UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
Commission file number 1-12372
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CYTEC INDUSTRIES INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3268660
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No).
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 357-3100
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |X| Accelerated filer | | Non-accelerated filer | |
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).Yes | | No |X|
There were 47,900,860 shares of common stock outstanding at April 25, 2007.
1
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
10-Q Table of Contents
Page
Part I - Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
Part II - Other Information
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
25
Item 4. Other 26
Item 6. Exhibits 27
Signature 28
Exhibit Index 29
2
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months
Ended
March 31,
2007 2006(1)
------------------------------------------------------------------------------------------------------------------------
Net sales $863.6 $ 819.4
Manufacturing cost of sales 698.8 645.7
Selling and technical services 49.9 52.8
Research and process development 18.4 18.8
Administrative and general 26.3 24.9
Amortization of acquisition intangibles 9.3 8.8
Gain on sale of assets held for sale 15.7 -
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Earnings from operations 76.6 68.4
Other income (expense), net 1.4 (0.8)
Equity in earnings of associated companies 0.3 0.8
Interest expense, net 10.3 14.5
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Earnings before income taxes and cumulative effect of accounting change 68.0 53.9
Income tax provision 16.3 14.6
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Earnings before cumulative effect of accounting change 51.7 39.3
Cumulative effect of accounting change (net of income tax benefit of $0.7) - (1.2)
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Net earnings $ 51.7 $ 38.1
Basic earnings (loss) per common share:
Earnings before cumulative effect of accounting change $ 1.07 $ 0.84
Cumulative effect of accounting change, net of taxes - (0.03)
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Net earnings $ 1.07 $ 0.81
Diluted earnings (loss) per common share:
Earnings before cumulative effect of accounting change $ 1.05 $ 0.82
Cumulative effect of accounting change, net of taxes - (0.03)
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Net earnings $ 1.05 $ 0.79
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Dividends per common share $ 0.10 $ 0.10
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(1) 2006 results were restated to show the effect of FSP AUG-AIR 1, which was
adopted retroactively during the first quarter of 2007. For further details
see Note 2 to the Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements
3
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions, except per share amounts)
March 31, December 31,
2007 2006(1)
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Assets
Current assets
Cash and cash equivalents $ 19.0 $ 23.6
Trade accounts receivable, less allowance for doubtful accounts of
$4.9 and $5.1 at March 31, 2007 and December 31, 2006, respectively 571.8 510.3
Other accounts receivable 61.8 81.5
Inventories 468.7 474.6
Deferred income taxes 8.0 9.2
Other current assets 22.1 15.4
Assets held for sale 14.3 38.8
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Total current assets 1,165.7 1,153.4
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Investment in associated companies 23.9 23.3
Plants, equipment and facilities, at cost 1,913.1 1,895.5
Less: accumulated depreciation (918.9) (897.0)
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Net plant investment 994.2 998.5
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Acquisition intangibles, net of accumulated amortization of
$102.5 and $92.1 at March 31, 2007 and December 31, 2006, respectively 481.3 486.1
Goodwill 1,049.4 1,042.5
Deferred income taxes 25.9 33.2
Other assets 92.1 93.5
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Total assets $3,832.5 $3,830.5
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Liabilities
Current liabilities
Accounts payable $ 323.8 $ 298.8
Short-term borrowings 42.7 41.8
Current maturities of long-term debt 1.5 1.4
Accrued expenses 177.0 203.8
Income taxes payable 12.1 39.3
Deferred income taxes 10.2 2.0
Liabilities held for sale 3.4 16.3
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Total current liabilities 570.7 603.4
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Long-term debt 856.7 900.4
Pension and other postretirement benefit liabilities 346.6 371.1
Other noncurrent liabilities 291.0 273.6
Deferred income taxes 109.0 105.3
Stockholders' equity
Common stock, $.01 par value per share, 150,000,000 shares authorized;
issued 48,132,640 shares 0.5 0.5
Additional paid-in capital 267.0 258.5
Retained earnings 1,386.8 1,339.6
Accumulated other comprehensive income (loss) 19.2 (5.7)
Treasury stock, at cost, 333,344 shares in 2007 and 510,006 shares in 2006 (15.0) (16.2)
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Total stockholders' equity 1,658.5 1,576.7
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Total liabilities and stockholders' equity $3,832.5 $3,830.5
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(1) Balances at December 31, 2006 have been restated to show the effect of FSP
AUG-AIR 1, which was adopted retroactively during the first quarter of
2007. For further details see Note 2 to the Consolidated Financial
Statements.
See accompanying Notes to Consolidated Financial Statements
4
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Three Months Ended
March 31,
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2007 2006(1)
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Cash flows provided by (used in) operating activities
Net earnings $ 51.7 $ 38.1
Noncash items included in net earnings:
Depreciation 25.1 27.9
Amortization 11.6 10.9
Share-based compensation 3.1 2.9
Deferred income taxes 9.2 (0.7)
Gain on sale of assets (15.7) -
Cumulative effect of accounting change, net of taxes - 1.2
Other (0.2) 3.1
Changes in operating assets and liabilities:
Trade accounts receivable (59.9) (19.1)
Other receivables 13.6 (7.5)
Inventories 6.8 (13.2)
Other assets (7.6) (4.3)
Accounts payable 23.0 9.4
Accrued expenses (20.5) (28.5)
Income taxes payable (8.1) (1.9)
Other liabilities (7.9) 2.6
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Net cash provided by operating activities 24.2 20.9
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Cash flows provided by (used in) investing activities
Acquisition of business, net of cash received - (0.5)
Additions to plants, equipment and facilities (14.8) (16.3)
Proceeds received on sale of assets 27.1 -
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Net cash provided by (used in) investing activities 12.3 (16.8)
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Cash flows provided by (used in) financing activities
Proceeds from long-term debt 101.6 23.0
Payments on long-term debt (145.1) (75.3)
Change in short-term borrowings 0.3 (1.0)
Cash dividends (4.8) (4.7)
Proceeds from the exercise of stock options and warrants 13.7 26.4
Purchase of treasury stock (9.7) -
Excess tax benefits from share-based payment arrangements 2.6 6.4
Other (0.4) (0.6)
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Net cash used in financing activities (41.8) (25.8)
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Effect of currency rate changes on cash and cash equivalents 0.7 0.9
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Decrease in cash and cash equivalents (4.6) (20.8)
Cash and cash equivalents, beginning of period 23.6 68.6
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Cash and cash equivalents, end of period $ 19.0 $ 47.8
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(1) 2006 results were restated to show the effect of FSP AUG-AIR 1, which was
adopted retroactively during the first quarter of 2007. For further details
see Note 2 to the Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements
5
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Currencies in millions, 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
("U.S. GAAP") have been condensed or omitted pursuant to such rules and
regulations. Financial statements prepared in accordance with U.S. 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, these financial statements include all normal and
recurring adjustments necessary for a fair presentation of the financial
position and the results of our operations and cash flows 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
financial statements should be read in conjunction with the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements
contained in the Company's 2006 Annual Report on Form 10-K. Unless indicated
otherwise, the terms "Company", "Cytec", "we", "us" and "our" each refer
collectively to Cytec Industries Inc. and its subsidiaries.
2. DEFERRED PLANNED MAINTAINANCE COSTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Staff Position No. AUG AIR-1, "Accounting for Planned Major Maintenance
Activities" ("FSP"). This FSP prohibits accruing as a liability the future costs
of periodic major overhauls and maintenance of plant and equipment under the
"accrue-in-advance" methodology, as the costs for future planned major
maintenance activities do not meet the definition of a liability. We adopted the
FSP as of January 1, 2007 and restated our prior consolidated financial
statements accordingly. Prior to adoption, we utilized the accrue-in-advance
method for incremental costs to be incurred for the planned major maintenance
activities which related to our Building Block Chemicals segment. We adopted the
deferral method to account for maintenance expenses incurred for scheduled
maintenance activities, which are amortized evenly until the next scheduled
activities. The impact to our consolidated results of operations was a $0.3
increase in net earnings for the year ended December 31, 2006, and a $0.1
increase in net earnings for the three months ended March 31, 2006. As a result
of these immaterial changes, 2006 earnings per share for these periods is
unchanged. The impact to our consolidated financial position was an increase in
retained earnings of $6.6 as of December 31, 2006, as a result of an increase in
other assets for $2.3 for the addition of prior unamortized deferred charges and
a decrease in accrued expenses of $8.5, as well as adjustments of deferred taxes
for these respective items. There was no impact to our 2006 net cash provided by
operating activities in our consolidated statement of cash flows.
3. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits
companies to choose to measure certain financial assets and liabilities at fair
value (the "fair value option"). If the fair value option is elected, any
upfront costs and fees related to the item must be recognized in earnings and
cannot be deferred, e.g., debt issue costs. The fair value election is
irrevocable and may generally be made on an instrument-by-instrument basis, even
if a company has similar instruments that it elects not to fair value. At the
adoption date, unrealized gains and losses on existing items for which fair
value has been elected are reported as a cumulative adjustment to beginning
retained earnings. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact, if any, that the
adoption of SFAS 159 will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and requires additional
disclosures about fair-value measurements. SFAS 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments) and is intended to
increase the consistency of those measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. However, for some entities, the
application of SFAS 157 will change current practice. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We are still in the process of reviewing the impact of adopting
this statement. However, we do not expect the adoption of SFAS 157 to have a
material impact on our consolidated financial statements.
