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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 June 30, 2007
Commission file number 1-12372
CYTEC INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3268660
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No).
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 357-3100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
There were 47,989,664 shares of common stock outstanding at July 25, 2007.
-1-
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
10-Q Table of Contents
Page
Part I - Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 27
Part II - Other Information
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other 30
Item 6. Exhibits 31
Signature 32
Exhibit Index 33
-2-
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
2007 2006(1) 2007 2006(1)
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Net sales $ 864.0 $ 853.1 $ 1,727.5 $ 1,672.5
Manufacturing cost of sales 662.8 688.0 1,361.7 1,333.7
Selling and technical services 53.1 54.2 103.0 106.9
Research and process development 19.2 17.2 37.6 36.1
Administrative and general 28.9 26.1 55.2 51.0
Amortization of acquisition intangibles 9.7 9.3 18.9 18.0
Gain on sale of assets held for sale - - 15.7 -
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Earnings from operations 90.3 58.3 166.8 126.8
Other income (expense), net 0.1 14.9 1.5 14.0
Equity in earnings of associated companies 0.1 0.9 0.4 1.7
Interest expense, net 11.4 14.6 21.6 29.1
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Earnings before income taxes and cumulative
effect of accounting change 79.1 59.5 147.1 113.4
Income tax provision 24.3 11.0 40.6 25.6
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Earnings before cumulative effect of
accounting change 54.8 48.5 106.5 87.8
Cumulative effect of accounting change (net
of income tax benefit of $0.7) - - - (1.2)
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Net earnings $ 54.8 $ 48.5 $ 106.5 $ 86.6
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Basic net earnings per common share:
Earnings before cumulative effect of
accounting change $ 1.14 $ 1.02 $ 2.22 $ 1.87
Cumulative effect of accounting change, net
of taxes - - - (0.03)
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Net earnings $ 1.14 $ 1.02 $ 2.22 $ 1.84
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Diluted net earnings per common share:
Earnings before cumulative effect of
accounting change $ 1.11 $ 1.00 $ 2.17 $ 1.81
Cumulative effect of accounting change, net
of taxes - - - (0.02)
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Net earnings $ 1.11 $ 1.00 $ 2.17 $ 1.79
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Dividends per common share $ 0.10 $ 0.10 $ 0.20 $ 0.20
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(1) 2006 results were restated to show the effect of Financial Accounting
Standards Board Staff Position No. AUG AIR-1, "Accounting for Planned Major
Maintenance Activities" ("FSP AUG-AIR 1"), which we adopted retroactively during
the first quarter of 2007. For further details see Note 2 to the Consolidated
Financial Statements.
See accompanying Notes to Consolidated Financial Statements
-3-
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions, except per share amounts)
June 30, December 31,
2007 2006(1)
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Assets
Current assets
Cash and cash equivalents $ 30.8 $ 23.6
Trade accounts receivable, less allowance
for doubtful accounts of $5.3 and $5.1 at
June 30, 2007 and December 31, 2006,
respectively 577.7 510.3
Other accounts receivable 62.0 81.5
Inventories 486.5 474.6
Deferred income taxes 8.4 9.2
Other current assets 23.3 15.4
Assets held for sale 6.9 38.8
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Total current assets 1,195.6 1,153.4
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Investment in associated companies 20.9 23.3
Plants, equipment and facilities, at cost 1,937.1 1,895.5
Less: accumulated depreciation (938.0) (897.0)
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Net plant investment 999.1 998.5
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Acquisition intangibles, net of accumulated
amortization of
$112.8 and $92.1 at June 30, 2007 and
December 31, 2006, respectively 474.8 486.1
Goodwill 1,054.3 1,042.5
Deferred income taxes 23.8 33.2
Other assets 96.5 93.5
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Total assets $ 3,865.0 $ 3,830.5
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Liabilities
Current liabilities
Accounts payable $ 304.8 $ 298.8
Short-term borrowings 42.1 41.8
Current maturities of long-term debt 101.1 1.4
Accrued expenses 180.2 203.8
Income taxes payable 11.6 39.3
Deferred income taxes 16.3 2.0
Liabilities held for sale 1.4 16.3
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Total current liabilities 657.5 603.4
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Long-term debt 740.8 900.4
Pension and other postretirement benefit
liabilities 341.5 371.1
Other noncurrent liabilities 297.5 273.6
Deferred income taxes 107.2 105.3
Stockholders' equity
Common stock, $.01 par value per share,
150,000,000 shares authorized; issued
48,132,640 shares 0.5 0.5
Additional paid-in capital 269.2 258.5
Retained earnings 1,436.8 1,339.6
Accumulated other comprehensive income (loss) 36.2 (5.7)
Treasury stock, at cost, 422,446 shares in
2007 and 510,006 shares in 2006 (22.2) (16.2)
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Total stockholders' equity 1,720.5 1,576.7
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Total liabilities and stockholders' equity $ 3,865.0 $ 3,830.5
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(1) Balances at December 31, 2006 have been restated to show the effect of FSP
AUG-AIR 1, which was adopted retroactively during the first quarter of 2007. For
further details see Note 2 to the Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements
-4-
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Six Months Ended
June 30,
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2007 2006(1)
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Cash flows provided by (used in) operating
activities
Net earnings $ 106.5 $ 86.6
Noncash items included in net earnings:
Depreciation 49.3 55.0
Amortization 23.2 21.1
Share-based compensation 6.8 5.7
Deferred income taxes 15.7 5.7
Gain on sale of assets (15.7) -
Asset impairment charges - 13.8
Cumulative effect of accounting change, net
of taxes - 1.9
Other 2.9 3.3
Changes in operating assets and liabilities,
excluding effects of divestiture:
Trade accounts receivable (57.6) (56.2)
Other receivables 18.1 2.7
Inventories (7.0) (31.2)
Other assets (12.2) 2.6
Accounts payable 1.9 16.4
Accrued expenses (20.3) (19.0)
Income taxes payable (9.2) (14.1)
Other liabilities (11.5) 0.6
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Net cash provided by operating activities 90.9 94.9
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Cash flows provided by (used in) investing
activities
Additions to plants, equipment and
facilities (39.4) (40.9)
Proceeds received on sale of assets 27.1 -
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Net cash used in investing activities (12.3) (40.9)
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Cash flows provided by (used in) financing
activities
Proceeds from long-term debt 194.1 65.9
Payments on long-term debt (254.9) (177.3)
Change in short-term borrowings (0.2) (0.5)
Cash dividends (9.6) (9.4)
Proceeds from the exercise of stock options 19.0 30.5
Purchase of treasury stock (25.1) -
Excess tax benefits from share-based
payment arrangements 4.0 7.7
Other (0.3) (0.4)
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Net cash used in financing activities (73.0) (83.5)
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Effect of currency rate changes on cash and
cash equivalents 1.6 2.3
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Increase/(decrease) in cash and cash
equivalents 7.2 (27.2)
Cash and cash equivalents, beginning of
period 23.6 68.6
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Cash and cash equivalents, end of period $ 30.8 $ 41.4
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(1) 2006 results were restated to show the effect of FSP AUG-AIR 1, which was
adopted retroactively during the first quarter of 2007. For further details see
Note 2 to the Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements
-5-
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Currencies in millions, except per share amounts, unless otherwise indicated)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements included herein
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP") have been condensed or omitted pursuant to such rules and
regulations. Financial statements prepared in accordance with U.S. GAAP require
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses and other disclosures.
In the opinion of management, these financial statements include all normal and
recurring adjustments necessary for a fair presentation of the financial
position and the results of our operations and cash flows for the interim
periods presented. The results of operations for any interim period are not
necessarily indicative of the results of operations for the full year. The
financial statements should be read in conjunction with the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements
contained in the Company's 2006 Annual Report on Form 10-K. Unless indicated
otherwise, the terms "Company", "Cytec", "we", "us" and "our" each refer
collectively to Cytec Industries Inc. and its subsidiaries.
2. DEFERRED PLANNED MAINTENANCE COSTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Staff Position No. AUG AIR-1, "Accounting for Planned Major Maintenance
Activities" ("FSP"). This FSP prohibits accruing as a liability the future costs
of periodic major overhauls and maintenance of plant and equipment under the
"accrue-in-advance" methodology, as the costs for future planned major
maintenance activities do not meet the definition of a liability. We adopted the
FSP as of January 1, 2007 and restated our prior consolidated financial
statements accordingly. Prior to adoption, we utilized the accrue-in-advance
method for incremental costs to be incurred for the planned major maintenance
activities which related to our Building Block Chemicals segment. We adopted the
deferral method to account for maintenance expenses incurred for scheduled
maintenance activities, which are amortized evenly until the next scheduled
activity. The impact to our consolidated results of operations was a $0.3
increase in net earnings for the year ended December 31, 2006, and a $0.1 and a
$0.2 increase in net earnings for the three and six months ended June 30, 2006,
respectively. As a result of these immaterial changes, earnings per share for
the three months ended June 30, 2006 is unchanged. The impact on 2006 basic
earnings per share for the six months ended June 30, 2006 was an increase of
$0.01 per share and diluted earnings per share is unchanged. The impact to our
consolidated financial position was an increase in retained earnings of $6.6 as
of December 31, 2006, as a result of an increase in other assets for $2.3 for
the addition of prior unamortized deferred charges and a decrease in accrued
expenses of $8.5, as well as adjustments of deferred taxes for these respective
items. There was no impact to our 2006 net cash provided by operating activities
in our consolidated statement of cash flows.
3. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits
companies to choose to measure certain financial assets and liabilities at fair
value (the "fair value option"). If the fair value option is elected, any
upfront costs and fees related to the item must be recognized in earnings and
cannot be deferred, e.g., debt issue costs. The fair value election is
irrevocable and may generally be made on an instrument-by-instrument basis, even
if a company has similar instruments that it elects not to fair value. At the
adoption date, unrealized gains and losses on existing items for which fair
value has been elected are reported as a cumulative adjustment to beginning
retained earnings. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact, if any, that the
adoption of SFAS 159 will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and requires additional
disclosures about fair-value measurements. SFAS 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments) and is intended to
increase the consistency of those measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. However, for some entities, the
application of SFAS 157 will change current practice. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We are still in the process of reviewing the impact of adopting
this statement. However, we do not expect the adoption of SFAS 157 to have a
material impact on our consolidated financial statements.
-6-
4. DIVESTITURES
In October 2006, we completed the first of three phases of the sale of our water
treatment chemicals and acrylamide product line to Kemira Group ("Kemira"). This
first phase included the product lines themselves, the related intellectual
property, the majority of the manufacturing sites and essentially all of the
sales, marketing, manufacturing, R&D and technical services personnel. The
manufacturing sites in the first phase included Mobile, Alabama, Longview,
Washington, Bradford, UK, and the acrylamide manufacturing plant at our Fortier,
Louisiana facility which will be operated by our personnel under a long term
manufacturing agreement. The sale of our Botlek manufacturing site in the
Netherlands was completed and transferred to Kemira in January 2007 as part of
the phase two closing. We will continue to supply acrylonitrile to the Kemira
acrylamide plants at Fortier and Botlek under long term supply agreements. In
addition, under various long term manufacturing agreements, we will manufacture
certain water treatment products for Kemira at several of our sites and Kemira
will manufacture for us certain mining chemicals at the Mobile, Alabama and
Longview, Washington sites and various other products at the Botlek site. These
contracts were all deemed to be at estimated fair value. Sales of certain assets
at various subsidiaries in Latin America and Asia/Pacific are expected to close
in the third quarter of 2007 as the last phase of the transaction.
The timing of the flow of funds is as follows: approximately $208.0 was received
in October 2006 for the first closing, and approximately $21.0 was received for
the second closing in January 2007. We also received approximately $6.0 in
February 2007 for a working capital adjustment from the first phase closing per
the terms of the contract. An estimated $10.0 is expected upon the completion of
the transfer of the assets at the various subsidiaries, bringing estimated total
proceeds to $245.0. The remaining subsidiary net asset closings are subject to
certain conditions and the amounts could change due to final working capital
transferred. We recorded a pre-tax gain of $75.5 ($59.6 after-tax) related to
the first phase closing in the fourth quarter of 2006, and a pre-tax gain of
$15.7 ($15.3 after-tax) in the first quarter of 2007 from the phase two closing.
