodic cost $ 4.4 $ 2.5 $ (1.7) $ 0.7
----------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------
Service cost $ 10.8 $ 9.4 $ 0.8 $ 1.0
Interest cost 25.9 24.3 10.7 12.4
Expected return on plan assets (29.1) (26.6) (3.7) (3.8)
Net amortization and deferral 5.8 2.5 (7.9) (7.9)
----------- -- ----------- --- ------------ -- ----------
Net periodic cost $ 13.4 $ 9.6 $ (0.1) $ 1.7
----------------------------------------------------------------------------------------------------------
In December 2003, Congress passed the Medicare Prescription Drug, Improvement
and Modernization Act of 2003. In May 2004, the FASB issued Staff Position No.
106-2 (FSP 106-2), "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP
106-2 requires companies to account for the reduction in accumulated
postretirement benefit obligation (APBO) as an actuarial gain to be amortized
into income over the average remaining service period of plan participants. The
Company adopted the provisions of FSP 106-2 in the third quarter of 2004,
retroactive to January 1, 2004, as permitted by FSP 106-2. In accordance with
FSP 106-2, the Company recorded a benefit of $0.9 pre-tax ($0.7 after tax or
$0.02 per diluted share) in the third quarter of 2004 and the nine month results
include the year-to-date benefit of FSP 106-2 of $2.6 pre-tax ($2.0 after tax or
$0.05 per diluted share).
The adoption of FSP 106-2 had reduced the APBO by approximately $31.7, which the
Company recognized as a reduction in unrecognized net actuarial loss. This
reduction in the APBO results from an ongoing tax-free government subsidy
beginning in 2006, for prescription benefits provided to plan participants if
such benefits are determined to be actuarially equivalent to those offered by
Medicare. Based on the current guidance of determining actuarial equivalence,
the Company has been able to determine that some of the plan participants
qualify for the subsidy. The Company amortizes the unrecognized net actuarial
loss over the average remaining service life of employees eligible for
postretirement benefits. The service cost, interest cost and net amortization
components of net postretirement benefit cost were reduced by $0.5, $2.0 and
$0.1, respectively, for the nine months ended September 30, 2004. The net
periodic cost above for the postretirement plans for the three and nine months
ended September 30, 2004 reflects the retroactive effects of the adoption of
FSP106-2 back to January 1, 2004.
The Company disclosed in its quarterly report on Form 10-Q for the quarter ended
March 31, 2004, that it expected to contribute $17.5 to $26.0 to its U.S.
pension plans in 2004. Through September 30, 2004, $22.9 in contributions were
made. The Company makes these voluntary contributions as a part of its normal
financial planning.
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 September 30,
2004 and 2003 were $4.3 and $3.0, respectively and for the nine months ended
September 30, 2004 and 2003 were $12.1 and $9.0, respectively.
14
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. Oil and natural gas costs are
significantly higher than the year ago period and many of the Company's raw
materials are derived from these two commodities. Key raw materials for the
Specialty Chemical and Building Block Chemicals segments are propylene, ammonia,
methanol derivatives and natural gas for utilities. Key raw materials for the
Specialty Materials segment are carbon fiber and various resins. Discussion of
the year to year impact of raw materials and energy is provided in our segment
discussion. In addition, higher global demand levels have limited the
availability of certain of the Company's raw materials. To date, with the
exception of propylene availability in the first quarter, this has not had any
material impact on the Company's operations.
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
Third Quarter of 2004 versus Third Quarter of 2003
Net sales for the third quarter of 2004 were $433.5 compared with $367.7 for the
third quarter of 2003. The two Specialty Chemicals segments had increased sales
primarily due to improved demand, the acquisitions completed in the second half
of 2003 and new business. The Specialty Materials segment increase was the
result of increased sales primarily in the large commercial aircraft, regional
and business jet, rotorcraft and high performance automotive sectors. The
Building Block Chemicals segment sales increase was due primarily to higher
selling prices driven by higher raw material and energy costs, offset by reduced
acrylonitrile selling volumes.
Manufacturing cost of sales was $334.1, or 77.1% of net sales, in the third
quarter of 2004, compared to $284.6, or 77.4% of sales, for the prior year
period. Cost of sales was primarily impacted by higher raw material and energy
costs of $17.6. In spite of the higher raw material and energy costs, gross
margin percent improved by 0.3% as the higher raw material costs were offset by
increased selling prices of $10.1, the net impact of exchange rate changes on
operations outside of the United States of $1.8, the fixed cost leverage from
the increased production levels and a favorable product mix.
Selling and technical services increased $2.6 primarily due to ongoing costs of
the acquired businesses in the Specialty Chemicals segments completed in the
second half of 2003, net exchange rate changes of $0.8 and higher costs in the
Specialty Materials segment of $1.2 where the Company is investing in personnel,
product qualifications and commercialization of new products for its growth
initiatives.