6
4. DIVESTITURES
In October 2006, we completed the first of three phases of the sale of our water
treatment chemicals and acrylamide product line to Kemira Group ("Kemira"). This
first phase included the product lines themselves, the related intellectual
property, the majority of the manufacturing sites and essentially all of the
sales, marketing, manufacturing, R&D and technical services personnel. The
manufacturing sites in the first phase included Mobile, Alabama, Longview,
Washington, Bradford, UK, and the acrylamide manufacturing plant at our Fortier,
Louisiana facility which will be operated by our personnel under a long term
manufacturing agreement. The sale of our Botlek manufacturing site in the
Netherlands was completed and transferred to Kemira in January 2007 as part of
the phase two closing. We will continue to supply acrylonitrile to the Kemira
acrylamide plants at Fortier and Botlek under long term supply agreements. In
addition, under various long term manufacturing agreements, we will manufacture
certain water treatment products for Kemira at several of our sites and Kemira
will manufacture for us certain mining chemicals at the Mobile, Alabama and
Longview, Washington sites and various other products at the Botlek site. These
contracts were all deemed to be at estimated fair value. Certain assets at
various subsidiaries in Asia/Pacific and Latin America are expected to close in
the second and third quarters of 2007 as the last phase.
The timing of the flow of funds is as follows: approximately $208.0 was received
in October 2006 for the first closing, and approximately $21.0 was received for
the second closing in January 2007. We also received approximately $6.0 in
February 2007 for a working capital adjustment from the first phase closing per
the terms of the contract. An estimated $10.0 is expected upon the completion of
the transfer of the assets at the various subsidiaries, bringing estimated total
proceeds to $245.0. The remaining subsidiary net asset closings are subject to
certain conditions and the amounts could change due to final working capital
transferred. We recorded a pre-tax gain of $75.5 ($59.6 after-tax) related to
the first phase closing in the fourth quarter of 2006, and a pre-tax gain of
$15.7 ($15.3 after-tax) in the first quarter of 2007 from the phase two closing.
The assets and liabilities of our water treatment chemicals and acrylamide
product lines included in the March 31, 2007 and December 31 , 2006 consolidated
balance sheets are comprised of:
March 31, December 31,
2007 2006
------------------------------------------------------------------------------------------------------------
Accounts receivable $ 7.9 $ 6.5
Inventories 6.4 4.3
Property, plant and equipment - 26.6
Other assets - 1.4
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Assets held for sale $ 14.3 $ 38.8
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Accounts payable $ - $ 3.4
Accrued liabilities 3.4 12.7
Other noncurrent liabilities - 0.2
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Liabilities held for sale $ 3.4 $ 16.3
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5. RESTRUCTURING OF OPERATIONS
In accordance with our policy, restructuring costs are included in our corporate
unallocated operating results consistent with management's view of its
businesses.
For the three months ended March 31, 2007, we recorded a net restructuring
charge of $0.8, primarily related to the 2006 decision of the shut down of our
manufacturing facility in Dijon, France, for costs that were not accruable in
prior periods. We expect to incur some additional restructuring costs in 2007
that primarily relate to personnel and site closure costs that were not
accruable in 2006 as well as some potential site remediation costs. In 2006,
based on forecasted cash flow information, we determined that the manufacturing
facility in Dijon and related intangible assets were impaired. This facility
manufactured solvent-borne alkyd and solvent-borne acrylic based resins in our
Cytec Surface Specialties ("CSS") segment. We have moved production of some of
the more profitable products manufactured at Dijon to other facilities and
ceased production of the remainder. The restructuring for the three months ended
March 31, 2007 was charged as follows: manufacturing cost of sales $0.7, and
administrative and general $0.1.
In 2006, we recorded severance of $19.5 including $8.4 related to the shut down
of the manufacturing facility in Dijon, $6.4 for the restructuring of our
Botlek, Netherlands facility, and $4.7 for other restructuring initiatives. As
of December 31, 2006, the reserve balance related to severance for the 2006
restructuring initiatives was $13.5 after cash payments of $6.4 and currency
translation adjustments. Also in 2006, we recorded an impairment charge of
$29.3, of which $13.8 was related to the Botlek facility for the impairment of
fixed assets related to our Polymer Additives product line in our Performance
Chemicals segment and $15.5 for the impairment of our manufacturing facility and
related intangible assets in Dijon. In addition, we recorded a restructuring
charge of $2.3 for other costs related to the Botlek facility.
7
2005 restructuring initiatives included aggregate charges of $16.8 related to
both Cytec Engineered Materials and Cytec Specialty Chemicals segments. As of
March 31, 2007, the reserve balance related to 2005 restructuring initiatives
was $0.7.
A summary of the restructuring activity is outlined in the table below:
2005 2006
Restructuring Restructuring
Severance Severance Total
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Balance
December 31, 2006 $1.4 $13.5 $14.9
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2007 charges - 0.8 0.8
Cash payments (0.7) (1.8) (2.5)
Currency translation adjustments - 0.2 0.2
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Balance
March 31, 2007 $0.7 $12.7 $13.4
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Cash payments related to the above restructurings are expected to be completed
in 2007, except for certain long-term severance payments.
6. SHARE-BASED COMPENSATION
On January 1, 2006, we adopted SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which requires companies to recognize compensation cost
in an amount equal to the fair value of share-based payments, such as stock
options granted to employees. As a result of the adoption of SFAS 123R, we
recorded additional charges related to stock options and stock appreciation
rights that are settled with common shares ("stock-settled SARS") of $3.1 and
$2.6 for the three months ended March 31, 2007 and 2006, respectively. The
adoption of SFAS 123R was recorded as of January 1, 2006 and resulted in a
non-cash charge for the cumulative effect of a change in accounting principle of
$1.6 and a non-cash credit of $0.4 for cash-settled SARS (as a result of the new
requirement to record expense at fair value) and non-vested and performance
stocks (forfeitures estimated now, as well as grant date only market value of
the shares under award), for a net charge of $1.2, net of a tax benefit of $0.7.
The effect on basic and diluted earnings per share for the cumulative effect
charge was $0.03 per share for the three months ended March 31, 2006.
For stock options granted before January 1, 2005, the fair value of each stock
option grant was estimated on the date of grant using the Black-Scholes option
pricing model. For stock options and stock-settled SARS granted after January 1,
2005, the fair value of each award is estimated on the date of grant using a
binomial-lattice option valuation model. Stock-settled SARS are economically
valued the same as stock options. The binomial-lattice model considers
characteristics of fair value option pricing that are not available under the
Black-Scholes model. Similar to the Black-Scholes model, the binomial-lattice
model takes into account variables such as volatility, dividend yield, and
risk-free interest rate. However, in addition, the binomial-lattice model
considers the contractual term of the option, the probability that the option
will be exercised prior to the end of its contractual life, and the probability
of termination or retirement of the option holder in computing the value of the
option. For these reasons, we believe that the binomial-lattice model provides a
fair value that is more representative of actual experience and future expected
experience than the value calculated in previous years using Black-Scholes. The
assumptions for the quarters ended March 31, 2007 and 2006 are noted in the
following table:
2007 2006
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Expected life (years) 6.2 5.7
Expected volatility 27.2% 37.6%
Expected dividend yield 0.69% 0.81%
Range of risk-free interest rate 4.8% - 5.2% 4.4% - 4.7%
Weighted-average fair value per option $ 19.50 $ 18.86
-------------------------------------------------------------------------------------------
The expected life of options granted is derived from the output of the option
valuation model and represents the period of time that options granted are
expected to be outstanding. Expected volatilities are based on the combination
of implied market volatility and our historical volatility. The decrease in our
expected volatility from 2006 represents a change in methodology used to
calculate the expected volatility. Prior to 2007, our expected volatility was
based on a weighted average of the implied volatility and the mean reversion
volatility (represents the annualized volatility of the stock prices over our
entire stock history) of our stock with weighting of 10% and 90%, respectively.
In 2007, we changed the methodology to a weighted average of the implied
volatility and most recent 6.2 years (which represents the most recent expected
life of the options/stock-SARS) volatility with weighting of 50% each. We feel
that the revised methodology is more representative of the market's expectation
of our volatility, based on recent trends and mature industries in which we
participate. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of grant.
SFAS 123R specifies that initial accruals be based on the estimated number of
instruments for which the requisite service is expected to be rendered.
Therefore, we are required to incorporate the probability of pre-vesting
forfeiture in determining the number of expected vested options. The forfeiture
rate is based on the historical forfeiture experience and prospective actuarial
analysis.
8
Stock Award and Incentive Plan:
The 1993 Stock Award and Incentive Plan (the "1993 Plan") provides for grants of
a variety of awards, such as stock options (including incentive stock options
and nonqualified stock options), non-vested stock (including performance stock),
stock appreciation rights (including those settled with common shares) and
deferred stock awards and dividend equivalents. At March 31, 2007, there are
approximately 5,200,000 shares reserved for issuance under the 1993 Plan.
We have utilized the stock option component of the 1993 Plan to provide for the
granting of nonqualified stock options and stock-settled SARS with an exercise
price at 100% of the market price on the date the grant. Options and
stock-settled SARS are generally exercisable in installments of one-third per
year commencing one year after the date of grant and annually thereafter, with
contract lives of generally 10 years from the date of grant.
A summary of stock options and stock-settled SARS activity for the three months
ended March 31, 2007 is presented below.
Weighted
Average
Weighted Remaining
Average Contractual Aggregate
Options and Stock-Settled Number of Exercise Life Intrinsic
SARS Activity: Units Price (Years) Value
---------------------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2007 4,339,920 $ 35.00
Granted 572,506 58.22
Exercised (367,313) 38.27
Forfeited (41,939) 43.60
Outstanding at March 31, 2007 4,503,174 $ 37.60 5.1 $ 83.9
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Exercisable at March 31, 2007 3,352,271 $ 32.15 3.9 $ 80.8
---------------------------------------------------------------------------------------------------------------------------
Weighted
Average
Grant
Nonvested Options and Stock Number of Date Fair
-Settled SARS: Units Value
-------------------------------------------------------------------------------------------------------
Nonvested at January 1, 2007 1,088,466 $ 18.24
Granted 572,506 19.50
Vested (496,114) 17.79
Forfeited (13,955) 18.66
-------------------------------------------------------------------------------------------------------
Nonvested at March 31, 2007 1,150,903 $ 19.06
-------------------------------------------------------------------------------------------------------
During the three months ended March 31, 2007, we granted 572,506 shares of
stock-settled SARS and stock options. We did not grant any stock-settled SARS
before 2006. The weighted-average grant-date fair value of the stock-settled
SARS and stock options granted during the three months ended March 31, 2007 and
2006 was $19.50 and $18.86 per share, respectively. Stock-settled SARS are
deemed to be equity-based awards under SFAS 123R. The total intrinsic value of
stock options and stock-settled SARS exercised during the three months ended
March 31, 2007 and 2006 was $7.6 and $17.2, respectively. Treasury shares have
been utilized for stock option exercises. The total fair value of stock options
vested during the three months ended March 31, 2007 and 2006 was $8.8 and $8.4,
respectively.