The assets and liabilities of our water treatment chemicals and acrylamide
product lines included in the June 30, 2007 and December 31, 2006 consolidated
balance sheets are comprised of:
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June 30, December 31,
2007 2006
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Accounts receivable $ 3.9 $ 6.5
Inventories 3.0 4.3
Property, plant and equipment - 26.6
Other assets - 1.4
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Assets held for sale $ 6.9 $ 38.8
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Accounts payable $ - $ 3.4
Accrued liabilities 1.4 12.7
Other noncurrent liabilities - 0.2
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Liabilities held for sale $ 1.4 $ 16.3
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5. RESTRUCTURING OF OPERATIONS
In accordance with our policy, restructuring costs are included in our corporate
unallocated operating results consistent with management's view of its
businesses.
For the three and six months ended June 30, 2007, we recorded net restructuring
charges of $1.8 and $2.6, respectively, primarily related to the 2006 decision
to shut down our manufacturing facility in Dijon, France, for costs that were
not accruable in prior periods. We expect to incur additional minor
restructuring costs in the remainder of 2007 that primarily relate to personnel
and site closure costs that are not accruable at June 30, 2007, including
potential additional site remediation costs. In 2006, based on forecasted cash
flow information, we determined that the manufacturing facility in Dijon and
related intangible assets were impaired and thus were written off. This facility
manufactured solvent-borne alkyd and solvent-borne acrylic based resins in our
Cytec Surface Specialties ("CSS") segment. We have moved production of some of
the more profitable products manufactured at Dijon to other facilities and
ceased production of the remainder. We are in the process of attempting to sell
the site. The restructuring for the three months ended June 30, 2007 was charged
as follows: manufacturing cost of sales $1.7, and administrative and general
$0.1. The restructuring for the six months ended June 30, 2007 was charged as
follows: manufacturing cost of sales $2.3, and administrative and general $0.3.
In 2006, we recorded severance of $19.5 including $8.4 related to the shut down
of the manufacturing facility in Dijon, $6.4 for the restructuring of our
Botlek, Netherlands facility, and $4.7 for other restructuring initiatives. As
of December 31, 2006, the reserve balance related to severance for the 2006
restructuring initiatives was $13.5 after cash payments of $6.4 and currency
translation adjustments. Also in 2006, we recorded an impairment charge of
$29.3, of which $13.8 was related to the Botlek facility for the impairment of
fixed assets related to our Polymer Additives product line in our Performance
Chemicals segment and $15.5 for the impairment of our manufacturing facility and
related intangible assets in Dijon. In addition, we recorded a restructuring
charge of $2.3 for other costs related to the Botlek facility.
-7-
2005 restructuring initiatives included aggregate charges of $16.8 related to
both Cytec Engineered Materials and Cytec Specialty Chemicals segments. As of
June 30, 2007, the reserve balance related to 2005 restructuring initiatives was
$0.6.
A summary of the restructuring activity is outlined in the table below:
2005 2006
Restructuring Restructuring Total
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Balance December 31, 2006 $ 1.4 $ 13.5 $ 14.9
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First Quarter 2007 charges - 0.8 0.8
Cash payments (0.7) (1.8) (2.5)
Currency translation adjustments - 0.2 0.2
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Balance March 31, 2007 $ 0.7 $ 12.7 $ 13.4
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Second Quarter 2007 charges - 1.8 1.8
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Cash payments (0.2) (4.6) (4.8)
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Currency translation adjustments 0.1 - 0.1
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Balance June 30, 2007 $ 0.6 $ 9.9 $ 10.5
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Cash payments related to the above restructurings are expected to be completed
in 2007, except for certain long-term severance payments.
6. SHARE-BASED COMPENSATION
On January 1, 2006, we adopted SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which requires companies to recognize compensation cost
in an amount equal to the fair value of share-based payments, such as stock
options granted to employees. As a result of the adoption of SFAS 123R, we
recorded additional charges related to stock options and stock appreciation
rights that are settled with common shares ("stock-settled SARS") of $3.3 and
$6.4 for the three and six months ended June 30, 2007, respectively. The
adoption of SFAS 123R was recorded as of January 1, 2006 and resulted in a
non-cash charge for the cumulative effect of a change in accounting principle of
$1.6 and a non-cash credit of $0.4 for cash-settled SARS (as a result of the new
requirement to record expense at fair value) and non-vested and performance
stocks (forfeitures estimated now, as well as grant date only market value of
the shares under award), for a net charge of $1.2, net of a tax benefit of $0.7.
The effect on basic and diluted earnings per share for the cumulative effect
charge was $0.03 and $0.02 per share, respectively, for the six months ended
June 30, 2006.
For stock options granted before January 1, 2005, the fair value of each stock
option grant was estimated on the date of grant using the Black-Scholes option
pricing model. For stock options and stock-settled SARS granted after January 1,
2005, the fair value of each award is estimated on the date of grant using a
binomial-lattice option valuation model. Stock-settled SARS are economically
valued the same as stock options. The binomial-lattice model considers
characteristics of fair value option pricing that are not available under the
Black-Scholes model. Similar to the Black-Scholes model, the binomial-lattice
model takes into account variables such as volatility, dividend yield, and
risk-free interest rate. However, in addition, the binomial-lattice model
considers the contractual term of the option, the probability that the option
will be exercised prior to the end of its contractual life, and the probability
of termination or retirement of the option holder in computing the value of the
option. For these reasons, we believe that the binomial-lattice model provides a
fair value that is more representative of actual experience and future expected
experience than the value calculated in previous years using Black-Scholes. The
assumptions for the quarters ended June 30, 2007 and 2006 are noted in the
following table:
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2007 2006
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Expected life (years) 6.2 5.7
Expected volatility 27.2% 37.6%
Expected dividend yield 0.69% 0.81%
Range of risk-free interest rate 4.8% - 5.2% 4.4% - 4.7%
Weighted-average fair value per option $19.50 $19.01
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-8-
The expected life of options granted is derived from the output of the option
valuation model and represents the period of time that options granted are
expected to be outstanding. Expected volatilities are based on the combination
of implied market volatility and our historical volatility. The decrease in our
expected volatility from 2006 represents a change in methodology used to
calculate the expected volatility. Prior to 2007, our expected volatility was
based on a weighted average of the implied volatility and the mean reversion
volatility (represents the annualized volatility of the stock prices over our
entire stock history) of our stock with weighting of 10% and 90%, respectively.
In 2007, we changed the methodology to a weighted average of our implied
volatility and our most recent 6.2 years (which represents the most recent
expected life of the options/stock-SARS) volatility with weighting of 50% each.
We feel that the revised methodology is more representative of the market's
expectation of our volatility, based on recent trends and the mature industries
in which we participate. The risk-free rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant. SFAS 123R specifies that initial accruals be based on the
estimated number of instruments for which the requisite service is expected to
be rendered. Therefore, we are required to incorporate the probability of
pre-vesting forfeiture in determining the number of expected vested options. The
forfeiture rate is based on the historical forfeiture experience and prospective
actuarial analysis.
Stock Award and Incentive Plan:
The 1993 Stock Award and Incentive Plan (the "1993 Plan") provides for grants of
a variety of awards, such as stock options (including incentive stock options
and nonqualified stock options), non-vested stock (including performance stock),
stock appreciation rights (including those settled with common shares) and
deferred stock awards and dividend equivalents. At June 30, 2007, there are
approximately 5,100,000 shares reserved for issuance under the 1993 Plan.
We have utilized the stock option component of the 1993 Plan to provide for the
granting of nonqualified stock options and stock-settled SARS with an exercise
price at 100% of the market price on the date of the grant. Options and
stock-settled SARS are generally exercisable in installments of one-third per
year commencing one year after the date of grant and annually thereafter, with
contract lives of generally 10 years from the date of grant.
A summary of stock options and stock-settled SARS activity for the six months
ended June 30, 2007 is presented below.
Weighted
Weighted Average
Average Remaining Aggregate
Options and Stock-Settled SARS Number of Exercise Contractual Intrinsic
Activity: Units Price Life (Years) Value
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Outstanding at January 1, 2007 4,339,920 $35.00
Granted 586,006 58.22
Exercised (531,666) 36.92
Forfeited (64,953) 46.39
Outstanding at June 30, 2007 4,329,307 $37.73 5.6 $112.7
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Exercisable at June 30, 2007 3,201,611 $32.11 4.5 $101.4
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Weighted
Average
Nonvested Options and Stock- Grant Date Fair
Settled SARS: Number of Units Value
------------------------------------------------------------
Nonvested at January 1, 2007 1,088,466 $18.24
Granted 586,006 19.50
Vested (511,907) 17.85
Forfeited (34,869) 17.89
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Nonvested at June 30, 2007 1,127,696 $19.08
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During the six months ended June 30, 2007, we granted 586,006 units of
stock-settled SARS and stock options. We did not grant any stock-settled SARS
prior to 2006. The weighted-average grant-date fair value of the stock-settled
SARS and stock options granted during the six months ended June 30, 2007 and
2006 was $19.50 and $19.01 per share, respectively. Stock-settled SARS are
deemed to be equity-based awards under SFAS 123R. The total intrinsic value of
stock options and stock-settled SARS exercised during the six months ended June
30, 2007 and 2006 was $11.8 and $20.8, respectively. Treasury shares have been
utilized for stock option exercises. The total fair value of stock options
vested during the six months ended June 30, 2007 and 2006 was $9.7 and $8.9,
respectively.
-9-
As of June 30, 2007, there was $13.7 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 1.7 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 June 30, 2007 and 2006 was
approximately $0.5 and $0.3, respectively.
Cash received (for stock options only) and the tax benefit realized from stock
options and stock-settled SARS exercised were $19.0 and $4.3 for the six months
ended June 30, 2007 and $30.5 and $7.7 for the six months ended June 30, 2006,
respectively. Cash used to settle cash-settled SARS was $0.5 and $0.3 for the
six months ended June 30, 2007 and 2006, respectively. The liability related to
our cash-settled SARS was $4.5 at June 30, 2007.
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 stock 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 stocks awarded in 2005 relate to the 2007 performance period. The
total amount of share-based compensation expense recognized for non-vested and
performance stock for the three and six months ended June 30, 2007 was $0.1 and
$0.2, respectively, and $0.3 and $0.6 for the three and six months ended June
30, 2006, respectively.
Upon adoption of SFAS 123R, we calculated our additional paid-in capital pool
("APIC Pool") to be $41.4. Exercises of stock options and stock-settled SARS
since the adoption increased the APIC Pool to $56.0 at June 30, 2007.
7. EARNINGS PER SHARE (EPS)
Basic earnings per common share excludes dilution and is computed by dividing
net earnings by the weighted-average number of common shares outstanding (which
includes shares outstanding, less performance and non-vested shares for which
vesting criteria have not been met) plus deferred stock awards, weighted for the
period outstanding. Diluted earnings per common share is computed 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.
The following shows the reconciliation of weighted-average shares:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------------------------
Weighted average shares outstanding: 48,178,286 47,418,662 48,071,408 47,167,598
Effect of dilutive shares:
Options and stock-settled SARS 1,034,911 1,147,138 1,052,869 1,147,430
Performance/Restricted Stock 23,864 66,630 22,824 63,846
---------------------------------------------------------------------------------------------
Adjusted average shares outstanding 49,237,061 48,632,430 49,147,101 48,378,874
---------------------------------------------------------------------------------------------
Outstanding stock options to purchase 35,068 and 1,500 shares of common stock
for the three months ended June 30, 2007 and 2006, respectively, and 35,068 and
43,000 shares of common stock for the six months ended June 30, 2007 and 2006,
respectively, were excluded from the above calculation because their inclusion
would have had an anti-dilutive effect on earnings per share. In addition,
543,776 and 640,420 of outstanding stock-settled SARS for the three and six
months ended June 30, 2007 and 2006, respectively, were excluded from the above
calculation due to their anti-dilutive effect on earnings per share.
