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, 2006
Commission file number 1-12372
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CYTEC INDUSTRIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3268660
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
(Address of principal executive offices) (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 47,137,467 shares of common stock outstanding at April 26, 2006.
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CYTEC INDUSTRIES INC. AND SUBSIDIARIES
10-Q Table of Contents
Page Part I - Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Operations 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 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Item 4. Controls and Procedures 26
Part II - Other Information
Item 1. Legal Proceedings 27
Item 6. Exhibits 28
Signature 29
Exhibit Index 30
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PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)
---------------------------
Three Months Ended
March 31,
2006 2005
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Net sales $ 819.4 $ 563.9
Manufacturing cost of sales 645.9 440.3
Selling and technical services 52.8 44.7
Research and process development 18.8 13.0
Administrative and general 24.9 17.8
Amortization of acquisition intangibles 8.8 4.0
Write-off of acquired in-process research and development - 37.0
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Earnings from operations 68.2 7.1
Other income (expense), net (0.8) (20.4)
Equity in earnings of associated companies 0.8 2.1
Interest expense, net 14.5 9.5
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Earnings (loss) from continuing operations before income taxes and
cumulative effect of accounting change 53.7 (20.7)
Income tax provision (benefit) 14.5 (13.7)
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Earnings (loss) from continuing operations before cumulative
effect of accounting change 39.2 (7.0)
Cumulative effect of accounting change (net of income tax benefit of $0.7) (1.2) -
---------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations 38.0 (7.0)
Earnings from discontinued operations (net of income tax provision of $0.7) - 0.5
---------------------------------------------------------------------------------------------------------------
Net earnings (loss) $38.0 $ (6.5)
Basic earnings (loss) per common share:
Earnings (loss) from continuing operations before cumulative effect of
accounting change $0.84 $(0.17)
Cumulative effect of accounting change, net of taxes (0.03) -
Earnings from discontinued operations, net of taxes - 0.01
---------------------------------------------------------------------------------------------------------------
Net earnings (loss) $0.81 $(0.16)
Diluted earnings (loss) per common share:
Earnings (loss) from continuing operations before cumulative
effect of accounting change $0.82 $(0.17)
Cumulative effect of accounting change, net of taxes (0.03) -
Earnings from discontinued operations, net of taxes - 0.01
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Net earnings (loss) $0.79 $(0.16)
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Dividends per common share $0.10 $ 0.10
===============================================================================================================
See accompanying Notes to Consolidated Financial Statements
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CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions, except per share amounts)
----------------------------------
March 31, December 31,
2006 2005
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Assets
Current assets
Cash and cash equivalents $ 47.8 $ 68.6
Trade accounts receivable, less allowance for doubtful accounts of
$7.2 and $7.8 at March 31, 2006 and December 31, 2005, respectively 519.3 493.8
Due from related party 10.1 8.0
Other accounts receivable 71.3 65.9
Inventories 442.7 424.7
Deferred income taxes 13.2 12.2
Other current assets 26.9 31.4
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Total current assets 1,131.3 1,104.6
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Investment in associated companies 21.0 20.3
Plants, equipment and facilities, at cost 2,091.2 2,064.3
Less: accumulated depreciation (1,018.5) (988.8)
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Net plant investment 1,072.7 1,075.5
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Acquisition intangibles, net of accumulated amortization of
$60.7 and $51.0 at March 31, 2006 and December 31, 2005, respectively 491.2 491.5
Goodwill 1,022.0 1,012.2
Other assets 103.9 106.4
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Total assets $ 3,842.1 $3,810.5
=======================================================================================================================
Liabilities
Current liabilities
Accounts payable $ 291.3 $ 278.6
Short-term borrowings 33.3 34.3
Current maturities of long-term debt 8.0 51.2
Accrued expenses 193.9 218.3
Income taxes payable 43.4 43.5
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Total current liabilities 569.9 625.9
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Long-term debt 1,224.6 1,225.5
Pension and other postretirement benefit liabilities 434.7 432.5
Other noncurrent liabilities 235.6 224.4
Deferred income taxes 56.4 64.1
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 244.3 235.6
Retained earnings 1,183.0 1,149.7
Unearned compensation - (2.5)
Accumulated other comprehensive income (loss):
Minimum pension liability (115.0) (115.0)
Unrealized net gains on cash flow hedges 1.1 0.4
Accumulated translation adjustments 41.4 27.6
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(72.5) (87.0)
Treasury stock, at cost, 1,089,883 shares in 2006 and 1,833,812 shares in 2005 (34.4) (58.2)
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Total stockholders' equity 1,320.9 1,238.1
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Total liabilities and stockholders' equity $ 3,842.1 $3,810.5
=======================================================================================================================
See accompanying Notes to Consolidated Financial Statements
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CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
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Three Months Ended
March 31,
---------------------------------------------------------------------------------------------------------------
2006 2005
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Cash flows provided by (used in) operating activities
Net earnings (loss) $ 38.0 $ (6.5)
Earnings from discontinued operations, net of taxes - 0.5
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Earnings (loss) from continuing operations 38.0 (7.0)
Noncash items included in net earnings from continuing operations:
Depreciation 27.9 23.3
Amortization 10.9 4.2
Share-based compensation 2.9 0.9
Deferred income taxes (0.9) (8.2)
Write-off of acquired in-process research and development - 37.0
Amortization of write-up to fair value of finished goods purchased in acquisition - 10.5
Gain on sale of assets - (1.0)
Cumulative effect of accounting change, net of taxes 1.2 -
Other 3.1 (2.1)
Changes in operating assets and liabilities (excluding effects of 2005
acquisition):
Trade accounts receivable (19.1) (5.4)
Other receivables (7.5) 4.4
Inventories (13.2) (31.7)
Other assets (4.8) 0.5
Accounts payable 9.4 (7.8)
Accrued expenses (27.7) (13.8)
Income taxes payable (1.9) (24.4)
Other liabilities 2.6 (11.1)
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Net cash provided by (used in) operating activities of continuing operations 20.9 (31.7)
Net cash provided by operating activities of discontinued operations - 1.1
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Net cash provided by (used in) operating activities 20.9 (30.6)
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Cash flows (used in) investing activities
Acquisition of business, net of cash received (0.5) (1,501.1)
Additions to plants, equipment and facilities (16.3) (17.1)
Proceeds received on sale of assets - 1.4
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Net cash used in investing activities (16.8) (1,516.8)
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Cash flows provided by (used in) financing activities
Proceeds from long-term debt 23.0 725.0
Payments on long-term debt (75.3) -
Change in short-term borrowings (1.0) 581.9
Cash dividends (4.7) (4.0)
Proceeds from the exercise of stock options and warrants 26.4 8.8
Deferred financing costs - (4.7)
Excess tax benefits from share-based payment arrangements 6.4 -
Other (0.6) (1.0)
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Net cash provided by (used in) financing activities (25.8) 1,306.0
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Effect of currency rate changes on cash and cash equivalents 0.9 (5.7)
---------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (20.8) (247.1)
Cash and cash equivalents, beginning of period 68.6 323.8
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Cash and cash equivalents, end of period $ 47.8 $ 76.7
===============================================================================================================
See accompanying Notes to Consolidated Financial Statements
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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 operations and cash flows of the Company for the
interim periods presented. The results of operations for any interim period are
not necessarily indicative of the results of operations for the full year. The
statements should be read in conjunction with the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements contained in the
Company's 2005 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.
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year's presentation.
2. ACQUISITION AND RELATED EVENTS
On February 28, 2005, we acquired the Surface Specialties business ("Surface
Specialties") of UCB SA ("UCB") for cash and stock valued at $1,799.7, of which
$1,508.9 ((euro)1,138.5 at 1.325 U.S. dollar per euro) was paid in cash and the
balance was paid in 5,772,857 shares of Cytec common stock ($290.8 at $50.37 per
Cytec share). During September 2005, we received $25.4 from UCB representing a
reduction of the purchase price for finalization of working capital amounts as
of the acquisition date. After considering the final working capital adjustment
and transaction costs incurred of $15.3, the acquisition was valued at $1,789.6.
