UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission file number 1-12372
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CYTEC INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3268660
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No).
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 357-3100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
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None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |X| No | |
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes | | No |X|
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 the filing
requirements for at least the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Yes | | No |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |X| Accelerated filer | | Non-accelerated filer | |
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes | | No |X|
At June 30, 2006 the aggregate market value of common stock held by
non-affiliates was $2,513,260,130 based on the closing price ($53.46 per share)
of such stock on such date.
There were 47,817,466 shares of common stock outstanding on February 19, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Part of Form 10-K
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Portions of Proxy Statement for 2007 Annual Meeting Parts III, IV
Of Common Stockholders, dated March 9, 2007.
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
Form 10-K
Table of Contents
Page
Part I.
Item 1. Business 4
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 14
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission Of Matters to a Vote of Security Holders 17
Part II.
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer 18
Purchases of Equity Securities
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 78
Item 9A. Controls and Procedures 78
Item 9B. Other Information 78
Part III.
Item 10. Directors and Executive Officers of the Registrant 79
Item 11. Executive Compensation 79
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 80
Matters
Item 13. Certain Relationships and Related Transactions 80
Item 14. Principal Accountant Fees and Services 80
Part IV.
Item 15. Exhibits and Financial Statement Schedules 81
Signatures 85
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COMMENTS ON FORWARD-LOOKING STATEMENTS
A number of the statements made by us in our Annual Report on Form 10-K, or in
other documents, including but not limited to the Chairman, President and Chief
Executive Officer's and Executive Vice President and Chief Financial Officer's
letters to stockholders and stakeholders, respectively, our press releases and
other periodic reports to the Securities and Exchange Commission, may be
regarded as "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements concerning our
(including our segments) outlook for the future, anticipated results of
acquisitions and divestitures, selling price and raw material cost trends, the
effects of changes in currency rates and forces within the industry, the
completion dates of and anticipated expenditures for capital projects, expected
sales growth, operational excellence strategies and their results, expected
annual effective tax rates, our long-term goals and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts. Such
statements are based upon our current beliefs and expectations and are subject
to significant risks and uncertainties. Actual results may vary materially from
those set forth in the forward-looking statements.
The following factors, among others, could affect our anticipated results:
successful completion of the information technology software integration of
Surface Specialties, changes in global and regional economies; the financial
well-being of end consumers of our products; changes in demand for our products
or in the quality, costs and availability of our raw materials and energy;
customer inventory reductions; the actions of competitors; currency and interest
rate fluctuations; technological change; our ability to renegotiate expiring
long-term contracts; changes in employee relations, including possible strikes;
government regulations, including those related to taxation and those particular
to the purchase, sale and manufacture of chemicals or operation of chemical
plants; governmental funding for those military programs that utilize our
products; litigation, including its inherent uncertainty and changes in the
number or severity of various types of claims brought against us; difficulties
in plant operations and materials transportation, including those caused by
hurricanes or other natural forces; environmental matters; returns on employee
benefit plan assets and changes in the discount rates used to estimate employee
benefit liabilities; changes in the medical cost trend rate; changes in our
assessment of uncertain tax positions; changes in accounting principles or new
accounting standards; political instability or adverse treatment of operations
in any of the significant countries in which we operate; war, terrorism or
sabotage; epidemics; and other unforeseen circumstances.
Unless indicated otherwise, the terms "Cytec", "the Company", "we", "us", and
"our" each refer collectively to Cytec Industries Inc. and its subsidiaries.
AVAILABLE INFORMATION
We maintain a website that contains various information on our Company and
products. It is accessible at www.Cytec.com. Through our website, stockholders
and the general public may access free of charge (other than any connection
charges from internet service providers) filings we make with the Securities and
Exchange Commission as soon as practicable after filing. Filing accessibility in
this manner includes the Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934.
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PART I
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Item 1. BUSINESS
We are a global specialty chemicals and materials company focused on developing,
manufacturing and selling value-added products. Our products serve a diverse
range of end markets including aerospace, adhesives, automotive and industrial
coatings, chemical intermediates, inks, mining and plastics. We use our
technology and application development expertise to create chemical and material
solutions that are formulated to perform specific and important functions for
our customers. We operate on a global basis with 37% of our 2006 revenues in
North America, 43% in Europe, 14% in Asia-Pacific and 6% in Latin America. We
have manufacturing and research facilities located in 19 countries. We had net
sales of $3,329.5 million and earnings from operations of $304.9 million in
2006, including a gain of $75.5 million on the sale of our water treatment and
acrylamide product lines. Cytec was incorporated as an independent public
company in December 1993.
On February 28, 2005, we completed the acquisition of the Surface Specialties
business ("Surface Specialties") of UCB SA ("UCB") for cash and stock valued at
approximately $1.8 billion. This acquisition complemented our existing product
offering to the coatings industry including the general industrial, automotive,
architectural, plastic, ink and wood sectors.
In October 2006, we completed the first of three phases of the sale of our water
treatment chemicals and acrylamide product lines to Kemira Group ("Kemira"),
which included the product lines themselves, the related intellectual property,
the majority of the manufacturing sites and essentially all of the sales,
marketing, manufacturing, R&D and technical services personnel . The
manufacturing sites in the first phase included Mobile, Alabama, Longview,
Washington, Bradford, UK, and the acrylamide manufacturing plant at our Fortier,
Louisiana facility which will be operated by our personnel under a long term
manufacturing agreement. The sale of our Botlek manufacturing site in the
Netherlands was completed and transferred to Kemira in January 2007 as part of
the phase two closing, and certain net assets at various subsidiaries in
Asia/Pacific and Latin America are expected to close within the next three
months as the last phase. We will continue to supply acrylonitrile to the Kemira
acrylamide plants at Fortier and Botlek under a long term supply agreement. In
addition, under various long term manufacturing agreements, we will manufacture
certain water treatment products for Kemira at several of our sites and Kemira
will manufacture for us certain mining chemicals at the Mobile, Alabama and
Longview, Washington sites and various other products at the Botlek site.
The timing of the flow of funds is as follows: approximately $208.0 million was
received in October 2006 for the first closing, approximately $21.0 million was
received for the second closing in January 2007, and an estimated $10.0 million
will be received upon completion of the transfer of the assets at the various
subsidiaries. We also recorded approximately $6.0 million of a receivable at
December 31, 2006 as a result of a working capital adjustment from the first
phase closing we expect to receive per the terms of the contract in 2007,
bringing estimated total proceeds to $245.0 million. The remaining subsidiary
net asset closings are subject to certain conditions and the amounts could
change due to final working capital transferred. The 2006 nine month sales of
the two product lines while owned by Cytec were approximately $231.1 million. We
recorded a pre-tax gain of $75.5 million ($59.6 million after-tax) related to
the first phase closing in the fourth quarter of 2006, and expect a smaller gain
in 2007 from the other closings.
We have four business segments: Cytec Performance Chemicals, Cytec Surface
Specialties, Cytec Engineered Materials and Building Block Chemicals. Cytec
Performance Chemicals and Cytec Surface Specialties are managed under one
executive leader, and are referred to collectively as Cytec Specialty Chemicals.
Cytec Performance Chemicals includes the following product lines: mining
chemicals, phosphines, polymer additives, specialty additives, specialty
urethanes and adhesives. Cytec Surface Specialties product lines include
radiation-cured resins (Radcure resins), powder coating resins and liquid
coating resins. Included in the liquid coating resins product line are
water-borne resins, amino resins and solvent based resins. Cytec Engineered
Materials principally includes advanced composites and structural film
adhesives. Building Block Chemicals principally includes acrylonitrile,
hydrocyanic acid, sulfuric acid and melamine.
Our corporate vision is to be a premier specialty chemicals and materials
company through customer focus, superior technology, operational excellence and
employee commitment. To achieve our corporate vision, our strategy includes the
following initiatives:
- Focus on developing applications and solutions that meet customer
needs. We seek to collaborate closely with our customers to understand
their needs and provide them with a superior value proposition, whether
through improvement in product quality, reduced part cost or a new
enabling technology. We seek to market our specialty products in terms
of the value they provide and focus on delivering a high level of
technical service to our customers as we work with them on solving
problems and providing them with better products for their
applications. For example, our water-borne liquid coating resins
technologies benefit customers by delivering valuable performance
properties while helping them meet evolving environmental standards,
including reducing or eliminating the need for solvents and other
volatile organic compounds.
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- Technology leadership. We are dedicated to creating a sustainable
competitive advantage through superior technology. We believe our
technology is the ultimate engine of our growth and success. To that
end we focus on our new product pipeline and delivering value-added
products to our customers every year. For example, we have continued to
invest in the Cytec Engineered Materials segment by recruiting
technical service as well as Research and Development personnel to take
advantage of the growing potential for new applications for our
technology. Our technology leadership position resulted in one of our
high temperature resins systems being used in the F-35 Joint Strike
Fighter program. Additionally, within the Cytec Surface Specialties
segment, we are developing hybrid resins, in which radiation-curable
properties are combined with water-based or powder-based technologies,
and in more complex applications, such as coil coating, automotive
repair, ultraviolet inkjet printing and flat-panel displays.
- Seek geographical expansion of our business. We operate on a global
basis with manufacturing plants located in 19 countries. Our
acquisition of Surface Specialties gave us local manufacturing
operations in high growth emerging markets where we can continue to
expand sales from existing production and add new technologies as
markets develop.
- Pursue operational excellence and efficiencies. We are focused on
operational excellence. To develop and implement best practices, we
benchmark our performance against our competitive peer group. This has
had a significant positive impact in terms of our safety and
environmental performance. Manufacturing has the largest impact on our
costs and we use various techniques to reduce our product costs by
improving process yields, reducing batch times, increasing capacity and
improving and/or streamlining our manufacturing processes.