8. INVENTORIES
Inventories consisted of the following:
----------------------------------------------------
June 30, December 31,
2007 2006
----------------------------------------------------
Finished goods $327.8 $333.4
Work in process 39.6 26.4
Raw materials & supplies 119.1 114.8
----------------------------------------------------
Total inventories $486.5 $474.6
----------------------------------------------------
-10-
9. DEBT
Long-term debt, including the current portion, consisted of the following:
June 30, 2007 December 31, 2006
---------------------------------------------------------------------------------------------------------
Face Carrying Value Face Carrying Value
---------------------------------------------------------------------------------------------------------
Five-Year Term Loan Due February 15, 2010 $ - $ - $ 52.6 $ 52.6
Five-Year Revolving Credit Line Due June 7, 2012 34.3 34.3 42.0 42.0
6.75% Notes Due March 15, 2008 100.0 99.6 100.0 99.3
5.5% Notes Due October 1, 2010 250.0 249.8 250.0 249.7
4.6% Notes Due July 1, 2013 200.0 201.3 200.0 201.5
6.0% Notes Due October 1, 2015 250.0 249.5 250.0 249.4
Other 7.4 7.4 7.3 7.3
---------------------------------------------------------------------------------------------------------
$ 841.7 $ 841.9 $ 901.9 $ 901.8
Less: Current maturities 101.5 101.1 1.4 1.4
---------------------------------------------------------------------------------------------------------
Long-term debt $ 740.2 $ 740.8 $ 900.5 $ 900.4
---------------------------------------------------------------------------------------------------------
During the first quarter of 2007, we repaid the $52.6 outstanding balance at
December 2006 under the five-year term loan and terminated this facility. In
June 2007, we amended and restated our revolving credit agreement to increase
the facility from $350.0 to $400.0 and extended the maturity date to June 2012.
Borrowings against the $400.0 unsecured five-year revolving credit facility
totaled $34.3 at June 30, 2007. This facility contains covenants that are
customary for such facilities.
The weighted-average interest rate on all of our debt was 5.05% and 4.73% for
the six months ended June 30, 2007 and 2006, respectively. The weighted-average
interest rate on short-term borrowing outstanding as of June 30, 2007 and 2006
was 4.70% and 4.77%, respectively.
10. ENVIRONMENTAL, CONTINGENCIES AND COMMITMENTS
Environmental Matters
We are subject to substantial costs arising out of environmental laws and
regulations, which include obligations to remove or limit the effects on the
environment of the disposal or release of certain wastes or substances at
various sites or to pay compensation to others for doing so.
As of June 30, 2007 and December 31, 2006, the aggregate environmental related
accruals were $103.2 and $102.7, respectively. As of June 30, 2007 and December
31, 2006, $7.4 of the above amounts was included in accrued expenses, with the
remainder included in other noncurrent liabilities. Environmental remediation
spending for the three months ended June 30, 2007 and 2006 was $1.3 and $1.3,
respectively, and for the six months ended June 30, 2007 and 2006 was $2.1 and
$2.0, respectively.
These accruals can change substantially due to such factors as additional
information on the nature or extent of contamination, methods of remediation
required, changes in the apportionment of costs among responsible parties and
other actions by governmental agencies or private parties or if we are named in
a new matter and determine that an accrual needs to be provided or if we
determine that we are not liable and no longer require an accrual.
A further discussion of environmental matters can be found in Note 13 of the
Notes to the Consolidated Financial Statements contained in our 2006 Annual
Report on Form 10-K.
Other Contingencies
We are the subject of numerous lawsuits and claims incidental to the conduct of
our or certain of our predecessors' businesses, including lawsuits and claims
relating to product liability, personal injury including asbestos,
environmental, contractual, employment and intellectual property matters.
During the third quarter of 2006, the Actuarial and Analytics Practice of AON
Risk Consultants ("AON") completed a study of our asbestos related contingent
liabilities and related insurance receivables. We previously commissioned a
similar study from AON in 2003. For these studies, we provided AON with, among
other things, detailed data for the past ten years on the incidence of claims,
the incidence of malignancy claims, indemnity payments for malignancy and
non-malignancy claims, and dismissal rates by claim. The actuarial methodology
employed by AON was primarily based on epidemiological data assumptions
regarding asbestos disease manifestation, the information provided by us, and
the estimates of claim filing and indemnity costs that may occur in the future.
In conjunction with AON, we also conducted a detailed review of our insurance
position and estimated insurance recoveries. We expect to recover close to 54%
of our future indemnity costs and certain defense and processing costs already
incurred. We anticipate updating the study approximately every three years or
earlier if circumstances warrant. We are in the process of negotiating coverage
in place and commutation agreements with several of our insurance carriers.
-11-
As a result of the findings from the 2006 AON study, we recorded an increase of
$9.0 in September 2006 to our self insured and insured contingent liabilities
for pending and anticipated probable future claims and recorded a higher
receivable for probable insurance recoveries for past, pending and future claims
of $6.8. The reserve increase is attributable to higher settlement values which
more than offset a decrease in number of claimants. The increase in the
receivable is a result of the higher gross liability plus an increase in overall
projected insurance recovery rates.
As of June 30, 2007 and December 31, 2006, the aggregate self-insured and
insured contingent liability was $70.3 and $72.4, respectively, and the related
insurance recovery receivable for the liability as well as claims for past
payments was $39.9 at June 30, 2007 and $40.9 at December 31, 2006. The asbestos
liability included in the above amounts at June 30, 2007 and December 31, 2006
was $54.2 and $54.6, respectively, and the insurance receivable related to the
liability as well as claims for past payments was $38.2 at June 30, 2007 and
$38.1 at December 31, 2006. We anticipate receiving a net tax benefit for
payment of those claims to which full insurance recovery is not realized.
The following table presents information about the number of claimants involved
in asbestos claims with us:
------------------------------------------------------------------------------------------
Six Months Ended Year Ended
June 30, 2007 December 31, 2006
---------------- -----------------
Number of claimants at beginning of period 8,600 22,200
Number of claimants associated with claims closed
during period (300) (15,800)
Number of claimants associated with claims opened
during period 200 2,200
--------------- ---------------
Number of claimants at end of period 8,500 8,600
------------------------------------------------------------------------------------------
Numbers in the foregoing table are rounded to the nearest hundred and are based
on information as received by us which may lag actual court filing dates by
several months or more. Claims are recorded as closed when a claimant is
dismissed or severed from a case. Claims are opened whenever a new claim is
brought, including from a claimant previously dismissed or severed from another
case. The significant decline in the number of claimants during 2006 primarily
reflects disposition of a large number of unwarranted filings in Mississippi
made immediately prior to the institution of tort reform legislation in that
state effective January 1, 2003.
It should be noted that the ultimate liability and related insurance recovery
for all pending and anticipated future claims cannot be determined with
certainty due to the difficulty of forecasting the numerous variables that can
affect the amount of the liability and insurance recovery. These variables
include but are not limited to: (i) significant changes in the number of future
claims; (ii) significant changes in the average cost of resolving claims; (iii)
changes in the nature of claims received; (iv) changes in the laws applicable to
these claims; and (v) financial viability of co-defendants and insurers.
At June 30, 2007, we are among several defendants in approximately 41 cases in
the U.S., in which plaintiffs assert claims for personal injury, property
damage, and other claims for relief relating to one or more kinds of lead
pigment that were used as an ingredient decades ago in paint for use in
buildings. The different suits were brought by government entities and/or
individual plaintiffs, on behalf of themselves and others. The suits variously
seek compensatory and punitive damages and/or injunctive relief, including:
funds for the cost of monitoring; detecting and removing lead based paint from
buildings and for medical monitoring; for personal injuries allegedly caused by
ingestion of lead based paint; and plaintiffs' attorneys' fees. We believe that
the suits against us are without merit, and we are vigorously defending against
all such claims. Accordingly, no loss contingency has been recorded.
In July, 2005, the Supreme Court of Wisconsin held in a case in which we were
one of several defendants that Wisconsin's risk contribution doctrine applies to
bodily injury cases against manufacturers of white lead pigment. Under this
doctrine, manufacturers of white lead pigment may be liable for injuries caused
by white lead pigment based on their past market shares unless they can prove
they are not responsible for the white lead pigment which caused the injury in
question. Seven other courts have previously rejected the applicability of this
and similar doctrines to white lead pigment. We settled this case for an
immaterial amount. Although we are a defendant in approximately 30 similar cases
in Wisconsin and additional actions may be filed in Wisconsin, we intend to
vigorously defend ourselves if such case(s) are filed based on what we believe
to be our non-existent or diminutive market share. Accordingly, we do not
believe that our liability, if any, in such cases will be material, either
individually or in the aggregate and no loss contingency has been recorded.
-12-
We have access to a substantial amount of primary and excess general liability
insurance for property damage and believe these policies are available to cover
a significant portion of both our defense costs and indemnity costs, if any, for
lead pigment related property damage claims. We have agreements with two of our
insurers which provide that they will pay for approximately fifty percent (50%)
of our defense costs associated with lead pigment related property damage
claims.
We commenced binding arbitration proceedings against SNF SA ("SNF") in 2000 to
resolve a commercial dispute relating to SNF's failure to purchase agreed
amounts of acrylamide under a long-term agreement. In July, 2004, the
arbitrators awarded us damages and interest aggregating approximately (euro)11.0
plus interest on the award at a rate of 7% per annum from July 28, 2004 until
paid. After further proceedings in France, we collected (euro)12.2 ($15.7)
related to the arbitration award including interest in the second quarter of
2006. Subsequent to the arbitration award, SNF filed a complaint alleging
criminal violation of French and European Community antitrust laws relating to
the contract, which was the subject of the arbitration proceedings, which
complaint was dismissed in December 2006. SNF has also filed a final appeal of
the court order which allowed us to enforce the award and a separate complaint
in France seeking compensation from Cytec for (euro)54.0 in damages it allegedly
suffered as a result of our attachment on various SNF receivables and bank
accounts to secure enforcement of the arbitration award. We believe that the
appeal and complaint are without merit. SNF also appealed the arbitration award
in Belgium where the Brussels Court of First Instance invalidated the award in
March 2007. We have appealed that decision to the Belgium Court of Appeals,
which will review the matter on a de novo basis. The Belgium decision should not
affect the enforceability of the award in France.
While it is not feasible to predict the outcome of all pending environmental
matters, lawsuits and claims, it is reasonably possible that there will be a
necessity for future provisions for costs for environmental matters and for
other contingent liabilities that we believe will not have a material adverse
effect on our consolidated financial position, but could be material to our
consolidated results of operations or cash flows in any one accounting period.
We cannot estimate any additional amount of loss or range of loss in excess of
the recorded amounts. Moreover, many of these liabilities are paid over an
extended period, and the timing of such payments cannot be predicted with any
certainty.
From time to time, we are also included in legal proceedings as a plaintiff
involving tax, contract, patent protection, environmental and other legal
matters. Gain contingencies related to these matters, if any, are recorded when
they are realized.
A further discussion of other contingencies can be found in Note 13 of the Notes
to the Consolidated Financial Statements contained in our 2006 Annual Report on
Form 10-K.
Commitments
We frequently enter into long-term contracts with customers with terms that vary
depending on specific industry practices. Our business is not substantially
dependent on any single contract or any series of related contracts.
Descriptions of our significant sales contracts at December 31, 2006 are set
forth in Note 13 of the Notes to Consolidated Financial Statements contained in
our 2006 Annual Report on Form 10-K.