Research and process development costs increased $1.7 primarily as a result of
ongoing costs of the acquired businesses of the Specialty Chemicals segments
completed in the second half of 2003, higher costs associated with the start-up
of the newly renovated Specialty Chemicals Technology Center and higher costs in
the Specialty Materials segment where the Company continues to invest for a
number of future opportunities.
15
Administrative and general increased $10.9 when compared with the third quarter
of 2003. Included in the third quarter of 2004 is a charge of $8.0 related to
the settlement of the carbon fiber class action lawsuit and several other minor
litigation matters. The remainder was primarily driven by ongoing costs of the
acquired businesses of the Specialty Chemical segments completed in the second
half of 2003 of approximately $0.6, an increase of $0.4 in performance stock
expense due to the increase in the price of the Company's stock and the impact
of exchange rate changes of $0.2 on operations outside of the United States.
Other expenses increased $4.7 during 2004. This is primarily due to a charge of
$2.0 related to the settlement of a series of disputed matters with Wyeth plus
$1.1 of increased costs for various litigation matters and transaction exchange
losses of $0.9.
Equity in earnings of associated companies is slightly lower than the year ago
period. While earnings from CYRO increased $0.6 as higher sales volumes and
selling prices offset increased raw material costs, results for 2003 include
earnings of $0.7 from the Company's former 50% owned Mitsui-Cytec joint venture.
See Note 6 of the Notes to Consolidated Financial Statements.
The Company's tax rate for the third quarter of 2004 was 22% which is equivalent
to the estimated underlying 2004 annual effective tax rate. The prior year's 22%
effective tax rate was the result of a cumulative adjustment as the Company
lowered its full-year estimated rate from 30% to 28% in the third quarter of
2003.
On September 30, 2004, the Company redeemed its Series C Cumulative Preferred
Stock ("Series C Stock") for $10 million in cash which had a liquidation value
of $25 per share. As a result, a charge to net earnings available to common
stockholders of $9.9 was recorded as a premium paid to redeem preferred stock
during the quarter. The Series C Stock was originally issued in 1993 in
conjunction with Cytec's spin-off from Cyanamid. Wyeth became beneficial owner
of Series C Stock following its acquisition of Cyanamid in 1994. The $10 million
was recorded in accrued expenses at September 30, 2004 and was paid during
October, 2004.
Net earnings available for common stockholders were $9.4 or $0.23 per diluted
share compared with $22.1 or $0.55 per diluted share in the third quarter of
2003. Net earnings available for common shareholders for 2004 include a pretax
charge of $8.0 million ($6.2 million after tax or $0.15 per diluted share)
relating to settlements of carbon fiber litigation matters, a pretax charge of
$2.0 million ($1.6 million after tax or $0.04 per diluted share) relating to the
settlement of disputed matters with the Wyeth and a charge of $9.9 million
($0.24 per diluted share) as a result of the redemption of the Company's Series
C Stock discussed above.
Segment Results
Third quarter 2004 to third quarter 2003 comparisons and analyses of changes in
net sales by business segment and region are set forth below.
Water and Industrial Process Chemicals:
- ---------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Sales Third Third
Quarter Quarter Total % Change Due to
----------------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------------------------------------------------
North America $ 37.4 $36.7 2% 0% 2% 0%
Latin America 22.4 16.7 34% -2% 33% 3%
Asia/Pacific 14.4 13.8 4% 0% 3% 1%
Europe/Middle East/Africa 32.7 23.6 39% -1% 32% 8%
---------- ------------
Total $106.9 $90.8 18% -1% 16% 3%
- ---------------------------------------------------------------------------------------------------------------------------------
Overall selling volumes improved 16% with acquisitions accounting for 3%. The
increase in base volume was attributable to increased volumes among all product
lines while selling prices declined slightly. On a regional basis, increased
water treatment sales to full service customers contributed to the increased
volume in Europe/Middle East/Africa while higher production rates at several
major copper mines led to increased sales of mining chemicals in Latin America.
The Company has been raising prices to offset increasing raw material and energy
costs. However, partially offsetting the price increases was a change in the
product mix, year over year, of sales to water treatment full service customers
which resulted in an overall average reduction in selling prices. Also, since
many of the Company's contracts for mining products are in local currencies
which are indexed to the U.S. dollar, as the dollar weakened, local currency
price declined but was offset in exchange.
16
Earnings from operations were $5.8, or 5.4% of sales, compared with $4.4 or 4.8%
of sales, in the third quarter of 2003. The increase in earnings is attributable
to the overall increase in sales described above partially offset by
significantly higher raw material and energy costs of $1.9.