As of March 31, 2007, there was $16.1 of total unrecognized compensation cost
related to stock options and stock-settled SARS. That cost is expected to be
recognized over a weighted-average period of 1.8 years as the majority of our
awards vest over three years. Compensation cost related to stock options and
stock-settled SARS capitalized in inventory as of March 31, 2007 and 2006 was
approximately $0.5 and $0.3, respectively.
Cash received (for stock options only) and the tax benefit realized from stock
options and stock-settled SARS exercised were $13.7 and $2.7 for the three
months ended March 31, 2007 and $26.4 and $6.4 for the three months ended March
31, 2006, respectively. Cash used to settle cash-settled SARS was $0.3 and $0.2
for the three months ended March 31, 2007 and 2006, respectively. The liability
related to our cash-settled SARS was $4.0 at March 31, 2007.
9
As provided under the 1993 Plan, we have also issued non-vested stock and
performance stock. Non-vested shares are subject to certain restrictions on
ownership and transferability that lapse upon vesting. Performance share payouts
are based on the attainment of certain financial performance objectives and may
vary depending on the degree to which the performance objectives are met.
Performance shares awarded in 2004 and 2005 relate to the 2006 and 2007
performance periods, respectively. The total amount of share-based compensation
expense recognized for non-vested and performance stock for three months ended
March 31, 2007 and 2006 was $0.1 and $0.3, respectively.
Upon adoption of SFAS 123R, we calculated our additional paid-in capital pool
("APIC Pool") to be $41.4. Exercises of stock options and stock-settled SARS
since the adoption increased the APIC Pool to $54.6 at March 31, 2007.
7. EARNINGS PER SHARE (EPS)
Basic earnings per common share excludes dilution and is computed by dividing
net earnings by the weighted-average number of common shares outstanding (which
includes shares outstanding, less performance and non-vested 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 for the three
months ended March 31, 2007 by dividing net earnings 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. For the quarter ended March 31, 2007, all per share calculations are
performed using the same denominator utilized in calculating earnings per share.
The following shows the reconciliation of weighted-average shares:
Three Months Ended
March 31,
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2007 2006
--------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding: 48,135,232 46,913,744
Effect of dilutive shares:
Options/Stock-settled SARS 1,048,987 1,079,620
Performance/Non-vested Stock 22,763 67,986
--------------------------------------------------------------------------------------------------------
Adjusted average shares outstanding 49,206,982 48,061,350
--------------------------------------------------------------------------------------------------------
Outstanding stock options to purchase 38,068 and 45,666 shares of common stock
for the three months ended March 31, 2007 and 2006, respectively, were excluded
from the above calculation because their inclusion would have had an
anti-dilutive effect on earnings per share. In addition, 537,938 and 643,300 of
outstanding stock-settled SARS for the three months ended March 31, 2007 and
2006, respectively, were excluded from the above calculation due to their
anti-dilutive effect on earnings per share.
8. INVENTORIES
Inventories consisted of the following:
March 31, December 31,
2007 2006
-------------------------------------------------------------------------------------------------------
Finished goods $ 306.2 $ 333.4
Work in process 41.7 26.4
Raw materials & supplies 120.8 114.8
-------------------------------------------------------------------------------------------------------
Total inventories $ 468.7 $ 474.6
-------------------------------------------------------------------------------------------------------
10
9. DEBT
Long-term debt, including the current portion, consisted of the following:
March 31, 2007 December 31, 2006
-----------------------------------------------------------------------------------------------------------------
Carrying Carrying
Face Value Face Value
-----------------------------------------------------------------------------------------------------------------
Five-Year Term Loan Due February 15, 2010 $ - $ - $ 52.6 $ 52.6
Five-Year Revolving Credit Line Due February 15, 2010 50.7 50.7 42.0 42.0
6.75% Notes Due March 15, 2008 100.0 99.5 100.0 99.3
5.5% Notes Due October 1, 2010 250.0 249.7 250.0 249.7
4.6% Notes Due July 1, 2013 200.0 201.4 200.0 201.5
6.0% Notes Due October 1, 2015 250.0 249.4 250.0 249.4
Other 7.5 7.5 7.3 7.3
-----------------------------------------------------------------------------------------------------------------
$ 858.2 858.2 $ 901.9 901.8
Less: Current maturities 1.5 1.5 1.4 1.4
-----------------------------------------------------------------------------------------------------------------
Long-term debt $ 856.7 856.7 $ 900.5 900.4
-----------------------------------------------------------------------------------------------------------------
During the three months ended March 31, 2007, we repaid the $52.6 outstanding
balance at December 2006 under the five-year term loan and terminated this
facility. Borrowings against the $350.0 unsecured five-year revolving credit
agreement facility totaled $50.7 at March 31, 2007. This facility contains
covenants that are customary for such facilities.
The weighted-average interest rate on all of our debt was 5.05% and 4.64% for
the three months ended March 31, 2007 and 2006, respectively. The
weighted-average interest rate on short-term borrowing outstanding as of March
31, 2007 and 2006 was 4.62% and 4.43%, respectively.
10. ENVIRONMENTAL, CONTINGENCIES AND COMMITMENTS
Environmental Matters
We are subject to substantial costs arising out of environmental laws and
regulations, which include obligations to remove or limit the effects on the
environment of the disposal or release of certain wastes or substances at
various sites or to pay compensation to others for doing so.
As of March 31, 2007 and December 31, 2006, the aggregate environmental related
accruals were $102.9 and $102.7, respectively. As of March 31, 2007 and December
31, 2006, $7.4 of the above amounts was included in accrued expenses, with the
remainder included in other noncurrent liabilities. Environmental remediation
spending for the three months ended March 31, 2007 and 2006 was $0.8 and $0.7,
respectively.
These accruals can change substantially due to such factors as additional
information on the nature or extent of contamination, methods of remediation
required, changes in the apportionment of costs among responsible parties and
other actions by governmental agencies or private parties or if we are named in
a new matter and determine that an accrual needs to be provided or if we
determine that we are not liable and no longer require an accrual.
A further discussion of environmental matters can be found in Note 13 of the
Notes to the Consolidated Financial Statements contained in our 2006 Annual
Report on Form 10-K.
Other Contingencies
We are the subject of numerous lawsuits and claims incidental to the conduct of
our or certain of our predecessors' businesses, including lawsuits and claims
relating to product liability, personal injury including asbestos,
environmental, contractual, employment and intellectual property matters.
During the third quarter of 2006, the Actuarial and Analytics Practice of AON
Risk Consultants ("AON") completed a study of our asbestos related contingent
liabilities and related insurance receivables. We previously commissioned a
similar study from AON in 2003. For these studies, we provided AON with, among
other things, detailed data for the past ten years on the incidence of claims,
the incidence of malignancy claims, indemnity payments for malignancy and
non-malignancy claims, and dismissal rates by claim. The actuarial methodology
employed by AON was primarily based on epidemiological data assumptions
regarding asbestos disease manifestation, the information provided by us, and
the estimates of claim filing and indemnity costs that may occur in the future.
In conjunction with AON, we also conducted a detailed review of our insurance
position and estimated insurance recoveries. We expect to recover close to 54%
of our future indemnity costs and certain defense and processing costs already
incurred. We anticipate updating the study approximately every three years or
earlier if circumstances warrant. We are in the process of negotiating coverage
in place and commutation agreements with several of our insurance carriers.
11
As a result of the findings from the 2006 AON study, we recorded an increase of
$9.0 in September 2006 to our self insured and insured contingent liabilities
for pending and anticipated probable future claims and recorded a higher
receivable for probable insurance recoveries for past, pending and future claims
of $6.8. The reserve increase is attributable to higher settlement values which
more than offset a decrease in number of claimants. The increase in the
receivable is a result of the higher gross liability plus an increase in overall
projected insurance recovery rates.
As of March 31, 2007 and December 31, 2006, the aggregate self-insured and
insured contingent liability was $70.0 and $72.4, respectively, and the related
insurance recovery receivable for the liability as well as claims for past
payments was $40.8 at March 31, 2007 and $40.9 at December 31, 2006. The
asbestos liability included in the above amounts at March 31, 2007 and December
31, 2006 was $54.3 and $54.6, respectively, and the insurance receivable related
to the liability as well as claims for past payments was $38.2 at March 31, 2007
and $38.1 at December 31, 2006. We anticipate 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 number of claimants involved
in asbestos claims with us:
Three Months
Ended Year Ended
March 31, December 31,
2007 2006
-------------------- -----------------
Number of claimants at beginning of period 8,600 22,200
Number of claimants associated with claims closed during period (100) (15,800)
Number of claimants associated with claims opened during period - 2,200
-------------------- -----------------
Number of claimants at end of period 8,500 8,600
---------------------------------------------------------------------------------------------------------
Numbers in the foregoing table are rounded to the nearest hundred and are based
on information as received by us which may lag actual court filing dates by
several months or more. Claims are recorded as closed when a claimant is
dismissed or severed from a case. Claims are opened whenever a new claim is
brought, including from a claimant previously dismissed or severed from another
case. The significant decline in the number of claimants during 2006 primarily
reflects disposition of a large number of unwarranted filings in Mississippi
made immediately prior to the institution of tort reform legislation in that
state effective January 1, 2003.
