SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------- SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ______ to ______
Commission file number 1-12372
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CYTEC INDUSTRIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3268660
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
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(Address of principal executive offices)
973-357-3100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 39,223,050 shares of Common
Stock, par value $.01 per share, were outstanding at September 30, 2002.
1
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
INDEX
Page
Part I - Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
Item 4. Controls and Procedures 27
Part II - Other Information 28
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Exhibit Index 33
2
PART I - FINANCIAL INFORMATION
Item 1. - CONSOLIDATED FINANCIAL STATEMENTS
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Millions of dollars, except per share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $ 332.8 $ 342.1 $1,001.8 $1,072.3
Manufacturing cost of sales 247.2 257.6 760.2 821.6
Selling and technical services 27.9 28.1 89.7 85.2
Research and process development 8.1 6.8 25.3 23.9
Administrative and general 10.2 11.7 36.8 33.1
Amortization of acquisition intangibles 0.8 3.2 2.3 9.5
--------- --------- --------- ---------
Earnings from operations 38.6 34.7 87.5 99.0
Other income, net 2.0 2.0 2.4 8.4
Equity in earnings (losses) of associated companies 0.4 0.9 3.7 (1.7)
Interest expense, net 2.5 5.1 12.5 15.0
--------- --------- --------- ---------
Earnings before income taxes and extraordinary item 38.5 32.5 81.1 90.7
Income tax provision 6.9 11.2 21.2 31.3
--------- --------- --------- ---------
Earnings before extraordinary item 31.6 21.3 59.9 59.4
Extraordinary gain, net of taxes of $2.6 - 4.9 - 4.9
--------- --------- --------- ---------
Net earnings $ 31.6 $ 26.2 $ 59.9 $ 64.3
========= ========= ========= =========
Earnings before extraordinary item per common share
Basic $ 0.80 $ 0.53 $ 1.51 $ 1.47
Diluted $ 0.78 $ 0.51 $ 1.47 $ 1.42
Extraordinary item per common share
Basic $ - $ 0.12 $ - $ 0.12
Diluted $ - $ 0.12 $ - $ 0.12
Net earnings per common share
Basic $ 0.80 $ 0.65 $ 1.51 $ 1.59
Diluted $ 0.78 $ 0.63 $ 1.47 $ 1.54
See accompanying Notes to Consolidated Financial Statements.
3
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Millions of dollars, except per share amounts)
September 30, December 31,
2002 2001
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 166.5 $ 83.6
Trade accounts receivable, less allowance for doubtful accounts
of $8.6 and $7.8 in 2002 and 2001, respectively 195.0 179.3
Other receivables 30.4 32.3
Inventories 148.9 147.3
Deferred income taxes 37.5 22.1
Other current assets 53.1 45.3
--------------- --------------
Total current assets 631.4 509.9
Investment in associated companies 96.3 92.6
Plants, equipment and facilities, at cost 1,358.8 1,344.5
Less: accumulated depreciation (789.8) (746.5)
--------------- --------------
Net plant investment 569.0 598.0
Acquisition intangibles, net of accumulated amortization 40.1 45.5
Goodwill 334.1 330.6
Deferred income taxes 31.0 48.4
Other assets 24.7 25.4
--------------- --------------
Total assets $ 1,726.6 $ 1,650.4
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 84.3 $ 75.8
Accrued expenses 183.7 157.8
Income taxes payable 58.3 48.4
--------------- --------------
Total current liabilities 326.3 282.0
Long-term debt 315.6 314.7
Other noncurrent liabilities 391.0 416.8
Stockholders' equity
Preferred stock, 20,000,000 shares authorized;
issued and outstanding 4,000 shares, Series C Cumulative,
$.01 par value at liquidation value of $25 per share 0.1 0.1
Common stock, $.01 par value per share, 150,000,000
shares authorized; issued 48,132,640 shares 0.5 0.5
Additional paid-in capital 131.3 136.7
Retained earnings 886.1 826.2
Unearned compensation (5.0) (4.0)
Accumulated other comprehensive loss (38.8) (51.9)
Treasury stock, at cost, 8,909,590 shares in 2002 an
8,511,532 shares in 2001 (280.5) (270.7)
--------------- --------------
Total stockholders' equity 693.7 636.9
--------------- --------------
Total liabilities and stockholders' equity $ 1,726.6 $ 1,650.4
=============== ==============
See accompanying Notes to Consolidated Financial Statements.
4
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of dollars)
Nine Months Ended
September 30,
2002 2001
-------- --------
Cash flows provided by (used for) operating activities
Net earnings $ 59.9 $ 64.3
Noncash items included in earnings:
Dividends from associated companies, greater (less)
than equity in earnings (3.1) 4.1
Depreciation 60.3 58.5
Amortization 1.8 8.1
Deferred income taxes 1.8 5.6
Loss on asset write-off 7.2 -
Gain on sale of assets (1.0) (1.9)
Extraordinary gain, net of tax - (4.9)
Other 0.2 (4.8)
Changes in operating assets and liabilities
Trade accounts receivable (11.1) (6.0)
Other receivables 1.8 19.3
Inventories 1.2 12.0
Accounts payable 6.9 (17.1)
Accrued expenses 29.6 (14.2)
Income taxes payable 11.8 (8.9)
Other assets (4.5) (8.9)
Other liabilities (25.7) (25.3)
-------- --------
Net cash flows provided by operating activities 137.1 79.9
-------- --------
Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (38.0) (48.2)
Proceeds received on sale of assets 5.4 2.8
Acquisition of businesses, net of cash received - (9.0)
Investment in unconsolidated affiliate - (0.5)
-------- --------
Net cash flows used for investing activities (32.6) (54.9)
-------- --------
Cash flows provided by (used for) financing activities
Proceeds from the exercise of stock options and warrants 2.8 9.3
Purchase of treasury stock (20.3) (48.8)
Change in long-term debt - 0.9
Proceeds received on sale of put options 0.3 0.6
Repayment of seller-financed debt (5.4) -
-------- --------
Net cash flows used for financing activities (22.6) (38.0)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 1.0 (2.2)
-------- --------
Increase (decrease) in cash and cash equivalents 82.9 (15.2)
Cash and cash equivalents, beginning of period 83.6 56.8
-------- --------
Cash and cash equivalents, end of period $ 166.5 $ 41.6
======== ========
See accompanying Notes to Consolidated Financial Statements.
5
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. The
statements should be read in conjunction with the consolidated financial
statements and notes to the consolidated financial statements contained in the
Company's 2001 Annual Report on Form 10-K/A.
In the opinion of management, the consolidated financial statements included
herein reflect all adjustments necessary for a fair statement of the information
presented as of September 30, 2002 and for the three and nine months ended
September 30, 2002 and 2001. Such adjustments are of a normal, recurring nature.
The consolidated statements of income for the three and nine months ended
September 30, 2002 are not necessarily indicative of the results to be expected
for the full year.
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year's presentation.
(2) ACQUISITIONS AND DISPOSITIONS
On October 29, 1999, the Company acquired the amino coatings resins business of
BIP Limited for approximately $37.2 in cash plus future consideration with a
value, at that time, equivalent to approximately $8.3. This transaction was
accounted for using the purchase method of accounting. During the three months
ended September 30, 2002, the Company paid $5.4 of the future consideration. The
Company expects to pay the remainder during the fourth quarter of 2002.
On August 31, 2001, the Company acquired certain assets of the carbon fiber
business of BP plc; on March 30, 2001, the Company acquired the composite
materials business of Minnesota Mining and Manufacturing Company ("3M") and on
March 27, 2001, the Company acquired the remaining 50% interest in the assets of
the Avondale Ammonia Company manufacturing joint venture. For more information
on the 2001 transactions, refer to Note 2 to the consolidated financial
statements contained in the Company's 2001 Annual Report on Form 10-K/A, which
is incorporated by reference herein.
(3) RESTRUCTURING OF OPERATIONS
In the first quarter of 2002, the Company recorded an aggregate restructuring
charge of $16.6, which included the elimination of 144 positions worldwide. The
charge was comprised of the following initiatives: reorganization of the
Specialty Chemicals segments resulting in a reduction of 72 personnel and a
charge of $5.7 for employee related costs; alignment of the Specialty Materials
segment in connection with reduced demand in the commercial aerospace industry
resulting in a reduction of 47 personnel and a charge of $1.6 for employee
related costs; closure of the Woodbridge, New Jersey facility resulting in the
elimination of 25 positions and a charge of $1.6 for employee related and
decommissioning costs and the discontinuance of a minor unprofitable product
line resulting in a charge of $7.7 for the write-down of the net book value of
the fixed assets and costs of decommissioning the facility. The restructuring
costs were charged to the Consolidated Statement of Income as follows:
manufacturing cost of sales, $11.7; selling and technical services, $3.0;
research and process development, $1.0 and administrative and general, $0.9. As
of September 30, 2002, approximately 83 positions have been eliminated. The
remaining personnel reductions are expected to be completed by the end of the
first quarter of 2003. As of September 30, 2002,
6
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
cash payments of $4.6 had been made for these charges and the remaining
liability to be paid was $4.8. In addition, during the first quarter of 2002 the
Company recorded charges of $0.4 in equity in earnings of associated companies
for its 50% share of additional restructuring charges related to CYRO
Industries' shutdown of its Niagara Falls, Ontario, Canada facility last year.