In the course of our ongoing operations, we have made a number of other
strategic business and product line acquisitions and dispositions. All
acquisitions have been recorded using the purchase method of accounting.
Accordingly, the results of operations of the acquired companies have been
included in our consolidated results from the dates of the respective
acquisitions.
Our management team regularly reviews our product line portfolio in terms of
strategic fit and capital allocation based on financial performance which
includes factors such as growth, profitability and return on invested capital.
From time to time, we may also dispose of or withdraw certain product lines. We
may also acquire additional product lines or technologies. We conduct regular
reviews of our plant sites' cost effectiveness, including individual facilities
within such sites.
SEGMENT INFORMATION
Revenues from external customers, earnings from operations and total assets for
each of our four reportable segments can be found in Note 18 of the Notes to
Consolidated Financial Statements which is incorporated by reference herein.
Cytec Performance Chemicals
Set forth below are our primary product lines and major products in this segment
and their principal applications.
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Product Line Major Products Principal Applications
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Mining chemicals Promoters, collectors, solvent Mineral separation and processing
extractants, flocculants, for copper, alumina and certain
frothers, filter and dewatering other minerals
aids, antiscalants, dispersants,
depressants, defoamers and
reagents
Phosphines Solvent extractants, flame Mineral processing,
retardants, catalyst ligands, pharmaceutical, chemical and
high purity phosphine gas and electronic manufacturing, and
biocides fumigants
Polymer additives Ultraviolet light stabilizers Plastics, coatings, and fibers
and absorbers, high performance for: agricultural films,
antioxidants and antistatic automotive parts, architectural
agents lighting, fiberglass, housewares,
packaging, outdoor furniture,
sporting goods, toys and apparel
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Specialty additives Surfactants, specialty monomers, Textiles, non-wovens and
acrylic stabilizers and PTZ(R) adhesives, super absorbent
Phenothiazine polymers, and acrylic acid
stabilizer
Specialty urethanes Polyurethane, resins, Breathable textile coatings,
isocyanates, carbamates and formulated polyurethane and epoxy
epoxy and polyurethane resin systems, adhesives, inks and
systems sealants
Adhesives Pressure sensitive adhesives: Signage, labels, tapes, graphics,
water-borne and solvent-borne medical and specialty customer
formulations
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We market our performance chemicals through specialized sales and technical
service staffs for each of our product lines. Sales are usually made directly to
large customers and through distributors to smaller customers. We have achieved
growth in our performance chemicals sales by finding new applications for our
existing products as well as developing new products. For discussion of raw
materials, refer to "Customers and Suppliers."
Mining Chemicals
Our mining chemicals product line is primarily used in applications to separate
desired minerals from host ores. We have leading positions in the copper
processing industry, particularly in the flotation and solvent extraction of
copper. We also have a leading position in the alumina processing industry,
where our patented HxPAMs are particularly effective at the flocculation of "red
mud." We also sell phosphine specialty reagents which have leading positions in
cobalt-nickel solvent extraction separation and complex sulfide flotation
applications. In 2003, we broadened our mining chemicals product line by
acquiring from Avecia its metal extractant product ("MEP") line. The MEP product
line has a leading position for solvent extraction processing of copper oxide
ores. In late 2005, we completed a capital project to increase our MEP capacity
by about 50%. Demand for mining chemicals is cyclical and varies with industry
conditions such as global demand, inventory levels and prices for the particular
minerals with respect to which our products have processing applications. We
strive to develop new technologies as well as new formulations tailored for
specific applications.
Phosphines
Our phosphine specialties are utilized for a variety of applications. We are a
leading supplier of ultra-high purity phosphine gas, used in semiconductor
manufacturing and light emitting diode applications, and have significant
positions in various phosphine derivative products including phosphonium salts
used in pharmaceutical catalysts and biocides. Included in the phosphine line is
the organo phosphorus compounds acquired from Avecia in 2003 as part of its
Intermediates and Stabilizers product line. The compounds are used primarily as
intermediates and catalyst ligands for organic and chemical synthesis in the
pharmaceutical and chemical industries.
Polymer Additives
We are a global supplier to the plastics industry of specialty additives which
protect plastics from the ultraviolet radiation of sunlight and from oxidation.
We seek to enhance our position with new products based on proprietary
chemistries, such as our proprietary technology for CYASORB THT ultraviolet
stabilizer, and our solutions-based technical support. CYASORB THT provides much
improved ultraviolet stabilization efficiency and cost effectiveness. In certain
cases, we use a combination of additives to achieve a level of efficiency not
previously achieved in polymer applications.
Specialty Additives
We are a leading global supplier of sulfosuccinate surfactants, acrylamide based
specialty monomers, and PTZ(R) Phenothiazine. Sulfosuccinate surfactants and
acrylamide based specialty monomers products are used in emulsion polymers,
paints, paper coatings, printing inks, and other diverse customer applications.
PTZ(R) Phenothiazine is used as an acrylic acid stabilizer.
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Specialty Urethanes
As part of our acquisition of Surface Specialties, we acquired a specialty line
of polyurethane resins and systems. This plus our existing line of isocyanates,
carbamates and epoxy and polyurethane resin systems are used in high-performance
applications in industries such as aerospace, automotive, military, computers,
biomedical, textiles and electrical / electronics.
Adhesives
As part of our acquisition of Surface Specialties, we acquired specialty
pressure sensitive adhesives for both water- and solvent-based systems. The
product line has numerous formulations featuring innovative products, such as
high-performance emulsions and removable adhesives.
Cytec Surface Specialties
Set forth below are our primary product lines and major products in this segment
and their principal applications.
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Product Line Major Products Principal Applications
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Radcure resins Oligomers, monomers, Coatings and inks used in industrial
photo-initiators metal, wood and plastic coatings
including parquet, safety glass
interlayer, printing inks and varnishes
Powder coating resins Conventional and ultraviolet Powder coatings for industrial and heavy
powders duty metal applications, appliance, white
goods, architecture and wood
Liquid coating resins Water-borne resins, Automotive and industrial coatings for
solvent-borne resins, amino appliances, automobiles, containers,
resins metal fixtures, metal and wood furniture,
and heavy-duty industrial machinery,
architectural applications, products used
in textiles coating, abrasives, tires,
electronics, marine, sanitary and
swimming pools
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We market our surface specialty chemicals through specialized sales and
technical service staffs for each of our product lines. Sales are typically made
directly to large customers and through distributors to smaller customers.
Certain of our products, primarily amino resins, in this segment are
manufactured using melamine that is manufactured by our Building Block Chemicals
segment. For further discussion of raw materials, refer to "Customers and
Suppliers."
Radcure Resins
We are a leading producer of environmentally friendly, radiation-cured resins
for high-performance coatings and graphics applications which we acquired as
part of our acquisition of Surface Specialties. These resins are cured (dried
and hardened) by exposing them to ultraviolet or electron-beam radiation, rather
than heat which typically reduces processing costs and increases productivity.
Products such as inks, compact discs, credit cards, packaging and coatings for
wood products utilize advanced resins like the ones we have developed.
Powder Coating Resins
As part of our acquisition of Surface Specialties, we acquired polyester powder
resin technologies for the rapidly growing market for powder coatings. Today,
these coatings which are considered environmentally friendly account for a
significant portion of the industrial finishing market. We offer innovations
such as powder resins for super durable clearcoats, weather-resistant finishes
and ultraviolet-curing powder coating systems for heat-sensitive substrates such
as plastic and wood. These powder coatings provide original equipment
manufacturers with a number of cost and environmental benefits compared to
traditional coating systems.
Liquid Coating Resins
As part of our acquisition of Surface Specialties, we acquired a broad range of
water-borne and solvent-borne resins. Together with our amino resins product
line, we are now a market leader in resins for high-solids and water-borne
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coating systems. Our extensive portfolio includes products based on seven
chemistries: acrylics, amino resins, epoxy systems, alkyds and polyesters,
polyurethanes, phenolics and unsaturated polyesters.
We also market a broad range of additives to assist customers in formulating
high-performance coatings for protective and decorative applications. Along with
individual additives, we have developed formulated products that combine
multiple additives to achieve specific performance properties targeted to meet
the needs of diverse industries.
Cytec Engineered Materials
Our Cytec Engineered Materials segment primarily manufactures and sells
aerospace materials that are used mainly in commercial and military aviation,
satellite and launch vehicles, aircraft brakes and certain high-performance
applications such as Formula 1 racing cars and high-performance sports cars.
We manufacture and sell advanced structural film adhesives and advanced
composite materials primarily to the aerospace industry and other high
performance specialty applications. The primary applications for both aerospace
adhesives and advanced composites are large commercial airliners, regional and
business jets, military aircraft (including rotorcraft, satellites and launch
vehicles), high-performance automotive and specialty applications.
Advanced composites are exceptionally strong and lightweight materials
manufactured by impregnating fabrics and tapes made from high performance fibers
(such as carbon fiber) with epoxy, bismaleimide, phenolic, polyimide and other
resins formulated or purchased by us.
Sales are dependent to a large degree on the commercial and military aircraft
build-rates and the number of applications and aircraft programs for which we
are a qualified supplier. The majority of commercial aircraft programs in the
Western world has qualified and uses certain of our products. We are a major
supplier to such military programs as the F-35 Joint Strike Fighter, the F/A-22
and F/A-18 combat aircraft and the C-17 transport aircraft. We have a number of
long term agreements, expiring over various periods, to supply aerospace
customers with their requirements, subject to various exceptions, of various
specialty materials at prices that are generally fixed by year.