Performance Products:
- ---------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Third Third Total % Change Due to
Net Sales Quarter Quarter
----------------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------------------------------------------------
North America $ 68.7 $ 63.4 8% 0% 8% 0%
Latin America 8.6 7.6 13% 4% 9% 0%
Asia/Pacific 30.0 21.0 43% 1% 42% 0%
Europe/Middle East/Africa 37.9 33.1 15% 0% 8% 7%
---------- ------------
Total $145.2 $125.1 16% 1% 13% 2%
- ---------------------------------------------------------------------------------------------------------------------------------
Overall selling volumes improved 13% with acquisitions accounting for 7%. Base
selling volumes improved across all product lines as a result of increased
demand for base resins and emulsion polymers and as a result of new business. On
a regional basis, Asia/Pacific sales volumes are up with acquisitions accounting
for almost 70% of the increase and the remainder due to improved demand for the
Company's products.
Earnings from operations were $15.2, or 10.5% of sales, compared with $7.8, or
6.2% of sales, in the third quarter of 2003. The increase in earnings resulted
from higher sales volumes and improved manufacturing operations, both of which
were partially offset by the effect of higher raw material and energy costs of
$1.4.
Specialty Materials:
- --------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Sales Third Third
Quarter Quarter Total % Change Due to
----------------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------------------------------------------------
North America $ 80.9 $ 70.5 15% 0% 15% 0%
Latin America (1) 0.6 0.3 - - - -
Asia/Pacific 5.0 3.5 43% -2% 45% 0%
Europe/Middle East/Africa 34.7 21.6 61% -2% 58% 5%
----------- ----------
Total $121.2 $95.9 26% -1% 26% 1%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons are not meaningful.
Overall selling volumes increased 26% with the increases coming from the large
commercial aircraft, regional and business jets and rotorcraft, and high
performance automotive sectors. On a regional basis the increase in North
America and Europe/Middle East/Africa sales volumes represents increased sales
primarily to large commercial aircraft, regional and business jet and
rotorcraft, as well as high performance automotive sectors in Europe. The
increase in Asia/Pacific sales volumes is principally due to increased sales for
commercial aircraft and regional and business jets.
Earnings from operations of $19.8, or 16.3% of sales, compared with $13.1, or
13.7% of sales, in the third quarter of 2003. The increase was primarily
attributable to the increase in selling volumes which were partially offset by
increased manufacturing and commercial costs to service the higher demand levels
and growth opportunities of this segment.
Building Block Chemicals:
- -------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Sales Third Third
Quarter Quarter Total % Change Due to
----------------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------------------------------------------------
North America $29.9 $22.4 33% 22% 11% 0%
Latin America (1) 0.9 0.3 - - - -
Asia/Pacific 20.3 17.0 19% 37% -18% 0%
Europe/Middle East/Africa 9.1 16.2 -44% -3% -45% 4%
---------- -----------
Total $60.2 $55.9 8% 19% -12% 1%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons are not meaningful.
Overall sales volumes decreased 12% and selling prices increased approximately
19% to reflect the partial recovery of higher raw material and energy costs. The
decrease in sales volume resulted primarily from lower acrylonitrile sales
volumes which were impacted
17
by settlement of acrylonitrile swaps from the second quarter entered into as a
result of the planned acrylonitrile plant maintenance shutdown and the delayed
shipment of a large quantity of acrylonitrile due to transportation
availability. The increase in North America sales volume is primarily due to new
and expanded business. The decline in sales volume in Europe/Middle East/Africa
is attributable to opportunistic acrylonitrile sales in this region during 2003
where spot pricing was improved over the Asia/Pacific region.
Earnings from operations were $1.4, or 2.3% of sales, compared with $5.2, or
9.3% of sales, for the comparable period of 2003. The decrease in earnings is
primarily due to higher raw material and energy costs of $14.2 which were only
partially offset by selling price increases of $10.7. Also reducing earnings
were the delayed shipment described above and approximately $1.0 of costs
incurred in connection with a plant shutdown and startup that occurred as a
result of Hurricane Ivan.
First Nine Months of 2004 versus First Nine Months of 2003
- ----------------------------------------------------------
Net sales for the first nine months of 2004 were $1,270.7 compared with $1,109.9
for the prior year period. 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, improving demand, favorable exchange rate
changes and new business. The Specialty Materials segment sales increase was
volume related and all sectors participated. The Building Block Chemicals
segment sales increased principally due to higher selling prices which were
driven by higher raw material and energy costs offset somewhat by a decrease in
sales volumes of acrylonitrile.
Manufacturing cost of sales was $960.3, or 75.6 % of net sales, in the first
nine months of 2004, compared to $836.0, or 75.3% of sales, for the prior year
period. Cost of sales was primarily impacted by higher raw material and energy
costs of $40.0. In spite of the higher raw material and energy costs, gross
margin percent decreased by only 0.3% as the higher raw material and energy
costs were offset by increased selling prices of $19.3, the net impact of
exchange rates on operations outside of the United States of $10.7, the fixed
cost leverage from the increased production levels and a favorable product mix.