In the second quarter of 2001, the Company recorded a restructuring charge of
$5.4 related to the mothballing of the Fortier ammonia plant and the Company's
share of the related personnel reduction of 67 positions at the Fortier
facility. The restructuring costs were charged to the Consolidated Statement of
Income as follows: manufacturing cost of sales, $4.6; and selling and technical
services, $0.8. The components of the restructuring charge included: employee
severance costs, $4.3; asset write-downs, $0.9 and other costs of $0.2. During
the first quarter of 2002, the Company reduced this restructuring accrual as a
result of incurring less costs than originally estimated. As a result, the
Company recognized a restructuring credit of $0.5 in the Consolidated Statement
of Income as follows: manufacturing cost of sales, $0.4 and selling and
technical services, $0.1. As of September 30, 2002, approximately 60 positions
have been eliminated. The majority of personnel reductions have been completed
and the remainder are expected to be completed by the end of 2002. As of
September 30, 2002, cash payments of $3.1 had been made for these charges and
the remaining liability to be paid was $0.9. In addition, during the second
quarter of 2001 the Company recorded charges of $2.3 in equity in earnings of
associated companies for its 50% share of CYRO Industries' restructuring
charges, which included $3.7 related to the shutdown of CYRO's manufacturing
facility in Niagara Falls, Ontario, Canada, and $0.8 related to CYRO's share of
the infrastructure restructuring at the Company's Fortier facility.
In the fourth quarter of 2000, the Company recorded a restructuring charge of
$10.8, related to a workforce reduction of approximately 110 employees and the
discontinuance of a tolling operation. The restructuring costs were charged to
the Consolidated Statement of Income as follows: manufacturing cost of sales,
$3.5; selling and technical services, $5.3; research and process development,
$1.6 and administrative and general, $0.4. The components of the restructuring
charge included: employee severance costs, $8.8 and asset write-downs, $2.0.
During the first half of 2002, the Company reduced this restructuring accrual as
a result of incurring less costs than originally estimated. As a result, the
Company recognized a restructuring credit of $1.5 in the Consolidated Statement
of Income as follows: manufacturing cost of sales, $0.5 and selling and
technical services, $1.0. As of September 30, 2002, the personnel reductions
have been completed. Cash payments of $6.8 had been made for these charges
through September 30, 2002 and the remaining liability to be paid was $0.5,
which primarily relates to long-term employee severance payouts.
(4) EARNINGS PER SHARE (EPS)
Basic earnings per common share excludes dilution and is computed by dividing
net earnings less preferred stock dividends by the weighted-average number of
common shares outstanding (which includes shares outstanding, less performance
and restricted shares for which vesting criteria have not been met) plus
deferred stock awards, weighted for the period outstanding. Diluted earnings per
common share is computed by dividing net earnings less preferred stock dividends
by the sum of the weighted-average number of common shares outstanding for the
period adjusted (i.e., increased) for all additional common shares that would
have been outstanding if potentially dilutive common shares had been issued and
any proceeds of the issuance had been used to repurchase common stock at the
average market price during the period. The proceeds used to repurchase common
stock are assumed to be the sum of the amount to be paid to the Company upon
exercise of options,
7
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
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 represents the reconciliation of the numerators and denominators
of the basic and diluted EPS computations for net earnings for the three and
nine months ended September 30, 2002 and 2001:
Three Months Ended September 30,
2002 2001
---- ----
Weighted Avg. Per Weighted Avg. Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
BASIC EPS
Earnings before extraordinary item $31.6 $0.80 $21.3 $0.53
Extraordinary gain, net of tax - 39,477,627 - 4.9 40,225,191 0.12
----- ----- ----- ----
Net earnings $31.6 $0.80 $26.2 $0.65
EFFECT OF DILUTIVE SECURITIES
Options 870,497 1,180,614
Performance/Restricted stock 193,611 177,241
Warrants - 3,113
Put options 8,318 2,628
----- -----
DILUTED EPS
Earnings before extraordinary item $31.6 $0.78 $21.3 $0.51
Extraordinary gain, net of tax - 40,550,053 - 4.9 41,588,787 0.12
----- ----- ----- ----
Net earnings $31.6 $0.78 $26.2 $0.63
Nine Months Ended September 30,
2002 2001
---- ----
Weighted Avg. Per Weighted Avg. Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
BASIC EPS
Earnings before extraordinary item $59.9 $1.51 $59.4 $1.47
Extraordinary gain, net of tax - 39,600,666 - 4.9 40,351,142 0.12
----- ----- ----- ----
Net earnings $59.9 $1.51 $64.3 $1.59
EFFECT OF DILUTIVE SECURITIES
Options 965,052 1,394,033
Performance/Restricted stock 129,956 128,499
Warrants 833 6,676
Put options 2,773 876
----- ---
DILUTED EPS
Earnings before extraordinary item $59.9 $1.47 $59.4 $1.42
Extraordinary gain, net of tax - 40,699,280 - 4.9 41,881,226 0.12
----- ----- ----- ----
Net earnings $59.9 $1.47 $64.3 $1.54
(5) RECENTLY ISSUED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF 94-3") and
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value in the period in
which the liability is incurred. Under EITF 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
adoption of SFAS 146 is expected to result in delayed recognition for certain
types of costs as compared to the provisions of EITF 94-3. SFAS 146 is effective
for new exit or disposal activities that are initiated after December 31, 2002,
and does not affect amounts currently reported in the Company's consolidated
financial statements. SFAS 146 will affect the types and timing of costs
included in future restructuring programs, if any, but is not expected to have a
material impact on the Company's financial position or results of operations.
8
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 addresses the financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal use of an asset. SFAS
143 requires that the fair value of the liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability the Company will
recognize a gain or loss on settlement.
SFAS 143 will become effective for the Company beginning January 1, 2003. The
Company is in the process of identifying and quantifying its legal obligations
for asset retirements and reviewing the potential impact of SFAS 143 on its
consolidated results of operation and financial position. Based on preliminary
analysis, upon initial application of SFAS 143, the Company will record a
one-time non-cash charge as a cumulative effect of a change in accounting
principle. The Company does not expect this charge to exceed $20.0 after-tax.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires business combinations consummated after June 30, 2001, to be accounted
for using the purchase method of accounting. It also specifies the criteria that
intangible assets must meet to be recognized apart from goodwill. SFAS 142
requires the use of a non-amortization approach to account for purchased
goodwill and intangibles with indefinite useful lives. Under this approach,
goodwill and intangibles with indefinite useful lives are not amortized, but
instead are reviewed for impairment at least annually and written down only in
the periods in which it is determined that the recorded value is greater than
the fair value. SFAS 142 also requires that intangible assets with determinable
useful lives be amortized over their respective estimated useful lives and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 142 became effective for the
Company January 1, 2002. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001, were amortized through December 31,
2001 in accordance with the appropriate pre-SFAS 141 and 142 accounting
literature.
The Company has evaluated its goodwill and intangible assets using the new
criteria in SFAS 141, and as a result, certain intangibles that no longer met
the criteria for recognition apart from goodwill were reclassified as goodwill
effective January 1, 2002 (see Note 12). The Company also re-evaluated the
remaining useful lives and residual values of all intangible assets with
determinable useful lives and made all necessary amortization period adjustments
effective January 1, 2002. The change in amortization expense related to the
adjustment of remaining useful lives and residual values was immaterial.
The Company also completed the transitional goodwill impairment tests as
required under SFAS 142 effective January 1, 2002. In connection with this test,
the Company defined its business segments as its SFAS 142 reporting units and
has determined that the fair values of those reporting units, to which goodwill
has been assigned, exceeded their recorded values and therefore, the Company did
not recognize an impairment loss as a result of adopting SFAS 142 effective
January 1, 2002.
9
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(6) INVENTORIES
The components of inventories at September 30, 2002 and December 31, 2001
consisted of the following:
September 30, December 31,
2002 2001
---- ----
Finished goods $ 93.7 $ 96.0
Work in process 17.3 18.0
Raw materials & supplies 69.7 65.1
------- ------
180.7 179.1
Less reduction to LIFO cost (31.8) (31.8)
------- ------
$ 148.9 $147.3
======= ======
(7) EQUITY IN EARNINGS OF ASSOCIATED COMPANIES
Summarized financial information for the Company's equity in earnings of
associated companies for the three and nine months ended September 30, 2002 and
2001 was as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $80.2 $79.5 $226.3 $238.5
Gross profit 15.5 13.3 45.1 37.6
Net earnings (loss) 3.9 1.3 10.0 (5.6)
----- ----- ------ ------
The Company's equity in earnings
(losses) of associated companies $ 0.4 $ 0.9 $ 3.7 $ (1.7)
===== ===== ====== ======
During the third quarter of 2002, the Company recorded a charge of $1.7 in
equity in earnings (losses) of associated companies to reduce the carrying value
of its net investment in the one-third owned Polymer Additives.com, LLC joint
venture to zero. Accordingly, the Company will no longer recognize its share of
the joint venture's expected future losses. The terms of the joint venture
agreement required the Company to make an additional contribution of $0.5 during
October 2002 and this required contribution was included in the amount of the
charge recognized in the third quarter of 2002. The Company is not obligated to
make any further capital contributions.