Advanced composites generally account for a higher percentage of the structural
weight on a military aircraft than on a commercial aircraft. They also account
for a higher percentage of the structural weight on newer design commercial
aircraft than older design commercial aircraft as technology progresses and
manufacturers design planes to achieve greater fuel efficiency. Advanced
composites made from carbon fibers and epoxy or bismaleimide resins are
primarily used for structural aircraft applications such as wing, tail and
rudder components, engine housings, and fuselage components while advanced
composites made from fiberglass or aramid materials and phenolic resins are
primarily used for secondary structure applications such as fairings and
interior aircraft applications such as sidewall, ceiling and floor panels and
storage and cargo bins. In addition, our ablatives are used in manufacturing
rocket nozzles and our carbon/carbon products are used in manufacturing aircraft
and other high performance brakes. We expect the demand for advanced composites
to continue to increase.
Our aerospace adhesives and advanced composites also have various applications
in industrial, high performance automotive and selected recreational products.
We are seeking to leverage our engineered materials portfolio with customers in
these and other new markets where we can add value.
We market aerospace materials primarily through a dedicated sales and technical
service staff typically direct to customers.
We purchase from third parties all of the aramid and glass fibers and much of
the carbon fibers and base resins used in the manufacture of composites. They
are mainly used as a reinforcement material for advanced composites used in the
aerospace and certain other industries and have many advantageous
characteristics such as light weight, high tensile strength and strong heat
resistance.
We manufacture and sell various high-performance grades of both
polyacrylonitrile ("PAN") type and pitch type carbon fibers. Approximately 65%
of our carbon fiber production is utilized internally (which represents 30% of
our demand for carbon fiber) with the balance being sold to third parties. We
recently completed a project increasing our production of PAN carbon fiber by
approximately 33%. We have announced our intention to build a new carbon fiber
line. This project, if approved, is forecasted to cost approximately $150.0
million, take approximately three years to complete and increase our capacity of
PAN carbon fiber by 100%. For additional information refer to "Customer and
Suppliers".
Building Block Chemicals
Building Block Chemicals are manufactured at our world-scale, highly integrated
Fortier facility. The Fortier facility is located on the bank of the Mississippi
8
River near New Orleans, Louisiana and has access to all major forms of
transportation and supplies of raw materials. This segment's product line
includes acrylonitrile, hydrocyanic acid (a co-product of acrylonitrile),
sulfuric acid and melamine which is produced both for use internally within our
other segments and for merchant sale. The integration of the facility comes from
its steam usage whereas the acrylonitrile and sulfuric acid production produces
excess steam which is used in the production of melamine. Additionally, a tenant
at the site purchases substantially all of the hydrocyanic acid we produce as
well as substantial amounts of the sulfuric acid we produce for the manufacture
of methyl methacrylate at the site. We strive to operate our plants at capacity
subject to market conditions and raw material availability.
Acrylonitrile and Hydrocyanic Acid
We expect to sell up to approximately 40% of our current acrylonitrile
production to an international trading company under a long-term distribution
agreement at a market based price. Another 25% is expected to be sold to Kemira
under long term agreements to make acrylamide (the product line sold to Kemira
in October 2006) and the remainder is sold within the United States or exported
to international markets principally in Europe and Asia depending upon selling
prices in the regions. We sell substantially all of our hydrocyanic acid under a
long-term supply agreement to a tenant at our Fortier site.
Other Building Block Chemicals
Previously, our melamine manufacturing plant was operated by American Melamine
Industries ("AMEL"), a 50% owned joint venture with a subsidiary of DSM N.V.
("DSM"). Effective August 1, 2006, DSM's 50% interest in AMEL was transferred to
us and AMEL was dissolved. We are the only manufacturer of melamine in North
America and about 30% of our approximately 150 million pound capacity is used
internally to make amino resins. Depending on market conditions, the remainder
is marketed and sold to third parties primarily in the United States. Our
ability to manufacture melamine at a competitive cost depends primarily on the
cost of ammonia (which is dependent on the cost of natural gas), freight rates
and prevailing exchange rates. In recent years, producers of melamine outside of
the U.S. have been able to manufacture melamine overseas using less expensive
natural gas than available to us in the U.S. and the resulting import
competition has resulted in selling prices in the U.S. less than our full cost
of production.
We manufacture and sell sulfuric acid and regenerated sulfuric acid under a
long-term supply agreement to a tenant at our Fortier site and sell sulfuric
acid in the merchant marketplace.
Prices of Building Block Chemicals are sensitive to the stages of economic
cycles, raw material cost and availability, energy prices and currency rates, as
well as to periods of insufficient or excess capacity. Building Block Chemicals
and its competitors tend to operate their plants at capacity even in poor market
environments, which may result in strong downward pressure on product pricing.
We sell Building Block Chemicals to third parties through a direct sales force
and distributors.
Associated Company and Minority Interests
We own a 50% ownership interest in SK Cytec Co., Ltd. and two majority-owned
entities, none of which are material to the results of our operations.
Competition
We actively compete with companies producing the same or similar products and,
in some instances, with companies producing different products designed for the
same uses. We encounter competition in price, delivery, service, performance,
product innovation and product recognition and quality, depending on the product
involved. For some of our products, our competitors are larger and have greater
financial resources than we do. As a result, these competitors may be better
able to withstand a change in conditions within the industries in which we
operate, a change in the prices of raw materials without increasing their prices
or a change in the economy as a whole.
Our competitors can be expected to continue to develop and introduce new and
enhanced products, which could cause a decline in market acceptance of our
products. Current and future consolidation among our competitors and customers
may also cause a loss of market share as well as put downward pressure on
pricing. Our competitors could cause a reduction in the prices for some of our
products as a result of intensified price competition. Competitive pressures can
also result in the loss of major customers.
In general, we compete by maintaining a broad range of products, focusing our
resources on products in which we have a competitive advantage and fostering our
reputation for quality products, competitive prices and excellent technical
service and customer support. To help increase sales and margins, we are seeking
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to leverage our research and development efforts to develop value-added products
and products based on proprietary technologies. If we cannot compete
successfully, our businesses, financial condition and results of operations
could be adversely affected.
Customers and Suppliers
Sales to one of our customers, including sales to this customer's
subcontractors, are significant to our Cytec Engineered Materials segment. The
loss of this customer and related subcontractors would have a material adverse
effect on the operating results of our Cytec Engineered Materials segment. Sales
of hydrocyanic acid and the sale and regeneration of sulfuric acid to one of our
customers are significant to our Building Block Chemicals segment. The loss of
this customer would have a material adverse effect on the operating results of
our Building Blocks Chemicals segment. Sales to one customer of our Cytec
Surface Specialties segment are significant to this segment and, if such sales
were lost, would have a material adverse effect on the operating results of our
Cytec Surface Specialties segment. A summary of various long-term customer
supply agreements is disclosed in Note 13, of the Notes to Consolidated
Financial Statements which is incorporated by reference herein.
A number of our customers operate in cyclical industries such as the aerospace,
automotive and mining. This in turn, causes demand for our products to also be
cyclical. Industry cycles also impact profitability of our Building Block
Chemicals' sales.
Key raw materials for the Cytec Specialty Chemical segments are propylene
derivatives such as acrylic acid, methanol derivatives and natural gas for
energy. Key raw materials for the Cytec Engineered Materials segment are carbon
fiber and various resins. We require natural gas, propylene, ammonia and sulfur
to manufacture our Building Block Chemicals. These are typically available
although we have experienced tight markets for certain raw materials from time
to time.
Oil and natural gas are important indirect raw materials for many of our
products. The prices of both of these commodities have been volatile over time
and have risen sharply in the last few years significantly increasing the
purchase costs of many downstream products we purchase. Because natural gas is
not easily transported, the price may vary widely between geographic regions.
The price of natural gas in the U.S. has historically been higher than the price
in many other parts of the world. Many of our products compete with similar
products made with less expensive natural gas available elsewhere and we may not
be able to recover any or all of the increased cost of gas in manufacturing our
products.
Our Fortier facility is served principally by a single propylene pipeline owned
by a supplier. Other suppliers can utilize the pipeline for a transportation
fee. We also have arrangements to obtain propylene by rail.
To minimize reliance on any one supplier, we generally attempt to retain
multiple sources for high volume raw materials, other than our own Building
Block Chemicals. We are dependent on a limited number of suppliers for carbon
fibers that are used in many of our advanced composite products. As we
manufacture some of our own carbon fibers, the risk of future carbon fiber
supply limitations is somewhat reduced. Currently carbon fiber is in short
supply and until market capacity increases, shortages are possible. There can be
no assurance that the risk of encountering supply limitations can be entirely
eliminated.
Changes to raw material costs year on year are an important factor in
profitability. Raw material prices can increase or decrease based on supply and
demand and other market forces. We have from time to time experienced difficulty
procuring several key raw materials, such as methanol derivatives, propylene,
natural gas and carbon fiber, due to general market conditions or conditions
unique to a significant supplier and may experience supply disruptions of these
and other materials in the future. During such periods, prices of the relevant
raw materials may increase significantly and potentially adversely affect our
profit margins. Additionally, such conditions, if protracted, could result in
our inability to manufacture our products, resulting in lower than anticipated
revenues.
We expect to continue to encounter tight markets for certain key raw materials
during 2007. Limited availability of these materials could lead to increased
prices which we may or may not be able to pass on to our customers. If we are
unable to raise our selling prices to recover the increased costs of raw
materials driven by higher energy costs or other factors, our profit margins
will be materially adversely affected.
International
We operate on a global basis, with manufacturing and research facilities located
in 19 countries. Through our sales forces, third party distributors and agents,
we market our products internationally. Geographical information is contained in
Note 18 of the Notes to Consolidated Financial Statements which are incorporated
by reference herein.
International operations are subject to various risks which may or may not be
present in U.S. operations. These risks include political instability, the
possibility of expropriation, restrictions on royalties, dividends and
remittances, instabilities of currencies, requirements for governmental
approvals for new ventures and local participation in operations such as local
10
equity ownership and workers' councils. Currency fluctuations between the
various currencies in which we do business have caused and will continue to
cause currency transaction gains and losses, which may be material. While we do
not currently believe that we are likely to suffer a material adverse effect on
our results of operations in connection with our existing international
operations, any of these events could have an adverse effect on our
international operations in the future by reducing the demand for our products,
affecting the prices at which we can sell our products or otherwise having an
adverse effect on our operating performance.