11. COMPREHENSIVE INCOME
The components of comprehensive income, which represents the change in equity
from non-owner sources, for the three and six months ended June 30, are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006(1) 2007 2006(1)
------------------------------------------------------------------------------------------------------
Net earnings as reported or restated $ 54.8 $ 48.5 $ 106.5 $ 86.6
Other comprehensive income (loss):
Accumulated pension liability (2) 2.2 - 17.9 -
Unrealized gains on cash flow hedges (0.4) (9.3) 10.3 (8.6)
Foreign currency translation adjustments 15.2 24.8 13.7(3) 38.6
------------------------------------------------------------------------------------------------------
Comprehensive income $ 71.8 $ 64.0 $ 148.4 $ 116.6
------------------------------------------------------------------------------------------------------
(1) 2006 results were restated to show the effect of FSP AUG-AIR 1, which was
adopted retroactively during the first quarter of 2007. For further details
see Note 2 to the Consolidated Financial Statements.
(2) 2007 includes amortization, first quarter impacts of a curtailment and
remeasurement related to certain U.S. plans, and a settlement in the
Netherlands related to the sale of the water treatment and acrylamide
product lines. For further details see Note 17 to the Consolidated
Financial Statements.
(3) 2007 includes the impact of recognizing $13.8 of foreign currency
translation adjustments in first quarter net earnings as a component of the
gain on the sale of the water treatment and acrylamide product lines.
-13-
12. INCOME TAXES
The effective rate for the three and six months ended June 30, 2007 was a tax
provision of 30.7% ($24.3) and 27.6%($40.6), respectively, compared to 18.5%
($11.0) and 22.6% ($25.6) for the three and six months ended June 30, 2006. The
2007 effective tax rate for the quarter and year to date was unfavorably
impacted by a shift in our earnings to higher tax jurisdictions, changes in U.S.
tax laws regarding export incentives, and a French restructuring charge for
which no tax benefit was given due to the unlikely utilization of related net
operating losses. The rate was favorably affected by the relatively low tax
expense of $0.4 with respect to a $15.7 gain recorded in the first quarter of
2007 on the second phase of the water business divestiture and changes in U.S.
tax laws regarding manufacturing incentives. Excluding these items and accrued
interest and penalties on unrecognized tax benefits in accordance with FIN 48 as
described below, the underlying estimated annual effective tax rate for the six
months ended June 30, 2007 was 29.3%, with a normalized effective rate of 29.75%
including such interest and penalties.
The 2006 effective tax rate for the quarter and year to date was favorably
impacted by the continued mix of earnings reported in countries with lower tax
rates compared to the U.S., a tax benefit from a restructuring charge recorded
at 29.6%, and the favorable decision in a legal dispute, a portion of which was
recorded in a lower tax entity. Also favorably impacting the rate was a
reduction in tax expense of $3.5 as a result of the completion of prior years
U.S. tax audits, offset to a lesser extent by the December 31, 2005 expiration
of the U.S. research and development tax credit for that period.
In 2005, we received a final notice from the Norwegian Assessment Board
disclosing an increase to taxable income with respect to a 1999 restructuring of
certain of our European operations. The tax liability attributable to this
assessment, excluding interest and possible penalties, was approximately 84.0
Norwegian krone ($14.2). We unsuccessfully contested this assessment before a
Norwegian tribunal in 2006 and filed an appeal in response to this adverse
decision during the first quarter of 2007.
In the event the Norwegian authorities ultimately prevail in their assessment,
approximately 22.0 Norwegian krone ($3.7) of tax related to this matter will be
remitted in subsequently filed tax returns beginning with the 2005 taxable
period in accordance with Norwegian law. As a result, we remitted 4.4 Norwegian
krone ($0.7) of additional tax in 2006 for the 2005 taxable period related to
this dispute. Accordingly, the accrued balance at June 30, 2007 for this
contingency was 24.7 Norwegian krone ($4.2), which represents our remaining
liability (including interest) regarding this matter in the event we ultimately
accept the Norwegian's court decision as final. We also expect to pay 3.5
Norwegian krone ($0.6) during 2007 for this issue related to the 2006 taxable
period.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109,
Accounting for Income Taxes" ("FIN 48"). FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon settlement with the tax authorities. FIN 48 also provides guidance
on derecognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures.
We adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, we recognized a $0.3 decrease in the liability for
unrecognized tax benefits. This decrease in liability resulted in an increase to
the January 1, 2007 retained earnings balance in the amount of $0.3. In
addition, as of January 1, 2007, we reclassified $19.3 of unrecognized tax
benefits from current taxes payable to non-current taxes payable, which is
included in other non-current liabilities on the consolidated balance sheet. The
amount of unrecognized tax benefits at January 1, 2007 is $25.6 (gross) of which
$18.9 would impact our effective tax rate, if recognized. As of June 30, 2007,
the amount of unrecognized tax benefits is $28.6 (gross) of which $20.6 would
impact our effective tax rate, if recognized. There are no known uncertain tax
positions which are reasonably possible to change over the next twelve months
necessitating a significant change in our unrecognized tax benefits.
We recognize interest and penalties related to unrecognized tax benefits in
income tax expense in the consolidated statements of income. We had recorded a
liability for the payment of interest and penalties of approximately $2.4 as of
January 1, 2007, increasing to approximately $3.1 as of June 30, 2007.
The Internal Revenue SerFvice (the "IRS") has completed and closed its audits of
our tax returns through 2003. During the second quarter of 2007, the IRS
commenced the audit of our tax returns for the years 2004 and 2005.
State income tax returns are generally subject to examination for a period of
3-5 years after filing of the respective return. The state impact of any federal
changes remains subject to examination by various states for a period of up to
one year after formal notification to the states. We have various state income
tax returns in the process of examination and administrative appeals.
-14-
International jurisdictions have statutes of limitations generally ranging from
3-5 years after filing of the respective return. Years still open to examination
by tax authorities in major jurisdictions include Austria (2005 onward), Belgium
(2004 onward), Germany (2005 onward), Netherlands (2005 onward), Canada (2001
onward), UK (2005 onward), Italy (2005 onward), China (2003 onward), and Norway
(1999 onward). We are currently under examination in several of these
jurisdictions.
13. OTHER FINANCIAL INFORMATION
On April 19, 2007 the Board of Directors declared a $0.10 per common share cash
dividend, paid on May 25, 2007 to shareholders of record as of May 10, 2007.
Cash dividends paid in the second quarter of 2007 and 2006 were $4.8 and $4.7,
respectively, and for the six months ended June 30, 2007 and 2006 were $9.6 and
$9.4, respectively. On July 19, 2007 the Board of Directors declared a $0.10 per
common share cash dividend, payable on August 27, 2007 to shareholders of record
as of August 10, 2007.
Income taxes paid for the six months ended June 30, 2007 and 2006 were $30.9 and
$30.8, respectively. Interest paid for the six months ended June 30, 2007 and
2006 was $22.6 and $28.9, respectively. Interest income for the six months ended
June 30, 2007 and 2006 was $0.6 and $1.1, respectively.
UCB SA ("UCB") was considered a related party during the year ended December 31,
2006 since it then owned more than 10% of Cytec's outstanding common stock. UCB
announced in March 2007 that it had sold all of its Cytec shares and as a
result, UCB is no longer a related party. As of June 30, 2007 and December 31,
2006, $2.5 and $2.4 was owed from UCB respectively, which is included in other
receivables on the accompanying consolidated balance sheet. The balance
represents amounts to be received from UCB for certain pre-acquisition tax
liabilities which we have paid or will pay as a result of our acquisition of
Surface Specialties.
14. SEGMENT INFORMATION
Summarized segment information for our four segments for the three and six
months ended June 30 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ --------------------------
2007 2006(1) 2007 2006(1)
---------------- ------------ ------------ ------------
Net sales
---------
Cytec Performance Chemicals
Sales to external customers $ 184.8 $ 229.6 $ 363.8 $ 455.6
Intersegment sales 1.9 2.1 3.7 3.9
Cytec Surface Specialties 419.6 390.8 824.1 764.7
Cytec Engineered Materials 166.6 151.6 330.1 290.7
Building Block Chemicals
Sales to external customers 93.0 81.1 209.5 161.5
Intersegment sales 7.3 23.2 16.7 46.3
----------- ----------- ----------- -----------
Net sales from segments 873.2 878.4 1,747.9 1,722.7
Elimination of intersegment revenue (9.2) (25.3) (20.4) (50.2)
----------- ----------- ----------- -----------
Net sales $ 864.0 $ 853.1 $ 1,727.5 $ 1,672.5
---------------------------------------------------------------------------------------------
% of % of % of % of
sales sales sales sales
--------- --------- --------- ---------
Earnings (loss) from operations
-------------------------------
Cytec Performance Chemicals $ 23.7 13% $ 18.3 8% $ 36.6 10% $ 36.2 8%
Cytec Surface Specialties 32.8 8% 29.5 8% 48.5 6% 58.9 8%
Cytec Engineered Materials 34.8 21% 28.3 19% 67.4 20% 52.2 18%
Building Block Chemicals 4.6 5% 6.4 6% 7.2 3% 6.3 3%
---------- -------- -------- ---------
Earnings from segments 95.9 11% 82.5 9% 159.7 9% 153.6 9%
Corporate and Unallocated (2) (5.6) (24.2) 7.1 (26.8)
---------- -------- -------- ---------
Earnings from operations $ 90.3 10% $ 58.3 7% $ 166.8 10% $ 126.8 8%
-----------------------------------------------------------------------------------------------------------------
(1) 2006 results were restated to show the effect of FSP AUG-AIR 1, which was
adopted retroactively during the first quarter of 2007. For further details see
Note 2 to the Consolidated Financial Statements.
(2) In the second quarter of 2007 Corporate and Unallocated includes a net
restructuring charge of $1.8 for costs related primarily to the shutdown of a
manufacturing facility in France. In the first six months of 2007 Corporate and
Unallocated includes a net restructuring charge of $2.6 million primarily
related to the shutdown of a manufacturing facility in France and a $15.7
million gain as a result of completing the second phase of the sale of our water
treatment chemicals and acrylamide product lines to Kemira Group. See notes 4&5
to the consolidated financial statements.
-15-
In the second quarter of 2006 Corporate and Unallocated includes a net
restructuring charge of $21.9 million and $1.0 for integration costs related to
the Surface Specialties acquisition. In the first six months of 2006 Corporate
and Unallocated includes a net restructuring charge of $22.3 million. See note 5
to the consolidated financial statements.
15. GOODWILL AND OTHER ACQUISITION INTANGIBLES
The following is the activity in the goodwill balances for each segment.
Cytec Cytec Cytec
Performance Surface Engineered
Chemicals Specialties Materials Corporate Total
-----------------------------------------------------------------------------------------------
Balance, December 31, 2006 $ 88.2 $ 712.4 $ 241.2 $ 0.7 $ 1,042.5
Currency exchange rate changes 0.8 11.0 - - 11.8
-----------------------------------------------------------------------------------------------
Balance, June 30, 2007 $ 89.0 $ 723.4 $ 241.2 $ 0.7 $ 1,054.3
-----------------------------------------------------------------------------------------------
Other acquisition intangibles consisted of the following major classes:
Weighted- Accumulated
average Gross carrying value amortization Net carrying value
Useful ---------------------------------------------------------------------------
Life June 30, December 31, June 30, December 31, June 30, December 31,
(years) 2007 2006 2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------
Technology-based 15.2 $ 55.0 $ 53.9 $ (21.3) $ (19.1) $ 33.7 $ 34.8
Marketing-related < 2.0 2.0 1.9 (1.6) (1.2) 0.4 0.7
Marketing-related 15.8 63.1 62.3 (17.8) (15.0) 45.3 47.3
Marketing-related 40.0 44.6 43.6 (1.1) (0.5) 43.5 43.1
Customer-related 15.0 422.9 416.5 (71.0) (56.3) 351.9 360.2
---------------------------------------------------------------------------------------------------------
Total $ 587.6 $ 578.2 $ (112.8) $ (92.1) $ 474.8 $ 486.1
---------------------------------------------------------------------------------------------------------
Amortization of acquisition intangibles for the three months ended June 30, 2007
and 2006 was $9.7 and $9.3, respectively, and for the six months ended June 30,
2007 and 2006 were $18.9 and $18.0, respectively. Assuming no change in the
gross carrying amount of acquisition intangibles and the currency exchange rates
remain constant, the estimated amortization of acquisition intangibles for the
fiscal year 2007 is $37.6, for the years 2008 and 2009 is $36.9 per year, and
for the years 2010 and 2011 is $36.8 per year.