(8) ENVIRONMENTAL MATTERS AND OTHER CONTINGENT LIABILITIES
The Company is subject to substantial costs arising out of environmental laws
and regulations, which include obligations to remove or limit the effects on the
environment of the disposal or release of certain wastes or substances at
various sites or to pay compensation to others for doing so. The Company's major
environmental liabilities relate to remediation and regulatory closure
obligations at manufacturing sites now or formerly owned by the Company. The
Company is also involved in legal proceedings directed at the cleanup of various
other sites, including a number of federal or state Superfund sites. Since the
laws pertaining to Superfund sites generally impose retroactive, strict, joint
and several liability, a governmental plaintiff could seek to recover all
remediation costs at any such site from any of the potentially responsible
parties ("PRPs") for such site, including the Company, despite the involvement
of other PRPs. In some cases, the Company is one of several hundred identified
PRPs, while in others it is the only one or one of only a few. Generally, where
there are a number of financially solvent PRPs, liability has been apportioned,
or the Company believes, based on its experience with such matters, that
liability will be apportioned based on the type and amount of waste disposed by
each PRP at such disposal site and the number of financially solvent PRPs. In
many cases, the nature of future environmental expenditures cannot be quantified
with accuracy. In addition, from time to time in the ordinary course of its
business, the Company is informed of, and receives inquiries with respect to,
additional sites that may be environmentally impaired and for which the Company
may be responsible.
10
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
As of September 30, 2002 and December 31, 2001, the aggregate environmental
related accruals were $86.7 and $93.9, respectively. As of September 30, 2002
and December 31, 2001, $15.0 and $20.0, respectively, of the above amounts were
included in accrued expenses, with the remainder included in other noncurrent
liabilities. Environmental remediation spending for the nine months ended
September 30, 2002 and 2001 was $9.4 and $7.6, respectively. All accruals have
been recorded without giving effect to any possible future insurance proceeds.
While it is not feasible to predict the outcome of all pending environmental
suits and claims, it is reasonably possible that there will be a necessity for
future provisions for environmental costs that, in management's opinion, will
not have a material adverse effect on the consolidated financial position of the
Company, but could be material to the consolidated results of operations of the
Company in any one accounting period. The Company cannot estimate any additional
amount of loss or range of loss in excess of the recorded amounts. Moreover,
environmental liabilities are paid over an extended period, and the timing of
such payments cannot be predicted with any confidence.
The Company is also a party to various other claims and litigation. Based on the
advice of counsel, management believes that the resolution of such claims and
litigation will not have a material adverse effect on the financial position of
the Company, but could be material to the results of operations of the Company
in any one accounting period.
(9) COMPREHENSIVE INCOME
The components of comprehensive income, which represents the change in equity
from non-owner sources, for the three and nine months ended September 30, 2002
and 2001 was as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net earnings $31.6 $26.2 $59.9 $64.3
Other comprehensive income (loss):
Unrealized gains on derivative instruments, net of tax and
reclassification adjustments
- - 0.1 -
Foreign currency translation adjustments (3.9) 3.1 13.0 (9.7)
----- ----- ----- -----
Comprehensive income $27.7 $29.3 $73.0 $54.6
===== ===== ===== =====
(10) OTHER FINANCIAL INFORMATION
Taxes paid for the nine months ended September 30, 2002 and 2001 were
approximately $10.9 and $32.5, respectively. Included in the nine months ended
September 30, 2001 were taxes of approximately $26.6 related to the gain on the
sale of the Paper Chemicals business, which occurred in the fourth quarter of
2000. Interest paid for the nine months ended September 30, 2002 and 2001 was
approximately $17.4.
At September 30, 2002 and December 31, 2001, the Company's long-term debt
consisted of public debt in the amounts of $315.6 and $314.7, respectively. The
Company has the intent and ability (as demonstrated by the credit agreements
discussed in the following paragraph) to refinance on a long-term basis the
$100.0 principal amount of 6.50% Notes due March 15, 2003.
On April 11, 2002, the Company executed a $100.0, three-year unsecured revolving
credit agreement and a $100.0, 364-day unsecured revolving credit agreement with
11
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
a one-year term out option. These two agreements replaced a $200.0 unsecured
revolving credit agreement that was due to expire in July 2002. Revolving loans
under the new agreements are available for the general corporate purposes of the
Company and its subsidiaries, including without limitations, for purposes of
making acquisitions permitted under the agreements. The credit agreements
contain covenants customary for such facilities.
On November 2, 2000, the Company announced an authorization of $100.0 to
repurchase shares of its outstanding common stock. The repurchases are made from
time to time on the open market or in private transactions and the shares
obtained under this authorization are anticipated to be utilized for stock
option plans, benefit plans and other corporate purposes. Through September 30,
2002, the Company had repurchased 2,606,173 shares at a cost of $78.1 under this
authorization.
In connection with the Company's stock repurchase program, during the nine
months ended September 30, 2002, the Company sold 100,000 put options to an
institutional investor in a private placement exempt from registration under
Section 4(2) of the Securities Act of 1933. The put options entitle the holder
to sell an aggregate of 100,000 shares of the Company's common stock to the
Company at an exercise price of $29.51. The Company received premiums of
approximately $0.2 on the sale of such put options. The put options were
scheduled to mature in September 2002. Subsequently, the terms were amended to
extend the maturity date to March 2003, for which the Company received an
additional premium of approximately $0.1.
During the nine months ended September 30, 2001, the Company sold an aggregate
of 300,000 put options at exercise prices ranging from $31.347 to $32.490 per
share. The Company received premiums of approximately $0.6 on the sale of such
options. During the third quarter of 2001, 140,000 of the put options expired
unexercised and the holders elected to exercise the remaining 160,000 put
options. As a result, the Company purchased 60,000 shares of its common stock at
an exercise price of $31.347 per share, which was slightly "out of the money" at
the time and 100,000 shares of its common stock at an exercise price of $32.490
per share.
During the third quarter of 2002, the Company settled an IRS claim related to
prior years' research and development tax credits. As a result, the Company
received a cash refund of $6.0, which was recorded as a reduction in the income
tax provision, plus an interest payment of $2.0, which was recorded in interest
expense, net. The Company also recognized a charge of $1.7 in administrative and
general expenses for external costs associated with such tax planning.
During the third quarter of 2002, the Company lowered its employee benefits
accrual due to lower than expected employee benefit costs. As a result, the
Company reversed expense accruals recorded during the first half of 2002 of
$1.3, $0.6 and $1.1 in manufacturing cost of sales, selling and technical
services and administrative and general, respectively. Also, during the third
quarter of 2002, based upon further analysis and future projections, certain
performance stock will not vest based on the performance targets. Accordingly,
during the third quarter of 2002, the Company reversed prior year expense
accruals of $0.7 and $1.2 in selling and technical services and administrative
and general, respectively.
The majority of the Company's pension plans' assets and liabilities are measured
at December 31 each year for financial reporting purposes. Recent market returns
on assets, particularly this year, have been poor. Additionally, with the
decline in interest rates, the Company expects a corresponding decrease in the
discount rate used to estimate its pension liabilities, which increases the
value of the Company's pension liabilities. Based on actual year to date asset
returns and current interest rates, both as of September 30, 2002, the Company
expects to record a non-cash after-tax minimum pension liability charge to Other
Comprehensive Income of approximately $100.0 at December 31, 2002. If asset
returns improve or interest rates increase before year-end, the charge will be
lower or none at all. However, if conditions worsen the charge will increase.
This
12
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
charge does not impact 2002 reported earnings and does not necessarily
impact future cash contributions required to be made to the pension trusts.
(11) SEGMENT INFORMATION
Summarized segment information for the Company's four segments for the three and
nine months ended September 30, 2002 and 2001 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
NET SALES
Water and Industrial Process Chemicals $ 81.5 $ 82.8 $ 240.7 $ 256.0
Performance Products 114.7 110.0 340.9 337.7
Specialty Materials 92.8 113.3 299.4 346.5
Building Block Chemicals
Sales to external customers 43.8 36.0 120.8 132.1
Intersegment sales 13.4 11.4 39.0 38.2
-------- -------- -------- --------
Net sales from segments 346.2 353.5 1,040.8 1,110.5
Elimination of intersegment revenue (13.4) (11.4) (39.0) (38.2)
-------- -------- -------- --------
Total consolidated net sales $ 332.8 $ 342.1 $1,001.8 $1,072.3
======== ======== ======== ========
% of % of % of % of
Earnings (loss) from operations Sales Sales Sales Sales
- ------------------------------- ----- ----- ----- -----
Water and Industrial Process Chemicals $ 8.7 11% $ 6.9 8% $18.7 6% $21.8 9%
Performance Products 11.7 10% 5.2 5% 31.0 9% 15.4 5%
Specialty Materials 15.8 17% 24.1 21% 53.7 18% 82.5 24%
Building Block Chemicals 5.0 9% (0.6) -1% 3.4 2% (11.8) -7%
----- ----- ----- -----
Earnings from segments 41.2 12% 35.6 10% 106.8 10% 107.9 10%
Corporate and Unallocated(1) (2.6) (0.9) (19.3) (8.9)
----- ----- ----- -----
Total consolidated earnings from operations $38.6 12% $34.7 10% $87.5 7% $99.0 9%
===== ===== ===== =====
(1) Three and nine months ended September 30, 2002 includes charges of $1.7 for
external costs related to a research and development tax credit. Nine
months ended September 30, 2002 includes net restructuring charges of
$14.6. Nine months ended September 30, 2001 includes restructuring charges
of $5.4 (see Notes 3 and 10).