The acquisition complemented our existing product lines by significantly
increasing our product offering to the coatings and additives industries
including the general industrial, automotive, architectural, plastic, graphic
arts and wood sectors.
In accordance with the purchase agreement, contingent consideration up to a
maximum of (euro)50.0 was to be determined in January 2006 based upon 2005
year-end results, of which (euro)20.0 ($26.5 at $1.325 per euro) was prepaid at
closing. In view of the parties' expectation that the contingent consideration
would not be payable, we were refunded the payment during September 2005
provided that a final year-end determination of the actual contingent payment
due, if any, would still be made. Subsequently, we determined that no amounts
were due under this agreement.
Upon closing, UCB became the owner of approximately 12.5% of our outstanding
common shares. We entered into a stockholder's agreement (the "Stockholder's
Agreement") with UCB which provides, subject to various exceptions, that UCB
must reduce its stake to less than 9% within three years, less than 7% within
four years and less than 5% within five years and which provides that UCB will
be prohibited from purchasing additional shares of our common stock or causing,
advocating or participating in a change of control in the ownership of Cytec.
The Stockholder's Agreement also contains customary terms and conditions
including an obligation of UCB to vote its shares of Cytec common stock in
accordance with our Board of Directors' recommendation on certain matters.
Pursuant to regulatory approvals, we were required to divest the Surface
Specialties amino resins ("SSAR") product line. On August 31, 2005, we sold SSAR
to affiliates of INEOS Group Limited ("INEOS") for cash consideration of
(euro)64.0 ($78.2 at 1.22 U.S. dollar per euro). In the fourth quarter of 2005
we paid $1.6 to INEOS representing a reduction of the selling price for final
working capital adjustments as of the acquisition date. After considering the
final working capital adjustment, the sale was valued at $76.6 ($72.8 net of
disposition related expenses of $3.8). From acquisition through the date of
sale, SSAR was classified as a discontinued operation. Revenues of SSAR were
$74.3 for the six months ended August 31, 2005 (acquisition through date of
sale). The net proceeds realized from the divestiture of SSAR were used to
reduce acquisition related debt.
In late 2004, we entered into $642.9 of forward-starting interest rate swaps to
hedge the benchmark interest rate and credit spread on certain debt anticipated
to be issued in 2005 in connection with the acquisition. Due to a subsequent
reduction in borrowing requirements, we liquidated $25.0 of these swaps in March
2005 at a cost of $0.4 and $60.4 of these swaps in June 2005 at a cost of $3.7.
In September 2005, we settled the remaining outstanding swaps at the same time
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that we priced our public debt offering. The termination payment of $27.4 was
paid in October 2005. The swaps were marked to market and recorded currently in
earnings until their termination.
We had also previously entered into currency forward contracts that related to
approximately 87% of the euro exposure of (euro)1,190.0 for the cash component
of the Surface Specialties acquisition. The forward contracts, which matured on
February 28, 2005, were marked to market and recorded currently in earnings
until their maturity.
The impact on earnings for the three months ended March 31, 2005 of the mark to
market adjustments on these swaps and forward contracts was a net pre-tax
expense of $20.0 and was recorded in other income (expense), net.
The following table summarizes the estimated fair value of the assets acquired
and the liabilities assumed in the acquisition. We have now completed the
purchase price allocation.
--------------------------------------------------------------------------------
Cash $ 34.6
Current deferred tax assets 28.3
Other current assets 533.1
Assets of discontinued operations held for sale 91.8
Property, plant and equipment 447.9
Goodwill 725.7
Acquired intangible assets 490.4
Acquired in-process research and development 37.0
Other assets 31.7
--------------------------------------------------------------------------------
Total assets acquired $2,420.5
================================================================================
Current liabilities 285.3
Liabilities of discontinued operations held for sale 26.5
Long-term deferred tax liabilities 181.9
Long-term debt 9.9
Other long-term liabilities 127.3
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Total liabilities assumed 630.9
--------------------------------------------------------------------------------
Net assets acquired $1,789.6
================================================================================
The $725.7 of goodwill is not tax deductible and, $38.0 was allocated to our
Cytec Performance Chemicals segment and $687.7 was allocated to our Cytec
Surface Specialties segment. Included in acquired intangible assets is $45.7
relating to certain trade names which have indefinite useful lives. The
remaining intangibles that were acquired were assigned to customer-related
($382.6), marketing-related ($50.8) and technology-related intangibles ($11.3),
and are being amortized over periods of 10 to 15 years. Immediately following
the acquisition, $37.0 of acquired in-process research and development costs
were written off.
Following are the unaudited pro forma combined results of operations for the
quarter ended March 31, 2005 as if Cytec and Surface Specialties had been
combined and the sale of SSAR had been completed as of January 1, 2005.
Additionally, the write-off of in-process research and development costs and the
cost of sales effects of the inventory valuation adjustments were excluded from
the 2005 amounts as they are considered non-recurring charges. The pro forma
results do not include any anticipated cost savings or other effects of the
planned integration and are not indicative of the results which would have
actually occurred if the business combination had been in effect on the dates
indicated, or which may result in the future. The pro forma information set
forth below considers the following factors: the issuance of 5,772,857 shares of
our common stock to UCB in connection with the acquisition; the issuance of
acquisition-related debt of $1,325.0 at a weighted-average interest rate of
3.79% and the associated increase in interest expense, net of the after-tax
proceeds from the sale of SSAR used to pay down such debt; a net reduction in
cash and an associated reduction in interest income as a result of the on-hand
cash utilized to purchase Surface Specialties; increased amortization of
acquisition intangibles; decreased depreciation expense based on asset values
and estimated useful lives included in the valuation report; amortization of
deferred financing costs; and the tax effects of each of these items.
----------------------------------------------------------------
Three Months
Ended
March 31, 2005
----------------------------------------------------------------
Revenues $ 788.7
Net earnings $ 39.8
Net earnings per common share:
Basic $ 0.87
Diluted $ 0.84
================================================================
-7-
Amounts related to the Surface Specialties acquisition in this footnote include
all adjustments to date and may differ from the amounts included in the
consolidated financial statements in Form 10-Q as of and for the three months
ended March 31, 2005 which were based on the preliminary purchase price
allocation.
3. DISCONTINUED OPERATIONS
Pursuant to regulatory approvals, we were required to divest SSAR and we
completed the sale of this business on August 31, 2005. SSAR develops and
manufactures amino resins for use in various industries. SSAR has assets and
liabilities that are located primarily in the U.S., Canada and Germany.
A summary of the operating results of SSAR for the one-month period ended March
31, 2005, which was included in the results of discontinued operations for
three-months ended March 31, 2005, is as follows:
Revenues $ 14.0
================================================================
Earnings before income taxes $ 1.2
Income tax expense 0.7
----------------------------------------------------------------
Earnings from discontinued operations $ 0.5
================================================================
4. RESTRUCTURING OF OPERATIONS
In the first quarter of 2006, we recorded a restructuring charge of $1.7, which
related to the elimination of 19 positions related to our Specialty Chemicals
segments. The restructuring costs were all severance related and were charged to
expense as follows: manufacturing cost of sales $0.4, selling and technical
services $0.5, research and process development $0.7 and administrative and
general $0.1. These costs were not recorded in the operating results of the
respective business segment as they were included in our corporate unallocated
operating results.
A summary of the 2006 restructuring charge is outlined in the table below:
----------------------------------------------------------------
Cytec Specialty
Chemicals
----------------------------------------------------------------
2006 charges $1.7
Cash payments (0.2)
----------------------------------------------------------------
Balance at
March 31, 2006 $1.5
================================================================
In 2005, we recorded aggregate restructuring charges of $16.8, which related to
the elimination of 136 positions worldwide. Of the total of 136 positions, 22
related to our Cytec Engineered Materials segment and 114 related to our
Specialty Chemicals segments. The restructuring costs, which were primarily
severance related, were charged to expense as follows: manufacturing cost of
sales, $5.0; selling and technical services, $3.7; research and process
development, $0.8; and administrative and general, $7.3. These costs were not
recorded in the operating results of the respective business segment as they
were included in our corporate unallocated operating results. In the first
quarter of 2006 we reduced this restructuring accrual by $1.3 primarily due to
incurring less costs than originally estimated as a result of fewer than
expected personnel reductions primarily due to attrition without severance and
to personnel filling other open positions. The reduction was credited to expense
as follows: manufacturing cost of sales, $1.0: selling and technical services,
$0.2: research and process development, $0.1.