16. DERIVATIVE FINANCIAL INSTRUMENTS AND COMMODITY HEDGING ACTIVITIES
Derivative Financial Instruments
We periodically enter into currency forward contracts primarily to hedge
currency fluctuations of transactions denominated in currencies other than the
functional currency of the business. At June 30, 2007, the principal
transactions hedged involved accounts receivable, accounts payable and
intercompany loans. When hedging currency exposures, our practice is to hedge
such exposures with forward contracts denominated in the same currency and with
similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction.
At June 30, 2007, net contractual amounts of forward contracts outstanding
translated into U. S. dollar amounts of $103.7. Of this total, $103.0 was
attributed to the net exposure in forward selling of U. S. dollars. The
remaining $0.7 was the net exposure in forward buying of Euros, translated into
U. S. dollar equivalent amount. The unfavorable fair value of currency
contracts, based on forward exchange rates at June 30, 2007, was $0.4
(unfavorable fair value at December 31, 2006 of $1.3).
Our euro denominated bank borrowings are used to provide a partial hedge of our
net investment in our Belgium-based subsidiary, Cytec Surface Specialties SA/NV.
From time to time we also enter into designated forward euro contracts to adjust
the amount of the net investment hedge. At June 30, 2007, we had designated
forward contracts to purchase (euro)58.0.
-16-
In September 2005, we entered into (euro)207.9 of five year cross currency swaps
and (euro)207.9 of ten year cross currency swaps. The swaps included an initial
exchange of $500.0 on October 4, 2005 and will require final principal exchanges
of $250.0 each on the settlement date of the 5-Year Notes due October 1, 2010
and 10-Year Notes due October 1, 2015. At the initial principal exchange, we
paid U.S. dollars to counterparties and received euros. Upon final exchange, we
will provide euros to counterparties and receive U.S. dollars. The swaps also
call for a semi-annual exchange of fixed euro interest payments for fixed U.S.
dollar interest receipts. With respect to the five year swaps, we will receive
5.5% per annum and will pay 3.784% per annum on each April 1 and October 1,
through the maturity date of the five year swaps. With respect to the ten year
swaps, we will receive 6.0% per annum and will pay 4.5245% per annum on each
April 1 and October 1, through the maturity date of the ten year swaps. The
cross currency swaps have been designated as cash flow hedges of the changes in
value of the future euro interest and principal receipts that result from
changes in the U.S. dollar to euro exchange rates on certain euro denominated
intercompany receivables we have with one of our subsidiaries. At June 30, 2007,
the unfavorable fair values of the five and ten year swaps were $20.9 and $17.8,
respectively, and at December 31, 2006, the unfavorable fair values of the five
and ten year swaps were $16.9 and $16.4, respectively.
Commodity Hedging Activities
At June 30, 2007, we held natural gas swaps, including the gas swaps for Fortier
plant, with an unfavorable fair value of $2.0, which will be reclassified into
Manufacturing Cost of Sales through June 2008 as these swaps are settled.
For more information regarding our hedging activities and derivative financial
instruments, refer to Note 7 to the Consolidated Financial Statements contained
in our 2006 Annual Report on Form 10-K.
17. EMPLOYEE BENEFIT PLANS
Net periodic cost for our pension and postretirement benefit plans was as
follows:
Postretirement
Pension Plans Plans
--------------------- ------------------
Three Months Ended June 30,
-----------------------------------------
2007 2006 2007 2006
-----------------------------------------------------------------------
Service cost $ 5.0 $ 6.5 $ 0.3 $ 0.3
Interest cost 11.0 11.0 3.6 3.4
Expected return on plan assets (11.0) (10.8) (1.2) (1.2)
Net amortization and deferral 3.9 4.1 (2.6) (2.3)
-------- -------- -------- --------
Net periodic cost $ 8.9 $ 10.8 $ 0.1 $ 0.2
-----------------------------------------------------------------------
Six Months Ended June 30,
-----------------------------------------
2007 2006 2007 2006
-----------------------------------------------------------------------
Service cost $ 10.1 $ 12.5 $ 0.6 $ 0.6
Interest cost 22.4 21.6 7.2 6.8
Expected return on plan assets (21.8) (21.3) (2.4) (2.4)
Net amortization and deferral 7.9 7.5 (5.2) (4.6)
Curtailments/settlements (1) 3.3 - - -
-------- --------- --------- ---------
Net periodic cost $ 21.9 $ 20.3 $ 0.2 $ 0.4
-----------------------------------------------------------------------
(1) Primarily represents a settlement charge related to the transfer of plan
assets and liabilities in the Netherlands related to the sale of the water
treatment and acrylamide product lines, which was charged against the gain on
sale.
We disclosed in our 2006 Annual Report on Form 10-K that we expected to
contribute $36.4 and $13.4, respectively, to our pension and postretirement
plans in 2007. Through June 30, 2007, $17.2 and $7.8 in contributions were made,
respectively.
In March 2007 we announced a change to certain of our U.S. pension plans from
defined benefit plans to defined contribution plans effective December 31, 2007.
A related plan curtailment was recorded in the first quarter of 2007, which
resulted in a decrease in our pension liabilities of $13.4, with a corresponding
increase in accumulated other comprehensive income of $8.2 and an adjustment to
deferred taxes of $5.2. The curtailment had an immaterial effect on our
consolidated statement of income. We considered these plan changes to be
significant events as contemplated by SFAS 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS 158") and accordingly, the
liabilities and assets for the affected plans have been remeasured as of March
31, 2007. The remeasurement resulted in a decrease to pension liabilities of
approximately $6.1, a corresponding increase of $3.7 in accumulated other
comprehensive income, and an adjustment to deferred taxes for $2.4. The
remeasurement was driven by a change in the discount rate assumption for the
affected plans (from 5.85% at December 31, 2006 to 6.00% at March 31, 2007), and
slightly better than expected returns on plan assets for the three months ended
March 31, 2007.
We also sponsor various defined contribution retirement plans in the United
States and a number of other countries, consisting primarily of savings and
profit growth sharing plans. Contributions to the savings plans are based on
matching a percentage of employees' contributions. Contributions to the profit
growth sharing plans are generally based on our financial performance. Amounts
expensed related to these plans for the three months ended June 30, 2007 and
2006 were $4.8 and $4.9, respectively, and for the six months ended June 30,
2007 and 2006 were $9.9 and $9.3 respectively.
-17-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements. Currency amounts are in millions, except per share amounts.
Percentages are approximate.
GENERAL
We are a global specialty chemicals and materials company which sells our
products to diverse major markets for aerospace, adhesives, automotive and
industrial coatings, chemical intermediates, inks, mining and plastics. Sales
price and volume by region and the impact of exchange rates on our reporting
segments are important measures that are analyzed by management.
In the course of our ongoing operations, a number of strategic product line
acquisitions and dispositions have been made. The results of operations of the
acquired businesses have been included in our consolidated results from the
dates of the respective acquisitions.
We also report net sales in four geographic regions: North America, Latin
America, Asia/Pacific and Europe/Middle East/Africa. The destination of the sale
determines the region under which it is reported consistent with management's
view of the business. North America consists of the United States and Canada.
Latin America includes Mexico, Central America, South America and the Caribbean
Islands. Asia/Pacific is comprised of Asia, Australia and the islands of the
South Pacific Rim.
Raw material cost changes year on year and selling price changes are an
important factor in profitability especially in years of high volatility. Global
oil and natural gas costs in certain countries are highly volatile and many of
our raw materials are derived from these two commodities. Discussion of the year
to year impact of raw materials, energy costs changes, and our ability to
recover these increases through higher selling prices is provided in our segment
discussion. In addition, higher global demand levels and, occasionally,
operating difficulties at suppliers, have limited the availability of certain of
our raw materials which have contributed to increased costs for some of these
raw materials.
Quarter Ended June 30, 2007, Compared With Quarter Ended June 30, 2006
Consolidated Results
Net sales for the second quarter of 2007 were $864.0 compared with $853.1 for
the second quarter of 2006, an increase of $10.9 or 1.3%. Performance Chemical
sales were down due to the divestiture of the water treatment chemicals product
line. Excluding the divestiture, sales were up slightly with higher volumes and
selling prices in mining, phosphines, and urethane specialties offset by
decreases in other product lines with changes in exchange rates increasing
sales. In the Cytec Surface Specialties segment, sales increased primarily as a
result of increased selling prices and changes in exchange rates partially
offset by lower demand primarily in North America and by discontinuing the sale
of unprofitable solvent-borne products. The Cytec Engineered Materials segment
sales increase was primarily volume related with higher sales to the large
commercial aircraft, business jet, and high performance automotive sectors. The
Building Block Chemicals segment sales were up despite the negative impact of
the divestiture of the acrylamide product line, which was more than offset by
increased volumes of acrylonitrile to the purchaser of the divested product line
and by higher selling volumes and prices of melamine.
For a detailed discussion on sales refer to the Segment Results section below.
Manufacturing cost of sales was $662.8 or 77% of sales during the second quarter
of 2007 compared with $688.0 or 81% of sales for the second quarter of 2006. The
second quarter 2007 decrease is primarily due to lower manufacturing costs from
the divestiture of the water treatment and acrylamide product lines and benefits
of restructuring initiatives partially offset by higher raw material costs of
$21.9. The second quarter of 2007 included a $1.7 restructuring charge primarily
related to the closure of an unprofitable manufacturing facility in France. The
second quarter of 2006 included a net restructuring charge of $21.6 primarily
related to our Polymer Additives business. See Note 5 to the consolidated
financial statements for additional detail of the net restructuring charges.
Selling and technical services was $53.1 in 2007 versus $54.2 in the prior year.
The decrease was primarily attributable to the divestiture of the water treating
chemicals product line and cost reduction initiatives in the Surface Specialties
segment partially offset by increased spending in Cytec Engineered Materials and
Mining Chemicals due to the higher levels of growth in those areas.
-18-
Research and process development was $19.2 in 2007 versus $17.2 in the prior
year. This increase was primarily attributable to increased spending in
Engineered Materials and Surface Specialties to develop and qualify new products
and applications, partially offset by lower spending in Performance Chemicals
due to the divestiture of the water treating chemicals product line.
Administrative and general expenses were $28.9 in 2007 which was up from $26.1
in the prior year. The increase in 2007 was primarily due to higher compensation
expenses and an increase in incentive compensation expenses. Included in the
2006 results is $1.0 for integration expenses primarily associated with
transition off of UCB's information technology system infrastructure.
Amortization of acquisition intangibles was $9.7 in 2007 versus $9.3 in the
prior year. The slight increase primarily resulted from the accelerated
amortization of certain Radcure trademarks in the Surface Specialties segment.
Other income (expense), net was income of $0.1 in 2007 compared with income of
$14.9 in the prior year. Included in the second quarter of 2006 is a gain of
$15.7 in connection with proceeds collected in an arbitration award of the
commercial dispute as discussed in Note 10 to the consolidated financial
statements.
Equity in earnings of associated companies was $0.1 versus $0.9 in the prior
year. The lower earnings are primarily due to market share loss at a major
customer of our joint venture.
Interest expense, net was $11.4 in 2007 compared with $14.6 in the prior year.
The decrease is primarily due to the lower average debt compared to the prior
year.
The effective tax rate for the quarter ended June 30, 2007 was a tax provision
of 30.7% ($24.3) compared to 18.5% ($11.0) for the quarter ended June 30, 2006.