Selling and technical services was $103.8 versus $92.6 in the prior year period
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 on operations outside of the United States of $3.2 and higher costs of
$2.9 in the Specialty Materials segment where the Company is investing in
personnel, product qualifications and commercialization of new products for its
growth initiatives.
Research and process development was $29.4 versus $25.2 in the prior year period
primarily as a result of ongoing costs of the acquired businesses of the
Specialty Chemical segments completed in the second half of 2003, and higher
costs associated with the start up of the newly renovated Specialty Chemicals
Technology Center and higher costs in the Specialty Materials segment where the
Company continues to invest for a number of future opportunities.
Administrative and general expenses were $49.8 versus $36.8 in the prior year
period. Included in the third quarter of 2004 is a charge of $8.0 related to the
settlement of the carbon fiber class action lawsuit and several other minor
litigation matters. Also contributing to the increase were ongoing costs of the
acquired businesses of the Specialty Chemical segments completed in the second
half of 2003 of approximately $1.5, an increase in performance stock expense of
$1.0 due to the increase in the Company's stock price versus the year ago period
and the impact of exchange rate changes on operations outside of the United
States of $0.8.
Other expense, net is a loss of $12.7 versus a loss of $3.9 in the prior year
period. Included in year-to-date 2004 results are charges of $6.1 for settlement
of several environmental remediation and toxic tort lawsuits and a charge of
$2.0 related to the settlement of a series of disputed matters with Wyeth,
partially offset by a gain of $2.0 related to the sale in 1999 of the Company's
share of its methanol joint venture 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. The Company also received in
the first quarter of 2004, a "good faith" payment of $1.0 from one of its
insurance carriers related to lead defense costs that it recorded in other
expense, net. Additionally, litigation costs primarily pertaining to businesses
and sites in which the Company no longer operates increased $3.2.
Equity in earnings of associated companies was $3.0 versus $5.3 in the prior
year period. Earnings from CYRO, the Company's 50% owned acrylic plastics joint
venture, decreased $0.6 as compared with the year ago period as increased sales
volumes and selling prices did not fully offset the higher raw material costs.
In addition, results for 2003 include earnings of $1.7 from the Company's former
50% owned Mitsui-Cytec joint venture. See Note 6 of the Notes to Consolidated
Financial Statements.
18
The Company's tax rate for the first nine months of 2004 is 19.6% versus a 28%
tax rate for the first nine months of 2003. This reduction reflects an
underlying 22% annual effective tax rate due to the Company's continued earnings
growth in lower tax jurisdictions and, to a lesser extent, a favorable
international tax ruling received in the first quarter of 2004. In addition, in
the second quarter of 2004, the Company recorded a reduction to its tax
liabilities due to the completion of several years of tax audits in an
international tax jurisdiction resulting in a reduction of $2.4 to the income
tax provision.
On September 30, 2004, the Company redeemed its Series C Stock for $10.0 in cash
which had a liquidation value of $25 per share. The payment was not tax
deductible. As a result, a charge to net earnings available to common
stockholders of $9.9 was recorded as a premium paid to redeem preferred stock.
The Series C Stock was originally issued in 1993 in conjunction with Cytec's
spin-off from Cyanamid. Wyeth became beneficial owner of Series C Stock
following its acquisition of Cyanamid in 1994. The $10 million was recorded in
accrued expenses at September 30, 2004 and was paid during October, 2004.
Net earnings available for common stockholders were $71.0 or $1.75 per diluted
share. Net earnings available for common shareholders for 2004 include: a pretax
charge of $8.0 million ($6.2 million after tax or $0.15 per diluted share)
relating to settlements of carbon fiber litigation matters, a pretax charge of
$2.0 million ($1.6 million after tax or $0.04 per diluted share) relating to the
settlement of disputed matters with the holder of the Company's Series C Stock
and a charge of $9.9 million ($0.24 per diluted share) as a result of the
redemption of the Company's Series C Stock. Also included in results for 2004 is
a net charge of $0.06 per diluted share made up of a charge of $4.8 after tax or
$0.12 per diluted share for the settlement of several environmental and toxic
tort lawsuits and a $2.4 decrease in the income tax provision or $0.06 per
diluted share as a result of the completion of prior years' income tax audits in
an international tax jurisdiction.
Net earnings available for common stockholders for the first nine months of 2003
were $62.8 or $1.55 per diluted share. Included in 2003 results is an after-tax,
non-cash charge of $13.6 ($0.34 per diluted share) reported as a cumulative
effect of accounting change related to the adoption of Financial Accounting
Standard No.143 (FAS 143), "Accounting for Asset Retirement Obligations" which
became effective January 1, 2003.