Research and Process Development
During 2006, 2005 and 2004, we incurred $73.9 million, $68.5 million and $40.0
million, respectively, of research and process development expense. The increase
in research and process development expense in 2005 was due primarily to the
Surface Specialties acquisition.
Trademarks and Patents
We have approximately 2,100 patents issued in various countries around the
world. We also have trademark applications and registrations for approximately
250 product names. We do not believe that the loss of patent or trademark
protection on any one product or process would have a material adverse effect on
our company. While the existence of a patent is prima facie evidence of its
validity, we cannot assure that any of our patents will not be challenged, nor
can we predict the outcome of any challenge.
Employees
We employ approximately 6,700 employees of whom about 50% are represented by
unions. We believe that our relations with employees and unions are generally
good.
Operating Risks
Our revenues are largely dependent on the continued operation of our various
manufacturing facilities. There are many risks involved in operating chemical
manufacturing plants, including the breakdown, failure or substandard
performance of equipment, operating errors, natural disasters, the need to
comply with directives of, and maintain all necessary permits from, government
agencies and potential terrorist attack. Our operations can be adversely
affected by labor force shortages or work stoppages and events impeding or
increasing the cost of transporting our raw materials and finished products. The
occurrence of material operational problems, including but not limited to the
above events, may have a material adverse effect on the productivity and
profitability of a particular manufacturing facility. With respect to certain
facilities, such events could have a material effect on our company as a whole.
Our operations are also subject to various hazards incident to the production of
industrial chemicals. These include the use, handling, processing, storage and
transportation of certain hazardous materials. Under certain circumstances,
these hazards could cause personal injury and loss of life, severe damage to and
destruction of property and equipment, environmental damage and suspension of
operations. Claims arising from any future catastrophic occurrence at one of our
locations may result in Cytec being named as a defendant in lawsuits asserting
potentially large claims.
We typically seek to utilize third party insurance. This insurance covers
portions of certain of these risks to the extent that coverage is available and
can be obtained on terms we believe are economically justifiable.
Environmental Matters
We are subject to various laws and regulations which impose stringent
requirements for the control and abatement of pollutants and contaminants and
the manufacture, transportation, storage, handling and disposal of hazardous
substances, hazardous wastes, pollutants and contaminants.
In particular, under various laws in the U.S. and certain other countries in
which we operate, a current or previous owner or operator of a facility may be
liable for the removal or remediation of hazardous materials at the facility and
nearby areas. Such laws typically impose liability without regard to whether the
owner or operator knew of, or was responsible for, the presence of such
hazardous materials. In addition, under various laws governing the generation,
transportation, treatment, storage or disposal of solid and hazardous wastes,
owners and operators of facilities may be liable for removal or remediation, or
other corrective action at areas where hazardous materials have been released.
The costs of removal, remediation or corrective action may be substantial. The
presence of hazardous materials in the environment at any our facilities, or the
failure to abate such materials promptly or properly, may adversely affect our
ability to operate such facilities. Certain of these laws also impose liability
for investigative, removal and remedial costs on persons who dispose of or
arrange for the disposal of hazardous substances at facilities owned or operated
by third parties. Liability for such costs is retroactive, strict, and joint and
several.
11
We are required to comply with laws that govern the emission of pollutants into
the ground, waters and the atmosphere and with laws that govern the generation,
transportation, treatment, storage, and disposal of solid and hazardous wastes.
We are also subject to laws that regulate the manufacture, processing, and
distribution of chemical substances and mixtures, as well as the disposition of
certain hazardous substances. In addition, certain laws govern the abatement,
removal, and disposal of asbestos-containing materials and the maintenance of
underground storage tanks and equipment which contains or is contaminated by
polychlorinated biphenyls. The costs of compliance with such laws and related
regulations may be substantial, and regulatory standards tend to evolve towards
more stringent requirements. These requirements might, from time to time, make
it uneconomic or impossible to continue operating a facility. Non-compliance
with such requirements at any of our facilities could result in substantial
civil penalties or our inability to operate all or part of the facility, or our
ability to sell certain products.
Further discussion of environmental matters is discussed in Note 13 of the Notes
to Consolidated Financial Statements which is incorporated by reference herein.
12
Item 1A. RISK FACTORS
Our indebtedness could adversely affect our financial condition, limit our
ability to grow and compete and prevent us from fulfilling our obligations under
our notes and our other indebtedness.
As of December 31, 2006, we had $943.6 million of debt outstanding, and $308.0
million of availability under our five year revolving credit agreement and $43.7
million of availability under various non-U.S. credit facilities. The
outstanding debt has decreased by 47% from the $1,780.0 million outstanding at
March 31, 2005, following our acquisition of the Surface Specialties business.
Even though we have repaid a substantial portion of the previous debt balance,
our remaining indebtedness could adversely affect our financial condition, limit
our ability to grow and compete and prevent us from fulfilling our obligations
under our notes and our other indebtedness. A discussion of our debt is
contained in Note 12 of the Notes to Consolidated Financial Statements which is
incorporated herein.
We consider our principal credit agreements ("PCA's") to be our five-year term
loan ($52.6 million outstanding at December 31, 2006) and $350.0 million
five-year revolving credit facilities ($42.0 million outstanding at December 31,
2006). Our PCA's require us to meet financial ratios, including total
consolidated debt to consolidated EBITDA (as defined in the credit agreements)
and consolidated EBITDA (as defined in the credit agreements) to interest
expense. These restrictions could limit our ability to plan for or react to
market conditions or meet extraordinary capital needs and could otherwise
restrict our financing activities.
Our ability to comply with the covenants as in effect from time to time, will
depend on our future operating performance. If we fail to comply with those
covenants and terms, we will be in default. In this case, we would be required
to obtain waivers from our lenders in order to maintain compliance. If we were
unable to obtain any necessary waivers, the debt under our PCA's could be
accelerated, and become immediately due and payable. In addition, both of our
PCA's have a cross default provision whereby amounts outstanding could become
due and payable if we default on other debt obligations of at least $25.0
million.
We could be adversely affected if our debt is downgraded.
Our ability to complete financing of debt securities on satisfactory terms in
the future will depend, in part, on the status of our future credit ratings. The
current ratings of our senior unsecured long-term indebtedness are BBB- by
Standard & Poor's Ratings Service ("S&P") and Baa3 by Moody's Investors Service,
Inc. ("Moody's"). Either S&P or Moody's, or both, may downgrade our credit
rating at any time, which would make it more difficult to complete financing of
debt securities on satisfactory terms and would generally result in increased
future borrowing costs and more restrictive covenants and may adversely affect
our access to capital. In addition, such a downgrade from current levels would
trigger a requirement, under the terms of our PCA's, for specified subsidiaries
in the U.S. to guarantee the obligations under our PCA's.
We may encounter difficulties in completing the information technology
integration of Surface Specialties.
We continue the process of implementing our Cytec Specialty Chemicals global
enterprise-wide planning systems for the acquired business of Surface
Specialties. The world-wide implementation is expected to be completed in early
2009 and includes changes that involve internal control over financial
reporting. Although we expect this implementation to proceed without any
material adverse effects, the possibility exists that the migration to our
global enterprise-wide planning systems could adversely affect our internal
control, our disclosure control and procedures or our results of operations in
future periods. We are reviewing each system and site as they are being
implemented and the control affected by the implementation. Appropriate changes
have been or will be made to any affected internal control during the
implementation.
Disposition or restructuring charges and goodwill impairment or acquisition
intangible impairment or other asset impairment charges may unpredictably affect
our results of operations in the future.
Management regularly reviews our business portfolio in terms of strategic fit
and financial performance and may from time to time dispose of or withdraw
certain product lines. For example in July 2006, we announced the sale of the
water treatment chemicals and acrylamide product lines to Kemira Group. The
water treatment chemicals product line was previously included in the Cytec
Performance Chemicals segment and the acrylamide product line was previously
included in the Building Block Chemicals segment. See Note 3 of the Notes to the
Consolidated Financial Statements for further details. Additionally, management
regularly reviews the cost effectiveness of its plant sites and/or assets at
such sites. Long-lived assets with determinable useful lives are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. We may find it necessary to
record disposition, restructuring or asset impairment charges in connection with
such reviews. For example, we recorded restructuring and asset impairment
charges of approximately $51.1 million in 2006 principally related to plant
closures and employee severance. See Note 4 of the Notes to the Consolidated
Financial Statements for further details. Such charges could have a material
adverse effect on our results of operations in the period in which they are
recorded.
13
We test goodwill for impairment on an annual basis in our fourth fiscal quarter
and more often if events occur or circumstances change that would likely reduce
the fair value of a reporting unit to an amount below its carrying value. We
also test for other possible acquisition intangible impairments if events occur
or circumstances change that would likely reduce the fair value of the stated
assets.
In connection with the 2005 acquisition of Surface Specialties, we recorded
goodwill in the amount of $725.7 million and recorded acquisition intangibles of
$490.4 million. In total, we had $1,042.5 million of goodwill, and acquisition
intangibles with a net carrying value of $486.1 million at December 31, 2006.
Future events could cause the impairment of goodwill or acquisition intangibles
associated with the Surface Specialties business or any other of our reporting
units. Any resulting impairment loss would be a non-cash charge and may have a
material adverse impact on our results of operations in any future period in
which we record a charge.
Prices and availability of raw materials could adversely affect our operations.
See "Item 1. BUSINESS - Customers and Suppliers."
We face active competition from other companies, which could adversely affect
our revenue and financial condition.