A summary of the 2005 restructuring charges is outlined in the table below:
--------------------------------------------------------------------------------
Cytec
Engineered Cytec Specialty
Materials Chemicals Total
--------------------------------------------------------------------------------
2005 charges $ 1.6 $ 15.2 $ 16.8
Cash payments - (6.3) (6.3)
--------------------------------------------------------------------------------
Balance at December 31, 2005 $ 1.6 $ 8.9 $ 10.5
Reduction in estimated costs - (1.3) (1.3)
Cash payments (0.4) (2.1) (2.5)
--------------------------------------------------------------------------------
Balance at March 31, 2006 $ 1.2 $ 5.5 $ 6.7
================================================================================
-8-
Cash payments related to the above restructurings are expected to be
substantially completed in 2006 except for certain long-term severance payments.
5. SHARE-BASED COMPENSATION
In December, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R addresses
the accounting for transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R supersedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25") and 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.
On January 1, 2006, we adopted SFAS 123R using the modified prospective method.
Under this method, we are required to record compensation cost for the unvested
portion of previously granted awards that remain outstanding as of January 1,
2006. Results for prior periods have not been restated. We previously accounted
for our share-based compensation under the recognition and measurement principle
of APB No. 25 and related Interpretations. Prior to the SFAS 123R adoption, no
share-based compensation cost was reflected in net income for stock options, as
all stock options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant. Also, prior to the SFAS 123R
adoption, compensation cost for restricted ("non-vested") stock was recorded
based on the market value on the date of grant, and compensation cost for
performance stock was recorded based on the market price of our common stock at
the end of each period through the date of vesting. Compensation cost for
non-vested and performance stock was charged to unearned compensation in
Stockholders' Equity and amortized to expense over the requisite vesting
periods. Stock appreciation rights payable in cash ("cash-settled SARS") were
accounted for as liabilities under APB 25. Compensation cost for cash-settled
SARS was recognized over the vesting period and through the life of the award
based on changes in the market price of our common stock over the market price
at the grant date.
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") to Manufacturing cost of sales, Selling and
technical services, Research and process development, and Administrative and
general of $0.3, $0.5, $0.1, and $1.7, respectively, for a total of $2.6 to 2006
first quarter earnings from operations. The effect on net earnings, cash
provided from operating activities, and cash provided for financing activities
were $1.7, $(6.4), and $6.4 respectively. The effect on basic and diluted
earnings per share was a reduction of $0.04. With the adoption of SFAS 123R,
compensation cost for non-vested and performance stocks is credited to
additional paid-in capital for the three months ended March 31, 2006. The
compensation cost for performance stock is recorded based on the market value on
the original date of grant, and not based on the price of our common stock at
the end of each reporting period as formerly was required under APB No. 25.
Compensation cost for cash-settled SARS is recognized based on the fair value of
the award at the end of each period through the date of vesting, also a change
from APB No. 25. SFAS 123R requires that we estimate a forfeiture rate to all
share-based awards. We monitor share option exercise and employee termination
patterns to estimate forfeiture rates within the valuation model. Prior to the
SFAS 123R adoption, forfeitures were recorded as they occurred. 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. In addition, the unearned stock compensation cost at the
adoption date of $3.1 relating to previous grants of non-vested and performance
stocks was offset against additional paid-in capital.
The following table illustrates the effect on the net earnings and earnings per
share if we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" to all share-based employee compensation for the three months
ended March 31, 2005. Option forfeitures were accounted for as they occurred and
no amounts of compensation expense have been capitalized into inventory or other
assets, but instead were considered period expenses in the pro forma amounts
below:
--------------------------------------------------------------------------------
Net earnings, as reported $(6.5)
Add :
Share-based employee compensation expense
included in reported net earnings, net of
related tax effects 0.5
-9-
Deduct:
Total share-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 1.9
--------------------------------------------------------------------------------
Pro forma net earnings $(7.9)
================================================================================
Net earnings per share:
Basic, as reported $(0.16)
Basic, pro forma (0.19)
Diluted, as reported $(0.16)
Diluted, pro forma (0.19)
--------------------------------------------------------------------------------
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 rate, 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, 2006, and 2005 are noted in the
following table:
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2006 2005
--------------------------------------------------------------------
Expected life (years) 5.7 5.8
Expected volatility 37.6% 38.5%
Expected dividend yield 0.81% 0.84%
Range of risk-free interest rate 4.4% - 4.7% 2.1% - 4.2%
Weighted-average fair value per option $18.86 $17.78
====================================================================
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 long-term historical volatility. 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.
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
shares), stock appreciation rights (including those settled with common shares)
and deferred stock awards and dividend equivalents. At March 31, 2006, there are
approximately 6,146,000 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 at 100% of the
market price on the date the grant. Options and stock-settled SARS are generally
exercisable in cumulative installments of 33 1/(3)% 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.
-10-
A summary of stock options and stock-settled SARS activity for the three months
ended March 31, 2006 is presented below.
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Life (Years) Value
--------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 5,137,923 $32.79
Granted 643,300 49.49
Exercised (802,541) 32.32
Forfeited (18,311) 36.14
Outstanding at March 31, 2006 4,960,371 $35.02 5.7 $124.0
--------------------------------------------------------------------------------------------------------
Exercisable at March 31, 2006 3,775,185 $31.30 4.5 $108.4
--------------------------------------------------------------------------------------------------------
Weighted
Average
Number of Grant Date
Shares Fair Value
-----------------------------------------------------------------
Nonvested at January 1, 2006 1,101,746 $13.49
Granted 643,300 18.86
Vested (552,913) 15.15
Forfeited (6,947) 17.40
-----------------------------------------------------------------
Nonvested at March 31, 2006 1,185,186 $18.09
-----------------------------------------------------------------
During the three months ended March 31, 2006, we granted 643,300 shares of
stock-settled SARS and did not grant any stock options. We did not grant any
stock-settled SARS before 2006. The weighted-average grant-date fair value of
the stock-settled SARS granted during the three months ended March 31, 2006 was
$18.86 per share, which are deemed to be equity-based awards under SFAS 123R.
The total intrinsic value of stock options exercised during the three months
ended March 31, 2006 was $17.2. Treasury shares have been utilized and reissued
upon stock option exercises. The total fair value of stock options vested during
the three months ended March 31, 2006 was $8.4.
As of March 31, 2006, there was approximately $16.7 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 2.0 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, 2006 was
approximately $0.3.
Prior to the adoption of SFAS 123R, we presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the Statement of Cash Flows. SFAS 123R requires that the cash flows resulting
from tax benefits resulting from tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be classified as
financing cash flows. Cash received and the tax benefit realized from stock
options exercised were $26.4 and $6.4 for the three months ended March 31, 2006
and $8.8 and $3.1 for the three months ended March 31, 2005, respectively. Cash
used to settle cash-settled SARS was $0.2.
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, 2006 and 2005 was $0.3 and $0.9, respectively.
In the event of a "change of control" (as defined in the 1993 Plan), (i) any
award under the 1993 Plan carrying a right to exercise that was not previously
exercisable and vested will become fully exercisable and vested, (ii) the
restrictions, deferral limitations, payment conditions and forfeiture applicable
to any other award granted under the 1993 Plan will lapse and such awards will
be deemed fully vested and (iii) any performance conditions imposed with respect
to awards shall be deemed to be fully achieved.
In November 2005, the FASB issued FASB Staff Position 123(R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-based Payment
Awards" (" FSP 123R- 3"). FSP 123R-3 provides an elective alternative transition
method of calculating the additional paid-in capital pool ("APIC Pool") of
excess tax benefits available to absorb tax deficiencies recognized subsequent
to the adoption of SFAS 123R to the method otherwise required by paragraph 81 of
SFAS 123R. We may take up to one year from the effective date of FSP 123R-3 to
evaluate its available alternatives and make its one-time election. We are
evaluating the impact of the adoption of this FSP in connection with our
adoption of SFAS No. 123R.