The 2007 effective tax rate for the quarter was unfavorably impacted changes in
U.S. tax laws regarding export incentives and a French restructuring charge for
which no tax benefit was given due to the unlikely utilization of related net
operating losses. Excluding the negative impact of our inability to recognize
any tax benefit on the restructuring charge and certain other discrete items
from the first quarter of 2007, the underlying effective annual tax rate was
29.75% for the quarter.
The effective tax rate for the quarter ended June 30, 2006 was 18.5 % resulting
in a tax provision of $11.0. The 2006 effective tax rate for the quarter was
favorably impacted by a tax benefit from a restructuring charge recorded at
29.6%, and the gain related to a legal dispute partially recorded in a lower tax
entity, resulting in an effective rate of 20%. Also favorably impacting the rate
was a reduction in tax expense of $3.5 as a result of the completion of 2002 and
2003 U.S. tax audits. Excluding these items, the underlying effective tax rate
for the three months ended June 30, 2006 was 27%.
Net earnings for the second quarter of 2007 were $54.8 ($1.11 per diluted
share), an increase over the net earnings of $48.5 ($1.00 per diluted share) in
the second quarter of 2006. The 2007 earnings are higher primarily due to higher
operating earnings in the quarter from lower manufacturing costs due to
restructuring initiatives and higher net selling prices in excess of higher raw
material costs, partially offset by higher operating costs. Earnings also
increased due to lower net interest expense and were partially offset by the
higher tax rate discussed above. The second quarter of 2007 also included a net
after tax restructuring charge of $1.8.
Net earnings for 2006 were $48.5 which included an after-tax net restructuring
charge of $15.4, an after-tax gain of $12.4 related to a favorable resolution of
a legal dispute and an income tax benefit of $3.5 related to the completion of
prior years 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.
Cytec Performance Chemicals
Total % Change Due to
---------------------------------------------
2007 2006 % Change Price Volume/Mix Divestiture Currency
----------------------------------------------------------------------------------------------------------
North America $ 67.9$ 86.2 -21% - -2% -19% -
Latin America 31.8 33.2 -4% - -1% -5% 2%
Asia/Pacific 32.4 31.7 2% -1% 11% -10% 2%
Europe/Middle East/Africa 52.7 78.5 -33% -1% - -37% 3%
----------------------------------------------------------------------------
Total $ 184.8$ 229.6 -20% - - -22% 2%
----------------------------------------------------------------------------------------------------------
Overall selling volumes were down 22% primarily attributable to the divestiture
of the water treating chemicals product line. Excluding the divestiture, sales
and prices were up slightly with higher volumes and selling prices in mining,
phosphines, and urethane specialties offset by decreases in other product lines.
Overall sales were up in Asia/Pacific primarily due to higher Mining sales
volumes offset by lower sales volumes across a number of product lines in North
America. Changes in exchange rates increased sales by 2%.
-19-
Earnings from operations were $23.7, or 13% of sales in 2007, compared with
$18.3, or 8% of sales, in 2006. The increase in earnings is primarily
attributable to benefits of our restructuring initiatives and a favorable
product mix primarily due to the divestiture of the water treating chemicals
product line, partially offset by a $4.1 increase in raw material costs from the
second quarter of 2006.
Cytec Surface Specialties
Total % Change Due to
--------------------------------
2007 2006 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------
North America $ 94.6 $ 93.9 1% 3% -2% -
Latin America 18.4 15.1 22% 6% 10% 6%
Asia/Pacific 69.7 69.4 1% 5% -5% 1%
Europe/Middle East/Africa 236.9 212.4 12% 8% -4% 8%
---------------------------------------------------------------
Total $ 419.6 $ 390.8 7% 6% -3% 4%
---------------------------------------------------------------------------------------------
Selling volumes decreased 3% primarily due to lower sales of liquid coating
resins (aminos lower due to price competition partially offset by higher
waterborne resins) and powder coatings resins in North America. In Asia/Pacific,
we had lower sales primarily in powder coating resins due to weak demand and the
impact from price competition on lower end products. In Europe, sales volumes
were negatively impacted primarily by discontinuing unprofitable solvent-borne
products and in Radcure resins due to lower demand in the industrial coatings
sector. Selling prices were up 6% due to increases in liquid coating resins and
powder coatings across all regions while selling prices were essentially flat in
Radcure resins. Changes in exchange rates increased sales by 4%.
Earnings from operations were $32.8, or 8% of sales in 2007, compared with
$29.5, or 8% of sales in 2006. The increase in earnings is primarily
attributable to the higher selling prices which more than offset the increased
raw material costs of $15.4, the lower selling volumes, and higher operating
costs.
Cytec Engineered Materials
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 7% primarily due to higher sales to the large
commercial aircraft, business jet, and high performance automotive markets in
North America and Europe. Overall prices increased 2% primarily due to price
increases in a number of market segments in all regions except Latin America.
Changes in exchange rates increased sales by 1%.
Earnings from operations were $34.8, or 21% of sales in 2007, compared with
$28.3, or 19% of sales in 2006. The impact of the increased sales volumes and
higher selling prices were partially offset by slightly higher raw material
costs of $0.6, increased costs in manufacturing to support the higher production
volumes, and higher commercial and research and development costs.
Building Block Chemicals
% Change Due to
----------------------------------------------
Total
2007 2006 % Change Price Volume/Mix Divestiture Currency
-----------------------------------------------------------------------------------------------------------
North America $ 56.6 $ 42.0 35% 2% 40% -7% -
Latin America(1) 0.6 1.4 - - - - -
Asia/Pacific 3.1 3.0 3% 4% 2% -3% -
Europe/Middle East/Africa 32.7 34.7 -6% 12% 14% -32% -
-----------------------------------------------------------------------------
Total $ 93.0 $ 81.1 15% 6% 28% -19% -
-----------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
-20-
Overall selling volumes were up 9%. Sales were negatively impacted 19% by the
divestiture of the acrylamide product line which was more than offset by
increased volumes of acrylonitrile to the purchaser of the divested product
line. Excluding these items, sales of acrylonitrile were lower in the quarter
due to a planned maintenance turnaround partially offset by higher melamine
sales volume. The higher melamine sales volume is primarily due to increased
capacity available following our takeover of the manufacturing plant in August
2006, which previously was a 50-50 manufacturing joint venture with a third
party. Overall selling prices increased sales by 6%.
Earnings from operations were $4.6 or 5% of sales in 2007, compared with $6.4,
or 6% of sales in 2006. The decrease in earnings was primarily due to
unfavorable mix due to the divestiture of the acrylamide product line and the
acrylonitrile planned maintenance turnaround in June 2007, partially offset by
selling price increases which were in excess of raw material increases of $1.8.
Six Months Ended June 30, 2007, Compared With Six Months Ended June 30, 2006
Consolidated Results
Net sales for the first six months of 2007 were $1,727.5 compared with $1,672.5
for the prior year period, an increase of $55.0 or 3.3%. The Cytec Performance
Chemicals segment sales volumes decreased primarily due to the divestiture of
the water treating chemicals product line. Cytec Performance Chemicals also
experienced slightly lower volumes in North America due to reduced demand
partially offset by increased volumes in Europe and Asia. In the Cytec Surface
Specialties segment, sales increased primarily as a result of the higher selling
prices in liquid coating resins and powder coatings in all regions, plus
favorable exchange rate changes partially offset by lower volumes in liquid
coating resins and Radcure. The Cytec Engineered Materials segment sales
increase was primarily volume related with higher sales to the large commercial
aircraft and launch markets with price increases in a number of markets across
most regions. The Building Block Chemicals segment sales were up despite the
negative impact of the divestiture of the acrylamide product line which was more
than offset by increased volumes of acrylonitrile to the purchaser of the
divested product line and higher selling volumes of melamine as well as
increased selling prices.
For a detailed discussion on sales refer to the Segment Results section below.
Manufacturing cost of sales was $1,361.7 or 79% for the first six months of 2007
compared with $1,333.7 or 80% of sales for the first six months of 2006. Most of
the increase is associated with higher selling volumes and higher raw material
costs of $51.7 partially offset by reduced costs due to the divestiture of the
water treatment chemicals and acrylamide product lines and restructuring
initiatives. The first six months of 2006 included a net restructuring charge of
$21.3. See Note 5 to the consolidated financial statements for additional detail
of the net restructuring charge.
Selling and technical services was $103.0 in 2007 versus $106.9 in the prior
year. The reduction was primarily due to the divestiture of the water treatment
chemicals product line partially offset by higher spending in Engineered
Materials and Surface Specialties.
Research and process development was $37.6 in 2007 versus $36.1 in the prior
year primarily due to higher research and development spending in Engineered
Materials and Surface Specialties to develop and qualify new products and
applications. Partially offset by a decline due to the divestiture of the water
chemicals product line.
Administrative and general expenses were $55.2 in 2007 versus $51.0 in the prior
year. The increase in 2007 was primarily attributable to higher compensation
expense and an increase in incentive compensation expenses. The first six months
of 2006 includes integration expenses of $1.0 associated with transitioning off
of UCB's information technology system infrastructure. Amortization of
acquisition intangibles was $18.9 in 2007 versus $18.0 in the prior year
primarily due to increased amortization of Radcure Trademarks.
Other income (expense), net was income of $1.5 in 2007 compared with income of
$14.0 in the prior year period. Included in the first six months of 2006 is a
gain of $15.7 in connection with proceeds collected in an arbitration award in
settlement of the commercial dispute as discussed in Note 10 to the consolidated
financial statements.
Equity in earnings of associated companies was $0.4 in 2007 versus $1.7 in the
prior year. The decline is attributable to the market share loss at a major
customer of our associated company.
Interest expense, net was $21.6 in 2007 compared with $29.1 in the prior year.
The decrease is primarily due to the lower average debt compared to the prior
year.
-21-
The effective rate for the six months ended June 30, 2007 was a tax provision of
27.6% ($40.6) compared to 22.6% ($25.6) for the six months ended June 30, 2006.
The 2007 effective tax rate for year to date was unfavorably impacted by a shift
in our earnings to higher tax jurisdictions, changes in U.S. tax laws regarding
export incentives, and a French restructuring charge for which no tax benefit
was given due to the unlikely utilization of related net operating losses. The
rate was favorably affected by the relatively low tax expense of $0.4 with
respect to a $15.7 gain recorded in the first quarter on the second phase of the
water business divestiture and changes in U.S. tax laws regarding manufacturing
incentives. Excluding these items and accrued interest and penalties on
unrecognized tax benefits in accordance with FIN 48, the underlying estimated
annual effective tax rate for the six months ended June 30, 2007 was 29.3%, with
a normalized annual effective rate of 29.75% including such interest and
penalties.
The effective tax rate for the first six months of 2006 was 22.6% ($25.6) which
was favorably impacted by a tax benefit from a restructuring charge recorded at
29.6%, and the gain on the favorable decision in a legal dispute partially
recorded in a lower tax entity, resulting in an effective rate of 20%. Also
favorably impacting the rate was a reduction in tax expense of $3.5 as a result
of the completion of 2002 and 2003 U.S. tax audits. Excluding these items, the
underlying annual effective tax rate for the six months ended June 30, 2006 was
27%.
Net earnings for 2007 were $106.5 ($2.17 per diluted share) compared with net
earnings for 2006 of $86.6 ($1.79 per diluted share). The improvement in net
earnings is primarily attributable to higher operating earnings from increased
selling volumes, increased selling prices in excess of raw material costs, and
benefits from prior restructuring initiates. Earnings also increased due to
lower net interest expense. These increases were partially offset by the higher
effective tax rate discussed above.
Net earnings for 2006 were $86.6 ($1.79 per diluted share) which included an
after-tax net restructuring charge of $15.7, an after-tax gain of $12.4 related
to a favorable resolution of a legal dispute, an income tax benefit of $3.5
related to the completion of prior years tax audits and the cumulative effect of
an accounting change after-tax charge of $1.2 related to the adoption of SFAS
123R.
Segment Results (Sales to external customers)
Year-to-year comparisons and analyses of changes in net sales by product line
segment and region are set forth below.