Segment Results
- ---------------
First nine months of 2004 to the first nine months of 2003 comparisons and
analyses of changes in net sales by business segment and region are set forth
below.
Water and Industrial Process Chemicals:
- ---------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Sales Nine Nine
Months Months Total % Change Due to
----------------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------------------------------------------------
North America $ 109.8 $ 106.7 3% 0% 3% 0%
Latin America 61.7 45.2 37% -4% 36% 5%
Asia/Pacific 36.2 38.1 -5% -1% -8% 4%
Europe/Middle East/Africa 91.6 75.7 21% 0% 12% 9%
---------- ------------
Total $299.3 $265.7 13% -1% 10% 4%
- ---------------------------------------------------------------------------------------------------------------------------------
Overall selling volumes improved 10% with acquisitions accounting for 8%. The 2%
increase in base business volumes is attributable to increased sales across all
product lines, particularly mining chemicals. On a regional basis, sales volumes
in Latin America increased with acquisitions accounting for 17% and the
remainder due primarily to improved demand for mining chemicals from copper
mining applications. Sales volumes were up 12% in Europe/Middle East/Africa with
acquisitions accounting for 5% and the remainder of the increase primarily due
to increased demand for water treatment chemicals from the full service
providers and phosphine applications.
Earnings from operations were $14.2, or 4.7% of sales, compared with $15.0 or
5.6% of sales, in the first nine months of 2003. The decrease in earnings is
primarily attributable to the increase in raw material and energy costs of $7.9
almost offset by the higher sales volumes and an improved product mix.
Performance Products:
- ---------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Sales Nine Nine
Months Months Total % Change Due to
----------------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------------------------------------------------
North America $204.7 $186.7 10% 0% 10% 0%
Latin America 25.5 21.7 18% 1% 16% 1%
Asia/Pacific 84.3 61.9 36% -1% 35% 2%
Europe/Middle East/Africa 113.1 97.7 16% 0% 6% 10%
---------- ------------
Total $427.6 $368.0 16% 0% 13% 3%
- ---------------------------------------------------------------------------------------------------------------------------------
19
Overall selling volumes improved 13% with acquisitions accounting for 9%. Base
selling volumes increased for all product lines as a result of improved demand
and new business. On a regional basis, North America sales volumes increased 10%
with acquisitions accounting for 5% and the remainder due to improved demand for
coatings and specialty additives. Asia/Pacific sales volumes increased 35% with
acquisitions accounting for most of the increase. Europe/Middle East/Africa
sales were up 16% with increased demand for coatings and specialty additives.
Earnings from operations were $46.2, or 10.8% of sales, compared with $30.6, or
8.3% of sales, in the first nine months of 2003. The favorable impact from
acquisitions, higher base sales volumes, improved manufacturing operations and
net favorable exchange rate changes more than offset the effect of higher raw
material and energy costs of $3.5.
Specialty Materials:
- --------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Sales Nine Nine
Months Months Total % Change Due to
----------------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------------------------------------------------
North America $248.8 $227.9 9% 0% 9% 0%
Latin America (1) 1.3 1.2 - - - -
Asia/Pacific 15.2 11.8 29% -1% 30% 0%
Europe/Middle East/Africa 104.3 71.1 47% -3% 45% 5%
----------- ----------
Total $369.6 $312.0 18% -1% 18% 1%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons are not meaningful.
Overall selling volumes increased 18% with the increases coming from the large
commercial aircraft, regional and business jets and rotorcraft, military, and
high performance automotive sectors. On a regional basis the 9% increase in
North America sales volumes represents increased sales primarily to large
commercial aircraft, military, business and regional jet and rotorcraft
applications. Europe/Middle East/Africa sales volumes increased 45% principally
due to increased sales to large commercial aircraft and high performance
automotive applications as well as business and regional jet and rotorcraft
applications. Asia/Pacific sales volumes increased 30% principally due to
increased sales for commercial aircraft and regional and business jets.
Earnings from operations were $69.9, or 18.9% of sales, compared with $55.4, or
17.8% of sales, in the first nine months of 2003. Higher earnings are
principally due to the increase in selling volumes partly offset by increased
manufacturing and commercial costs to service the higher demand levels and
growth opportunities of this segment.
Building Block Chemicals:
- -------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Sales Nine Nine
Months Months Total % Change Due to
----------------------------------------
2004 2003 % Change Price Volume/Mix Exchange
- ---------------------------------------------------------------------------------------------------------------------------------
North America $ 88.0 $ 67.8 30% 19% 11% 0%
Latin America (1) 2.3 2.9 - - - -
Asia/Pacific 52.6 47.5 11% 29% -18% 0%
Europe/Middle East/Africa 31.3 46.0 -32% -3% -34% 5%
---------- -----------
Total $174.2 $164.2 6% 15% -10% 1%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons are not meaningful.