-11-
6. EARNINGS (LOSS) PER SHARE (EPS)
Basic earnings (loss) per common share excludes dilution and is computed by
dividing net earnings (loss) 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, 2006 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, 2006, all per share calculations are
performed using the same denominator utilized in calculating earnings per share
from continuing operations.
The following shows the reconciliation of weighted-average shares:
================================================================================
Three Months Ended
March 31,
--------------------------------------------------------------------------------
2006 2005
--------------------------------------------------------------------------------
Weighted-average shares outstanding: 46,913,744 42,118,580
Effect of dilutive shares:
Options 67,986 -*
Performance/Non-vested Stock 1,079,620 -*
--------------------------------------------------------------------------------
Adjusted average shares outstanding 48,061,350 42,118,580
================================================================================
* As of March 31, 2005, 5,488,205 stock options and 180,053 of performance and
non-vested shares were outstanding and excluded from the loss per share
calculations as they were anti-dilutive.
7. INVENTORIES
Inventories consisted of the following:
-----------------------------------------------------------
March 31, December 31,
2006 2005
-----------------------------------------------------------
Finished goods $294.5 $ 288.4
Work in process 34.6 26.3
Raw materials & supplies 113.6 110.0
-----------------------------------------------------------
Total inventories $442.7 $ 424.7
===========================================================
8. ASSOCIATED COMPANY AND MINORITY INTERESTS
Upon acquisition of Surface Specialties, we acquired a 50% ownership interest in
SK Cytec Co., Ltd., a joint venture that manufacturers and sells similar
products to those sold by Surface Specialties. The operations of SK Cytec Co.,
Ltd. are not material to the operations of the Company.
Upon acquisition of Surface Specialties, Cytec also acquired ownership interests
in two majority-owned entities for which the net assets and results of
operations are consolidated. The earnings associated with the minority ownership
interests are included in other income (expense), net and amount to $0.2 and
$0.1 for the three months ended March 31, 2006 and 2005 respectively. The
minority ownership interests in the net assets of these entities are included in
other noncurrent liabilities and total $1.6 and $1.7 as of March 31, 2006 and
2005, respectively.
-12-
9. DEBT
Long-term debt, including the current portion, consisted of the following:
============================================================================================================
March 31, 2006 December 31, 2005
------------------------------------------------------------------------------------------------------------
Carrying Carrying
Face Value Face Value
------------------------------------------------------------------------------------------------------------
Five-Year Term Loan Due February 14, 2010 $ 406.0 406.0 $ 461.2 $ 461.2
6.75% Notes Due March 15, 2008 100.0 98.9 100.0 98.8
5.5% Notes Due October 1, 2010 250.0 249.7 250.0 249.6
4.6% Notes Due July 1, 2013 200.0 201.6 200.0 201.7
6.0% Notes Due October 1, 2015 250.0 249.4 250.0 249.4
Other 27.0 27.0 16.0 16.0
------------------------------------------------------------------------------------------------------------
$ 1,233.0 1,232.6 $ 1,277.2 $ 1,276.7
Less: Current maturities 8.0 8.0 51.2 51.2
------------------------------------------------------------------------------------------------------------
Long-term debt $ 1,225.0 1,224.6 $ 1,226.0 $ 1,225.5
============================================================================================================
The five-year term loan requires a payment of the lesser of $72.5 or the then
outstanding balance each December through 2008 with a final payment due February
2010. As of March 31, 2006 we have prepaid the $72.5 due in December 2006 and
$21.0 of the $72.5 due in December 2007. We also have a $350.0 unsecured
five-year revolving credit agreement. Borrowings against this facility totaled
$12.0 at March 31, 2006. The facilities contain covenants that are customary for
such facilities.
The weighted-average interest rate on our debt was 4.64% and 3.79% for the
quarters ended March 31, 2006 and 2005, respectively.
10. 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, 2006 and December 31, 2005, the aggregate environmental related
accruals were $103.2 and $102.9, respectively. As of March 31, 2006 and December
31, 2005, $7.5 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, 2006 and 2005 was $0.7 and $1.2,
respectively.
In the first quarter of 2005, we increased our reserves by $4.4 as a result of
our agreement in principle to settle claims by a third party for the costs of
environmental remediation at a manufacturing site operated by the former
American Cyanamid Company ("Cyanamid") prior to 1944. In connection with our
spin-off from Cyanamid in 1993, we agreed to indemnify Cyanamid for claims of
this nature. Under the terms of the settlement which was finalized in the second
quarter of 2005, the third party has released all claims and indemnified us
against third-party environmental remediation claims arising from the alleged
contamination at the site. Although we believed that we had meritorious defenses
to this claim, we agreed to the settlement to avoid incurring additional legal
fees and any risk of an adverse outcome in any related litigation.
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 11 of the
Notes to the Consolidated Financial Statements contained in our 2005 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.
As of March 31, 2006 and December 31, 2005, the aggregate self-insured and
insured contingent liability was $65.5 and $65.8, respectively, and the related
insurance recovery receivable related to the liability as well as claims for
past payments was $38.1 at March 31, 2006 and $37.7 at December 31, 2005. The
asbestos liability included in the above amounts at March 31, 2006 and December
31, 2005 was $47.7 and $47.8, respectively, and the insurance receivable related
to the liability as well as claims for past payments was $35.1 at March 31, 2006
and $34.7 at December 31, 2005. We anticipate receiving a net tax benefit for
payment of those claims to which full insurance recovery is not realized.
-13-
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,
2006 2005
--------------------- ------------------
Number of claimants at beginning of period 18,111 27,947
Number of claimants associated with claims closed during period (3,331) (11,949)
Number of claimants associated with claims opened during period 918 2,113
--------------------- ------------------
Number of claimants at end of period 15,698 18,111
===================================================================================================================
Our asbestos liability and related insurance receivable is based on a study we
commissioned in 2003 by the Actuarial and Analytics Practice of AON Risk
Consultants ("AON"). 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 policies and estimated
insurance recoveries in 2003. We expect to recover close to 50% of our future
indemnity costs and certain defense and processing costs already incurred. We
anticipate updating the study in 2006 and approximately every three years or
earlier if circumstances warrant.
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.
We are among several defendants in approximately 30 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 similar cases 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.
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. We obtained a court order in France to enforce the award, which order was
appealed by SNF. In March, 2006, the Court of Appeal of Paris denied SNF's
appeal and affirmed the court order. Although SNF may appeal this decision, we
are permitted to collect on the arbitration award which we will proceed with in
the second quarter of 2006. No gain contingency has been recorded as of March
31, 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. We believe
that the complaint is without merit.
In 2006, we were named as a defendant in a series of civil cases alleging
violation of antitrust laws relating to the sale of methyl methacrylate, a
chemical manufactured and sold by CYRO Industries ("CYRO"), and seeking damages
arising out of such alleged violations. In 2005, we sold our interest in CYRO to
Degussa Specialty Polymers, Inc., an affiliate of Degussa AG. In accordance with
the terms of the sales agreement, Degussa Specialty Polymers, Inc. has agreed to
defend and indemnify us for any losses and expenses associated with these cases.
-14-
In February 2006, a subsidiary of DSM filed a lawsuit against us seeking
immediate dissolution of American Melamine Industries ("AMEL"), the melamine
manufacturing joint venture between DSM and Cytec or the appointment of a
receiver for the joint venture, the rescission of the services agreement between
Cytec and AMEL and compensatory damages. We believe this lawsuit is without
merit and we are vigorously defending against all of the claims.
While it is not feasible to predict the outcome of all pending environmental
matters, lawsuits and claims, it is reasonably possible that there will be a
necessity for future provisions for costs for environmental matters and for
other contingent liabilities that in management's opinion, will not have a
material adverse effect on 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, if any, are recorded when they are realized.