See "Item 1. BUSINESS - Competition."
We face numerous risks relating to our international operations that may
adversely affect our results of operations.
See "Item 1. BUSINESS - International."
Our production facilities are subject to operating risks that may adversely
affect our operations.
See "Item 1. BUSINESS - Operating Risks."
We are subject to significant environmental and product regulatory expenses and
risks.
See "Item 1. BUSINESS - Environmental Matters."
Some of our customers' businesses are cyclical and demand by our customers for
our products weakens during economic downturns. Loss of significant customers
may have an adverse effect on our business.
See "Item 1. BUSINESS - Customers and Suppliers."
We are subject to significant litigation expense and risk.
See "Item 1. LEGAL PROCEDINGS."
Item 1B. UNRESOLVED STAFF COMMENTS
None.
14
Item 2. PROPERTIES
We operate manufacturing and research facilities in 19 countries. Capital
spending for the years ended 2006, 2005 and 2004 was $102.5 million, $105.3
million and $89.3 million, respectively.
Our capital expenditures are intended to provide increased capacity, to improve
the efficiency of production units, to improve the quality of our products, to
modernize or replace older facilities, or to install equipment for protection of
employees, neighboring communities and the environment.
Our manufacturing and research facilities and the segments served by each such
facility are as follows:
FACILITY SEGMENTS SERVED
--------------------------------------------------------------------------------
Anaheim, California Cytec Engineered Materials
Antofagasta, Chile Cytec Performance Chemicals
Atequiza, Mexico Cytec Performance Chemicals
Avondale (Fortier), Louisiana Building Block Chemicals
Bassano, Italy Cytec Surface Specialties
Belmont (Willow Island), West Virginia Cytec Performance Chemicals
Bogota, Colombia Cytec Performance Chemicals;
Cytec Surface Specialties
D'Aircraft (Anaheim), California Cytec Engineered Materials
Dijon, France Cytec Surface Specialties
Drogenbos, Belgium Cytec Performance Chemicals;
Cytec Surface Specialties
Graz, Austria Cytec Surface Specialties
Greenville, South Carolina Cytec Engineered Materials
Greenville, Texas Cytec Engineered Materials
Gumi, Korea Cytec Performance Chemicals
Hamburg, Germany Cytec Surface Specialties
Havre de Grace, Maryland Cytec Engineered Materials
Indian Orchard, Massachusetts Cytec Performance Chemicals
Kalamazoo, Michigan Cytec Performance Chemicals;
Cytec Surface Specialties;
Cytec Engineered Materials
La Llagosta, Spain Cytec Surface Specialties
Langley, South Carolina Cytec Performance Chemicals;
Cytec Surface Specialties
Lillestrom, Norway Cytec Surface Specialties
Mount Pleasant, Tennessee Cytec Performance Chemicals
New Castle, Delaware Cytec Performance Chemicals
North Augusta, South Carolina Cytec Surface Specialties
Oestringen, Germany Cytec Engineered Materials
Olean, New York Cytec Performance Chemicals
Orange, California Cytec Engineered Materials
Pampa, Texas Cytec Surface Specialties
Rayong, Thailand Cytec Surface Specialties
Rock Hill, South Carolina Cytec Engineered Materials
San Fernando, Spain Cytec Surface Specialties
Schoonaarde, Belgium Cytec Surface Specialties
Seremban, Malaysia Cytec Surface Specialties
Shanghai, China Cytec Surface Specialties
Shimonoseki, Japan Cytec Surface Specialties
Smyrna, Georgia Cytec Surface Specialties
Stamford, Connecticut Cytec Performance Chemicals;
Cytec Surface Specialties
Suzano, Brazil Cytec Surface Specialties
Wallingford, Connecticut Cytec Performance Chemicals;
Cytec Surface Specialties
Welland, Canada Cytec Performance Chemicals
Werndorf, Austria Cytec Surface Specialties
Wiesbaden, Germany Cytec Surface Specialties
Winona, Minnesota Cytec Engineered Materials
Wrexham, U. K. Cytec Engineered Materials
--------------------------------------------------------------------------------
We own all of the foregoing facilities and their sites except for the land at
the Indian Orchard, Lillestrom, New Castle, Pampa and Shimonoseki facilities. We
lease both the land and the facilities at the Smyrna and Wiesbaden sites. We
lease the land at Lillestrom, Shimonoseki and Wiesbaden under long term leases.
We are currently negotiating new leases with our landlords for the Indian
Orchard, Pampa and Smyrna locations, and reviewing our options regarding these
sites. We plan to relocate our New Castle, Delaware operations to the new plant
at our Kalamazoo, Michigan facility. We anticipate the relocation and the exit
from the New Castle site to be complete during the last half of 2007. In
addition, we have announced that we will cease manufacturing operations at the
Dijon site by mid 2007. We lease our corporate headquarters in West Paterson,
New Jersey, our Cytec Specialty Chemicals headquarters in Brussels, Belgium and
our Cytec Engineered Materials headquarters located in Tempe, Arizona.
15
Item 3. LEGAL PROCEEDINGS
We are the subject of numerous lawsuits and claims incidental to the conduct of
our or our predecessors' businesses, including lawsuits and claims relating to
product liability, personal injury, environmental, contractual, employment and
intellectual property matters. Many of the matters relate to the use, handling,
processing, storage, transport or disposal of hazardous materials. We believe
that the resolution of such lawsuits and claims, including those described
below, will not have a material adverse effect on our consolidated financial
position, but could be material to our consolidated results of operations and
cash flows in any one accounting period. We, in this section, include certain
predecessor entities being indemnified by us.
Lead Pigment
We are among several defendants in approximately 35 cases in the U.S., in which
plaintiffs assert claims for personal injury, property damage, and other claims
for relief relating to one or more kinds of lead pigment that were used as an
ingredient decades ago in paint for use in buildings. The different suits were
brought by government entities and/or individual plaintiffs, on behalf of
themselves and others. The suits variously seek compensatory and punitive
damages and/or injunctive relief, including funds for the cost of monitoring,
detecting and removing lead based paint from buildings and for medical
monitoring; for personal injuries allegedly caused by ingestion of lead based
paint; and plaintiffs' attorneys' fees. We believe that the suits against us are
without merit, and we are vigorously defending against all such claims.
Accordingly, no loss contingency has been recorded.
In July 2005, the Supreme Court of Wisconsin held in a case in which we were one
of several defendants that Wisconsin's risk contribution doctrine applies to
bodily injury cases against manufacturers of white lead pigment. Under this
doctrine, manufacturers of white lead pigment may be liable for injuries caused
by white lead pigment based on their past market shares unless they can prove
they are not responsible for the white lead pigment which caused the injury in
question. Seven other courts have previously rejected the applicability of this
and similar doctrines to white lead pigment. We settled this case for an
immaterial amount. Although we are a defendant to three or more similar cases in
Wisconsin and additional actions may be filed in Wisconsin, we intend to
vigorously defend ourselves if such case(s) are filed based on what we believe
to be our non-existent or diminutive market share. Accordingly, we do not
believe that our liability, if any, in such cases will be material, either
individually or in the aggregate and no loss contingency has been recorded.
We have access to a substantial amount of primary and excess general liability
insurance for property damage and believe these policies are available to cover
a significant portion of both our defense costs and indemnity costs, if any, for
lead pigment related property damage claims. We have agreements with two of our
insurers which provide that they will pay for approximately fifty percent (50%)
of our defense costs associated with lead pigment related property damage claims
and we continue to pursue recovery of our past and future defense costs from
additional insurers.
Asbestos
We, like many other industrial companies, have been named as one of hundreds of
defendants in a number of lawsuits filed in the U.S. by persons alleging bodily
injury from asbestos. The claimants allege exposure to asbestos at facilities
that we own or formerly owned or from products that we formerly manufactured for
specialized applications. Most of these cases involve numerous defendants,
sometimes as many as several hundred. Historically, most of the closed asbestos
claims against us have been dismissed without any indemnity payment by us,
however, we have no information that this pattern will continue.
The following table presents information about asbestos claims activity:
Year Ended Year Ended
December 31, December 31,
2006 2005
------------------- --------------------
Number of claimants at beginning of period 22,200 27,500
Number of claimants associated with claims closed during period (15,800) (12,500)
Number of claimants associated with claims opened during period 2,200 7,200
-------- --------
Number of claimants at end of period 8,600 22,200
-------------------------------------------------------------------------------------------------------------
16
Numbers in the foregoing table are rounded to the nearest hundred and are based
on information as received by us which may lag actual court filing dates by
several months or more. Claims are recorded as closed when a claimant is
dismissed or severed from a case. Claims are opened whenever a new claim is
brought, including from a claimant previously dismissed or severed from another
case. The significant decline in the number of claimants during 2005 and 2006
primarily reflects disposition of a large number of unwarranted filings in
Mississippi made immediately prior to the institution of tort reform legislation
in that state effective January 1, 2003.
Other
We commenced binding arbitration proceedings against SNF SA ("SNF"), in 2000 to
resolve a commercial dispute relating to SNF's failure to purchase agreed
amounts of acrylamide under a long-term agreement. In July, 2004, the
arbitrators awarded us damages and interest aggregating approximately (euro)11.0
million plus interest on the award at a rate of 7% per annum from July 28, 2004
until paid. After further proceedings in France, we collected (euro)12.2 million
($15.7 million) related to the arbitration award including interest in the
second quarter of 2006. Subsequent to the arbitration award, SNF filed a
complaint alleging criminal violation of French and European Community antitrust
laws relating to the contract which was the subject of the arbitration
proceedings which complaint was dismissed in December 2006. SNF has also filed a
final appeal of the court order which allowed us to enforce the award and a
separate complaint in France seeking compensation from Cytec for (euro)54.0
million in damages it allegedly suffered as a result of our attachment on
various SNF receivables and bank accounts to secure enforcement of the
arbitration award. We believe that the appeal and complaint are without merit.