It should be noted that the ultimate liability and related insurance recovery
for all pending and anticipated future claims cannot be determined with
certainty due to the difficulty of forecasting the numerous variables that can
affect the amount of the liability and insurance recovery. These variables
include but are not limited to: (i) significant changes in the number of future
claims; (ii) significant changes in the average cost of resolving claims; (iii)
changes in the nature of claims received; (iv) changes in the laws applicable to
these claims; and (v) financial viability of co-defendants and insurers.
At March 31, 2007, we are among several defendants in approximately 70 cases in
the U.S., in which plaintiffs assert claims for personal injury, property
damage, and other claims for relief relating to one or more kinds of lead
pigment that were used as an ingredient decades ago in paint for use in
buildings. The different suits were brought by government entities and/or
individual plaintiffs, on behalf of themselves and others. The suits variously
seek compensatory and punitive damages and/or injunctive relief, including:
funds for the cost of monitoring; detecting and removing lead based paint from
buildings and for medical monitoring; for personal injuries allegedly caused by
ingestion of lead based paint; and plaintiffs' attorneys' fees. We believe that
the suits against us are without merit, and we are vigorously defending against
all such claims. Accordingly, no loss contingency has been recorded.
In July, 2005, the Supreme Court of Wisconsin held in a case in which we were
one of several defendants that Wisconsin's risk contribution doctrine applies to
bodily injury cases against manufacturers of white lead pigment. Under this
doctrine, manufacturers of white lead pigment may be liable for injuries caused
by white lead pigment based on their past market shares unless they can prove
they are not responsible for the white lead pigment which caused the injury in
question. Seven other courts have previously rejected the applicability of this
and similar doctrines to white lead pigment. We settled this case for an
immaterial amount. Although we are a defendant in approximately 30 similar cases
in Wisconsin and additional actions may be filed in Wisconsin, we intend to
vigorously defend ourselves if such case(s) are filed based on what we believe
to be our non-existent or diminutive market share. Accordingly, we do not
believe that our liability, if any, in such cases will be material, either
individually or in the aggregate and no loss contingency has been recorded.
12
We have access to a substantial amount of primary and excess general liability
insurance for property damage and believe these policies are available to cover
a significant portion of both our defense costs and indemnity costs, if any, for
lead pigment related property damage claims. We have agreements with two of our
insurers which provide that they will pay for approximately fifty percent (50%)
of our defense costs associated with lead pigment related property damage
claims.
We commenced binding arbitration proceedings against SNF SA ("SNF") in 2000 to
resolve a commercial dispute relating to SNF's failure to purchase agreed
amounts of acrylamide under a long-term agreement. In July, 2004, the
arbitrators awarded us damages and interest aggregating approximately (euro)11.0
plus interest on the award at a rate of 7% per annum from July 28, 2004 until
paid. After further proceedings in France, we collected (euro)12.2 ($15.7)
related to the arbitration award including interest in the second quarter of
2006. Subsequent to the arbitration award, SNF filed a complaint alleging
criminal violation of French and European Community antitrust laws relating to
the contract, which was the subject of the arbitration proceedings, which
complaint was dismissed in December 2006. SNF has also filed a final appeal of
the court order which allowed us to enforce the award and a separate complaint
in France seeking compensation from Cytec for (euro)54.0 in damages it allegedly
suffered as a result of our attachment on various SNF receivables and bank
accounts to secure enforcement of the arbitration award. We believe that the
appeal and complaint are without merit. SNF also appealed the arbitration award
in Belgium where the Brussels Court of First Instance invalidated the award in
March 2007. We have appealed that decision to the Belgium Court of Appeals,
which will review the matter on a de novo basis. The Belgium decision should not
affect the enforceability of the award in France.
While it is not feasible to predict the outcome of all pending environmental
matters, lawsuits and claims, it is reasonably possible that there will be a
necessity for future provisions for costs for environmental matters and for
other contingent liabilities that we believe will not have a material adverse
effect on our consolidated financial position, but could be material to our
consolidated results of operations or cash flows in any one accounting period.
We 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.
From time to time, we are also included in legal proceedings as a plaintiff
involving tax, contract, patent protection, environmental and other legal
matters. Gain contingencies related to these matters, if any, are recorded when
they are realized.
A further discussion of other contingencies can be found in Note 13 of the Notes
to the Consolidated Financial Statements contained in our 2006 Annual Report on
Form 10-K.
Commitments
We frequently enter into long-term contracts with customers with terms that vary
depending on specific industry practices. Our business is not substantially
dependent on any single contract or any series of related contracts.
Descriptions of our significant sales contracts at December 31, 2006 are set
forth in Note 13 of the Notes to Consolidated Financial Statements contained in
our 2006 Annual Report on Form 10-K.
11. COMPREHENSIVE INCOME
The components of comprehensive income, which represents the change in equity
from non-owner sources, for the three months ended March 31, are as follows:
Three Months Ended
March 31,
-------------------------------------------------------------------------------------------------------------------
2007 2006(1)
-------------------------------------------------------------------------------------------------------------------
Net earnings $ 51.7 $ 38.1
Other comprehensive income (loss):
Accumulated pension liability 15.7 (2) -
Unrealized gains on cash flow hedges 10.7 0.7
Foreign currency translation adjustments (1.5)(3) 13.8
-------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 76.6 $ 52.6
-------------------------------------------------------------------------------------------------------------------
(1) 2006 results were restated to show the effect of FSP AUG-AIR 1, which was
adopted retroactively during the first quarter of 2007. For further details
see Note 2 to the Consolidated Financial Statements.
(2) Includes amortization, impacts of a curtailment and remeasurement related
to certain U.S. plans, and a settlement in the Netherlands related to the
sale of the water treatment and acrylamide product lines. For further
details see Note 17 to the Consolidated Financial Statements.
(3) Includes the impact of recognizing $13.8 in net earnings as a component
of the gain on sale of the water treatment and acrylamide product lines.
13
12. INCOME TAXES
The effective rate for the three months ended March 31, 2007 was a tax provision
of 24% ($16.3) compared to 27% ($14.6) for the three months ended March 31,
2006. For the first three months ended March 31, 2007, the rate was unfavorably
impacted by a shift in our earnings to higher tax jurisdictions, changes in U.S.
tax laws regarding export incentives, and a French restructuring charge for
which no tax benefit was given due to the unlikely utilization of related net
operating losses. The rate was favorably affected by the relatively low tax
expense of $0.4 with respect to a $15.7 gain recorded on the second phase of the
water business divestiture and changes in U.S. tax laws regarding manufacturing
incentives. Excluding these items and accrued interest on unrecognized tax
benefits in accordance with FIN 48 as described below, the underlying estimated
annual effective tax rate for the three months ended March 31, 2007 was 29.4%,
with a normalized effective rate of 29.8% including such interest.
For the three months ended March 31, 2006, the rate was favorably impacted by
the growth of earnings in lower tax jurisdictions offset to a lesser extent by
the December 31, 2005 expiration of the U.S. research and development tax credit
for that period.
In 2005, we received a final notice from the Norwegian Assessment Board
disclosing an increase to taxable income with respect to a 1999 restructuring of
certain of our European operations. The tax liability attributable to this
assessment, excluding interest and possible penalties, was approximately 84.0
Norwegian krone ($13.8). We unsuccessfully contested this assessment before a
Norwegian tribunal in 2006 and filed an appeal in response to this adverse
decision during the first quarter of 2007.
In the event the Norwegian authorities ultimately prevail in their assessment,
approximately 22.0 Norwegian krone ($3.6) of tax related to this matter will be
remitted in subsequently filed tax returns beginning with the 2005 taxable
period in accordance with Norwegian law. As a result, we remitted 4.4 Norwegian
krone ($0.7) of additional tax in 2006 for the 2005 taxable period related to
this dispute. Accordingly, the accrued balance at March 31, 2007 for this
contingency was 24.7 Norwegian krone ($4.1), which represents our remaining
liability (including interest) regarding this matter in the event we ultimately
accept the Norwegian's court decision as final. We also expect to pay 2.8
Norwegian krone ($0.5) during 2007 for this issue related to the 2006 taxable
period.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109,
Accounting for Income Taxes" ("FIN 48"). FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48,we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon settlement with the tax authorities. FIN 48 also provides guidance
on derecognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures.
We adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, we recognized a $0.3 decrease in the liability for
unrecognized tax benefits. This decrease in liability resulted in an increase to
the January 1, 2007 retained earnings balance in the amount of $0.3. In
addition, as of January 1, 2007, we reclassified $19.3 of unrecognized tax
benefits from current taxes payable to non-current taxes payable, which is
included in other non-current liabilities on the balance sheet. The amount of
unrecognized tax benefits at January 1, 2007 is $25.6 (gross) of which $18.9
would impact our effective tax rate, if recognized. There are no known tax
positions which are reasonably possible to change over the next twelve months
necessitating a significant change in our unrecognized tax benefits.
We recognize interest and penalties related to unrecognized tax benefits in
income tax expense in the consolidated statements of income. As of January 1,
2007, we had recorded a liability of approximately $2.4 for the payment of
interest and accrued an additional $0.3 for interest during the first quarter of
2007.
The Internal Revenue Service (the "IRS") has completed and closed its audits of
our tax returns through 2003. In May, 2006, we received notice that the Internal
Revenue Service approved the final settlement with respect to a federal income
tax audit for the 2002 and 2003 calendar years. The IRS will likely commence the
audit of our tax returns for the years 2004 and 2005 in the second quarter of
2007.
State income tax returns are generally subject to examination for a period of
3-5 years after filing of the respective return. The state impact of any federal
changes remains subject to examination by various states for a period of up to
one year after formal notification to the states. We have various state income
tax returns in the process of examination and administrative appeals.
14
International jurisdictions have statutes of limitations generally ranging from
3-5 years after filing of the respective return. Years still open to examination
by tax authorities in major jurisdictions include Austria (2005 onward), Belgium
(2004 onward), Germany (2005 onward), Netherlands (2005 onward), Canada (2001
onward), UK (2005 onward), Italy (2005 onward), China (2003 onward), and Norway
(1999 onward). We are currently under examination in several of these
jurisdictions.