A further discussion of other contingencies can be found in Note 11 of the Notes
to the Consolidated Financial Statements contained in our 2005 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 year end are set forth in
Note 11 of the Notes to Consolidated Financial Statements contained in our 2005
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,
--------------------------------------------------------------------------------
2006 2005
--------------------------------------------------------------------------------
Net earnings (loss) $ 38.0 $ (6.5)
Other comprehensive income (loss):
Unrealized gains on cash flow hedges 0.7 1.6
Foreign currency translation adjustments 13.8 (8.6)
--------------------------------------------------------------------------------
Comprehensive income $ 52.5 $ (13.5)
================================================================================
12. INCOME TAXES
The effective rate for the three months ended March 31, 2006 was a tax provision
of 27% compared to a tax benefit of 66% for the three months ended March 31,
2005. For the first three months ended March 31, 2006, the rate was favorably
impacted by the continued growth of earnings in lower tax jurisdictions offset
to a lesser extent by the December 31, 2005 expiration of the US research and
development tax credit. In the event the US government again elects to extend
this credit consistent with prior tax law, this will likely have a favorable
impact on our effective tax rate going forward. For the three months ended March
31, 2005, the underlying effective tax rate was 27% excluding the favorable
impact by U.S. hedging losses and reduction in tax expense due to resolution of
the IRS audits, and the unfavorable impact of the write-off of acquired
in-process research and development expenses related to the Surface Specialties
acquisition, for which there was no tax benefit
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 ($12.8). We have retained tax counsel to assist in our
continuing defense of the final assessment given our vigorous defense in
protesting this taxable income increase. Notwithstanding our meritorious
defenses in these matters, in prior years as these matters developed, we accrued
for the potential unfavorable outcome of this dispute for the full amount of the
tax liability of the assessment including interest thereon. In 2005, we also
received notice from the Norwegian authorities demanding a tax payment of 56.0
Norwegian krone ($8.5) plus accrued interest regarding this matter, and remitted
this amount as a deposit pending final resolution of this dispute. The accrued
balance at March 31, 2006 for this contingency was 29.1 Norwegian krone ($4.4).
Assuming the dispute resolution process follows a normal course, a complete
resolution of the Norwegian issue will probably occur in late 2006 or early
2007.
-15-
In January, 2005, we received notice that the Congressional Joint Committee on
Taxation (the "Joint Committee") approved the final IRS examination findings for
the years 1999 through 2001 and a separate tax refund claim filed by the Company
for 1998. Such Joint Committee approval resulted in a tax refund of
approximately $0.2 and $0.1 for the years 1998 and 2000, respectively, which was
recorded in the first quarter of 2005. We also recorded a reduction in tax
expense of approximately $16.2 for the three months ended March 31, 2005 to
reflect the final resolution of these audits.
13. OTHER FINANCIAL INFORMATION
On February 9, 2006 the Board of Directors declared a $0.10 per common share
cash dividend, paid on March 15, 2006 to shareholders of record as of February
27, 2006. Cash dividends paid in the first quarter of 2006 and 2005 were $4.7
and $4.0, respectively. On May 2, 2006 the Board of Directors declared a $0.10
per common share cash dividend, payable on May 25, 2006 to shareholders of
record as of May 12, 2006.
Taxes paid for the three months ended March 31, 2006 and 2005 were $15.2 and
$17.9, respectively. Interest paid for the three months ended March 31, 2006 and
2005 was $13.9 and $8.4, respectively. Interest income for the three months
ended March 31, 2006 and 2005 was $0.6 and $1.6, respectively.
Included in due from related party are certain tax reimbursements to be received
from UCB in accordance with the terms of the purchase agreement entered into in
connection with the acquisition of Surface Specialties. Included in accrued
expenses are immaterial amounts due to UCB under certain transition services
agreements.
14. SEGMENT INFORMATION
We have restated segment information for all periods presented in order to
reflect our current organizational structure as announced in October 2005.
Summarized segment information for our four segments for the three months ended
March 31 is as follows:
--------------------------------------------------------------------------------
2006 2005
--------------------------------------------------------------------------------
Net Sales:
Cytec Performance Chemicals
Sales to external customers $ 225.9 $ 196.0
Intersegment sales 1.8 1.1
Cytec Surface Specialties 374.0 168.2
Cytec Engineered Materials 139.0 127.8
Building Block Chemicals
Sales to external customers 80.5 71.9
Intersegment sales 23.1 23.2
--------------------------------------------------------------------------------
Net sales from segments 844.3 588.2
Elimination of intersegment revenue (24.9) (24.3)
--------------------------------------------------------------------------------
Total consolidated net sales $ 819.4 $ 563.9
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
% of % of
Sales Sales
--------------------------------------------------------------------------------
Earnings (loss) from operations:
Cytec Performance Chemicals $ 17.9 8% $ 7.6 4 %
Cytec Surface Specialties 29.4 8% (27.9) (17)%
Cytec Engineered Materials 23.9 17% 23.4 18 %
Building Block Chemicals (0.3) 0% 7.3 8 %
------ ------
Earnings from segments 70.9 9% 10.4 2 %
Corporate and Unallocated (2.7) (3.3)
------ ------
Total earnings from operations $ 68.2 8% $ 7.1 1 %
--------------------------------------------------------------------------------
-16-
15. GOODWILL AND OTHER ACQUISITION INTANGIBLES
The following is the activity in the goodwill balances for each segment.
-------------------------------------------------------------------------------------------------------------------------
Cytec Cytec
Performance Cytec Surface Engineered
Chemicals Specialties Materials Corporate Total
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $101.5 $668.7 $241.3 $ 0.7 $1,012.2
Currency exchange 0.2 12.2 - - 12.4
Other - (2.6) - - (2.6)
-------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2006 $101.7 $678.3 $241.3 $ 0.7 $1,022.0
=========================================================================================================================
We recorded a reduction to goodwill of $2.6 as a result of finalizing the
purchase price allocation of Surface Specialties acquired in February, 2005.
Other acquisition intangibles consisted of the following major classes:
--------------------------------------------------------------------------------------------------------------------------------
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) 2006 2005 2006 2005 2006 2005
--------------------------------------------------------------------------------------------------------------------------------
Technology-based 15.2 $ 52.9 $ 52.2 $ (16.0) $(15.0) $ 36.9 $ 37.2
Marketing-related 15.4 62.0 58.9 (11.1) (9.0) 50.9 49.9
Marketing-related indefinite 41.8 41.8 - - 41.8 41.8
Customer-related 15.0 395.2 389.6 (33.6) (27.0) 361.6 362.6
--------------------------------------------------------------------------------------------------------------------------------
Total $551.9 $542.5 $ (60.7) $(51.0) $491.2 $491.5
================================================================================================================================
Amortization of acquisition intangibles for the three months ended March 31,
2006 and 2005 was $8.8 and $4.0, respectively. Amortization expense for the
three months ended March 31, 2005 includes one month of amortization of the
acquisition intangibles associated with the purchase of Surface Specialties.
Assuming no change in the gross carrying amount of acquisition intangibles, the
estimated amortization of acquisition intangibles for the fiscal year 2006 is
$34.9 and for the years 2007 through 2010 is $34.8 per year. Included in
marketing-related intangibles is $41.8 relating to certain trade names purchased
upon acquisition of Surface Specialties which have indefinite useful lives.
16. DERIVATIVE FINANCIAL INSTRUMENTS AND COMMODITY HEDGING ACTIVITIES
Derivative Financial Instruments
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 Note due October 1, 2010 and
10-Year Notes due October 1, 2015 as defined in Note 9. 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 our subsidiaries. At March 31, 2006, the
fair values of the five and ten year swaps were $0.9 and $(0.5), respectively.
Euro denominated bank borrowings naturally hedge the remainder of our euro
denominated intercompany loans receivable and provide a partial hedge of our net
investment in our Belgium based subsidiary, Cytec Surface Specialties SA/NV.