13
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(12) GOODWILL AND OTHER INTANGIBLES
On January 1, 2002, the Company adopted SFAS 142 and certain transition
provisions of SFAS 141 (see Note 5). Application of these standards required
that the Company assess its recorded intangibles, and effective January 1, 2002,
reclassify to goodwill those intangibles which no longer meet the criteria for
recognition apart from goodwill. The Company's acquisition intangibles, net of
accumulated amortization, before and after such reclassifications were as
follows:
GOODWILL INTANGIBLES TOTAL
BEFORE RECLASSIFICATIONS:
Water and Industrial Process Chemicals
Process Chemicals $ 31.3 $ 3.8 $ 35.1
Performance Products 49.1 26.7 75.8
Specialty Materials 250.2 15.0 265.2
Building Block Chemicals - - -
-------------- ------------------ -----------
Total $ 330.6 $ 45.5 $ 376.1
============== ================== ===========
GOODWILL INTANGIBLES TOTAL
AFTER RECLASSIFICATIONS:
Water and Industrial Process Chemicals
Process Chemicals $ 31.1 $ 4.0 $ 35.1
Performance Products 50.1 25.7 75.8
Specialty Materials 252.6 12.6 265.2
Building Block Chemicals - - -
-------------- ------------------ -----------
Total $ 333.8 $ 42.3 $ 376.1
============== ================== ===========
At September 30, 2002, the gross carrying value of acquisition intangibles was
$51.0, less accumulated amortization of $10.9, which consisted of the following
major classes:
Gross Acquisition
carrying Accumulated intangibles,
value amortization net
----- ------------ ---
Technology-based $29.8 $ (6.5) $23.3
Marketing-related 9.3 (1.9) 7.4
Customer-related 11.9 (2.5) 9.4
----- ------ -----
Total $51.0 $(10.9) $40.1
===== ====== =====
Amortization of acquisition intangibles for the three and nine months ended
September 30, 2002 was $0.8 and $2.3, respectively. Assuming no change in the
gross carrying amount of acquisition intangibles, the estimated amortization of
acquisition intangibles for the twelve months ended December 31, 2002 and for
each of the next four succeeding years is $3.1. At September 30, 2002, there
were no acquisition intangibles with indefinite useful lives as defined by SFAS
142.
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective January 1, 2002 (see Note 5). A reconciliation of previously
reported net earnings and earnings per share to the amounts adjusted for the
exclusion of goodwill amortization and the related income tax impact is as
follows:
14
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
Three Months Nine Months
Ended Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Reported As Adjusted Reported As Adjusted
-------- ----------- -------- -----------
Net Sales $342.1 $342.1 $1,072.3 $1,072.3
Amortization of acquisition intangibles 3.2 0.8 9.5 2.2
Earnings from operations 34.7 37.2 99.0 106.2
Earnings before income taxes and extraordinary item
32.5 34.9 90.7 97.9
Earnings before extraordinary item 21.3 22.9 59.4 64.2
Net earnings 26.2 27.8 64.3 69.1
Earnings before extraordinary item per common share
Basic $0.53 $0.57 $1.47 $1.59
Diluted $0.51 $0.55 $1.42 $1.53
Net earnings per common share
Basic $0.65 $0.69 $1.59 $1.71
Diluted $0.63 $0.67 $1.54 $1.65
(13) COMMODITY AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses natural gas forward contracts, which are physically settled, to
hedge utility requirements at its Fortier manufacturing facility. Because the
Company takes physical delivery of the commodity, realized gains and losses on
these contracts are included in the cost of the commodity upon settlement of the
contract. As of September 30, 2002, the Fortier facility's 2002 remaining
forecasted natural gas utility requirements were 86% hedged and the 2003
forecasted natural gas utility requirements were 30% hedged. At September 30,
2002, the Company had natural gas forward contracts with a notional value of
$7.6 outstanding and October 2002 through September 2003 delivery dates.
Beginning in 2002, the Company expanded its hedging program to include the use
of natural gas swaps to hedge utility requirements at certain of its other
facilities. These swaps, which are financially settled, are highly effective at
achieving offsetting cash flows of the underlying natural gas purchases and have
been designated as cash flow hedges as defined by SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The swaps are reported on the
Consolidated Balance Sheets at fair value, with offsetting amounts included in
Accumulated Other Comprehensive Loss ("AOCL") on an after-tax basis. Gains and
losses are reclassified into earnings, as a component of Manufacturing Cost of
Sales in the period the hedged natural gas purchases affect earnings. As of
September 30, 2002, the fair value of these swaps was $0.1, which will be
reclassified into Manufacturing Cost of Sales during the three months ending
December 31, 2002 as these swaps are settled. For more information on the
Company's derivative accounting policies, refer to the Financial Instrument
section of Note 1 to the consolidated financial statements contained in the
Company's 2001 Annual Report on Form 10-K/A, which is incorporated by reference
herein.
15
(Millions of dollars, except share and per share amounts)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER OF 2002 VERSUS THIRD QUARTER OF 2001
Net sales for the third quarter of 2002 were $332.8, compared with $342.1 for
the third quarter of 2001. The decrease in demand for commercial aircraft
products in the Specialty Materials segment offset the higher selling volumes in
the Performance Products segment, increased acrylonitrile sales in the Building
Block Chemicals segment and the favorable impacts of changes in exchange rates.
Net sales in the United States were $171.4 for the third quarter of 2002,
compared with $178.3 for the third quarter of 2001. International net sales were
$161.4 for the third quarter of 2002, or 48.5% of total net sales, compared with
$163.8, or 47.9% of total net sales for the third quarter of 2001.
Manufacturing cost of sales was $247.2 or 74.3% of net sales in the third
quarter of 2002, compared to $257.6, or 75.3% of net sales for the prior year
period. The increase in gross profit margins was due to higher sales volumes in
the Performance Products and Building Block Chemicals segments, offset by lower
sales volumes in the Specialty Materials segment. Also contributing to the
improved margins were lower raw material costs, the favorable effects of
exchange rate changes and lower than expected employee benefit costs, which
resulted in a $1.3 reversal of employee benefit expense accruals recorded during
the first half of 2002.
Selling and technical services expenses decreased $0.2, research and process
development expenses increased $1.3 and administrative and general expenses
decreased $1.5. Included in administrative and general expenses for the third
quarter of 2002 were charges of $1.7 for fees incurred in connection with a
favorable cash settlement of prior years' research and development tax credit
claim with the IRS. Excluding these charges, administrative and general expenses
decreased $3.2. During the third quarter of 2002, the Company lowered its
employee benefits accrual due to lower than expected employee benefit costs. As
a result, during the third quarter of 2002, selling and technical services and
administrative and general expenses benefited $0.6 and $1.1, respectively, due
to a reversal of employee benefit expense accruals recorded during the first
half of 2002. Selling and technical services and administrative and general
expenses also benefited $0.7 and $1.2, respectively, during the third quarter of
2002 from the reversal of prior year accruals for performance stock, which upon
further analysis and future projections, will not vest based on the performance
targets. Research and process development expenses in 2001 were abnormally low
due to unusually low expenses in that period for items such as patent fees and
outside processing costs.
Amortization of acquisition intangibles was $0.8, down $2.4 from the prior year
period as goodwill is no longer amortized under Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangibles" ("SFAS
142").
Other income, net was $2.0 for the third quarter of 2002 and 2001, which
primarily reflects foreign currency exchange gains and royalties received.
Equity in earnings (losses) of associated companies was $0.4 for the third
quarter of 2002, compared to $0.9 for the prior year period. During the third
quarter of 2002 the Company recorded a charge of $1.7 to reduce the carrying
value of its net investment in the one-third owned Polymer Additives.com, LLC
joint venture to zero. Accordingly, the Company will no longer recognize its
share of the joint venture's expected future losses. The terms of the joint
venture agreement required the Company to make an additional contribution of
$0.5 during October 2002 and this required contribution was included in the
amount of the charge recognized in the third quarter of 2002. The Company is not
obligated to make any further capital contributions. Sales at associated
companies were $80.2 for the third quarter of 2002, an increase of 6.1% after
16
(Millions of dollars, except share and per share amounts)
excluding sales of the former AC Molding Compounds joint venture, which was
shut-down in November 2001. Specifically, higher sales along with cost cutting
efforts have resulted in improved earnings at CYRO Industries.
Interest expense, net was $2.5 for the third quarter of 2002, compared to $5.1
for the prior year period. Included in the third quarter of 2002 was interest
income of $2.0 in connection with a favorable cash settlement of prior years'
research and development tax credit claim with the IRS. The remainder of the
decrease was due to higher interest income attributable to higher cash balances
during the third quarter of 2002.
The income tax provision was $6.9 for the third quarter of 2002 and included a
reduction of $6.0 in connection with a cash settlement of prior years' research
and development tax credit claims. Excluding this item, the effective tax rate
continued to be 33.5%, down from 34.5% for the prior year period.
Earnings before extraordinary item for the third quarter of 2002 were $31.6, or
$0.78 per diluted share, compared to $21.3, or $0.51 per diluted share, for the
prior year period. Included in the third quarter of 2002 was a net credit of
$6.2, or $0.15 per diluted share, related to a research and development tax
credit refund. Included in the prior year period was after-tax goodwill
amortization of $1.6, or $0.04 per diluted share, that is no longer required
under SFAS 142. Excluding these items, earnings before extraordinary item for
the third quarter of 2002 were $25.4, or $0.63 per diluted share, compared to
$22.9, or $0.55 per diluted share, for the prior year period. The adjusted
period-over-period increase in net earnings before extraordinary items was
primarily due to higher sales in the Performance Products segment and the
resulting leverage on its earnings and improvements in acrylonitrile margins and
manufacturing operations in the Building Block Chemicals segment, offset by a
decrease in demand for commercial aircraft products in the Specialty Materials
segment. Lower than anticipated employee benefit costs and the favorable effects
of the Company's stock repurchase program also improved results for the third
quarter of 2002.