In addition 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
our products constitute or contain hazardous materials, we have 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.
See "Item 1. BUSINESS - Environmental Matters" and Note 13 of the Notes to
Consolidated Financial Statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our stock is listed on the New York Stock Exchange. On February 19, 2007, there
were approximately 8,400 registered holders of our Common Stock.
The high and low closing stock prices and declared dividends per share for each
quarter were:
1Q 2Q 3Q 4Q
--------------------------------------------------------------------------------
2006
High $60.67 $62.30 $56.07 $58.90
Low $45.80 $51.46 $50.24 $52.20
Dividends $0.10 $0.10 $0.10 $0.10
2005
High $53.90 $52.94 $48.39 $47.64
Low $45.91 $39.62 $39.34 $40.98
Dividends $0.10 $0.10 $0.10 $0.10
--------------------------------------------------------------------------------
On February 1, 2007, our Board of Directors declared a quarterly cash dividend
of $0.10 per common share, payable on February 26, 2007 to stockholders of
record as of February 12, 2007.
See Part III, Item 11. "Executive Compensation" for information relating to our
equity compensation plans.
18
Item 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
(Dollars in millions, except per share amounts)
2006 2005 2004 2003 2002
----------------------------------------------------------------------------------------------------------------------------------
Statements of income data:
Net sales $3,329.5 $2,925.7 $1,721.3 $1,471.8 $1,346.2
Earnings from operations $ 304.9 (1),(3) $ 160.5 (4) $ 167.7 (6) $ 144.1 $ 118.4 (10)
Earnings before discontinued operations, accounting
change and premium paid to redeem preferred stock $ 196.1 (2) $ 57.9 (5) $ 131.0 (7) $ 92.8 $ 78.7 (11)
Earnings from discontinued operations, net of taxes - 1.2 - - -
Cumulative effect of accounting change, net of taxes (1.2) (3) - - (13.6) (9) -
Premium paid to redeem preferred stock - - (9.9) (8) - -
----------------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 194.9 $ 59.1 $ 121.1 $ 79.2 $ 78.7
----------------------------------------------------------------------------------------------------------------------------------
Basic net earnings per common share :
Net earnings available to common stockholders before
discontinued operations and accounting change $ 4.13 $ 1.28 $ 3.06 $ 2.38 $ 1.99
Earnings from discontinued operations, net of taxes - 0.03 - - -
Cumulative effect of accounting change, net of taxes (0.02) - - (0.35) -
----------------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 4.11 $ 1.31 $ 3.06 $ 2.03 $ 1.99
----------------------------------------------------------------------------------------------------------------------------------
Diluted net earnings per common share:
Net earnings available to common stockholders before
discontinued operations and accounting change $ 4.03 $ 1.25 $ 2.96 $ 2.31 $ 1.94
Earnings from discontinued operations, net of taxes - 0.02 - - -
Cumulative effect of accounting change, net of taxes (0.02) - - (0.34) -
----------------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 4.01 $ 1.27 $ 2.96 $ 1.97 $ 1.94
----------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared and paid per common share $ 0.40 $ 0.40 $ 0.40 - -
Balance sheet data:
Total assets $3,831.5 $3,859.1 $2,251.6 $2,046.4 $1,785.2
Long-term debt $ 900.4 $1,225.5 $ 300.1 $ 416.2 $ 216.0
----------------------------------------------------------------------------------------------------------------------------------
(1) Includes pre-tax restructuring charges of $19.2 ($16.1 after-tax) primarily
related to plant closures, pre-tax impairment charges of $29.3 ($24.6 after-tax)
related to two unprofitable manufacturing sites in Europe, a pre-tax charge of
$2.6 ($1.9 after-tax) related to a change in employee benefit plans in the U.K.,
a pre-tax charge of $2.2 ($1.6 after-tax) related to a contingent liability
study update, pre-tax integration costs of $1.7 ($1.3 after-tax) related to the
Surface Specialties acquisition and a pre-tax gain of $75.5 ($59.6 after-tax)
related to the first phase of the sale of the water treatment and acrylamide
product lines.
(2) In addition to the items in Note (1) above, includes a pre-tax $15.7 ($12.4
after-tax) gain related to resolution of a legal dispute and an income tax
benefit of $3.5 related to the completion of prior years tax audits, partially
offset by a $1.7 tax charge related to a taxable capital reduction at our
Thailand subsidiary.
(3) Represents the cumulative effect of adopting Statement of Financial
Accounting Standards ("SFAS") No. 123(R). Pre-tax expenses resulting from the
application of SFAS No. 123(R) included in Earnings from Operations were $10.4
in 2006.
(4) Includes a non-deductible charge of $37.0 for the write-off of acquired
in-process research and development, a pre-tax charge of $20.8 ($15.4 after-tax)
resulting from the amortization of the write-up to fair value of acquired
inventory, pre-tax restructuring charges of $16.8 ($12.4 after-tax) and pre-tax
integration costs of $0.2 ($0.1 after-tax).
(5) In addition to the items in Note (4) above, includes pre-tax charges of
$44.2 ($28.1 after-tax) related to derivative contracts entered into to hedge
currency and interest rate exposure associated with the purchase of Surface
Specialties, $22.0 ($14.0 after-tax) of interest charges and unamortized put
premiums and rate lock agreements related to the redemption of the Mandatory Par
Put Remarketed Securities ("MOPPRS") and $28.3 representing the favorable
resolution of several prior year tax matters.
(6) Includes a pre-tax charge of $8.0 ($6.2 after-tax) for various litigation
matters.
(7) In addition to the item in Note (6) above, includes a pre-tax charge of $6.2
($4.8 after-tax) relating to the settlement of several environmental and toxic
tort lawsuits, a pre-tax charge of $2.0 (after-tax $1.6) relating to the
settlement of disputed matters with the former holder of our Series C Preferred
Stock, a tax credit of $2.4 resulting from the favorable outcome of a completed
international tax audit and a pre-tax gain of $26.8 (after-tax $17.1) resulting
from derivative transactions related to the acquisition of Surface Specialties.
(8) Represents a charge to net earnings available to common stockholders
resulting from the redemption of our Series C Preferred Stock.
(9) Represents the cumulative effect of adopting SFAS No. 143. Pre-tax expenses
resulting from SFAS No. 143 included in Earnings from Operations were $1.8 in
2003. Had this accounting policy been in effect in prior years, additional
pre-tax expenses of $1.7 in 2002 would have been recognized in the determination
of earnings from operations.
(10) Includes net restructuring pre-tax charges of $13.7 ($9.2 after-tax) and a
pre-tax charge of $1.7 ($1.1 after-tax) for costs associated with obtaining a
tax refund related to the prior years' research and development tax credit.
(11) In addition to the items in Note (10) above, includes restructuring pre-tax
charges of $0.4 ($0.2 after-tax) included in equity in earnings of associated
companies, $2.0 of pre-tax interest income (after tax $1.3) related to the
research and development tax credit, and a $6.0 reduction in income tax expense
related to a refund associated with prior years' research and development tax
credits.
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements. It is assumed that the reader is familiar with the description of
our business and risk factors contained in Part I of this report. Currency
amounts are in millions, except per share amounts. Percentages are approximate.
GENERAL
We are a global specialty chemicals and materials company and sell our products
to diverse major markets for aerospace, adhesives, automotive and industrial
coatings, chemical intermediates, inks, mining and plastics. Sales price and
volume by region and the impact of exchange rates on our reporting segments are
important measures that are analyzed by management and are provided in our
segment analysis.
In the course of our ongoing operations, a number of strategic product line
acquisitions and dispositions have been made. The results of operations of the
acquired businesses have been included in our consolidated results from the
dates of the respective acquisitions. On February 28, 2005, we acquired the
Surface Specialties business of UCB in a transaction valued at $1,789.6. In
addition, on October 2, 2006, we completed the initial closing on the sale of
our water treatment chemicals and acrylamide product lines for $208.0. A further
discussion of acquisitions and dispositions can be found in Notes 2 and 3 to the
Notes to the Consolidated Financial Statements contained herein.
We also report net sales in four geographic regions: North America, Latin
America, Asia/Pacific and Europe/Middle East/Africa. The destination of the sale
determines the region under which it is reported consistent with management's
view of the business. North America consists of the United States and Canada.
Latin America includes Mexico, Central America, South America and the Caribbean
Islands. Asia/Pacific is comprised of Asia, Australia and the islands of the
South Pacific Rim.
Raw material cost changes year on year are an important factor in profitability
especially in years of high volatility. Global oil and natural gas costs in
certain countries are highly volatile and many of our raw materials are derived
from these two commodities. Discussion of the year to year impact of raw
materials and energy is provided in our segment discussion. In addition, higher
global demand levels and, occasionally, operating difficulties at suppliers,
have limited the availability of certain of our raw materials.