Global sales volumes decreased 10% in part due to decreased acrylonitrile
product as a result of reduced propylene (the key raw material for
acrylonitrile) availability during the first quarter, a regularly scheduled
maintenance shutdown of the acrylonitrile manufacturing plant during most of
May. North America selling volumes were up 11% with the majority due to new
acrylonitrile business. Europe/Middle East/Africa volumes are down as 2003
reflects opportunistic sales due to better spot selling prices versus the
Asia/Pacific region. North America and Asia/Pacific selling prices were up
primarily reflecting partial recovery of the higher raw material and energy
costs.
Earnings from operations were $7.3, or 4.2% of sales compared with $17.8, or
10.8% of sales, for the first nine months of 2003. The decrease in earnings is
partially due to the scheduled maintenance downtime during the second quarter
for the acrylonitrile manufacturing plant reducing sales of acrylonitrile and
its derivative product, hydrocyanic acid. As a result of the shutdown,
maintenance costs were higher than the year ago period. Also, acrylonitrile
plant operations were curtailed in the first quarter due to reduced propylene
availability. In addition selling price increases of $24.8 were not enough to
offset higher raw material and energy costs of $27.9.
20
Liquidity and Financial Condition
- ---------------------------------
At September 30, 2004 the Company's cash balance was $285.1 compared with $251.1
at year end 2003.
Net cash flows provided by operating activities were $84.7 for the first nine
months of 2004 compared with $89.6 for the same period in 2003.
Trade accounts receivable dollars increased $40.4 as a result of the higher
level of sales but days outstanding is slightly lower. Inventories increased
$21.6 due to increased production to support higher customer demand as well as
higher raw material costs. Accounts payable increased $25.0 due to increased raw
material costs and purchases to support increased demand levels. Other assets
increased by $17.0 due in part to the capitalization of $8.7 of certain costs
related to the previously announced and pending acquisition of Surface
Specialties as well as $2.5 in prepayments to fund certain of the Company's
European pension plans. Other liabilities decreased by $33.0 primarily as a
result of U.S. pension plan funding, net of accruals, of $14.1, retiree medical
spending, net of accruals, of $13.7, and environmental remediation spending of
$4.8.
Net cash flows used for investing activities were $44.5 for the first nine
months of 2004 compared with $164.2 for the same period in 2003.
Capital spending was $54.3 compared with $60.9 for the comparable period in
2003. The net decline is attributable to lower spending on the Specialty
Chemicals Technology Center renovation project which is essentially complete.
This is offset somewhat by increased spending in the Building Block Chemicals
segment due to the maintenance turnarounds for the melamine and acrylonitrile
facilities, spending at the three locations from the two acquisitions made in
the second half of 2003 and the expansion of the Specialty Materials advanced
composites manufacturing facility in Germany which is essentially complete.
During the first quarter of 2004, the Company received from a third party $9.1,
net of expenses, as a prepayment for a long term lease on a certain property for
future development. The development of the property is not connected with
Company operations. The third party has the option to purchase the property from
the Company at a later date. The net proceeds are being amortized to income over
the life of the lease.
Net cash flows used for financing activities were $2.2 in the first nine months
of 2004 compared with net cash flows provided by financing activities of $90.9
during the same period of 2003.
During the first nine months of 2004 the Company paid three quarterly cash
dividends of $0.10 per common share which aggregated $11.7. Proceeds from stock
option exercises totaled $20.9 compared with $11.8 for the same period of 2003.
The total number of treasury shares reissued as a result of option exercises was
approximately 1,032,800 for the first nine months of 2004 compared with
approximately 868,900 for the first nine months of 2003. The Company repurchased
approximately 388,300 shares of stock at a cost of $13.2 compared with the
repurchase of 613,200 shares of stock at a cost of $19.8 for the first nine
months of 2003. In March 2003, the Company repaid $100.0 of its 6.50% debt then
due. In June 2003, the Company sold $200.0 principal amount of 4.6% Notes due
July 1, 2013. Proceeds to the Company from the sale of the Notes after deducting
costs were approximately $198.9.
The Company maintains an unsecured revolving credit agreement under which $100.0
is available to the Company through April 11, 2005.
On October 1, 2004, the Company announced that it had signed a definitive
agreement to purchase the Surface Specialties business of UCB Group ("UCB"), a
Belgium biopharmaceutical and specialty chemical company, for cash and stock
valued at 1.5 billion Euros ($1.9 billion at 1.27 US dollars per Euro). The
acquisition, approved by the board of directors of both companies, is subject to
customary closing conditions including the approval of regulatory authorities
and is expected to close by December 31, 2004.