Commodity Hedging Activities
At March 31, 2006, the Building Block Chemicals segment Fortier plant's 2006
remaining forecasted natural gas utility requirements were 67% hedged utilizing
natural gas forward contracts at an average cost of $8.84 per MMBTU. These
contracts had a total fair value of $11.3 and delivery dates ranging from April,
2006 to December, 2006. We are transitioning from natural gas forward contracts
to natural gas swaps to hedge the plant's future utility requirements. At March
31, 2006, 5% of the plant's 2006 remaining forecasted natural gas utility
requirements were hedged through natural gas swaps.
At March 31, 2006, we held natural gas swaps, including the gas swaps for
Fortier plant, with a unfavorable fair value of $(2.1), which will be
reclassified into Manufacturing Cost of Sales through March 2007 as these swaps
are settled.
-17-
For more information regarding our hedging activities and derivative financial
instruments, refer to Note 5 to the Consolidated Financial Statements contained
in our 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,
----------------------------------------------------------------------------------------------------------
2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------
Service cost $ 6.0 $ 4.5 $ 0.3 $ 0.3
Interest cost 10.6 9.7 3.4 3.6
Expected return on plan assets (10.5) (10.0) (1.2) (1.3)
Net amortization and deferral 3.4 2.8 (2.3) (2.7)
----------------------------------------------------------------------------------------------------------
Net periodic cost $ 9.5 $ 7.0 $ 0.2 $ (0.1)
==========================================================================================================
We disclosed in our Annual Report on Form 10-K for the year ended December 31,
2005, that we expected to contribute $23.8 and $19.4, respectively, to our
pension and postretirement plans in 2006. Through March 31, 2006, $6.6 and $4.5
in contributions were made, respectively.
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, 2006 and
2005 were $4.4 and $4.8, respectively.
-18-
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, plastics and water
treatment. 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. On February 28, 2005, we acquired the
Surface Specialties business of UCB in a transaction valued at $1,789.6. A
further discussion of acquisitions and dispositions can be found in Note 2 to
the Notes to the Consolidated Financial Statements contained herein.
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 are an important factor in profitability
especially in years of high volatility. Oil and natural gas costs are
significantly higher than the year ago period and many of our raw materials are
derived from these two commodities. Discussion of the year to year impact of raw
materials and energy 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.
On January 1, 2006 we adopted SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"). For further details see Note 5 to the Consolidated Financial
Statements.
Quarter Ended March 31, 2006 Compared With Quarter Ended March 31, 2005
Consolidated Results
Net sales for the first quarter of 2006 were $819.4 compared with $563.9 for the
first quarter of 2005, up 45% of which 38% was due to the inclusion of sales for
the full quarter from Surface Specialties which was acquired on February 28,
2005. Selling volumes increased 8%, selling prices increased 2%, and exchange
rates decreased sales 3%. Cytec Performance Chemicals experienced a net increase
in sales which resulted primarily from the addition of sales of the acquired
pressure sensitive adhesives and polyurethanes product lines of Surface
Specialties as well as from increases in selling volumes and selling prices.
Cytec Surface Specialties experienced a net increase in sales which resulted
primarily from the addition of sales related to the remainder of the acquired
product lines of Surface Specialties as well as from increases in selling
volumes and selling prices. Cytec Engineered Materials sales increase was
principally volume related, as sales increased in the large commercial
transport, and commercial rotorcraft sectors. Building Block Chemicals sales
increased from both higher selling volumes and selling prices.
For a detailed discussion on revenues refer to the Segment Results section
below.
Manufacturing cost of sales was $645.9 or 78.8% of sales in the first quarter of
2006 compared with $440.3 or 78.1% of sales in the first quarter of 2005. Most
of the increase was associated with higher selling volumes, the majority of
which was due to the inclusion of the acquired Surface Specialties business. Raw
material and energy costs increased $24.5 and charges related to stock options
and stock appreciation rights that are settled with common shares
("stock-settled SARS") due to the adoption of SFAS 123R added $0.3. Also the
first quarter of 2006 includes a net restructuring credit of $0.6. See Note 4 to
the consolidated financial statements for additional detail. Included in 2005
was a charge of $10.5 representing the amortization of a portion of the excess
of the fair value of the finished goods inventory of the acquired business over
normal manufacturing cost.
Selling and technical services was $52.8 in the first quarter of 2006 versus
$44.7 in the. first quarter of 2005. Research and process development was $18.8
-19-
versus $13.0 in the prior year. Administrative and general expenses were $24.9
versus $17.8 in the prior year. This increase was primarily due to the inclusion
of the acquired Surface Specialties business and charges related to stock
options and stock-settled SARS due to the adoption of SFAS 123R of $0.5, $0.1
and $1.7 for selling and technical services, research and development and
administrative and general expenses, respectively. Also, 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 4 to the consolidated financial statements for
additional detail.
The write-off of acquired in-process research and development of $37.0 in the
prior year was the result of the Surface Specialties acquisition.
Amortization of acquisition intangibles was $8.8 in the first quarter of 2006
versus $4.0 in the first quarter of 2005 reflecting a full quarter's
amortization of intangibles related to the acquired Surface Specialties
business.
Other income (expense), net was expense of $0.8 in the first quarter of 2006
compared with expense of $20.4 in the first quarter of 2005. In late 2004 and
early 2005, we entered into derivative contracts to economically hedge currency
and interest rate exposures associated with the Surface Specialties acquisition.
These contracts resulted in a loss for the quarter of $20.0 in 2005. Also in
2005, we recorded other income of $2.6 related to currency transaction gains, we
recorded other income of $1.3 related to the recovery of past defense costs from
one of our insurers related to lead pigment litigation and recorded a charge of
$4.4 to settle claims by a third party for the costs of environmental
remediation at a manufacturing site operated by the former American Cyanamid
Company prior to 1944.
Equity in earnings of associated companies was $0.8 versus $2.1 in the prior
year. On June 1, 2005, we sold our 50% ownership stake in CYRO Industries to our
joint venture partner Degussa Specialty Polymers, a company of Degussa AG.
Interest expense, net was $14.5 compared with $9.5 in the prior year. The
increase resulted from higher outstanding debt balances incurred in conjunction
with our acquisition of Surface Specialties.
Our 2006 annual effective tax rate on income from continuing operations was 27%.
Our 2005 annual effective tax rate on loss from continuing operations was a tax
benefit of 66%. Favorably impacting the 2005 rate was a reduction in income tax
expense of $16.2 recorded related to final approval of the Internal Revenue
Service's examination of our tax returns for the years 1999 through 2001. Also
favorably impacting the 2005 rate were the losses of $20.0 incurred in the U.S.
on interest rate and currency derivatives entered into in connection with
Surface Specialties acquisition. The tax benefit on this loss was recorded at
36.5%. Unfavorably impacting the 2005 tax rate was a charge of $37.0 for the
write-off of in-process research and development expenses related to the Surface
Specialties acquisition for which no tax benefit was recorded. Excluding these
items, our underlying 2005 annual effective tax rate would have been 27%.
The cumulative effect of accounting change relates to the adoption of SFAS 123R
resulted in a non-cash charge of $1.2, net of taxes of $0.7. There were two
components to this; a $1.6 non-cash charge for cash-settled stock appreciation
rights issued in prior years which are now required to be recorded at fair
market value at the end of each period through the date of vesting and a $0.4
non-cash credit for estimated forfeitures related to performance and restricted
("non-vested") stock outstanding. Previously forfeitures were recorded as
incurred. In addition, performance stock is now valued only at the date of grant
at fair value while previously it was adjusted to market price at the end of
each reporting period.
Earnings from discontinued operations were $0.5 in 2005, net of taxes of $0.7
and reflect the results of Surface Specialties amino resins ("SSAR") product
line. SSAR was divested on August 31, 2005.
Net earnings for 2006 were $38.0 ($0.79 per diluted share) an increase over the
net loss of $6.5 in 2005. Included in the quarter was a cumulative effect of
accounting change charge of $1.2, after-tax related to the adoption of FAS 123R
and a net restructuring charge of $0.3 after-tax. The improvement in earnings is
primarily due to the inclusion of a full quarter of Surface Specialties
operations in 2006 and various purchase accounting and other charges recorded in
2005 as listed below.