13. OTHER FINANCIAL INFORMATION
On February 1, 2007 the Board of Directors declared a $0.10 per common share
cash dividend, paid on February 26, 2007 to shareholders of record as of
February 12, 2007. Cash dividends paid in the first quarter of 2007 and 2006
were $4.8 and $4.7, respectively. On April 19, 2007 the Board of Directors
declared a $0.10 per common share cash dividend, payable on May 25, 2007 to
shareholders of record as of May 10, 2007.
Taxes paid for the three months ended March 31, 2007 and 2006 were $14.7 and
$15.2, respectively. Interest paid for the three months ended March 31, 2007 and
2006 was $9.6 and $13.9, respectively. Interest income for the three months
ended March 31, 2007 and 2006 was $0.8 and $0.6, respectively.
UCB SA ("UCB") was considered a related party during the year ended December 31,
2006 since it then owned more than 10% of Cytec's outstanding common stock. UCB
announced in March 2007 that it had sold all of its Cytec shares and as a
result, UCB is no longer a related party. At December 31, 2006, $2.4 was owed
from UCB which is included in other receivables on the accompanying 2006
consolidated balance sheet. The balance represents amounts to be received from
UCB for certain pre-acquisition tax liabilities which we have paid or will pay
as a result of our acquisition of Surface Specialties.
14. SEGMENT INFORMATION
Summarized segment information for our four segments for the three months ended
March 31 is as follows:
2007 2006(1)
------------------------------------------------------------------------------------------------------------------------
Net Sales:
Cytec Performance Chemicals
Sales to external customers $ 179.1 $ 225.9
Intersegment sales 1.8 1.8
Cytec Surface Specialties 404.5 374.0
Cytec Engineered Materials 163.4 139.0
Building Block Chemicals
Sales to external customers 116.6 80.5
Intersegment sales 9.5 23.1
------------------------------------------------------------------------------------------------------------------------
Net sales from segments 874.9 844.3
Elimination of intersegment revenue (11.3) (24.9)
------------------------------------------------------------------------------------------------------------------------
Total consolidated net sales $ 863.6 $ 819.4
------------------------------------------------------------------------------------------------------------------------
% of % of
Sales Sales
-----------------------------------------------------------------------------------------------------------------------
Earnings from operations:
Cytec Performance Chemicals $ 13.0 7 % $ 17.9 8 %
Cytec Surface Specialties 15.7 4 % 29.4 8 %
Cytec Engineered Materials 32.6 20 % 23.9 17 %
Building Block Chemicals 2.6 2 % (0.1) 0 %
---------- ---------
Earnings from segments 63.9 7 % 71.1 9 %
Corporate and Unallocated 12.7 (2) (2.7)
---------- ---------
Total earnings from operations $ 76.6 9 % $ 68.4 8 %
-----------------------------------------------------------------------------------------------------------------------
(1) 2006 results were restated to show the effect of FSP AUG-AIR 1, which was
adopted retroactively during the first quarter of 2007. For further details
see Note 2 to the Consolidated Financial Statements.
(2) Includes pre-tax gain of $15.7 related to the second phase of the sale of
our water treatment and acrylamide product lines.
15
15. GOODWILL AND OTHER ACQUISITION INTANGIBLES
The following is the activity in the goodwill balances for each segment.
Cytec Cytec Cytec
Performance Surface Engineered
Chemicals Specialties Materials Corporate Total
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2006 $ 88.2 $ 712.4 $ 241.2 $ 0.7 $1,042.5
Currency exchange 0.2 6.7 - - 6.9
------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2007 $ 88.4 $ 719.1 $ 241.2 $ 0.7 $1,049.4
------------------------------------------------------------------------------------------------------------------------
Accumulated
Weighted Gross carrying value amortization Net carrying value
-average ---------------------------------------------------------------------------
Useful
Life March 31, December 31, March 31, December 31, March 31, December 31,
(years) 2007 2006 2007 2006 2007 2006
-------------------------------------------------------------------------------------------------------------------------
Technology-based 15.2 $ 54.3 $ 53.9 $ (20.1) $ (19.1) $ 34.2 $ 34.8
Marketing-related less than
2.0 1.9 1.9 (1.4) (1.2) 0.5 0.7
Marketing-related 15.8 62.8 62.3 (16.5) (15.0) 46.3 47.3
Marketing-related 40.0 44.2 43.6 (0.8) (0.5) 43.4 43.1
Customer-related 15.0 420.6 416.5 (63.7) (56.3) 356.9 360.2
-------------------------------------------------------------------------------------------------------------------------
Total $ 583.8 $ 578.2 $ (102.5) $ (92.1) $ 481.3 $ 486.1
-------------------------------------------------------------------------------------------------------------------------
Amortization of acquisition intangibles for the three months ended March 31,
2007 and 2006 was $9.3 and $8.8, respectively. Assuming no change in the gross
carrying amount of acquisition intangibles and the currency exchange rates
remain constant, the estimated amortization of acquisition intangibles for the
fiscal year 2007 is $36.8, for the years 2008 through 2009 is $36.1 per year,
and for the years 2010 through 2011 is $36.0 per year.
16. DERIVATIVE FINANCIAL INSTRUMENTS AND COMMODITY HEDGING ACTIVITIES
Derivative Financial Instruments
We periodically enter into currency forward contracts primarily to hedge
currency fluctuations of transactions denominated in currencies other than the
functional currency of the business. At March 31, 2007, the principal
transactions hedged involved accounts receivable, accounts payable and
intercompany loans. When hedging currency exposures, our practice is to hedge
such exposures with forward contracts denominated in the same currency and with
similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction.
At March 31, 2007, net contractual amounts of forward contracts outstanding
translated into U. S. dollar amounts of $112.6. Of this total, $107.2 was
attributed to the net exposure in forward selling of U. S. dollars. The
remaining $5.4 was the net exposure in forward buying of Euros, translated into
U. S. dollar equivalent amount. The favorable fair value of currency contracts,
based on forward exchange rates at March 31, 2007, was $1.2 (unfavorable fair
value at December 31, 2006 of $1.3).
Our euro denominated bank borrowings are used to provide a partial hedge of our
net investment in our Belgium-based subsidiary, Cytec Surface Specialties SA/NV.
From time to time we also enter into designated forward euro contracts to adjust
the amount of the net investment hedge. At March 31, 2007, we had designated
forward contracts to purchase (euro)58.0.
In September 2005, we entered into (euro)207.9 of five year cross currency swaps
and (euro)207.9 of ten year cross currency swaps. The swaps included an initial
exchange of $500.0 on October 4, 2005 and will require final principal exchanges
of $250.0 each on the settlement date of the 5-Year Notes due October 1, 2010
and 10-Year Notes due October 1, 2015. At the initial principal exchange, we
paid U.S. dollars to counterparties and received euros. Upon final exchange, we
will provide euros to counterparties and receive U.S. dollars. The swaps also
call for a semi-annual exchange of fixed euro interest payments for fixed U.S.
dollar interest receipts. With respect to the five year swaps, we will receive
5.5% per annum and will pay 3.784% per annum on each April 1 and October 1,
through the maturity date of the five year swaps. With respect to the ten year
swaps, we will receive 6.0% per annum and will pay 4.5245% per annum on each
April 1 and October 1, through the maturity date of the ten year swaps. The
cross currency swaps have been designated as cash flow hedges of the changes in
value of the future euro interest and principal receipts that result from
changes in the U.S. dollar to euro exchange rates on certain euro denominated
intercompany receivables we have with one of our subsidiaries. At March 31,
2007, the unfavorable fair values of the five and ten year swaps were $17.1 and
$15.7, respectively, and at December 31, 2006, the unfavorable fair values of
the five and ten year swaps were $16.9 and $16.4, respectively.
16
Commodity Hedging Activities
At March 31, 2007, we held natural gas swaps with an unfavorable fair value of
$0.2, net of taxes, which will be reclassified into Manufacturing Cost of Sales
through December 2007 as these swaps are settled.
For more information regarding our hedging activities and derivative financial
instruments, refer to Note 7 to the Consolidated Financial Statements contained
in our 2006 Annual Report on Form 10-K.
17. EMPLOYEE BENEFIT PLANS
Net periodic cost for our pension and postretirement benefit plans was as
follows:
Pension Plans Postretirement Plans
------------------------- ---------------------
Three Months Ended March 31,
---------------------------------------------------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------
Service cost $ 5.1 $ 6.0 $ 0.3 $ 0.3
Interest cost 11.4 10.6 3.6 3.4
Expected return on plan assets (10.8) (10.5) (1.2) (1.2)
Net amortization and deferral 4.0 3.4 (2.6) (2.3)
Curtailments/Settlements (1) 3.3 - - -
--------------------------------------------------------------------------------- ----------- ---------- -----------
Net periodic cost $ 13.0 $ 9.5 $ 0.1 $ 0.2
---------------------------------------------------------------------------------------------------------------------
(1) Primarily represents a settlement charge related to the transfer of plan
assets and liabilities in the Netherlands related to the sale of the water
treatment and acrylamide product lines, which was charged against the gain
on sale.
We disclosed in our 2006 Annual Report on Form 10-K that we expected to
contribute $36.4 and $13.4, respectively, to our pension and postretirement
plans in 2007. Through March 31, 2007, $8.7 and $3.8 in contributions were made,
respectively.
In March 2007 we announced a change to certain of our U.S. pension plans from
defined benefit plans to defined contribution plans effective December 31, 2007.