During the third quarter of 2001, the Company recognized an extraordinary gain,
net of taxes of $4.9, or $0.12 per diluted share related to its acquisition of
the BP carbon fibers business. Taxes recorded on the transaction were $2.6.
SEGMENT RESULTS
Water and Industrial Process Chemicals:
Water and Industrial Process Chemicals net sales were $81.5 a decrease of 1.6%
from the prior year period. Selling volumes decreased approximately 2.4% due to
lower water treatment sales in the paper and oilfield markets and lower
phosphine chemical sales where a certain customer has experienced reduced demand
in their end market, which in turn has resulted in lower purchases of the
Company's products. Mining chemical sales were flat with the prior year period.
Selling prices increased approximately 0.8%, principally in mining chemicals and
the effects of exchange rate changes were negligible.
Earnings from operations for the third quarter of 2002 were $8.7 or 10.7% of net
sales, compared to $6.9 or 8.3% of net sales for the same period last year.
Lower raw material and operating costs more than offset the decrease in selling
volumes. Also benefiting earnings by approximately 1.1%, 0.6% and 0.4% of net
sales was lower than anticipated employee benefit costs, the reversal of prior
year accruals for performance stock and lower amortization expense from adopting
SFAS 142, respectively.
Performance Products:
Performance Products net sales were $114.7, an increase of 4.3% from the prior
year period. Selling volumes increased approximately 4.3%, with all product
lines contributing to the increase over the prior year period. Demand from the
U.S. automotive and general industrial markets improved versus the prior year
17
(Millions of dollars, except share and per share amounts)
period, however in the Europe region demand was lower. Exchange rate changes
increased sales approximately 1.2% and selling prices decreased approximately
1.2%. The lower selling prices were primarily in the polymer additives product
line, while other product lines were up slightly.
Earnings from operations improved to $11.7 or 10.2% of net sales, compared to
$5.2 or 4.7% of net sales for the prior year period. The improvement in earnings
from operations is the result of the leverage achieved from higher selling
volumes and lower raw material and operating costs. Also benefiting earnings by
approximately 0.8%, 0.5% and 0.3% of net sales were lower than anticipated
employee benefit costs, the reversal of prior year accruals for performance
stock and lower amortization expense from adopting SFAS 142, respectively.
Specialty Materials:
Specialty Materials net sales were $92.8, a decrease of 18.1% from the previous
year period. Selling volumes decreased approximately 19.4%, excluding a 1.3%
increase from acquisitions. The effect of exchange rate changes and selling
prices were negligible. The decrease in selling volumes reflects the significant
decrease in demand for commercial aircraft although military aircraft business
remains strong.
Earnings from operations for the third quarter of 2002 were $15.8 or 17.0% of
net sales, compared to $24.1 or 21.3% of net sales for the prior year period.
The decline in earnings from operations reflects the decrease in selling volumes
partially offset by efforts to keep costs aligned with demand. Also benefiting
earnings by approximately 1.0%, 0.6% and 2.0% of net sales was lower than
anticipated employee benefit costs, the reversal of prior year accruals for
performance stock and lower amortization expense from adopting SFAS 142,
respectively.
Building Block Chemicals:
Building Block Chemicals net sales to external customers were $43.8, an increase
of 21.7% from the prior year period. Overall, selling volumes increased
approximately 11.6%, selling prices increased approximately 8.6% and exchange
rate changes increased sales approximately 1.5%. Earnings from operations were
$5.0, as compared to an operating loss of $0.6 in the prior year period.
Benefiting earnings were higher acrylonitrile spreads, increased demand in the
export markets for acrylonitrile, partly driven by third-party supply
disruptions and lower energy costs, principally natural gas. The cost of
propylene, the key raw material for acrylonitrile, was higher but acrylonitrile
selling prices outpaced the propylene increases. Also benefiting earnings by
approximately 0.6% and 0.5% of net sales was lower than anticipated employee
benefit costs and the reversal of prior year accruals for performance stock,
respectively.
NET SALES BY REGION
In the North America region (i.e., United States and Canada), net sales were
$185.5 for the third quarter of 2002, down 4.0% from the prior year period.
Overall, selling volumes decreased approximately 3.9% in the region. Selling
volumes in Water and Industrial Process Chemicals decreased 4.0%, Performance
Products increased 6.4%, Specialty Materials decreased 16.6% and Building Block
Chemicals increased 21.7%. Overall, selling prices were flat and the effect of
exchange rate changes reduced sales approximately 0.1% in the region.
In the Europe/Mideast/Africa region, net sales were $82.7 for the third quarter
of 2002, down 4.4% from the prior year period. Overall, selling volumes
decreased approximately 9.0% in the region. Selling volumes in Water and
Industrial Process Chemicals decreased 3.6%, Performance Products decreased
2.7%, Specialty Materials decreased 24.3% and Building Block Chemicals increased
6.8%. Overall, selling prices increased approximately 0.2% in the region with
the segment breakdown as follows: Water and Industrial Process Chemicals
18
(Millions of dollars, except share and per share amounts)
decreased 2.8%, Performance Products decreased 1.7%, Specialty Materials
decreased 0.9% and Building Block Chemicals increased 17.0%. For the region
overall, the favorable effect of exchange rate changes increased sales
approximately 4.4%.
In the Asia/Pacific region, net sales were $43.2 for the third quarter of 2002,
up 5.9% from the prior year period. Overall, selling volumes increased
approximately 3.8% in the region. Selling volumes in Water and Industrial
Process Chemicals increased 16.8%, Performance Products increased 6.0%,
Specialty Materials decreased 9.8% and Building Block Chemicals decreased 6.6%.
Overall, selling prices increased approximately 0.8% in the region with the
segment breakdown as follows: Water and Industrial Process Chemicals decreased
1.2%, Performance Products decreased 6.8%, Specialty Materials decreased 1.7%
and Building Block Chemicals increased 16.8%. For the region overall, the
favorable effect of exchange rate changes increased sales approximately 1.3%.
In the Latin America region, net sales were $21.4 for the third quarter of 2002,
down 0.9% from the prior year period. Overall, selling volumes decreased 0.2% in
the region. Selling volumes in Water and Industrial Process Chemicals decreased
9.0% and Performance Products increased 10.1%. Sales in the Specialty Materials
and Building Block Chemicals segments are relatively small in this region and,
accordingly, comparisons are not meaningful. Exchange rate changes adversely
affected sales by 10.8% but this was largely offset by selling price increases
of approximately 10.1%, which were up 10.3% and 14.4% in the Water and
Industrial Process Chemicals and Performance Products segments, respectively.
NINE MONTHS OF 2002 VERSUS NINE MONTHS OF 2001
Net sales for the nine months ended September 30, 2002 were $1,001.8, compared
with $1,072.3 for the prior year period. The decrease was primarily due to a
significant decrease in demand for commercial aircraft in the Specialty
Materials segment, lower Water and Industrial Process Chemicals sales,
particularly water treatment sales in the municipal water, paper and oilfield
markets and lower phosphine chemical sales, and lower selling prices in the
Building Block Chemicals segment, offset by an increase in selling volumes in
the Performance Products segment.
Net sales in the United States were $520.1 for the nine months ended September
30, 2002, compared with $571.0 for the prior year period. International net
sales were $481.7 for the nine months ended September 30, 2002, or 48.1% of
total net sales, compared with $501.3, or 46.7% of total net sales for the prior
year period.
Manufacturing cost of sales was $760.2 or 75.9% of net sales for the nine months
ended September 30, 2002 and included net restructuring charges of $10.8 for
plant closure, employee related costs and expenses associated with discontinuing
a product line. Excluding these charges, manufacturing cost of sales was $749.4
or 74.8% of net sales for the nine months ended September 30, 2002.
Manufacturing cost of sales was $821.6 or 76.6% of net sales for the prior year
period and included a restructuring charge of $4.6 related to the mothballing of
the Fortier ammonia plant and the Company's share of the related personnel
reductions at the Fortier facility. Excluding these charges, manufacturing cost
of sales was $817.0 or 76.2% of net sales for the prior year period. The
adjusted period-over-period increase in gross profit margins was due to lower
raw material and energy costs, particularly natural gas, partially offset by
unfavorable product mix.
Selling and technical services expenses increased $4.5, research and process
development expenses increased $1.4 and administrative and general expenses
increased $3.7. Included in the nine months ended September 30, 2002 were net
restructuring charges of $1.9, $1.0 and $0.9 in selling and technical services,
research and process development and administrative and general, respectively,
which primarily related to employee reductions in the Specialty Chemical and
Specialty Material segments. Also, included in administrative and general
expenses for the nine months ended September 30, 2002 were charges of $1.7 for
fees incurred in connection with a favorable cash settlement of a prior years'
19
(Millions of dollars, except share and per share amounts)
research and development tax credit claim with the IRS. Included in selling and
technical services expenses for the nine months ended September 30, 2001 was a
restructuring charge of $0.8, which related to the Company's share of personnel
reductions at the Fortier facility.
After adjusting for these items, selling and technical services expenses
increased $3.4, research and process development expenses increased $0.4 and
administrative and general expenses increased $1.1. Selling and technical
services and administrative and general expenses for the nine months ended
September 30, 2002 benefited $0.7 and $1.2, respectively, from the reversal of
prior year accruals for performance stock, which will not vest based on the
performance targets. The benefits realized in selling and technical services and
administrative and general expenses from the reversal of performance stock
accruals were offset by increased accruals for incentive-based compensation.