Net loss for 2005 of $6.5 ($0.16 net loss per basic share) included purchase
accounting related charges of $7.7 after-tax, related to acquired inventories
from Surface Specialties being recorded at fair value which exceeded normal
manufacturing cost and $37.0 related to the write-off of in-process research and
development costs of Surface Specialties; a $12.7 after-tax charge related to
currency and interest rate derivative transactions associated with the Surface
Specialties acquisition; a $3.2 after-tax charge related to a settlement to
resolve a dispute over an environmental matter; a charge of $1.0 after-tax for
employee redundancy costs and a tax benefit of $16.2 related to completion of
prior year tax audits.
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 and reflect the new organizational and
reporting structure of our reportable segments for all periods presented.
-20-
Cytec Performance Chemicals
------------------------------------------------------------------------------------------------------------------------------
% Change Due to
Total ---------------------------------------------------
2006 2005 % Change Price Volume/Mix Acquisition Currency
------------------------------------------------------------------------------------------------------------------------------
North America $90.1 $83.5 8% 5% (6)% 9% -
Latin America 33.9 28.5 19% 1% 13 % - 5 %
Asia/Pacific 28.8 26.0 11% 2% 4 % 6% (1)%
Europe/Middle East/Africa 73.1 58.0 26% 3% 12 % 20% (9)%
------------------------
Total $225.9 $196.0 15% 4% 3 % 10% (2)%
===============================================================================================================================
Overall sales increased 15% primarily due to higher selling volumes. Selling
volume increased 3% and the acquisition of Surface Specialties added another
10%. On a regional basis, the decrease in selling volume in North America was
primarily attributable to the water treatment chemicals product line which was
impacted by decisions to give up low margin business and in polymer additives
which was impacted by aggressive price competition in low end products resulting
in loss of business as well as reduced demand in the polyolefin markets. Selling
volumes in Latin America increased primarily due to improved demand for mining
chemicals for copper mining and alumina applications partly offset by lower
sales volumes in polymer additives. Selling volumes in Asia were up principally
in the mining chemicals product line partially offset by reduced selling volumes
in the polymer additives product line due to decisions to give up low margin
business. Selling volume increased in Europe/Middle East/Africa in essentially
all product lines as demand improved in the latter part of the quarter. Selling
prices increased as a result of implementation of price increases initiated in
2005 to cover significantly higher raw material and energy costs.
Earnings from operations were $17.9, or 8% of sales, compared with $7.6 or 4% of
sales in 2005. The improved earnings were the result of the inclusion of the
acquired Surface Specialties product lines and higher selling volumes. Price
increases of $6.9 were more than offset by higher raw material and energy costs
of $12.4 and stock option and stock-settled SARS expense of $0.6 in 2006.
Included in 2005 results is a write-off of acquired in-process research and
development costs of $6.9 and a charge of $1.3 for the excess of the fair value
of the finished goods inventory of the acquired business over normal
manufacturing cost.
Cytec Surface Specialties
------------------------------------------------------------------------------------------------------------------------------
% Change Due to
Total ---------------------------------------------------
2006 2005 % Change Price Volume/Mix Acquisition Currency
------------------------------------------------------------------------------------------------------------------------------
North America $ 99.3 $ 50.8 95% 10% - 85% -
Latin America 14.4 7.7 87% - (10)% 90% 7%
Asia/Pacific 58.7 27.8 111% (5)% 27% 93% (4)%
Europe/Middle East/Africa 201.7 81.9 146% (3)% 17% 142% (10)%
------------------------
Total $374.0 $168.2 122% 1% 12% 114% (5)%
===============================================================================================================================
Overall selling volumes increased 12% with the acquisition adding another 114%.
On a regional basis, North American selling volumes were flat with increases in
the radcure and powder coating resins product lines offset by a decrease in the
liquid coating resins product line (automotive and school furniture market
sectors). Latin America selling volumes were down in liquid coating resins.
Selling volumes in Asia-Pacific and Europe were up in all product lines with the
improvement in Europe coming in the latter part of the quarter. Selling prices
were up for all three product lines in North America as a result of initiatives
taken in the latter half of 2005 to offset the impact of higher raw material
costs. Selling prices declined in Europe due primarily to competitive pricing
pressures in our liquid coating and powder coating product lines.
Earnings from operations were $29.4, or 8% of sales, compared with a loss from
operations of $27.9 or 17% of sales in 2004. The increase in earnings was
primarily attributable to the following factors: the inclusion of the acquired
product lines related to the acquisition of Surface Specialties, higher selling
volumes and good cost controls, including the first quarter effect of the
restructuring announced in the fourth quarter of 2005. Increased selling prices
of $1.4 were more than offset by higher raw material and energy costs of $5.6 as
well as stock option and stock-settled SARS expense of $1.1 in 2006. Included in
the loss for 2005 were the following: the write-off of acquired in-process
research and development costs of $30.1 and a charge of $9.2 for the excess of
fair value of the finished goods inventory of the acquired business over normal
manufacturing costs.
-21-
Cytec Engineered Materials
-----------------------------------------------------------------------------------------------------------------
% Change Due to
Total --------------------------------------
2006 2005 % Change Price Volume/Mix Currency
-----------------------------------------------------------------------------------------------------------------
North America $ 84.8 $ 81.6 4% 1% 3% 0%
Latin America(1) 0.3 0.5 --- --- --- ---
Asia/Pacific 8.3 6.6 26% 3% 23% 0%
Europe/Middle East/Africa 45.6 39.1 17% 2% 17% (2)%
------------------------
Total $139.0 $127.8 9% 2% 8% (1)%
=================================================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 8%. Increased sales volumes in the
Asia/Pacific, Europe/Middle East/Africa and North America regions were primarily
related to increased volumes to the large commercial transport and commercial
rotorcraft sectors primarily due to increased build rates and new business.
Earnings from operations were $23.9, or 17% of sales, compared with $23.4 or 18%
of sales, in 2005. The impact from the increased selling volumes and higher
selling prices of $2.0 was mostly offset by increased raw material costs of
$3.6, increased manufacturing cost related to the higher production volumes and
stock option and stock-settled SARS expense of $0.6.
Building Block Chemicals
---------------------------------------------------------------------------------------------------------------
% Change Due to
Total ------------------------------------
2006 2005 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------------------------
North America $44.2 $42.5 4% 5% (1)% 0%
Latin America(1) 1.5 1.2 --- --- --- ---
Asia/Pacific 9.0 18.1 (50)% (10)% (40)% 0%
Europe/Middle East/Africa 25.8 10.1 155% 14% 151% (10)%
------------------------
Total $80.5 $71.9 12% 3% 10% (1)%
===============================================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 10%. On a regional basis, selling volumes to
the Asia/Pacific region decreased as a result of sluggish demand for
acrylonitrile. Also poor acrylonitrile margins discouraged us from moving
product into the Asia-Pacific region. Selling volumes in the Europe/Middle
East/Africa region saw improved demand for imported acrylonitrile and the margin
spreads, while still low, were higher than those in the Asia-Pacific region.
Selling prices were up in North America, primarily acrylamide. Selling prices in
Asia-Pacific were down due to acrylonitrile and increased in Europe due to
acrylonitrile.
Loss from operations was $0.3 compared with earnings from operations of $7.3, or
10% of sales, in 2005. The decrease in earnings reflects the following; low
margin spreads on acrylonitrile sales, the impact of the scheduled two week
maintenance turnaround in the acrylonitrile production facility which reduced
fixed cost absorption, higher maintenance costs and the loss of efficiencies in
the melamine production facility which operated for only half of the quarter as
our manufacturing joint venture partner requested zero production. Higher
selling prices of $2.1 mostly offset increased raw material and energy costs of
$2.4 and stock option and stock-settled SARS expense of $0.3.
LIQUIDITY AND FINANCIAL CONDITION
At March 31, 2006 our cash balance was $47.8 compared with $68.6 at year end
2005.