Cytec Performance Chemicals
Total % Change Due to
----------------------------------------------
2007 2006 % Change Price Volume/Mix Divestiture Currency
------------------------------------------------------------------------------------------------------------
North America $ 132.7 $ 176.2 -25% - -6% -19% -
Latin America 61.6 67.2 -8% 2% -8% -3% 1%
Asia/Pacific 66.5 60.6 10% -2% 15% -5% 2%
Europe/Middle East/Africa 103.0 151.6 -32% - 2% -38% 4%
------------------------------------------------------------------------------
Total $ 363.8 $ 455.6 -20% - -1% -21% 2%
------------------------------------------------------------------------------------------------------------
Overall selling volumes decreased 22% primarily due to the divestiture of the
water treating chemicals product line. In North America, there was lower volumes
in most product lines. In Latin America, selling volumes are down principally
due to timing of mine fills. Overall volume in Asia Pacific increased 15%
primarily due to volume gains in mining chemicals and specialty additives
product lines. Overall average price was flat as price increases were offset by
customer mix. Changes in exchange rates increased sales by 2%.
Earnings from operations were $36.6, or 10% of sales, compared with $36.2 or 8%
of sales in 2006. Earnings were up slightly and operating margins improved as
the favorable product mix and benefits of the 2006 polymer additives cost
restructuring more than offset the lost contribution of the divested water
treating chemical product line and raw material cost increases $7.7.
Cytec Surface Specialties
Total % Change Due to
--------------------------------
2007 2006 % Change Price Volume/Mix Currency
-------------------------------------------------------------------------------
North America $ 180.1 $ 193.2 -7% 3% -10% -
Latin America 34.5 29.4 17% 4% 9% 4%
Asia/Pacific 133.0 128.1 4% 6% -3% 1%
Europe/Middle
East/Africa 476.5 414.0 15% 7% -1% 9%
----------------------------------------------------------------
Total $ 824.1 $ 764.7 8% 6% -3% 5%
-------------------------------------------------------------------------------
-22-
Overall selling volumes decreased 3% primarily due to weak demand across most
product lines in North America and lower sales of solvent borne resin products
due to the discontinuance of certain products. Overall selling prices increased
6% primarily due to higher selling prices in liquid coating resins and powder in
all regions. Overall Radcure resin volumes were down 2% primarily due to weaker
demand in North America and price competition while overall Radcure prices were
basically flat. Changes in exchange rates increased sales by 5% across all
product lines and most regions.
Earnings from operations were $48.5, or 6% of sales, compared with $58.9, or 8%
of sales in 2006. The decrease in earnings is primarily attributable to the
lower selling volumes, higher raw materials of $38.3, and higher operating
expenses partially offset by increased selling prices of $43.6.
Cytec Engineered Materials
Total % Change Due to
-------------------------------
2007 2006 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------
North America $ 206.9 $ 180.2 15% 2% 13% -
Latin America(1) 0.6 0.6 - - - -
Asia/Pacific 24.0 20.8 15% 1% 14% -
Europe/Middle East/Africa 98.6 89.1 11% 2% 6% 3%
---------------------------------------------------------------
Total $ 330.1 $ 290.7 14% 2% 11% 1%
---------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 11% from higher volumes to the large
commercial aircraft primarily due to build rates and new program sales into the
launch vehicle market segment. Net selling prices increased 2% due to price
increases across a number of markets in most regions. Changes in exchange rates
increased sales by 1%.
Earnings from operations were $67.4, or 20% of sales, compared with $52.2, or
18% of sales in 2006. The impact of the increased sales on operating earnings
due to higher volumes and higher selling prices was partially offset by
increased raw material costs of $2.0, higher manufacturing costs as a result of
increased production volumes, and higher technical and research and development
expenditures.
Building Block Chemicals
Total % Change Due to
-------------------------------------------
2007 2006 % Change Price Volume/Mix Divestiture Currency
---------------------------------------------------------------------------------------------------------
North America $ 112.8 $ 86.2 31% - 38% -7% -
Latin America(1) 1.1 2.8 - - - - -
Asia/Pacific 11.7 12.0 -3% 17% -19% -1% -
Europe/Middle East/Africa 83.9 60.5 39% 12% 65% -38% -
---------------------------------------------------------------------------
Total $ 209.5 $ 161.5 30% 6% 43% -19% -
---------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes were up 24%. Sales were negatively impacted 19% by the
divestiture of the acrylamide product line which was more than offset by
increased volumes of acrylonitrile to the purchaser of the divested product
line. Melamine sales were higher in the six month period primarily due to
increased capacity available following our takeover of the manufacturing plant
in August 2006, which previously was a 50-50 manufacturing joint venture with a
third party. Overall selling prices increased sales by 6%.
Earnings from operations were $7.2, or 3% of sales in 2007, compared with $6.3,
or 3% of sales in 2006. The increase in earnings was primarily due to the higher
volumes of acrylonitrile and melamine as well as 6% higher selling prices
partially offset by the divestiture of the acrylamide product line, higher raw
material costs of $3.8, and lower production due to the planned maintenance
turnaround of the acrylonitrile manufacturing facility in June 2007.
LIQUIDITY AND FINANCIAL CONDITION
At June 30, 2007 our cash balance was $30.8 compared with $23.6 at year end
2006.
Cash flows provided by operating activities were $90.9 in 2007 compared with
$94.9 in 2006. Trade accounts receivable increased $57.6 reflecting the increase
in sales and inventory increased $7.0 due to higher inventory levels to meet
increasing demand. Accrued expenses decreased $20.3 primarily due to payments in
excess of current accruals for: incentive compensation and profit sharing of
$9.4, restructuring related activities of $4.8 and customer rebate payments of
approximately $2.5.
-23-
Cash flows used in investing activities were $12.3 for 2007 compared with $40.9
for 2006. This decrease was primarily attributable to the proceeds of $27.1
related to the sale of our water treatment chemicals and acrylamide product line
to Kemira Group. Capital spending for the first half of 2007 was $39.4, although
this is expected to trend higher as activity on our expansion projects in the
Engineered Materials and Surface Specialty segments increase over the remainder
of the year.
Net cash flows used in financing activities were $73.0 in 2007 compared with
$83.5 for 2006. This change is primarily due to a reduction in net debt
repayments in 2007. In the first half of 2007, we had net debt repayments of
$60.8 and treasury stock repurchases of 432,800 shares for $25.1, which were
partially offset by proceeds received on the exercise of stock options of $19.0.
In June 2007, we amended and restated our revolving credit agreement to increase
the facility from $350.0 to $400.0, and extend the maturity date to June 2012.
Borrowings against the $400.0 unsecured five-year revolving credit facility
totaled $34.3 and therefore, we have $365.7 of borrowing capacity unutilized at
June 30, 2007.
Approximately $43.7 remained authorized under our stock buyback program as of
June 30, 2007. We anticipate repurchases will be made from time-to-time on the
open market or in private transactions and will be utilized for share-based
compensation plans and other corporate purposes.
On April 19, 2007 the Board of Directors declared a $0.10 per common share cash
dividend, paid on May 25, 2007 to shareholders of record as of May 10, 2007.
Cash dividends paid in the second quarter of 2007 and 2006 were $4.8 and $4.7,
respectively, and for the six months ended June 30, 2007 and 2006 were $9.6 and
$9.4, respectively. On July 19, 2007 the Board of Directors declared a $0.10 per
common share cash dividend, payable on August 27, 2007 to shareholders of record
as of August 10, 2007.
During 2006, the Pension Protection Act of 2006 was enacted in the U.S. The
principal changes under this legislation relate to the way assets and
liabilities are valued to determine required pension contributions. This
legislation also impacts the timing and manner of required contributions to
under-funded pension plans. These changes could increase the funding
requirements for our U.S. pension plans. Accordingly, the amounts we might
contribute to these benefit plans in the future are subject to uncertainty. We
believe we have adequate liquidity to fund any increased funding requirements of
our U.S. pension plans that may occur due to the Pension Protection Act.
We believe that we have the ability to fund our operating cash requirements,
planned capital expenditures and dividends as well as the ability to meet our
debt service requirements for the foreseeable future from existing cash and from
internal cash generation. However, from time to time, based on such factors as
local tax regulations, prevailing interest rates and our plans for capital
investment or other investments, it may make economic sense to utilize our
existing credit lines in order to meet those cash requirements, which may
include debt-service related disbursements.
We have not guaranteed any indebtedness of our unconsolidated associated
company.
Excluding the impact of increasing raw materials, inflation is not considered
significant since the rate of inflation has remained relatively low in recent
years and investments in areas of the world where inflation poses a risk are
limited. The impact of increasing raw material costs are discussed under
"Customers and Suppliers" in "Business" in Item 1 in our 2006 Annual Report on
Form 10-K.
There were no material changes in contractual obligations from December 31, 2006
to June 30, 2007. Reference is also made to Note 12 in the Notes to Consolidated
Financial Statements included herein which describes certain gross liabilities
totaling $28.6 for unrecognized tax benefits that will be resolved at some point
over the next several years.
OTHER
2007 OUTLOOK
In our July 19, 2007 press release, which was also furnished as an exhibit to a
current report on Form 8-K, we presented our best estimate of the full year 2007
earnings at the time based on various assumptions set forth in the press
release. There can be no assurance that sales or earnings will develop in the
manner projected. Actual results may differ materially. See "Comments on Forward
Looking Statements."
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SIGNIFICANT ACCOUNTING ESTIMATES / CRITICAL ACCOUNTING POLICIES
See "Critical Accounting Policies" under Item 7A of our 2006 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on February 28,
2007 and incorporated by reference herein. There were no changes to our critical
accounting policies except as follows.
Accounting for Uncertainty in Income Taxes
During the first quarter of 2007, we adopted FIN 48. Under FIN 48, we recognize
the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than fifty percent likelihood of being
realized upon effective settlement. See Note 12 of the Consolidated Financial
Statements for additional details on the impact of adoption of FIN 48.
COMMENTS ON FORWARD-LOOKING STATEMENTS
A number of the statements made by us in this report, in our Annual Report on
Form 10-K, or in other documents, including but not limited to the Chairman,
President and Chief Executive Officer's letter to Stockholders, our press
releases and other periodic reports to the Securities and Exchange Commission,
may be regarded as "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning our
(including our segments) outlook for the future, anticipated results of
acquisitions and divestitures, restructuring initiatives and their expected
results, pricing trends, the effects of changes in currency rates and forces
within the industry, the completion dates of and anticipated expenditures for
capital projects, expected sales growth, operational excellence strategies and
their results, expected annual effective tax rates, our long-term goals, legal
settlements and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. Such statements are based upon our
current beliefs and expectations and are subject to significant risks and
uncertainties. Actual results may vary materially from those set forth in the
forward-looking statements.
The following factors, among others, could affect the anticipated results: the
ability to complete the successful integration of Surface Specialties, including
realization of anticipated synergies within the expected timeframes or at all,
and the ongoing operations of the business; the ability to successfully complete
planned restructuring activities, including realization of the anticipated
savings and operational improvements resulting from such activities; the
retention of current ratings on our debt; changes in global and regional
economies; the financial well-being of end consumers of our products; changes in
demand for our products or in the quality, costs and availability of our raw
materials and energy; customer inventory reductions; the actions of competitors;
currency and interest rate fluctuations; technological change; our ability to
renegotiate expiring long-term contracts; changes in employee relations,
including possible strikes; government regulations, including those related to
taxation and those particular to the purchase, sale and manufacture of chemicals
or operation of chemical plants; governmental funding for those military
programs that utilize our products; litigation, including its inherent
uncertainty and changes in the number or severity of various types of claims
brought against us; difficulties in plant operations and materials
transportation, including those caused by hurricanes or other natural forces;
environmental matters; returns on employee benefit plan assets and changes in
the discount rates used to estimate employee benefit liabilities; changes in the
medical cost trend rate; changes in accounting principles or new accounting
standards; political instability or adverse treatment of foreign operations in
any of the significant countries in which we operate; war, terrorism or
sabotage; epidemics; and other unforeseen circumstances.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Currencies in millions)
For a discussion of market risks at year-end, refer to Item 7A of our Annual
Report on Form 10-K for the year ended December 31, 2006, filed with the
Securities and Exchange Commission on February 28, 2007 and incorporated by
reference herein. Other 2007 financial instrument transactions include:
Commodity Price Risk: At June 30, 2007, we held natural gas swaps, including the
gas swaps for our Fortier plant, with an unfavorable fair value of $2.0, which
will be reclassified into Manufacturing Cost of Sales through June 2008 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 $3.8 in the value of the swaps.