Incentive compensation is performance based and for the nine months ended
September 30, 2002 assumes the Company will exceed several of its 2002 annual
targets, whereas in the early part of 2001, it became apparent that economic
conditions would prevent the Company from attaining several of its 2001
performance targets and incentive-based compensation accruals were reduced
accordingly.
Amortization of acquisition intangibles was $2.3, down $7.2 from the prior year
period as goodwill is no longer amortized under SFAS 142.
Other income, net was $2.4 for the nine months ended September 30, 2002 and
included $1.0 from three minor land sales. Other income, net was $8.4 for the
prior year period and included gains of $7.0 related to the sale of reclaimed
land in Florida and the settlement of a royalty issue concerning mineral rights
associated with a former phosphate rock mining joint venture also in Florida.
The Company continues to seek opportunities to monetize excess assets, but does
not expect any transactions significantly affecting other income, net for the
remainder of 2002.
Equity in earnings of associated companies was $3.7 for the nine months ended
September 30, 2002, compared to a loss of $1.7 in the prior year period.
Included in the nine months ended September 30, 2002 and 2001 were restructuring
charges of $0.4 and $2.3, respectively, related to CYRO Industries' shutdown of
its Niagara Falls, Ontario, Canada facility and CYRO's share of infrastructure
restructuring at the Company's Fortier facility. Excluding these charges, equity
in earnings of associated companies was $4.1 for the nine months ended September
30, 2002, compared to $0.6 for the prior year period. The increase in equity
earnings of associated companies reflects cost cutting efforts and lower raw
material costs at CYRO. Sales at associated companies were $226.3 for the nine
months ended September 30, 2002 a decrease of 0.3% after excluding sales of the
former AC Molding Compounds joint venture, which was shut-down in November 2001.
Included in the nine months ended September 30, 2002 was a charge of $1.7 to
reduce the carrying value of the Company's net investment in the one-third owned
Polymer Additives.com, LLC joint venture to zero. Accordingly, the Company will
no longer recognize its share of the joint venture's expected future losses. The
terms of the joint venture agreement required the Company to make an additional
contribution of $0.5 during October 2002 and this required contribution was
included in the amount of the charge recognized in the nine months ended
September 30, 2002. The Company is not obligated to make any further capital
contributions.
Interest expense, net was $12.5 for the nine months ended September 30, 2002,
compared to $15.0 for the prior year period. Included in the nine months ended
September 30, 2002 was interest income of $2.0 received in connection with a
favorable cash settlement of prior years' research and development tax credit
claims with the IRS. The remainder of the decrease was due to higher interest
income attributable to higher cash balances during the nine months ended
September 30, 2002.
The income tax provision was $21.2 for the nine months ended September 30, 2002
and included a reduction of $6.0 in connection with a cash settlement of prior
20
(Millions of dollars, except share and per share amounts)
years' research and development tax credit claims. Excluding this item, the
effective tax rate continued to be 33.5%, down from 34.5% for the prior year
period.
Earnings before extraordinary item for the nine months ended September 30, 2002
were $59.9, or $1.47 per diluted share, compared to $59.4, or $1.42 per diluted
share for the prior year period. Included in the nine months ended September 30,
2002 were after-tax net restructuring charges of $10.0, or $0.25 per diluted
share and a net credit of $6.2, or $0.15 per diluted share, related to a
research and development tax credit refund. Included in the nine months of 2001
were after-tax restructuring charges of $5.0, or $0.12 per diluted share and
after-tax goodwill amortization of $4.8, or $0.11 per diluted share, that is no
longer required under SFAS 142. Excluding these items, earnings before
extraordinary items for the nine months ended September 30, 2002 were $63.7, or
$1.57 per diluted share, compared to $69.2, or $1.65 for the prior year period.
The adjusted period-over-period decrease in net earnings was primarily due to
the lower sales, particularly for large commercial aircraft in the Specialty
Materials segment.
SEGMENT RESULTS
Water and Industrial Process Chemicals:
Water and Industrial Process Chemicals net sales were $240.7 for the nine months
ended September 30, 2002, a decrease of approximately 6.0% from the prior year
period. Selling volumes decreased approximately 5.9%, selling prices increased
approximately 1.0% and the adverse effects of exchange rate changes decreased
sales approximately 1.1%. The decreases in selling volumes were due to lower
water treatment and paper chemical sales in the North American region, lower
mining chemical sales in the Latin American region and lower phosphine sales in
the Europe/Mideast/Africa and North American regions.
Earnings from operations were $18.7 or 7.8% of net sales for the nine months
ended September 30, 2002, compared to $21.8 or 8.5% of net sales for the prior
year period. The lower earnings from operations were primarily the result of
lower sales and an unfavorable product mix offset by lower overall raw material
costs, the reversal of prior year accruals for performance stock and lower
amortization expense from adopting SFAS 142.
Performance Products:
Performance Products net sales were $340.9 for the nine months ended September
30, 2002, an increase of 0.9% from the prior year period. Selling volumes
increased approximately 2.4%, with all product lines contributing to the
increase over the prior year period. Demand from U.S. automotive and general
industrial markets improved versus prior year period, however in the Europe
region demand was lower. Selling prices decreased approximately 1.8% and the
favorable effects of exchange rate changes increased sales approximately 0.3%.
The lower selling prices were primarily in the polymer additives product line.
Earnings from operations for the nine months ended September 30, 2002 were $31.0
or 9.1% of net sales, compared to $15.4 or 4.6% of net sales for the prior year
period. The improvement in earnings from operations is the result of the
leverage achieved from higher selling volumes and lower raw material and
operating costs. Also benefiting earnings was the reversal of prior year
accruals for performance stock and lower amortization expense from adopting SFAS
142.
Specialty Materials:
Specialty Materials net sales were $299.4 for the nine months ended September
30, 2002, a decrease of 13.6% from the prior year period. Selling volumes
decreased approximately 15.9%, excluding a 2.8% increase from acquisitions. The
21
(Millions of dollars, except share and per share amounts)
effect of exchange rate changes were negligible, while selling prices were down
approximately 0.5%. The decrease in selling volumes reflects the significant
decrease in demand for commercial aircraft.
Earnings from operations for the nine months ended September 30, 2002 were $53.7
or 17.9% of net sales, compared to $82.5 or 23.8% for the prior year period. The
decline in earnings from operations reflects the decrease in selling volumes, as
noted above, partially offset by efforts to keep costs aligned with demand, the
reversal of prior year accruals for performance stock and lower amortization
expense from adopting SFAS 142.
Building Block Chemicals:
Building Block Chemicals net sales to external customers were $120.8 for the
nine months ended September 30, 2002, a decrease of 8.6% from the prior year
period. Selling volumes decreased approximately 0.4%, selling prices decreased
approximately 8.7% and exchange rate changes increased sales approximately 0.5%.
The decrease in selling prices was primarily due to lower acrylonitrile and
acrylamide selling prices during the first half of 2002.
Earnings from operations were $3.4, as compared to the prior year period
operating loss of $11.8. The improvement was due to higher acrylonitrile spreads
driven by increased demand in the export markets for acrylonitrile and by
third-party supply disruptions, lower energy costs, principally natural gas in
the United States, and the reversal of prior year accruals for performance
stock.
NET SALES BY REGION
In the North America region (i.e., United States and Canada), net sales were
$562.4 for the nine months ended September 30, 2002, down 9.2% from the prior
year period. Overall, selling volumes decreased approximately 7.5% in the
region. Selling volumes in Water and Industrial Process Chemicals decreased
11.5%, Performance Products increased 2.2%, Specialty Materials decreased 10.1%
and Building Block Chemicals decreased 17.2%. Overall, selling prices decreased
approximately 1.6% in the region with the segment breakdown as follows: Water
and Industrial Process Chemicals decreased 0.2%, Performance Products decreased
1.2%, Specialty Materials decreased 0.3% and Building Block Chemicals decreased
9.7%. For the region overall, the effect of exchange rate changes reduced sales
approximately 0.1%.
In the Europe/Mideast/Africa region, net sales were $241.8 for the nine months
ended September 30, 2002, down 6.1% from the prior year period. Overall, selling
volumes decreased approximately 6.8% in the region. Selling volumes in Water and
Industrial Process Chemicals increased 0.6%, Performance Products decreased
0.9%, Specialty Materials decreased 21.4% and Building Block Chemicals increased
10.1%. Overall, selling prices decreased approximately 1.3% in the region with
the segment breakdown as follows: Water and Industrial Process Chemicals
decreased 2.0%, Performance Products decreased 1.8%, Specialty Materials
decreased 0.8% and Building Block Chemicals increased 0.1%. For the region
overall, the favorable effect of exchange rate changes increased sales
approximately 2.0%.
In the Asia/Pacific region, net sales were $136.9 for the nine months ended
September 30, 2002, up 9.1% from the prior year period. Overall, selling volumes
increased approximately 14.7% in the region. Selling volumes in Water and
Industrial Process Chemicals increased 18.6%, Performance Products increased
10.0%, Specialty Materials decreased 12.6% and Building Block Chemicals
increased 27.2%. Overall, selling prices decreased approximately 6.1% in the
region with the segment breakdown as follows: Water and Industrial Process
Chemicals decreased 1.7%, Performance Products decreased 5.7%, Specialty
Materials decreased 1.2% and Building Block Chemicals decreased 11.5%. For the
region overall, the favorable effect of exchange rate changes increased sales
approximately 0.5%.