A related plan curtailment was recorded in the first quarter of 2007, which
resulted in a decrease in our pension liabilities of $13.4, with a corresponding
increase in accumulated other comprehensive income of $8.2 and an adjustment to
deferred taxes of $5.2. The curtailment had an immaterial effect on our
consolidated statement of income. We considered these plan changes to be
significant events as contemplated by SFAS 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS 158") and accordingly, the
liabilities and assets for the affected plans have been remeasured as of March
31, 2007. The remeasurement resulted in a decrease to pension liabilities of
approximately $6.1, a corresponding increase of $3.7 in accumulated other
comprehensive income, and an adjustment to deferred taxes for $2.4. The
remeasurement was driven by a change in the discount rate assumption for the
affected plans (from 5.85% at December 31, 2006 to 6.00% at March 31, 2007), and
a slightly better than expected returns on plan assets for the three months
ended March 31, 2007.
We also sponsor 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 our financial performance. Amounts
expensed related to these plans for the three months ended March 31, 2007 and
2006 were $5.0 and $4.4, respectively.
17
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. Currency amounts are in millions, except per share amounts.
Percentages are approximate.
GENERAL
We are a global specialty chemicals and materials company which sells our
products to diverse major markets for aerospace, adhesives, automotive and
industrial coatings, chemical intermediates, inks, mining and plastics. Sales
price and volume by region and the impact of exchange rates on our reporting
segments are important measures that are analyzed by management.
In the course of our ongoing operations, a number of strategic product line
acquisitions and dispositions have been made. The results of operations of the
acquired businesses have been included in our consolidated results from the
dates of the respective acquisitions.
We also report 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 and selling price changes are an
important factor in profitability especially in years of high volatility. Global
oil and natural gas costs in certain countries are highly volatile and many of
our raw materials are derived from these two commodities. Discussion of the year
to year impact of raw materials, energy costs changes, and our ability to
recover these increases through higher selling prices is provided in our segment
discussion. In addition, higher global demand levels and, occasionally,
operating difficulties at suppliers, have limited the availability of certain of
our raw materials which have contributed to increased costs for some of these
raw materials.
Quarter Ended March 31, 2007 Compared With Quarter Ended March 31, 2006
Consolidated Results
Net sales for the first quarter of 2007 were $863.6 compared with $819.4 for the
first quarter of 2006. Overall, sales were up 5% with volume growth up 6%, price
increases of 4%, and changes in exchange rates adding 3%, which more than offset
the 8% reduction in sales due to the divestiture of the water treatment and
acrylamide product lines in October 2006. Cytec Performance Chemicals
experienced a net decrease in sales primarily due to this divestiture of the
water treatment business. Cytec Surface Specialties experienced a net increase
in sales primarily due to higher selling prices and the favorable impact of
exchange rate changes, partially offset by lower selling volumes. Cytec
Engineered Materials sales increase was principally selling volume related, as
sales increased in the large commercial transport, launch vehicles, and
rotorcraft sectors. Building Block Chemicals sales increased from both higher
selling volumes and higher selling prices.
For a detailed discussion on revenues refer to the Segment Results section
below.
Manufacturing cost of sales was $698.8, or 80.9% of sales in the first quarter
of 2007, compared with $645.7 or 78.8% of sales in the first quarter of 2006.
The increase in manufacturing cost as a percent of sales is principally due to
high cost inventory in Specialty Chemicals not recovered through selling price
increases and an unfavorable product mix in the Surface Specialties segment.
Partially offsetting this was improved manufacturing cost as a percent of sales
in the Engineered Materials segment due to higher sales and production volumes
reducing the fixed cost per unit. Most of the overall increase in cost was
associated with higher selling volumes, higher raw materials and energy costs,
and exchange rates partially offset by lower costs due to the divestiture of the
water treatment and acrylamide product lines. Raw material and energy costs
increased $30.4. The first quarter of 2007 includes a net restructuring charge
of $0.7 while the first quarter of 2006 includes a net restructuring credit of
$0.6. See Note 5 to the consolidated financial statements for additional detail.
Selling and technical services was $49.9 in the first quarter of 2007 versus
$52.8 in the first quarter of 2006. Research and process development was $18.4
versus $18.8 in the prior year. Administrative and general expenses were $26.3
versus $24.9 in the prior year. The decreases in selling and technical as well
as research are primarily due to the divesture of the water treatment and
acrylamide product lines partially offset by increased spending in Cytec
Engineered Materials and exchange rate changes. Administrative and general
expenses are higher with the majority due to changes in exchange rates. The
first quarter of 2006 includes a net restructuring charge of $0.3, $0.6 and $0.1
for selling and technical services, research and development and administrative
and general expenses, respectively. See Note 5 to the consolidated financial
statements for additional detail.
18
Amortization of acquisition intangibles was $9.3 in the first quarter of 2007
versus $8.8 in the first quarter of 2006 due to increases in Cytec Surface
Specialties primarily due to higher exchange rates.
The gain on sale of assets of $15.7 is attributable to the phase two closing of
the water treatment and acrylamide product lines. See Note 4 of the Consolidated
Financial Statements for further information.
Other income (expense), net was income of $1.4 in the first quarter of 2007
compared with expense of $0.8 in the first quarter of 2006. Equity in earnings
of associated companies was $0.3 versus $0.8 in the prior year.
Interest expense, net was $10.3 compared with $14.5 in the prior year. The
decrease resulted primarily from lower outstanding debt balances due to the use
of the net proceeds from sale of the water treatment and acrylamide product
lines and a portion of cash flow generated by operations to repay debt.
Tax expense for first quarter 2007 was $16.3 or 24% on earnings before income
taxes versus $14.6 or 27% for first quarter 2006. For the quarter ended March
31, 2007, the rate was unfavorably impacted by a shift in our earnings to higher
tax jurisdictions, changes in U.S. tax laws regarding export incentives, and a
French restructuring charge for which no tax benefit was given due to the
unlikely utilization of related net operating losses. The rate was favorably
affected by the relatively low tax expense of $0.4 with respect to a $15.7 gain
recorded on the second phase of the water treatment and acrylamide divestiture
and changes in U.S. tax laws regarding manufacturing incentives. Excluding these
items and accrued interest on unrecognized tax benefits in accordance with FIN
48, the underlying estimated annual effective tax rate for the first quarter
2007 was 29.4%, with a normalized effective rate of 29.8% including such
interest. This compares to 27% (normalized effective rate) in first quarter
2006.
Net earnings for 2007 were $51.7 ($1.05 per diluted share), an increase over the
net earnings of $38.1 ($0.79 per diluted share) in 2006. Included in the first
quarter of 2007 were a $15.3 after-tax gain on the sale of the water treatment
and acrylamide product lines and a $0.8 after-tax charge for restructuring.
Included in the first quarter of 2006 was a cumulative effect of accounting
change charge of $1.2 net of tax, related to the adoption of SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123R") and a net restructuring
charge of $0.3 after-tax.
Segment Results (Sales to external customers)
Year-to-year comparisons and analyses of changes in net sales by product line
segment and region are set forth below.
Cytec Performance Chemicals
% Change Due to
Total ---------------------------------------
2007 2006 % Change Price Volume/Mix Divestiture Currency
----------------------------------------------------------------------------------------------------------------------------
North America $ 64.8 $ 90.1 -28% 1% -9% -20% -
Latin America 29.8 33.9 -12% 4% -14% -1% -1 %
Asia/Pacific 34.1 28.8 18% -3% 20% - 1%
Europe/Middle East/Africa 50.4 73.1 -31% 1% 3% -38% 3%
-----------------------------------------------------------------------------
Total $ 179.1 $ 225.9 -21% 1% -2% -21% 1%
---------------------------------------------------------------------------------------------------------------------------
Overall sales decreased 21% primarily due the divestiture of the water treatment
and acrylamide product lines in October 2006. Other selling volumes were down 2%
and were offset by increased selling prices of 1% and exchange rate changes
increasing sales 1%. Selling volumes were down in mining chemicals and phosphine
chemicals due to order patterns and strong mining sales in the first quarter of
2006. Selling volumes were up in polymer additives primarily due to a strong
demand for technologically differentiated products and new business. Regionally,
selling volumes were down in North America (weak demand) and Latin America
(mining chemicals' large mine fill in 2006) but were partially offset by strong
growth in Asia/Pacific (principally mining chemicals). Selling prices were up in
mining chemicals and basically flat in the other businesses.
Earnings from operations were $13.0, or 7% of sales, compared with $17.9, or 8%
of sales, in 2006. The lower earnings are primarily a result of the lower sales
volumes and loss of earnings from the divested water treatment chemical product
line. Price increases of $1.3 were more than offset by higher raw material costs
of $3.4.
19
Cytec Surface Specialties
% Change Due to
Total --------------------------------
2007 2006 % Change Price Volume/Mix Currency
-----------------------------------------------------------------------------------------------------------------
North America $ 85.5 $ 99.3 -14% 3% -17% -
Latin America 16.2 14.4 13% 3% 9% 1%
Asia/Pacific 63.3 58.7 8% 7% - 1%
Europe/Middle East/Africa 239.5 201.7 19% 6% 3% 10%
-------------------------------------------------------------------
Total $ 404.5 $ 374.0 8% 5% -3% 6%
-----------------------------------------------------------------------------------------------------------------
Overall sales were up 8%, primarily due to 5% higher selling prices which
increased in all regions and 6% due to changes in exchange rates mostly in
Europe partially offset by 3% overall lower selling volumes. The reduction in
selling volumes was driven by a 17% reduction in North American volumes due to
softening demand for wood, furniture, coil and architectural coatings in the
region, a certain Radcure resin customer who decided to internally produce
rather than purchase and reduced volume due to price competition. The volume
reduction in North America was across all the major product lines and offset
modest growth in Europe and Latin America. Prices were up primarily in liquid
coating resins and powders coating resins and down slightly in Radcure resins.
Earnings from operations were $15.7, or 4% of sales, compared with $29.4, or 8%
of sales, in 2006. The decreased earnings is primarily attributable to a $22.7
increase in raw material costs, which was not fully offset by the $19.2 increase
in selling prices, lower selling volumes in North America and an unfavorable
product mix of lower Radcure sales, and higher operating costs of $3.4 primarily
due to changes in exchange rates in Europe.