On January 1, 2006 we adopted SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123R"). For further details see Note 5 to the Consolidated Financial
Statements.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship that certain items in
our Consolidated Statements of Income bear to net sales:
Years Ended December 31, 2006 2005 2004
--------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Manufacturing cost of sales 80.2 79.1 75.7
--------------------------------------------------------------------------------
Gross profit 19.8 20.9 24.3
Selling and technical services 6.5 7.3 8.1
Research and process development 2.2 3.6 2.3
Administrative and general 3.1 3.5 3.8
Amortization of acquisition intangibles 1.1 1.0 0.3
Gain on sale of assets 2.3 - -
--------------------------------------------------------------------------------
Earnings from operations 9.2 5.5 9.8
--------------------------------------------------------------------------------
Net earnings available to common stockholders 5.9 2.0 7.0
--------------------------------------------------------------------------------
20
NET SALES BY SEGMENT AND GEOGRAPHIC AREA
Europe/
North Latin Asia/ Middle East/
Net Sales America America Pacific Africa Total
---------------------------------------------------------------------------------------------------------
2006
Cytec Performance Chemicals $324.1 $128.8 $127.9 $284.3 $865.1
Cytec Surface Specialties 366.7 60.3 260.6 835.8 1,523.4
Cytec Engineered Materials 378.2 1.2 44.7 177.7 601.8
Building Block Chemicals 177.6 4.7 26.9 130.0 339.2
----------------------------------------------------------------------
Total $1,246.6 $195.0 $460.1 $1,427.8 $3,329.5
----------------------------------------------------------------------
2005
Cytec Performance Chemicals $340.8 $126.8 $118.5 $269.7 $855.8
Cytec Surface Specialties 329.6 50.7 202.9 660.9 1,244.1
Cytec Engineered Materials 349.2 1.5 30.0 160.9 541.6
Building Block Chemicals 149.2 4.9 50.3 79.8 284.2
----------------------------------------------------------------------
Total $1,168.8 $183.9 $401.7 $1,171.3 $2,925.7
----------------------------------------------------------------------
2004
Cytec Performance Chemicals $293.8 $104.0 $106.7 $208.2 $712.7
Cytec Surface Specialties 122.4 16.2 56.7 65.7 261.0
Cytec Engineered Materials 322.4 1.7 21.5 141.4 487.0
Building Block Chemicals 126.6 3.3 77.0 53.7 260.6
----------------------------------------------------------------------
Total $865.2 $125.2 $261.9 $469.0 $1,721.3
----------------------------------------------------------------------
Net sales in the United States were $1,162.3, $1,095.3, and $802.4 for 2006,
2005 and 2004, respectively. International net sales were $2,167.2, $1,830.4,
and $918.9, or 65%, 63% and 53% of total net sales, for 2006, 2005 and 2004,
respectively.
For more information on our segments, refer to Note 18 of the Notes to
Consolidated Financial Statements and further discussions in "Segment Results"
below.
YEAR ENDED DECEMBER 31, 2006, COMPARED WITH YEAR ENDED DECEMBER 31, 2005
Consolidated Results
Net sales for 2006 were $3,329.5 compared with $2,925.7 for 2005, up 14%, of
which 7% was due to the inclusion of sales from Surface Specialties for a full
year (acquired on February 28, 2005). The divestiture of the water treatment and
acrylamide product lines on October 1, 2006 decreased sales 2%. Excluding these
two factors, selling volumes were up 6%, selling prices increased 2% and changes
in exchange rates increased sales 1%. Cytec Performance Chemicals experienced a
net increase in sales which resulted primarily from higher selling volumes, the
addition of sales of the acquired pressure sensitive adhesives and polyurethanes
product lines of Surface Specialties as well as from selling price increases.
This was partially offset by decreased sales due to the divestiture of the water
treatment chemicals product line. Cytec Surface Specialties experienced a net
increase in sales which resulted primarily from the addition of sales related to
the acquired product lines of Surface Specialties for a full year and higher
selling volumes. The Cytec Engineered Materials sales increase was principally
volume related, primarily from increased sales to the large commercial transport
and commercial rotorcraft sectors. Building Block Chemicals sales increased from
higher selling volumes and selling prices, partially offset by decreased sales
due to the divestiture of the acrylamide product line. Net sales and operating
results for the Building Blocks segment in 2005 were significantly impacted by
the effects of hurricanes Katrina and Rita in the U.S. gulf coast.
For a detailed discussion on revenues refer to the Segment Results section
below.
Manufacturing cost of sales was $2,670.1 compared with $2,313.7 for 2005. Most
of the increase is associated with higher selling volumes, the inclusion of
expenses for a full year relating to Surface Specialties, higher raw material
costs of $60.3, unfavorable currency exchange on raw materials and energy of
$12.5, partially offset by reduction in manufacturing cost of sales due to the
October 1, 2006 divestiture of the water treatment chemicals and acrylamide
product lines. The results for 2006 also include an impairment and restructuring
charge of $22.1 related to the Polymer Additives product line, an impairment and
restructuring charge of $20.9 for an unprofitable manufacturing facility in
France, a charge of $1.0 for restructuring of a manufacturing site in the U.S.,
21
a $2.2 net increase in asbestos related contingent liabilities, a $2.6 charge
related to a change in employee benefit plans in the U.K., and a charge of $2.0
related to stock options and stock-settled SARS due to the application of SFAS
123R. These were partially offset by a net restructuring charge reversal of
$0.7. See Note 4 to the consolidated financial statements for additional detail
of the net restructuring and impairment charges. The 2005 results include $20.8
of amortization of the excess of the fair value of the finished goods inventory
for the acquired Surface Specialties business over normal manufacturing cost.
Pension expense increased $20.8 principally as a result of a full year of
expense for the additional plans and employees acquired upon the Surface
Specialties acquisition in 2005, curtailments and settlements, and to a lesser
extent, the lowering of the discount rate at the beginning of 2006 in the U.S.
by 0.15% to reflect current market rates on fixed income securities. Pension
expense is primarily reported in manufacturing cost of sales.
Selling and technical services was $215.4 in 2006 versus $213.6 in the prior
year. The increase was primarily attributable to the inclusion of expenses for a
full year relating to Surface Specialties and charges related to stock options
and stock-settled SARS due to the application of SFAS 123R of $3.2. Partially
offsetting this was a reduction in costs due to the divestiture of the water
treatment chemicals and acrylamide product lines. Also included in 2006 are net
restructuring charges of $1.1 and a benefit plan curtailment charge as described
above of $0.4. Included in amounts for 2005 was $3.5 for employee severance
costs.
Research and process development was $73.9 in 2006 versus $68.5 in the prior
year. The increase was primarily attributable to the inclusion of expenses for a
full year relating to Surface Specialties and charges related to stock options
and stock-settled SARS due to the application of SFAS 123R of $0.6. Partially
offsetting this was a reduction in costs due to divestiture of the water
treatment chemicals and acrylamide product lines. Also included in 2006 are
restructuring charges of $1.0. Included in amounts for 2005 are restructuring
charges of $0.8.
Administrative and general expenses were $102.9 in 2006 versus $102.1 in the
prior year. The increase was primarily attributable to the inclusion of expenses
for a full year relating to Surface Specialties and charges related to stock
options and stock-settled SARS due to the application of SFAS 123R of $4.6. Also
included in 2006 are integration expenses of $1.4 associated with transitioning
away from UCB's information technology system infrastructure, a benefit plan
curtailment charge of $0.2 as described above and restructuring charges of $1.8.
Included in amounts for 2005 are employee severance costs of $7.3 and a charge
of $2.4 related to the settlement of a litigation matter.
Amortization of acquisition intangibles was $37.8 in 2006 versus $30.3 in the
prior year. This increase was primarily attributable to the inclusion of
amortization expense for a full year relating to Surface Specialties, the
write-off of $1.4 related to impaired intangibles related to an unprofitable
product line manufactured in Europe and $0.6 of higher amortization of certain
Radcure trademarks due to a change in their estimated useful lives.
The write-off of acquired in-process research and development of $37.0 in the
prior year was related to the Surface Specialties acquisition.
The divestiture gain of $75.5 is attributable to the phase one closing of the
water treatment and acrylamide product lines. See Note 3 of the Consolidated
Financial Statements for further information.
Other income (expense), net was income of $12.7 in 2006 compared with expense of
$44.9 in the prior year. Included in 2006 is a gain of $15.7 in connection with
proceeds collected in an arbitration award in settlement of the commercial
dispute as discussed in Note 13 of the consolidated financial statements.
Included in 2005 is a loss of $44.2 related to derivative contracts entered to
hedge currency and interest rate exposure associated with the acquisition of
Surface Specialties and a charge of $4.4 for a settlement to resolve a dispute
over an environmental matter.
Equity in earnings of associated companies was $3.2 versus $7.9 in the prior
year. On June 1, 2005, we sold our 50% ownership stake in CYRO Industries
("CYRO") to our joint venture partner Degussa Specialty Polymers, a company of
Degussa AG, which subsequently reduced our equity earnings.
Interest expense, net was $55.5 in 2006 compared with $80.0 in the prior year.
The amount for 2005 includes $21.0 of interest charges and $1.0 of unamortized
put premiums and rate lock agreements related to the optional redemption of the
Mandatory Par Put Remarketed Securities (MOPPRS) in May 2005. Excluding these
2005 charges, interest expense is down due to the reduction in the outstanding
weighted-average debt balance during 2006 as we used our free cash flow and
proceeds from the divestiture to pay down debt.
The effective income tax rate for 2006 was a tax provision of 26.1% ($69.2)
compared to a tax benefit of 33% ($14.4) for 2005. The 2006 effective rate was
positively impacted by an arbitration award in settlement of a commercial
dispute, a portion of which was recorded in a lower tax entity resulting in an
effective rate of 20%. Also favorably impacting the rate was a 21% tax rate
22
associated with the gain on the divestiture of the water treatment and
acrylamide product lines and a $3.5 reduction of tax expense as a result of the
completion of prior years U.S. tax audits. The rate was also favorably impacted
by the change in statutory tax rates with respect to deferred tax assets and
liabilities recorded in certain countries. These results were partially offset
by a reduction of earnings of divested product lines in lower tax jurisdictions,
the zero tax benefit on a French restructuring charge due to insufficient
earnings to realize its net deferred tax asset, a tax benefit from a
restructuring charge recorded at 29.6% and a $1.7 tax charge associated with a
capital reduction with respect to a foreign subsidiary. Excluding these items,
the underlying annual effective tax rate for 2006 was 26.8%.