22
(Millions of dollars, except share and per share amounts)
In the Latin America region, net sales were $60.7 for the nine months ended
September 30, 2002, down 13.3% from the prior year period. Overall, selling
volumes decreased approximately 11.3% in the region. Selling volumes in Water
and Industrial Process Chemicals decreased 13.7% and Performance Products
decreased 1.3%. Sales in the Specialty Materials and Building Block Chemicals
segments are relatively small in this region and, accordingly, comparisons are
not meaningful. Overall, selling prices increased approximately 6.8% in the
region. Water and Industrial Process Chemicals increased 10.9% and Performance
Products increased 2.8%. For the region overall, the adverse effect of exchange
rate changes reduced sales approximately 8.8%.
LIQUIDITY AND FINANCIAL CONDITION
At September 30, 2002, the Company's cash balance was $166.5, an increase of
$82.9 from year-end 2001.
Net cash flows provided by operating activities were $137.1 for the nine months
ended September 30, 2002, compared with net cash flows provided by operating
activities of $79.9 for the nine months ended September 30, 2001.
Accounts payable increased over the prior year-end, but the impact on cash flows
as compared to the prior period was magnified by a significant decrease in
payables for the nine months ended September 30, 2001. The opening balance for
2001 reflected higher raw material and natural gas prices related to production
levels in the fourth quarter of 2000. Payment of these balances and lower
production levels in response to the economic conditions last year resulted in a
significant use of cash related to accounts payable in 2001. Conversely, as
volumes have increased in 2002, the payable balance has also increased. Accrued
expenses increased over the prior year period due largely to the timing of
payroll tax payments and increases in incentive-based compensation and profit
sharing accruals. The impact on cash flows as compared to the prior period is
again magnified by the events of 2001. Incentive and profit sharing payments are
generally accrued in one year and paid out in the first quarter of the next
year. In 2001, incentive and profit sharing payments for 2000 were made in the
first quarter, but by September 30, 2001 it was clear that several 2001 targets
would not be achieved so the accruals were reduced and payments in 2002 were
minimal. Current year accruals are at a higher level. As a result, accrued
expenses reflect a significant use of cash in 2001, but represent a source of
cash for the current period. Income taxes payable in 2001 included a payment of
$26.6 related to the gain on the sale of the Paper Chemicals business in the
fourth quarter of 2000. In the current period, the Company settled an IRS claim
related to prior years' research and development tax credits and received a cash
refund of $6.0.
Net cash flows used for investing activities totaled $32.6 for the nine months
ended September 30, 2002, compared with $54.9 for the nine months ended
September 30, 2001. Included in 2001 was $9.0 funding for three small
acquisitions. Capital spending for the nine months ended September 30, 2002 was
$38.0, compared with $48.2 for the nine months ended September 30, 2001. The
Company expects quarterly spending to increase over the next several quarters as
the Specialty Chemical research laboratory renovation progresses. The Company
now expects capital spending for the full year 2002 to be in the range of $55.0
to $60.0.
The Company believes that, based on its expected operating results for 2002, it
will be able to fund operating cash requirements and planned capital
expenditures through the end of 2002. For further discussion on risks, see
Quantitative and Qualitative Disclosures about Market Risk, Significant
Accounting Estimates and Comments on Forward-Looking Statements below.
Net cash flows used for financing activities totaled $22.6 for the nine months
ended September 30, 2002, compared with net cash flows used for financing
activities of $38.0 for the nine months ended September 30, 2001. Included in
the nine months ended September 30, 2002 was a payment of $5.4 related to the
purchase of the amino coatings resins business of BIP Limited in 1999.
In connection with the stock repurchase program discussed below, during the nine
months ended September 30, 2002, the Company purchased 733,382 shares of common
23
(Millions of dollars, except share and per share amounts)
stock at a cost of $20.3. During the nine months ended September 30, 2001 the
Company purchased 1,601,300 shares of common stock at a cost of $48.8.
On November 2, 2000, the Company announced an authorization of $100.0 to
repurchase shares of its outstanding common stock. The repurchases are made from
time to time on the open market or in private transactions and the shares
obtained under this authorization are utilized for stock option plans, benefit
plans and other corporate purposes. Through September 30, 2002, the Company had
repurchased 2,606,173 shares at a cost of $78.1 under this authorization.
In connection with the Company's stock repurchase program, the Company may sell
put options to institutional investors in private placements exempt from
registration under Section 4(2) of the Securities Act of 1933. During the nine
months ended September 30, 2002 the Company sold 100,000 put options that were
originally scheduled to expire in September 2002 at an exercise price of $29.505
per share. The Company received premiums of approximately $0.2 on the sale of
such options. Subsequently, the terms were amended to extend the maturity date
to March 2003, for which the Company received an additional premium of
approximately $0.1. During the nine months ended September 30, 2001, the Company
sold an aggregate of 300,000 put options at exercise prices ranging from $31.347
to $32.490 per share. The Company received premiums of approximately $0.6 on the
sale of such options. During the third quarter of 2001, 140,000 of the put
options expired unexercised and the holders elected to exercise the remaining
160,000 put options. As a result, the Company purchased 60,000 shares of its
common stock at an exercise price of $31.347 per share, which was slightly "out
of the money" at the time and 100,000 shares of its common stock at an exercise
price of $32.490 per share.
On April 11, 2002, the Company executed a $100.0, three-year unsecured revolving
credit agreement and a $100.0, 364-day unsecured revolving credit agreement with
a one-year term out option. These two agreements replaced a $200.0 unsecured
revolving credit agreement that was due to expire in July 2002. Revolving loans
under the new agreements are available for the general corporate purposes of the
Company and its subsidiaries, including without limitations, for purposes of
making acquisitions permitted under the agreements. The credit agreements
contain covenants customary for such facilities.
The Company has the intent and ability (as demonstrated by the credit agreements
discussed in the preceding paragraph) to refinance on a long-term basis the
$100.0 principal amount of 6.50% Notes due March 15, 2003.
OTHER
The majority of the Company's pension plans' assets and liabilities are measured
at December 31 each year for financial reporting purposes. Recent market returns
on assets, particularly this year, have been poor. Additionally, with the
decline in interest rates, the Company expects a corresponding decrease in the
discount rate used to estimate its pension liabilities, which increases the
value of the Company's pension liabilities. Based on actual year to date asset
returns and current interest rates, both as of September 30, 2002, the Company
expects to record a non-cash after-tax minimum pension liability charge to Other
Comprehensive Income of approximately $100.0 at December 31, 2002. If asset
returns improve before year-end or interest rates increase, the charge will be
lower or none at all. If conditions worsen the charge will increase. This charge
does not impact 2002 reported earnings and does not necessarily impact future
cash contributions required to be made to the pension trusts. However, based on
those assumptions, the Company expects higher pension expense in 2003 partially
offset by lower costs in other benefit plans.
2002 Outlook:
With better than expected results in the third quarter of 2002, the Company has
revised upward its full-year 2002 EPS estimate to a range of $1.87 to $1.92 from
$1.65 to $1.75. This estimate excludes net restructuring charges from the first
quarter and the net benefit of the prior years' research and development tax
24
(Millions of dollars, except share and per share amounts)
credits recorded in the third quarter. The 2002 fourth quarter estimate is
essentially unchanged at $0.30-$0.35. The following are the full-year
expectations for the individual segments.
In Specialty Chemicals, the Company's expectation is for the economy in the
fourth quarter of 2002 to continue as-is although it typically has a seasonal
dip in sales. For full year 2002, the Water and Industrial Process Chemicals
segment, sales and earnings are expected to be down slightly, while in the
Performance Products segment, the expectation is for sales to increase about 3%
and earnings to about double over the prior year.
In the Specialty Materials segment, build rates for large commercial aircraft
are declining in line with the Company's original guidance, but the market for
smaller aircraft, particularly business jets, is weakening, and those customers
are working down inventory levels. The military business remains strong. The
Company now expect sales for the full year to decline 15% and earnings to be 35
to 40% lower than 2001.
In the Building Block Chemicals segment, propylene costs are peaking but the
expected downturn in cost is less than expected from the guidance provided last
quarter. Acrylonitrile selling prices increased and expectations is for them to
remain at these levels for the fourth quarter. Natural gas costs will increase
slightly over third quarter levels. Demand side indicators are that the Fortier
plant will continue to run at the higher third quarter 2002 levels. The net
result of the above should be full year earnings in a range around $5.0.
Recently Issued Statements of Financial Accounting Standards:
For information on recent accounting pronouncements see Note 5 of the Notes to
Consolidated Financial Statements.
Significant Accounting Estimates:
Accounting principles generally accepted in the United States of America require
management to make certain estimates and assumptions. These estimates and
assumptions affect the reported amounts in the financial statements and the
notes thereto. The areas discussed below involve the use of significant judgment
in the preparation of the Company's consolidated financial statements and
changes in the estimates and assumptions used may impact future results of
operations and financial condition.
Retirement Plans
Certain assumptions are used in the calculation of the actuarial valuation of
the Company-sponsored defined benefit pension plans. These assumptions include
the discount rate used to estimate pension liabilities, expected return on
assets, rates of future compensation increases, retirement age and mortality
rates. Changing these assumptions will impact the amount of pension expense to
be recognized. For example, increasing/decreasing the discount rate used to
estimate pension liabilities by 0.25% decreases/increases pension expense by
$0.9 and increasing/decreasing the expected return on plan assets by 0.25%
decreases/increases pension expense by $0.8.