Cytec Engineered Materials
% Change Due to
Total ----------------------------------
2007 2006 % Change Price Volume/Mix Currency
-------------------------------------------------------------------------------------------------------------------
North America $ 100.4 $ 84.8 18% 2% 16% -
Latin America(1) 0.4 0.3 - - - -
Asia/Pacific 12.1 8.3 46% 3% 43% -
Europe/Middle East/Africa 50.5 45.6 11% 2% 6% 3%
-------------------------------------------------------------------
Total $ 163.4 $ 139.0 18% 2% 15% 1%
-------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall sales were up 18%, driven by selling volumes increasing 15% due to
higher volumes in all regions primarily related to increased build-rates and new
business in the large commercial transport, launch vehicles, and rotorcraft
sectors. Selling prices were up approximately 2% across all regions except Latin
America.
Earnings from operations were $32.6, or 20% of sales, compared with $23.9 or 17%
of sales, in 2006. The impact from the increased selling volumes and higher
selling prices of $2.8 were partially offset by increased raw material costs of
$1.9, increased manufacturing cost related to the higher production volumes, and
increased costs of $1.5 in research and development primarily related to our
large commercial transport development initiatives.
Building Block Chemicals
% Change Due to
Total --------------------------------------------
2007 2006 % Change Price Volume/Mix Divestiture Currency
---------------------------------------------------------------------------------------------------------------------
North America $ 56.2 $ 44.2 27% -2% 36% -7% -
Latin America(1) 0.5 1.5 -66% - - - -
Asia/Pacific 8.6 9.0 -4% 20% -23% -1% -
Europe/Middle East/Africa 51.3 25.8 98% 13% 132% -47% -
--------------------------------------------------------------------------------
Total $ 116.6 $ 80.5 45% 5% 60% -20% -
---------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall sales increased 45% primarily due to higher volumes despite the 20%
reduction in sales due to the sale of the acrylamide product line in October
2006. Overall selling volumes were up 60% although 27% of this is due to sales
of acrylonitrile to the purchaser of the divested acrylamide product line.
Acrylonitrile is the key raw material used to make acrylamide and in conjunction
with the divestiture, we entered into a long-term agreement to provide
acrylonitrile to the purchaser. Increased melamine sales volume added 15% to
sales as a result of increased capacity available following our takeover of the
manufacturing plant in August 2006 which previously was a 50-50 production joint
venture with a third party. On a regional basis, selling volumes were up in
Europe principally for acrylonitrile due to tighter supply and the decision to
sell additional volumes in Europe due to the higher margins for acrylonitrile
compared to the market in Asia/Pacific. Selling volumes in North America
increased primarily due to higher melamine sales. Overall selling prices were up
5% primarily in Europe and Asia/Pacific due to the aforementioned tighter supply
and increasing feedstock costs.
20
Earnings from operations were $2.6, or 2% of sales, compared with a loss of $0.1
in 2006. The impact from the increased selling volumes and higher selling prices
of $3.7 were partially offset by increased raw material costs of $2.6,
unfavorable sales mix of lower acrylamide sales due to the divestiture versus
higher acrylonitrile and melamine sales. Sales of acrylonitrile and melamine are
less profitable than sales of acrylamide.
LIQUIDITY AND FINANCIAL CONDITION
At March 31, 2007 our cash balance was $19.0 compared with $23.6 at year end
2006.
Cash flows provided by operating activities were $24.2 in 2007 compared with
$20.9 in 2006. Trade accounts receivable increased $59.9 reflecting the increase
in sales. Other receivables decreased $13.6 primarily due to payments received
for items such as raw material rebates and value added taxes. Inventory
decreased $6.8 primarily due to strong sales of Building Block Chemicals
including sales delayed from the preceding quarter due to weather related
problems. Accrued expenses decreased $20.5 primarily due to payments of $17.7
for incentive compensation and profit sharing payouts relating to prior year
results, offset by an increase in accounts payable of $23.0 primarily reflecting
the higher production levels in the quarter.
Cash flows provided by investing activities were $12.3 for 2007 compared with
cash flows used in investing activities of $16.8 for 2006. This increase was
primarily attributable to the proceeds of $27.1 related to the aforementioned
divestiture. Capital spending for the first quarter was $14.8 although this is
expected to trend higher as activity on capital expansion projects increase for
the remainder of the year.
Net cash flows used by financing activities were $41.8 in 2007 compared with
$25.8 in 2006. During the first quarter of 2007, we had net debt repayments of
$43.5 and treasury stock repurchases of 170,000 shares for $9.7, which was
partially offset by proceeds received on the exercise of stock options of $13.7.
Approximately $59.0 remained authorized under our stock buyback program as of
March 31, 2007. We anticipate repurchases will be made from time-to-time on the
open market or in private transactions and will be utilized for share-based
compensation plans and other corporate purposes.
At March 31, 2007, we have $299.3 of borrowing capacity unutilized under our
$350.0 revolving credit facility.
On February 1, 2007 the Board of Directors declared a $0.10 per common share
cash dividend, paid on February 26, 2007 to shareholders of record as of
February 12, 2007. Cash dividends paid in the first quarter of 2007 and 2006
were $4.8 and $4.7, respectively. On April 19, 2007 the Board of Directors
declared a $0.10 per common share cash dividend, payable on May 25, 2007 to
shareholders of record as of May 10, 2007.
During 2006, the Pension Protection Act of 2006 was enacted in the U.S. The
principal changes under this legislation relate to the way assets and
liabilities are valued to determine required pension contributions. This
legislation also impacts the timing and manner of required contributions to
under-funded pension plans. These changes could increase the funding
requirements for our U.S. pension plans. Accordingly, the amounts we might
contribute to these benefit plans in the future are subject to uncertainty. We
believe we have adequate liquidity to fund any increased funding requirements of
our U.S. pension plans that may occur due to the Pension Protection Act.
We believe that we have the ability to fund our operating cash requirements,
planned capital expenditures and dividends as well as the ability to meet our
debt service requirements for the foreseeable future from existing cash and from
internal cash generation. However, from time to time, based on such factors as
local tax regulations, prevailing interest rates and our plans for capital
investment or other investments, it may make economic sense to utilize our
existing credit lines in order to meet those cash requirements, which may
include debt-service related disbursements.
We have not guaranteed any indebtedness of our unconsolidated associated
company.
Excluding the impact of increasing raw materials, inflation is not considered
significant since the rate of inflation has remained relatively low in recent
years and investments in areas of the world where inflation poses a risk are
limited. The impact of increasing raw material costs are discussed under
"Customers and Suppliers" in "Business" in Item 1 in our 2006 Annual Report on
Form 10-K.
There were no material changes in contractual obligations from December 31, 2006
to March 31, 2007. Reference is also made to Note 12 in the Notes to
Consolidated Financial Statements included herein which describes certain gross
liabilities totaling $25.6 for unrecognized tax benefits that will be resolved
at some point over the next several years.
21
OTHER
2007 OUTLOOK
In our April 19, 2007 press release, which was also filed as an exhibit to a
current report on Form 8-K, we presented our best estimate of the full year 2007
earnings at the time based on various assumptions set forth in the press
release. 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 / CRITICAL ACCOUNTING POLICIES
See "Critical Accounting Policies" under Item 7A of our 2006 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on February 28,
2007 and incorporated by reference herein. There were no changes to our critical
accounting policies except as follows.
Accounting for Uncertainty in Income Taxes
During the first quarter of 2007, we adopted FIN 48. Under FIN 48, we recognize
the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. See Note 12 of the Consolidated Financial
Statements for additional details on the impact of adoption of FIN 48.
COMMENTS ON FORWARD-LOOKING STATEMENTS
A number of the statements made by us in this report, in our Annual Report on
Form 10-K, or in other documents, including but not limited to the Chairman,
President and Chief Executive Officer's letter to Stockholders, our 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 our
(including our segments) outlook for the future, anticipated results of
acquisitions and divestitures, restructuring initiatives and their expected
results, pricing trends, the effects of changes in currency rates and forces
within the industry, the completion dates of and anticipated expenditures for
capital projects, expected sales growth, operational excellence strategies and
their results, expected annual effective tax rates, our long-term goals, legal
settlements and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. Such statements are based upon our
current beliefs and expectations 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 anticipated results: the
ability to complete the successful integration of Surface Specialties, including
realization of anticipated synergies within the expected timeframes or at all,
and the ongoing operations of the business; the ability to successfully complete
planned restructuring activities, including realization of the anticipated
savings and operational improvements resulting from such activities; the
retention of current ratings on our debt; changes in global and regional
economies; the financial well-being of end consumers of our products; changes in
demand for our products or in the quality, costs and availability of our raw
materials and energy; customer inventory reductions; the actions of competitors;
currency and interest rate fluctuations; technological change; our 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 our products; litigation, including its inherent
uncertainty and changes in the number or severity of various types of claims
brought against us; difficulties in plant operations and materials
transportation, including those caused by hurricanes or other natural forces;
environmental matters; 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; political instability or adverse treatment of foreign operations in
any of the significant countries in which we operate; war, terrorism or
sabotage; epidemics; and other unforeseen circumstances.
22
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Currencies in millions)
For a discussion of market risks at year-end, refer to Item 7A of our Annual
Report on Form 10-K for the year ended December 31, 2006, filed with the
Securities and Exchange Commission on February 28, 2007 and incorporated by
reference herein. Other 2007 financial instrument transactions include:
Commodity Price Risk: At March 31, 2007, we held natural gas swaps, including
the gas swaps for Fortier plant, with a unfavorable fair value of $0.2, net of
taxes, which will be reclassified into Manufacturing Cost of Sales through
December 2007 as these swaps are settled and the inventory is sold.
Assuming all other factors are held constant, a hypothetical increase/decrease
of 10% in the price of natural gas would cause an increase/decrease of
approximately $1.6 in the value of the swaps.