Cash flows provided by operating activities were $20.9 in 2006 compared with
cash flows used by operating activities of $30.6 in 2005. The increase in
operating cash flows reflects the improvement in earnings and the effect of
higher non-cash depreciation and intangible asset amortization resulting from
the Surface Specialties acquisition. Trade accounts receivable increased $19.1
reflecting the increase in sales and inventory increased $13.2 due to higher raw
material cost and increased demand. Accrued expenses decreased $27.7 primarily
due to payments of $13.2 for incentive compensation and profit sharing payouts
relating to prior year results and customer rebate payments of $5.5 for customer
rebates earned in 2005 and paid in 2006 in excess of the current quarter's
accruals.
Cash flows used in investing activities were $16.8 for 2006 compared with
$1,516.8 for 2005. This decrease was primarily attributable to $1,501.1 of cash
used for the Surface Specialties acquisition in 2005. Capital spending for the
first quarter was $16.3. Capital spending for the full year is expected to
approximate $110.0.
Net cash flows used by financing activities were $25.8 in 2006 compared with net
cash flows provided by financing activities of $1,306.0 during 2005. This change
is primarily due to proceeds received for debt incurred in 2005 related to the
purchase Surface Specialties. In the first quarter of 2006, we had net debt
repayments of $53.3, which was partially offset by proceeds received on the
exercise of stock options of $26.4.
-22-
At March 31, 2006, we may borrow up to an additional $338.0 under our $350.0
revolving credit facility.
On February 9, 2006 the Board of Directors declared a $0.10 per common share
cash dividend, paid on March 15, 2006 to shareholders of record as of February
27, 2006. Cash dividends paid in the first quarter of 2006 and 2005 were $4.7
and $4.0, respectively. On May 2, 2006 the Board of Directors declared a $0.10
per common share cash dividend, payable on May 25, 2006 to shareholders of
record as of May 12, 2006.
In connection with the Surface Specialties acquisition, we suspended our stock
buy-back program and do not anticipate making future stock buy-backs for at
least two years from the closing date in order to maximize the funds available
for debt service and other corporate purposes.
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 2005 Annual Report on
Form 10-K.
OTHER
2006 OUTLOOK
In our May 2, 2006 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 2006
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 2005 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on February 28,
2006 and incorporated by reference herein.
Share-based Compensation
On January 1, 2006 we adopted SFAS 123R which supersedes Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
and 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.
See Note 5 of the Consolidated Financial Statements for additional details on
and the impact of adoption of SFAS 123R.
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 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.
-23-
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.
-24-
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, 2005, filed with the
Securities and Exchange Commission on February 28, 2006 and incorporated by
reference herein. During 2006, we executed various foreign exchange transactions
that do not materially alter the market risk assessment performed as of December
31, 2005. Other 2006 financial instrument transactions include:
Commodity Price Risk: At March 31, 2006, the Building Block Chemicals segment
Fortier plant's 2006 remaining forecasted natural gas utility requirements were
67% hedged utilizing natural gas forward contracts at an average cost of $8.84
per MMBTU. These contracts had a total fair value of $11.3 and delivery dates
ranging from April, 2006 to December, 2006. We are transitioning from natural
gas forward contracts to natural gas swaps to hedge the plant's future utility
requirements. At March 31, 2006, 5% of the plant's 2006 remaining forecasted
natural gas utility requirements were hedged through natural gas swaps.
At March 31, 2006, we held natural gas swaps, including the gas swaps for
Fortier plant, with a unfavorable fair value of $(2.1), which will be
reclassified into Manufacturing Cost of Sales through March 2007 as these swaps
are settled.
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 $1.1 in the value of the contracts referred to above.
Interest Rate Risk: At March 31, 2006, our outstanding borrowings consisted of
$33.3 of short-term borrowings and long-term debt, including the current
portion, which had a carrying value of $1,232.6 a face value of $1,233.0 and a
fair value, based on dealer quoted values, of approximately $1,190.0.
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, 2006, interest expense would increase/decrease by
approximately $1.1 for the next fiscal quarter.
For a discussion of the interest rate derivative activities entered into as part
of the acquisition of Surface Specialties, refer to "Liquidity and Financial
Condition" in Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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, 2006, 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, 2006, the currency and net contractual amounts of forward contracts
outstanding translated into U. S. dollar equivalent amounts totaled $56.5. The
fair value of currency contracts, based on forward exchange rates at March 31,
2006, was approximately $(0.3). 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, 2006 would decrease by approximately $3.9.
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 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, 2006, the fair value of the five and ten year swaps
were $0.9 and $(0.5), respectively. Assuming other factors are held constant, a
hypothetical increase of 10% in the euro exchange rate would have an adverse
effect of approximately $50.6 on the combined value of the cross-currency swaps.
-25-
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, 2006, we had
forward contracts to purchase (euro)35.0 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 $4.2 in the value of these forward contracts.
Item 4. CONTROLS AND PROCEDURES (Currencies in millions)
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, 2006. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's current disclosure
controls and procedures are effective.
There were no changes in internal control over financial reporting that occurred
during the first quarter of 2006 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
We are in the process of implementing our Cytec Specialty Chemicals global
enterprise-wide planning systems for the acquired businesses of Surface
Specialties. The world-wide implementation is expected to be completed over the
next three years and includes changes that involve internal controls 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
controls, our disclosure controls 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
will be made to any affected internal controls during the implementation and we
will test all modified controls to insure they are functioning effectively.
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PART II - OTHER INFORMATION (Currencies in millions)
Item 1. LEGAL PROCEEDINGS
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, includes certain
predecessor entities being indemnified by us.
Material developments to legal proceedings described in our 2005 Annual Report
on Form 10-K are set forth below.
The following table presents information about asbestos claims activity during
the nine months ended March 31, 2006:
--------------------------------------------------------------------------------
For the Three
Month Period Ended
March 31,
2006
--------------------------------------------------------------------------------
Number of claimants at beginning of period 18,111
Number of claimants associated with claims closed during period (3,331)
Number of claimants associated with claims opened during period 918
--------------------------------------------------------------------------------
Number of claimants at end of period 15,698
--------------------------------------------------------------------------------
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. We obtained a court order in France to enforce the award, which order was
appealed by SNF. In March, 2006, the Court of Appeal of Paris denied SNF's
appeal and affirmed the court order. Although SNF may appeal this decision, we
are permitted to collect on the arbitration award which we will proceed with in
the second quarter of 2006. No gain contingency has been recorded. 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. We believe that the complaint is
without merit.
In 2006, we were named as a defendant in a series of civil cases alleging
violation of antitrust laws relating to the sale of methyl methacrylate, a
chemical manufactured and sold by CYRO Industries ("CYRO"), and seeking damages
arising out of such alleged violations. In 2005, we sold our interest in CYRO to
Degussa Specialty Polymers, Inc., an affiliate of Degussa AG. In accordance with
the terms of the sales agreement, Degussa Specialty Polymers, Inc. has agreed to
defend and indemnity us for any losses and expenses associated with these cases.
See also the Note 10 of the Notes to the Consolidated Financial Statements,
herein.
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Item 6. EXHIBITS
(a). Exhibits
--------
See Exhibit Index on page 30 for exhibits filed with this Quarterly Report on
Form 10-Q.
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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 3, 2006
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Exhibit Index
-------------
3.1(a) Certificate of Incorporation (incorporated by reference to
exhibit 3.1(a) to our quarterly report on Form 10-Q for the
quarter ended September 30, 1996).
3.1(b) Certificate of Amendment to Certificate of Incorporation dated
May 13, 1997 (incorporated by reference to exhibit 3.1(a) to our
quarterly report on Form 10-Q for the quarter ended June 30,
1997).
3.1(c) Conformed copy of Certificate of Incorporation, as amended
(incorporated by reference to exhibit 3(c) to our registration
statement on Form S-8, registration number 333-45577).
3.2 By-laws, as amended through January 22, 2002 (incorporated by
reference to exhibit 3.2 to our annual report on Form 10-K for
the year ended December 31, 2002).
10.1 Form of Restricted Stock Award letter used for grants to members
of our Board of Directors from May 2, 2006.
12 Computation of Ratio of Earnings to Fixed Charges for the three
and three months ended March 31, 2006 and 2005.
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
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