For more information see "Significant Accounting Estimates" under Item 7 of the
Company's 2001 Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 25, 2002 and incorporated by reference herein.
COMMENTS ON FORWARD-LOOKING STATEMENTS
A number of the statements made by the Company in the Quarterly Report on Form
10-Q, or in other documents, including but not limited to the Company's Annual
Report to Stockholders, its press releases and other periodic reports to the
25
(Millions of dollars, except share and per share amounts)
Securities and Exchange Commission, may be regarded as "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995.
Forward-looking statements include, among others, statements concerning the
Company's (including its segments) outlook for 2002 and beyond, the
accretiveness of acquisitions, the financial effects of divestitures, pricing
trends, the effects of changes in foreign exchange rates and forces within the
industry, the completion dates of and expenditures for capital projects,
expected sales growth, cost reduction strategies and their results, long-term
goals of the Company and other statements of expectations, beliefs, future plans
and strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts.
All predictions as to future results contain a measure of uncertainty and,
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in global and regional economies; the
financial well-being of end consumers of the Company's products, particularly
the airline industry; changes in demand for the Company's products or in the
quality, costs and availability of its raw materials; costs and availability of
natural gas; customer inventory destocking; the actions of competitors; currency
exchange and interest rate fluctuations; the success of our customers' demands
for price decreases; technological change; our ability to renegotiate expiring
long-term contracts; changes in employee relations, including possible strikes;
government regulations; governmental funding for those military programs that
utilize the Company's products; litigation, including its inherent uncertainty;
difficulties in plant operations and materials transportation; environmental
matters; the results of and recoverability of investments in associated
companies; energy costs; returns on employee benefit plans assets and changes in
the discount rates used to estimate employee benefit liabilities; changes in the
medical cost trend rate; war, terrorism or sabotage; and other unforeseen
circumstances. A number of these factors are discussed in this and other of the
Company's filings with the Securities and Exchange Commission.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of market risks at year-end, refer to Item 7A of the Company's
2001 Annual Report on Form 10-K for the year ended December 31, 2001, filed with
the Securities and Exchange Commission on March 25, 2002 and incorporated by
reference herein. During 2002, the Company executed various foreign exchange and
natural gas derivative instrument transactions that do not materially alter the
market risk assessment performed as of December 31, 2001. Other 2002 financial
instrument transactions include:
On April 11, 2002, the Company executed a $100.0, three-year unsecured revolving
credit agreement and a $100.0, 364-day unsecured revolving credit agreement with
a one-year term out option. These two agreements replaced a $200.0 unsecured
revolving credit agreement that was due to expire in July 2002. Revolving loans
under the new agreements are available for the general corporate purposes of the
Company and its subsidiaries, including, without limitation, for purposes of
making acquisitions permitted under the agreements. The credit agreements
contain covenants customary for such facilities.
During the nine months ended September 30, 2002 the Company sold 100,000 put
options that were originally scheduled to expire in September 2002 at an
exercise price of $29.505 per share. The Company received premiums of
approximately $0.2 on the sale of such options. Subsequently, the terms were
amended to extend the maturity date to March 2003, for which the Company
received an additional premium of approximately $0.1. In lieu of purchasing the
shares from the put option holder, the Company has the right to elect settlement
by paying the holder of the put options the excess of the strike price over the
then market price of the shares in either cash or additional shares of the
Company's common stock (i.e., net cash or net share settlement).
26
(Millions of dollars, except share and per share amounts)
Beginning in 2002, the Company expanded its hedging program to include the use
of natural gas swaps to hedge utility requirements at certain of its other
facilities. These swaps, which are financially settled, are highly effective at
achieving offsetting cash flows of the underlying natural gas purchases. As of
September 30, 2002, the fair value of these swaps was $0.1, which will be
reclassified into Manufacturing Cost of Sales during the three months ending
December 31, 2002 as these swaps are settled.
Item 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this Quarterly Report on Form 10-Q,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures as defined in Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's current disclosure controls and procedures are
effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the evaluation by the Chief Executive Officer and
Chief Financial Officer.
The design of any system of controls and procedures is based in part upon
certain assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
27
Part II - Other Information
Item 1. LEGAL PROCEEDINGS
The Company is the subject of numerous lawsuits and claims incidental to the
conduct of its or its predecessors' businesses, including lawsuits and claims
relating to product liability, personal injury, environmental, contractual,
employment and intellectual property matters. Many of the matters relate to the
use, handling, processing, storage, transport or disposal of hazardous
materials. The Company believes that the resolution of such lawsuits and claims,
including those described below, will not have a material adverse effect on the
financial position of the Company, but could be material to the results of
operations of the Company in any one accounting period.
Cytec and/or American Cyanamid Company ("Cyanamid"), the Company's former parent
company, are among several defendants in more than 35 cases, pending in various
state and federal courts, in which plaintiffs assert claims for personal injury,
property damage, and other claims for relief relating to lead pigment that was
used as an ingredient decades ago in paint for use in buildings. Cytec has an
agreement to indemnify Cyanamid in connection with such suits. The different
suits were brought by government entities and individual plaintiffs, on behalf
of themselves and others. The suits variously seek injunctive relief and
compensatory and punitive damages, including funds for the cost of monitoring,
detecting and removing lead based paint from buildings; for personal injuries
allegedly caused by ingestion of lead based paint; and plaintiffs' attorneys'
fees. The Company and Cyanamid believe that the suits against them are without
merit and are vigorously defending against all such claims.
The Company has access to a substantial amount of primary and excess general
liability insurance for property damage under the policies of Cyanamid. The
Company believes these policies are available to cover a significant portion of
both its defense costs and indemnity costs, if any, for lead related property
damage. The Company is currently pursuing an agreement with various of its
insurers concerning coverage with respect to the claims asserted in these suits.
In January 1999 the Company received a subpoena to testify before, and provide
documents to, a federal grand jury in California investigating the carbon fiber
and prepreg industry. The Company manufactures prepregs as part of its advanced
composites product line. The Company has no reason to believe that it is a
target of the grand jury investigation. After the grand jury investigation was
commenced, the Company and the other companies subpoenaed to testify before the
grand jury were named as defendants in two civil antitrust class actions in
state and federal courts in California on behalf of purchasers of carbon fiber,
which the complaints defined to include prepregs manufactured from carbon fiber.
In each case the complaint alleges that the defendants, manufacturers of carbon
fiber and/or prepregs manufactured therefrom, conspired to fix the prices of
their products. The Company, the other companies, and certain defense
contractors have also been named as defendants in a qui tam proceeding brought
by four individuals on behalf of the United States government seeking to recover
for the submission by the defendants of alleged false or fraudulent claims for
payment to the United States government arising from alleged fraudulently fixed
carbon fiber and prepreg prices. The Company and other companies have also been
named as defendants in a state civil antitrust action in the state court in
Massachusetts. The Company denies that it conspired to fix prices.
In connection with its acquisition of BP's carbon fibers business, the Company
was indemnified by BP from any liabilities BP's carbon fibers business may have
in these proceedings. The indemnity does not cover any liability the Company may
have in its own right and not as a successor to BP's carbon fibers business.
See also the first four paragraphs of "Environmental Matters" under Item 1 of
the Company's 2001 Annual Report on Form 10-K, which is incorporated by
28
reference herein, and Note 8 of the Notes to the Consolidated Financial
Statements (unaudited) on Part I, item (1).
In addition to liabilities with respect to the specific cases described above,
because the production of certain chemicals involves the use, handling,
processing, storage, transportation and disposal of hazardous materials, and
because certain of the Company's products constitute or contain hazardous
materials, the Company has been subject to claims of injury from direct exposure
to such materials and from indirect exposure when such materials are
incorporated into other companies' products. There can be no assurance that, as
a result of past or future operations, there will not be additional claims of
injury by employees or members of the public due to exposure, or alleged
exposure, to such materials.
Furthermore, the Company also has exposure to present and future claims with
respect to workplace exposure, workers' compensation and other matters, arising
from past events.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 10 of the Notes to Consolidated Financial Statements contained in Part
I, Item 1 for a description of certain put options sold by the Company.
Item 5. OTHER INFORMATION
The Company has rescheduled its next annual meeting of Common Stockholders to
April 17, 2003 from May 12, 2003 as was previously reported.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). EXHIBITS
See Exhibit Index on page 33 for exhibits filed with this Quarterly Report on
Form 10-Q.
(b). REPORTS ON FORM 8-K
The Company has not filed a current report on Form 8-K during the third quarter
of 2002.
29
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYTEC INDUSTRIES INC.
By:/s/James P. Cronin
---------------------
James P. Cronin
Executive Vice President and Chief
Financial Officer
October 31, 2002
30
CERTIFICATIONS
I, David Lilley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cytec Industries
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ David Lilley
- -----------------------
David Lilley
Chairman, President and
Chief Executive Officer
October 31, 2002
31
CERTIFICATIONS
I, James P. Cronin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cytec Industries
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ James P. Cronin
- ----------------------------
James P. Cronin
Executive Vice President and
Chief Financial Officer
October 31, 2002
32
EXHIBIT INDEX
12 Computation of Ratio of Earnings to Fixed Charges for the three and nine
months ended September 30, 2002 and 2001
99.1 Material Incorporated by reference from the 2001 Annual Report on Form
10-K and with respect to Item 8 on Form 10-K/A
99.2 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
99.3 Certification of James P. Cronin, Chief Financial Officer Pursuant To 18
U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002
33