Interest Rate Risk: At March 31, 2007, our outstanding borrowings consisted of
$42.7 of short-term borrowings and $858.2 of long-term debt, including the
current portion. The long-term debt had a carrying and face value of $858.2 and
a fair value, based on dealer quoted values, of approximately $846.6.
Assuming other factors are held constant, a hypothetical increase/decrease of 1%
in the weighted-average prevailing interest rates on our variable rate debt
outstanding as of March 31, 2007, interest expense would increase/decrease by
approximately $0.2 for the next fiscal quarter.
Currency Risk: We periodically enter into currency forward contracts primarily
to hedge currency fluctuations of transactions denominated in currencies other
than the functional currency of the business. At March 31, 2007, the principal
transactions hedged involved accounts receivable, accounts payable and
intercompany loans. When hedging currency exposures, our practice is to hedge
such exposures with forward contracts denominated in the same currency and with
similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction.
At March 31, 2007, the currency and net contractual amounts of forward contracts
outstanding translated into U. S. dollar equivalent amounts totaled $112.6. The
favorable fair value of currency contracts, based on forward exchange rates at
March 31, 2007, was approximately $1.2. Assuming that period-end exchange rates
between the underlying currencies of all outstanding contracts and the various
hedged currencies were to adversely change by a hypothetical 10%, the fair value
of all outstanding contracts at March 31, 2007 would decrease by approximately
$15.7. However, since these contracts hedge specific transactions, any change in
the fair value of the contracts would be offset by changes in the underlying
value of the item or transaction being hedged.
In September, 2005, we entered into (euro)207.9 of five year cross currency
swaps and (euro)207.9 of ten year cross currency swaps to effectively convert
the 5-Year Notes and 10-Year Notes into euro-denominated liabilities. The swaps
included an initial exchange of $500.0 on October 4, 2005 and will require final
principal exchanges of $250.0 on each settlement date of the 5-Year and 10-Year
Notes (October 1, 2010 and October 1, 2015), respectively. At the initial
principal exchange, we paid US dollars to counterparties and received euros.
Upon final exchange, we will provide euros to counterparties and receive US
dollars. The swaps also call for a semi-annual exchange of fixed euro interest
payments for fixed US dollar interest receipts. With respect to the five year
swaps, we will receive 5.5% per annum and will pay 3.784% per annum on each
April 1 and October 1, through the maturity date of the five year swaps. With
respect to the ten year swaps, we will receive 6.0% per annum and will pay
4.5245% per annum on each April 1 and October 1, through the maturity date of
the ten year swaps. The cross currency swaps have been designated as cash flow
hedges of the changes in value of the future euro interest and principal
receipts that results from changes in the US dollar to euro exchange rates on
certain euro denominated intercompany loans receivable we have with our
subsidiaries. At March 31, 2007, the unfavorable fair values of the five and ten
year swaps were $17.1 and $15.7, respectively. Assuming other factors are held
constant, a hypothetical increase of 10% in the euro exchange rate would have an
adverse effect of approximately $53.3 on the combined value of the
cross-currency swaps.
Our euro denominated bank borrowings naturally hedge certain of our remaining
euro denominated intercompany loans receivable and, further, provide a partial
hedge of our net investment in our Belgium-based subsidiary, Cytec Surface
Specialties SA/NV. From time to time we also enter into forward euro contracts
to adjust the level of this net investment hedge. At March 31, 2007, we had
forward contracts to purchase (euro)58.0 which were designated as a net
investment hedge. Assuming other factors are held constant, a hypothetical
increase/decrease of 10% in the euro exchange rate would cause an
increase/decrease of approximately $7.7 in the value of these forward contracts.
Item 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation
of the management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures as required by Exchange Act Rule 13a-15(b) as of the period ended
March 31, 2007. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective.
23
We continue the process of implementing our Cytec Specialty Chemicals global
enterprise-wide planning systems for the acquired business of Surface
Specialties. The world-wide implementation is expected to be completed in early
2009 and includes changes that involve internal control over financial
reporting. Although we expect this implementation to proceed without any
material adverse effects, the possibility exists that the migration to our
global enterprise-wide planning systems could adversely affect our internal
control, our disclosure control and procedures or our results of operations in
future periods. We are reviewing each system and site as they are being
implemented and the controls affected by the implementation. Appropriate changes
have been or will be made to any affected internal control during the
implementation. We will test all significant modified controls resulting from
the implementation to ensure they are functioning effectively.
As of January 1, 2007, we began utilizing the aforementioned global systems for
the acquired Surface Specialties entities in the United States and Canada. In
conjunction with this implementation, the former U.S. legal entity for the
Surface Specialty business was also merged with the Cytec Industries Inc. U.S.
legal entity. We have reviewed the results of the merger and the concurrent
systems implementation and have concluded that neither had a negative impact on
our internal control over financial reporting.
There were no other changes in internal control over financial reporting that
occurred during the three months ended March 31, 2007 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
24
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS (Currencies in millions, except per share amounts)
We are the subject of numerous lawsuits and claims incidental to the conduct of
our or our predecessors' businesses, including lawsuits and claims relating to
product liability, personal injury, environmental, contractual, employment and
intellectual property matters. Many of the matters relate to the use, handling,
processing, storage, transport or disposal of hazardous materials. We believe
that the resolution of such lawsuits and claims, including those described
below, will not have a material adverse effect on our consolidated financial
position, but could be material to our consolidated results of operations and
cash flows in any one accounting period. We, in this section, include certain
predecessor entities being indemnified by us.
Material developments to legal proceedings described in our 2006 Annual Report
on Form 10-K are set forth below.
The following table presents information about asbestos claims activity during
the three months ended March 31, 2007:
For the
Three Month Period Ended
March 31,
2007
--------------------------------------------------------------------------------------------
Number of claimants at beginning of period 8,600
Number of claimants associated with claims closed during period (100)
Number of claimants associated with claims opened during period -
--------------------------------------------------------------------------------------------
Number of claimants at end of period 8,500
--------------------------------------------------------------------------------------------
Numbers in the foregoing table are rounded to the nearest hundred and are based
on information as received by the Company, which may lag actual court filing
dates by several months or more. Claims are recorded as closed when a claimant
is dismissed or severed from a case. Claims are opened whenever a new claim is
brought, including from a claimant previously dismissed or severed from another
case.
We commenced binding arbitration proceedings against SNF SA ("SNF"), in 2000 to
resolve a commercial dispute relating to SNF's failure to purchase agreed
amounts of acrylamide under a long-term agreement. In July, 2004, the
arbitrators awarded us damages and interest aggregating approximately (euro)11.0
plus interest on the award at a rate of 7% per annum from July 28, 2004 until
paid. After further proceedings in France, we collected (euro)12.2 ($15.7)
related to the arbitration award including interest in the second quarter of
2006. Subsequent to the arbitration award, SNF filed a complaint alleging
criminal violation of French and European Community antitrust laws relating to
the contract, which was the subject of the arbitration proceedings, which
complaint was dismissed in December 2006. SNF has also filed a final appeal of
the court order which allowed us to enforce the award and a separate complaint
in France seeking compensation from Cytec for (euro)54.0 in damages it allegedly
suffered as a result of our attachment on various SNF receivables and bank
accounts to secure enforcement of the arbitration award. We believe that the
appeal and complaint are without merit. SNF also appealed the arbitration award
in Belgium where the Brussels Court of First Instance invalidated the award in
March 2007. We have appealed that decision to the Belgium Court of Appeals,
which will review the matter on a de novo basis. The Belgium decision should not
affect the enforceability of the award in France.
See also Note 10 of the Notes to the Consolidated Financial Statements herein.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES (Currencies in millions, except per share
amounts)
During the three months ended March 31, 2007, we repurchased common stock for
$9.7 under our stock buyback program, which was suspended in October 2004 and
reinstated in February 2007. Approximately $59.0 remained authorized under the
buyback program as of March 31, 2007. Pursuant to this program, shares can be
repurchased in open market transactions or privately negotiated transactions at
our discretion.
Total Number of Approximate Dollar Value
Shares Purchased as of Shares That May Yet Be
Total Number of Average Price Per Part of Publicly Purchased
Period Shares Purchased Share Announced Program Under the Program
---------------------------------------------------------------------------------------------------------------------------
March 1, 2007 - March 31, 2007 170,000 $57.04 170,000 $ 59.0
---------------------------------------------------------------------------------------------------------------------------
25
Item 4. OTHER
REGULATORY DEVELOPMENTS
The Registration, Evaluation and Authorization of Chemicals ("REACH")
legislation becomes effective in the European Union on June 1, 2007. This
legislation requires manufacturers and importers of certain chemicals to
register certain chemicals and evaluate their potential impact on human health
and the environment. Under REACH, where warranted by a risk assessment,
specified uses of some hazardous substances may be restricted. Covered
substances must be pre-registered by December 31, 2008. Subsequently,
registration is required based on volume for covered substances manufactured or
imported into the European Union in quantities greater than one metric ton per
year. The European Commission is preparing technical guidance documents to
facilitate the implementation of REACH, but this guidance is not expected to be
available until the end of 2007. Currently, REACH is expected to take effect in
three primary stages over eleven years following the final effective date. The
registration, evaluation and authorization phases would require expenditures and
resource commitments, for example, in order to compile and file comprehensive
reports, including testing data, on each chemical substance and perform chemical
safety assessments. We do not expect to incur significant costs for REACH
compliance in 2007. However, the overall cost of compliance over the next 10-15
years could be substantial. In addition, it is possible that REACH may affect
raw material supply, customer demand for certain products, and our decision to
continue to manufacture and sell certain products.
26
Item 6. EXHIBITS
(a). Exhibits
--------
See Exhibit Index on page 29 for exhibits filed with this Quarterly Report on
Form 10-Q.
27
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
May 2, 2007
28
Exhibit Index
-------------
12 Computation of Ratio of Earnings to Fixed Charges for the three months
ended March 31, 2007 and 2006.
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
29