The cost of the acquisition consists of 1.275 billion Euros in cash and
5,772,857 shares of Cytec common stock valued at 225 million Euros. It is
anticipated that the cash portion of the transaction will be financed with a new
credit facility, a bridge loan, which the Company intends to refinance with
long-term debt, and existing cash. Upon closing, UCB will own approximately 12%
of the outstanding shares of the Company. UCB and the Company have also agreed
to enter into a stockholders agreement which will provide that UCB must reduce
its stake to less than 9% within 3 years, less than 7% within 4 years and less
than 5% within 5 years and contains other customary terms and provisions.
The global Surface Specialties business had revenues of $1.2 billion in 2003.
The acquisition will complement Cytec's existing product lines in the
Performance Products segment by significantly increasing Cytec's product
offering to the coatings and additives industries including the general
industrial, automotive, architectural, plastic, graphic arts and wood sectors.
Many of the Surface Specialties product lines such as UV cure, powder and
waterborne systems have above average growth rates.
21
Cytec intends to operate the Surface Specialties business as a separate segment
and will integrate its coating and specialty additives and performance chemicals
product lines into the new segment.
In conjunction with this transaction, the Company anticipates divesting Surface
Specialties' amino resin product line during 2005 and using the proceeds to
reduce debt. Sales of Surface Specialties' amino resin product line in 2003 were
approximately $140.0.
During October 2004, the Company entered into $238.1 of forward starting
interest rate swaps to hedge the benchmark interest rate and credit spread on a
portion of the debt that will be issued to finance the acquisition of Surface
Specialties. The weighted-average interest rate of 4.7% for the U.S dollar swaps
includes a swap credit spread of approximately 45 basis points and a premium of
approximately 17 basis points for the forward starting element of the swap. The
corresponding Euro swaps have a weighted-average interest rate of 4.13% and
include a swap credit spread of approximately 14 basis points and an 11 basis
point premium for the forward starting element of the swap. The credit spread
portion of the swaps are representative of AA rated 10 year notes and serve as a
proxy credit spread for the company. The Company's actual credit spread at the
time of debt issuance will be determined primarily based on its actual credit
rating and market conditions. The swaps, which mature in March 2005, will be
marked to market and recorded currently in earnings until maturity or
settlement. As of October 29, 2004, the Company has hedged approximately 34% of
the anticipated portion of the purchase price that will be refinanced.
Through October 29 2004, the Company has entered into forward contracts totaling
155 million Euros to hedge approximately 12% of the Euro exposure of 1.275
billion for the cash component of the Surface Specialties acquisition. Excluding
the hedge impact of any anticipated Euro denominated debt for the acquisition,
the Company has hedged approximately 16% of the exposure with these forward
contracts together with natural hedges of approximately $55.0. The forward
contracts, which mature in December 2004, will be marked to market and recorded
currently in earnings until maturity.
The Company filed a current report on Form 8-K dated October 6, 2004 regarding
its entry into the Purchase Agreement with UCB pursuant to which the Company
agreed to acquire Surface Specialties and its intention to transfer certain
shares of its common stock held in treasury to UCB, without registration, as
partial consideration for the acquisition.
In connection with the pending acquisition, the Company suspended its stock
buy-back program for up to two years in order to maximize the funds available
for debt service and other corporate purposes.
The Company believes that, based on its expected operating results for the next
twelve months, it will be able to fund operating cash requirements, including
debt service requirements to finance the purchase of Surface Specialties,
planned capital expenditures and dividends from internal cash generation, which
would include cash generated from the operations of Surface Specialties.
OTHER
- -----
2004 Outlook
In its October 21, 2004 press release, which was also furnished as an exhibit to
a current report on Form 8-K, the Company set forth its assumptions and
management's best estimate of the fourth quarter and full year 2004 earnings at
that time based on various assumptions including those set forth in its press
release.
The Company expects to provide guidance for 2005 when it reports fourth quarter
and full year 2004 earnings in January 2005. 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
- --------------------------------
Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the enactment date.
The Company intends to reinvest the unremitted earnings of international
subsidiaries. Accordingly, no provision has been made for U.S. or additional
non-U.S. taxes with respect to these earnings. In the event of repatriation to
the U.S., such earnings would be subject to U.S. income taxes in most cases.
Foreign tax credits would be available to substantially reduce the amount of
U.S. tax otherwise payable in future years.
22
The Company's annual effective tax rate is based on expected income, statutory
tax rates and tax planning opportunities available in various jurisdictions in
which the Company operates. Significant judgment is required in determining the
Company's annual effective tax rate and in evaluating its tax positions.
The Company establishes accruals for tax contingencies when, notwithstanding the
reasonable belief that its tax return positions are fully supported, the Company
believes that certain filing positions are likely to be challenged and moreover,
that such filing positions may not be fully sustained.
The Company continually evaluates its tax contingency accruals and will adjust
such amounts in light of changing facts and circumstances, including but not
limited to emerging case law, tax legislation, rulings by relevant tax
authorities, and the progress of on-going tax audits. Settlement of a given tax
contingency could impact the income tax provision in the year of resolution. The
Company's tax contingency accruals are presented in the balance sheet within
income taxes payable.