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Interest Rate Risk: At June 30, 2007, our outstanding borrowings consisted of
$42.1 of short-term borrowings and $841.9 of long-term debt, including the
current portion. The long-term debt had a face value of $841.7 and a fair value,
based on dealer quoted values, of approximately $818.7 at June 30, 2007.
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 June 30, 2007, interest expense would increase/decrease by
approximately $0.2 for the next fiscal quarter.
Currency Risk: We periodically enter into currency forward contracts primarily
to hedge currency fluctuations of transactions denominated in currencies other
than the functional currency of the business. At June 30, 2007, the principal
transactions hedged involved accounts receivable, accounts payable and
intercompany loans. When hedging currency exposures, our practice is to hedge
such exposures with forward contracts denominated in the same currency and with
similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction.
At June 30, 2007, net contractual amounts of forward contracts outstanding
translated into U. S. dollar amounts of $103.7. The unfavorable fair value of
currency contracts, based on forward exchange rates at June 30, 2007, was $0.4.
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 June 30,
2007 would decrease by approximately $15.8. However, since these contracts hedge
specific transactions, any change in the fair value of the contracts would be
offset by changes in the underlying value of the item or transaction being
hedged.
In September, 2005, we entered into (euro)207.9 of five year cross currency
swaps and (euro)207.9 of ten year cross currency swaps to effectively convert
the 5-Year Notes and 10-Year Notes into euro-denominated liabilities. The swaps
included an initial exchange of $500.0 on October 4, 2005 and will require final
principal exchanges of $250.0 on each settlement date of the 5-Year and 10-Year
Notes (October 1, 2010 and October 1, 2015), respectively. At the initial
principal exchange, we paid US dollars to counterparties and received euros.
Upon final exchange, we will provide euros to counterparties and receive US
dollars. The swaps also call for a semi-annual exchange of fixed euro interest
payments for fixed US dollar interest receipts. With respect to the five year
swaps, we will receive 5.5% per annum and will pay 3.784% per annum on each
April 1 and October 1, through the maturity date of the five year swaps. With
respect to the ten year swaps, we will receive 6.0% per annum and will pay
4.5245% per annum on each April 1 and October 1, through the maturity date of
the ten year swaps. The cross currency swaps have been designated as cash flow
hedges of the changes in value of the future euro interest and principal
receipts that results from changes in the US dollar to euro exchange rates on
certain euro denominated intercompany loans receivable we have with one of our
subsidiaries. At June 30, 2006, the unfavorable fair value of the five and ten
year swaps were $20.9 and $17.8, respectively. Assuming other factors are held
constant, a hypothetical increase of 10% in the euro exchange rate would have an
adverse effect of approximately $53.9 on the combined value of the
cross-currency swaps.
Our euro denominated bank borrowings are used to provide a partial hedge of our
net investment in our Belgium-based subsidiary, Cytec Surface Specialties SA/NV.
From time to time we also enter into forward euro contracts to adjust the level
of this net investment hedge. At June 30, 2007, we had forward contracts to
purchase (euro)58.0 which were designated as a net investment hedge. Assuming
other factors are held constant, a hypothetical decrease of 10% in the euro
exchange rate would have an adverse impact of approximately $7.8 in the value of
these forward contracts.
Item 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation
of the management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures as required by Exchange Act Rule 13a-15(b) as of the period ended
June 30, 2007. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective.
We continue the process of implementing our Cytec Specialty Chemicals global
enterprise-wide planning systems for the acquired business of Surface
Specialties. The world-wide implementation is expected to be completed in early
2009 and includes changes that involve internal control over financial
reporting. Although we expect this implementation to proceed without any
material adverse effects, the possibility exists that the migration to our
global enterprise-wide planning systems could adversely affect our internal
control, our disclosure control and procedures or our results of operations in
future periods. We are reviewing each system and site as they are being
implemented and the controls affected by the implementation. Appropriate changes
have been or will be made to any affected internal control during the
implementation. We will test all significant modified controls resulting from
the implementation to ensure they are functioning effectively.
-26-
As of January 1, 2007, we began utilizing the aforementioned global systems for
the acquired Surface Specialties entities in the United States and Canada. In
conjunction with this implementation, the former U.S. legal entity for the
Surface Specialty business was also merged with the Cytec Industries Inc. U.S.
legal entity. We have reviewed the results of the merger and the concurrent
systems implementation and have concluded that neither had a negative impact on
our internal control over financial reporting.
There were no changes in internal control over financial reporting that occurred
during the three months ended June 30, 2007 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
-27-
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS (Currencies in millions, except per share amounts)
We are the subject of numerous lawsuits and claims incidental to the conduct of
our or our predecessors' businesses, including lawsuits and claims relating to
product liability, personal injury, environmental, contractual, employment and
intellectual property matters. Many of the matters relate to the use, handling,
processing, storage, transport or disposal of hazardous materials. We believe
that the resolution of such lawsuits and claims, including those described
below, will not have a material adverse effect on our consolidated financial
position, but could be material to our consolidated results of operations and
cash flows in any one accounting period. We, in this section, include certain
predecessor entities being indemnified by us.
Material developments to legal proceedings described in our 2006 Annual Report
on Form 10-K are set forth below.
The following table presents information about asbestos claims activity during
the six months ended June 30, 2007:
---------------------------------------------------------------------------------------------------
For the Six Month Period
Ended
June 30, 2007
---------------------------------------------------------------------------------------------------
Number of claimants at beginning of period 8,600
Number of claimants associated with claims closed during period (300)
Number of claimants associated with claims opened during period 200
---------------------------------------------------------------------------------------------------
Number of claimants at end of period 8,500
---------------------------------------------------------------------------------------------------
Numbers in the foregoing table are rounded to the nearest hundred and are based
on information as received by the Company, which may lag actual court filing
dates by several months or more. Claims are recorded as closed when a claimant
is dismissed or severed from a case. Claims are opened whenever a new claim is
brought, including from a claimant previously dismissed or severed from another
case.
We commenced binding arbitration proceedings against SNF SA ("SNF"), in 2000 to
resolve a commercial dispute relating to SNF's failure to purchase agreed
amounts of acrylamide under a long-term agreement. In July, 2004, the
arbitrators awarded us damages and interest aggregating approximately (euro)11.0
plus interest on the award at a rate of 7% per annum from July 28, 2004 until
paid. After further proceedings in France, we collected (euro)12.2 ($15.7)
related to the arbitration award including interest in the second quarter of
2006. Subsequent to the arbitration award, SNF filed a complaint alleging
criminal violation of French and European Community antitrust laws relating to
the contract, which was the subject of the arbitration proceedings, which
complaint was dismissed in December 2006. SNF has also filed a final appeal of
the court order which allowed us to enforce the award and a separate complaint
in France seeking compensation from Cytec for (euro)54.0 in damages it allegedly
suffered as a result of our attachment on various SNF receivables and bank
accounts to secure enforcement of the arbitration award. We believe that the
appeal and complaint are without merit. SNF also appealed the arbitration award
in Belgium where the Brussels Court of First Instance invalidated the award in
March 2007. We have appealed that decision to the Belgium Court of Appeals,
which will review the matter on a de novo basis. The Belgium decision should not
affect the enforceability of the award in France.
See also Note 10 of the Notes to the Consolidated Financial Statements herein.
-28-
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES (Currencies in millions, except per share
amounts)
During the six months ended June 30, 2007, we repurchased common stock for $25.1
under our stock buyback program, which was suspended in October 2004 and
reinstated in February 2007. Approximately $43.7 remained authorized under the
buyback program as of June 30, 2007. Pursuant to this program, shares can be
repurchased in open market transactions or privately negotiated transactions at
our discretion.
Approximate Dollar
Total Number of Value of Shares
Shares Purchased as That May Yet Be
Total Number of Average Price Per Part of Publicly Purchased
Period Shares Purchased Share Announced Program Under the Program
----------------------------------------------------------------------------------------------------
March 1, 2007 -
March 31, 2007 170,000 $57.04 170,000 $59.0
----------------------------------------------------------------------------------------------------
April 1, 2007 -
April 30, 2007 72,000 $55.64 72,000 $55.0
----------------------------------------------------------------------------------------------------
May 1, 2007 - May
31, 2007 78,000 $57.81 78,000 $50.5
----------------------------------------------------------------------------------------------------
June 1, 2007 - June
30, 2007 112,800 $60.75 112,000 $43.7
----------------------------------------------------------------------------------------------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of Common Stockholders on April 19, 2007. At
this meeting, the following matters were voted on:
1. Election of Directors - Ms. Chris A. Davis and Messrs Louis L. Hoynes,
Jr., and William P. Powell were elected Directors at the Annual
Meeting for terms ending at the Annual Meeting of Stockholders in 2010
by the margins set forth below. In addition, the terms of the
following directors continued after that meeting: Anthony G.
Fernandes, Barry C. Johnson, David Lilley, Thomas W. Rabaut, Jerry R.
Satrum, Raymond P. Sharpe and James R. Stanley.
Name Votes For Votes Withheld
--------------------------------------------------------------
Chris A. Davis 44,088,484 923,694
Louis L. Hoynes, Jr. 43,607,804 1,404,374
William P. Powell 42,610,529 2,401,649
--------------------------------------------------------------
2. The appointment of KPMG LLP as the Company's independent registered
public accounting firm for 2007 was ratified by the following margin:
For Against Abstain
-------------------------------------------------------
44,508,855 416,569 86,754
-------------------------------------------------------
Item 5. OTHER
REGULATORY DEVELOPMENTS
The Registration, Evaluation and Authorization of Chemicals ("REACH")
legislation became effective in the European Union on June 1, 2007. This
legislation requires manufacturers and importers of certain chemicals to
register certain chemicals and evaluate their potential impact on human health
and the environment. Under REACH, where warranted by a risk assessment,
specified uses of some hazardous substances may be restricted. Covered
substances must be pre-registered by December 31, 2008. Subsequently,
registration is required based on volume for covered substances manufactured or
imported into the European Union in quantities greater than one metric ton per
year. The European Commission is preparing technical guidance documents to
facilitate the implementation of REACH, but this guidance is not expected to be
available until the end of 2007. Currently, REACH is expected to take effect in
three primary stages over eleven years following the final effective date. The
registration, evaluation and authorization phases would require expenditures and
resource commitments, for example, in order to compile and file comprehensive
reports, including testing data, on each chemical substance and perform chemical
safety assessments. We do not expect to incur significant costs for REACH
compliance in 2007. However, the overall cost of compliance over the next 10-15
years could be substantial. In addition, it is possible that REACH may affect
raw material supply, customer demand for certain products, and our decision to
continue to manufacture and sell certain products in the European Union.
-29-
Item 6. EXHIBITS
(a). Exhibits
See Exhibit Index on page 33 for exhibits filed with this Quarterly Report on
Form 10-Q.
-30-
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/ David M. Drillock
---------------------
David M. Drillock
Vice President and
Chief Financial Officer
August 1, 2007
-31-
Exhibit Index
-------------
12 Computation of Ratio of Earnings to Fixed Charges for the three and six
months ended June 30, 2007 and 2006
31.1 Certification of David Lilley, Chief Executive Officer, Pursuant to Rule
13a-14(a) of the Securities Exchange Act
31.2 Certification of David Drillock, 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 David Drillock, Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002
-32-