For additional information on 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, annual effective
tax rates, 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.
Forward-looking statements also include, but are not limited to, statements
about the pending acquisition of UCB's Surface Specialties business, which may
include financial and operating results, the parties' plans, beliefs,
expectations and intentions and other statements that are not historical facts.
Such statements are based upon the current beliefs and expectations of
management and are subject to significant risks and uncertainties. Actual
results may vary materially from those set forth in the forward-looking
statements. The following factors, among others, could affect the consummation
of the pending transaction: the expiration or termination of any applicable
waiting period under the Hart-Scott-Rodino Act and the receipt of the European
Commission and other competition law clearances. The following factors, among
others, could affect the anticipated results: consummation of the financing on
terms different than anticipated by the Company, the ability to integrate
successfully the acquired business within the expected timeframes or at all, and
ongoing operations of the business. Additional factors that could cause Cytec's
results to differ materially from those described in the forward-looking
statements can be found in Cytec's filings with the Securities and Exchange
Commission
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.
23
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 September 30, 2004, the Building Block Chemicals segment Fortier plant's 2004
remaining forecasted natural gas utility requirements were 84% hedged utilizing
natural gas forward contracts. These contracts were valued at $5.5 and have
delivery dates ranging from October 2004 to December 2004. Additionally, the
plant's 2005 gas utility requirements were 25% hedged at September 30, 2004, and
these contracts were valued at $6.8 and have delivery dates ranging from January
to September 2005.
At September 30, 2004, the Company held natural gas swaps with a fair value gain
of $0.6, net of taxes, which will be reclassified into Manufacturing Cost of
Sales through September 2005 as these swaps are settled.
Interest Rate Risk:
At September 30, 2004, the outstanding borrowings of the Company consisted of
$7.7 short-term borrowings and fixed rate long-term debt, which had a carrying
value of $419.0 a face value of $420.0 and a fair value, based on dealer quoted
values of approximately $424.9.
During the nine months ended September 30, 2004, the Company terminated all
$100.0 of its interest rate swaps. The net gain thereon of $0.2 and $2.9 for the
three and nine months then ended 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 $2.8 at September 30, 2004
Assuming other factors are held constant, interest rate changes generally affect
the fair value of fixed rate debt. Accordingly, assuming a 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 $17.2 at September 30, 2004.
Refer to Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of the Notes to the Consolidated Financial
Statements contained herein for discussion of derivative activities subsequent
to September 30, 2004 as a result of the pending acquisition of Surface
Specialties.
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 September 30, 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.
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 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 in the Company's Annual
Report on Form 10-K, 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 and cash flows of the Company in any one accounting
period. The Company, in this section, includes certain predecessor entities
being indemnified by Cytec.
Set forth below are updates to the legal proceedings sections found in the
Company's Annual Report on Form 10-K.
During the third quarter of 2004, the Company signed a stipulation of settlement
with plaintiffs in a federal class action lawsuit on behalf of purchasers of
carbon fiber. The settlement is subject to court approval. While Company
management denied any charges of wrongdoing and in fact believed the Company
would have been a victim of any conspiracy among carbon fiber manufacturers,
management believed the costs of further defense outweighed the costs of
settlement. As a result of this and several other minor litigation matters, the
Company recorded a pre-tax charge of $8.0 ($6.2 after tax) which is reflected in
administrative and general expense in the third quarter of 2004.
The following table presents information about the asbestos claims against the
Company.
Nine Months Ended Year Ended
September 30, December 31,
2004 2003
--------------------- --------------------
Claims closed in period 2,759 7,601
Claims filed in period 3,542 7,648
Claims open at end of period 27,738 26,955
- -------------------------------------------------------------------------------
No material developments relating to the Company's lead paint litigation
occurred during the quarter ended September 30, 2004.
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.
25
Item 6. Exhibits
--------
(a). Exhibits
--------
See Exhibit Index on page 28 for exhibits filed with this Quarterly Report on
Form 10-Q.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYTEC INDUSTRIES INC.
By: /s/ James P. Cronin
-------------------
James P. Cronin
Executive Vice President and
Chief Financial Officer
October 29, 2004
27
Exhibit Index
- -------------
2.3 Stock and Asset Purchase Agreement, dated as of October 1, 2004, between UCB S.A. and Cytec Industries Inc.
(incorporated by reference to Exhibit 99.1 of the Company's Current Report on Form 8-K dated October 1, 2004)
10.10 Omnibus Agreement, dated September 30, 2004, among Wyeth Holdings Corporation, MDP Holdings, Inc. and Cytec
Industries Inc.
12 Computation of Ratio of Earnings to Fixed Charges for the three and nine months ended September 30, 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
28