The 2005 effective tax rate was favorably impacted by hedging losses incurred in
the U.S. in connection with the Surface Specialties acquisition, the MOPPRS
redemption, and reduction in tax expense of $12.2 due to partial resolution of a
tax audit in Norway and a reduction in income tax expense of $16.2 related to
final approval of the Internal Revenue Service's examination of our tax returns
for the years 1999 through 2001. The rate was unfavorably impacted by the
write-off of acquired in-process research and development expenses related to
the Surface Specialties acquisition, for which there is no tax benefit.
Excluding these items, the underlying annual effective tax rate for 2005 would
have been 26%.
Earnings from discontinued operations were $1.2 in 2005 and reflect the results
of Surface Specialties amino resins ("SSAR") product line. SSAR was divested on
August 31, 2005.
The adoption of SFAS 123R was recorded as of January 1, 2006 and resulted in a
non-cash charge for the cumulative effect of a change in accounting principle of
$1.2, net of tax benefit of $0.7.
Net earnings for 2006 were $194.9 ($4.01 per diluted share) compared with net
earnings for 2005 of $59.1 ($1.27 per diluted share). Included in the 2006
results are an after-tax gain of $59.6 ($1.23 per diluted share) related to the
first phase of the sale of the Water Treatment and acrylamide product lines,
after-tax net restructuring and impairment charges of $40.6 ($0.84 per diluted
share), an after-tax charge of $1.6 ($0.03 per diluted share) related to
completion of a detailed update of our asbestos contingent liability, net of
insurance recoveries, after-tax costs of $1.3 ($0.03 per diluted share) related
to Surface Specialties integration, an after-tax gain of $12.4 ($0.26 per
diluted share) related to a favorable resolution of a legal dispute, an
after-tax charge of $1.9 ($0.04 per diluted share) related to a change in
employee benefit plans in the U.K. and the cumulative effect of an accounting
change after-tax charge of $1.2 ($0.02 per diluted share) related to the
adoption of SFAS 123R. The improvement in net earnings is primarily related to
the net effect of the aforementioned special items, higher selling volumes,
increased selling prices, inclusion of a full year of earnings from Surface
Specialties, increased production levels and the benefits of the our recent
restructuring initiatives partially offset by higher raw material costs.
Net earnings for 2005 included the write-off of $37.0 ($0.80 per diluted share)
of in-process research and development costs; a $15.2 ($0.33 per diluted share)
after-tax amortization charge from the write-up to fair value of the acquired
inventory that was subsequently sold; $0.1 after-tax integration costs related
to the acquired business; a charge of $1.8 ($0.04 per diluted share) after-tax
for settlement of a certain litigation matter; $12.4 ($0.27 per diluted share)
after-tax employee restructuring costs; a $3.2 ($0.07 per diluted share)
settlement to resolve a dispute over an environmental matter; $14.0 ($0.30 per
diluted share) after-tax interest charges and unamortized put premiums related
to the redemption of the MOPPRS prior to their final maturity; a $28.1 ($0.61
per diluted share) after-tax charge related to currency and interest rate
derivative transactions associated with the Surface Specialties acquisition, all
of which were partially offset by the higher overall sales attributable to the
acquisition; and an income tax benefit of $28.4 ($0.61 per diluted share)
reflecting favorable resolution of tax audits with respect to prior year tax
returns.
Segment Results (Sales to external customers)
Year-to-year comparisons and analyses of changes in net sales by segment and
region are set forth below.
Cytec Performance Chemicals
% Change Due to
---------------------------------------------------
Total Acquisition/
2006 2005 % Change Price Volume/Mix Divestiture Currency
-----------------------------------------------------------------------------------------------------------------------
North America $324.1 $340.8 -5% 3% -5% -3% -
Latin America 128.8 126.8 1% 1% - -2% 2%
Asia/Pacific 127.9 118.5 8% - 7% 1% -
Europe/Middle East/Africa 284.3 269.7 6% -1% 11% -5% 1%
---------------------------------------------------------------------------------------
Total $865.1 $855.8 1% 1% 3% -3% -
-----------------------------------------------------------------------------------------------------------------------
Overall selling volumes increased 3% due to increases in the mining chemicals,
phosphines, pressure sensitive adhesives and specialty additives product lines
23
due to market growth and commercialization of new technologies. This was
partially offset by decreased selling volumes primarily in the specialty
urethanes product line due to competitive price pressure. The inclusion of full
year sales attributable to pressure sensitive adhesives and polyurethane product
lines of Surface Specialties added 2% to sales and the divestiture of the water
treatment chemicals product line decreased sales 5%. On a regional basis, North
America sales volumes declined primarily in water treatment chemicals due to low
demand from the paper sector and our decision to reduce sales on low profit
accounts and in urethane specialties due to a technology shift in the market
that affected our customer. The sales volume increase in Asia/Pacific is
primarily in mining chemicals and phosphines mostly due to higher demand levels.
Sales volume in Europe/Middle East/Africa increased 11% as a result of overall
improved demand.
Earnings from operations were $68.4, or 8% of sales, compared with $56.6 or 7%
of sales in 2005. The increase in earnings is primarily attributable to
increased selling volumes, slightly higher selling prices, benefits of
restructuring initiatives and the inclusion of the full year Surface Specialties
product lines. Partially offsetting these were higher raw material costs of
$28.1, the divestiture of the water treatment chemicals product line and expense
of $3.6 for stock options and stock-settled SARS related to SFAS 123R. 2005
results also included $2.6 for the excess of the fair value of the finished
goods inventory over normal manufacturing cost related to the Surface
Specialties acquisition and $7.0 of in-process research and development cost
write-offs related to the Surface Specialties acquisition.
Cytec Surface Specialties
% Change Due to
---------------------------------------------------
Total
2006 2005 % Change Price Volume/Mix Acquisition Currency
-----------------------------------------------------------------------------------------------------------------------
North America $ 366.7 $ 329.6 11% 4% -6% 13% -
Latin America 60.3 50.7 19% -2% - 14% 7%
Asia/Pacific 260.6 202.9 29% -4% 19% 13% 1%
Europe/Middle East/Africa 835.8 660.9 27% - 7% 18% 2%
---------------------------------------------------------------------------------------
Total $1,523.4 $1,244.1 22% - 5% 15% 2%
-----------------------------------------------------------------------------------------------------------------------
Overall selling volumes increased 5% primarily in the Radcure resins and powder
coating resins product lines. The inclusion of full year sales attributable to
Surface Specialties added $192.0 to sales. In North America volumes declined due
to reduced demand levels from the automotive and architectural sectors in the
liquid coating resins product line. In Asia/Pacific and Europe/Middle
East/Africa volumes increased 19% and 7%, respectively, due to improved demand
and new business. Selling prices declined in Asia primarily due to price
competition in lower technology products.
Earnings from operations were $95.5, or 6% of sales, compared with earnings from
operations of $22.0, or 2% of sales in 2005. The increase in earnings is
primarily attributable to the increased selling volumes, the benefits of
restructuring initiatives and the inclusion of a full year results from Surface
Specialties. Partially offsetting these are higher raw material costs of $7.8
which were not offset by selling price increases and expense of $3.2 for stock
options and stock-settled SARS related to SFAS 123R. 2005 results include the
write-off of in-process research and development costs of $30.1 and a charge of
$18.2 for the excess of the fair value of the finished goods inventory over
normal manufacturing cost related to the Surface Specialties acquisition.
Cytec Engineered Materials
% Change Due to
-------------------------------------
Total
2006 2005 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------------------
North America $378.2 $349.2 8% 2% 6% -
Latin America(1) 1.2 1.5 - - - -
Asia/Pacific 44.7 30.0 49% 4% 45% -
Europe/Middle East/Africa 177.7 160.9 11% 3% 8% -
-------------------------------------------------------------------------
Total $601.8 $541.6 11% 2% 9% -
---------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons are not meaningful.
Overall selling volumes increased 9% primarily from higher sales to the large
commercial aircraft, rotorcraft and business jet sector partially offset by
lower sales in the high performance auto sector due to the completion of a
program in early 2006 and lower sales to the launch vehicle sector. Net selling
prices increased 2% due to price increases in all regions and across a number of
markets. North America, Europe, and Asia/Pacific sales volumes increased 6%, 8%,
and 45%, respectively, with the increases coming primarily from the large
commercial aircraft and military sectors due to increased aircraft build rates.
Earnings from operations were $106.0, or 18% of sales, compared with $103.0, or
19% of sales, in 2005. The impact of the increased sales volume and prices on
operating earnings was partially offset by increased raw material costs of $9.7,
increased costs in manufacturing to support the higher production volumes, some
plant inefficiencies, planned higher technical service and research expenses,
lower production rates in one of our carbon fiber plants due to trial runs of
new product and costs to startup a carbon fiber manufacturing line that was
24
previously idled. Also included is expense of $2.4 for stock options and
stock-settled SARS related to SFAS 123R and a $2.4 pension curtailment charge
due to a change from a defined benefit pension plan to a defined contribution
pension plan in the U.K.
Building Block Chemicals
% Change Due to
---------------------------------------------------
Total
2006 2005 % Change Price Volume/Mix Divestiture Currency
-----------------------------------------------------------------------------------------------------------------------
North America $ 177.6 $ 149.2 19% 7% 14% -2% -
Latin America(1) 4.7 4.9 - - - - -
Asia/Pacific 26.9 50.3 -46% 3% -49% - -
Europe/Middle East/Africa 130.0 79.8 63% 17% 58% -13% 1%
---------------------------------------------------------------------------------------
Total $ 339.2 $ 284.2 19% 9% 15% -5% -
-----------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons are not meaningful.
Overall sales volumes are 10% higher and selling prices are 9% higher, both
primarily related to acrylonitrile. The divestiture of the acrylamide product
line on October 1, 2006 reduced sales 5% but was more than fully offset by
increased sales of acrylonitrile to the purchaser of the acrylamide product
line. Acrylonitrile is the key raw material to make acrylamide and prior to the
divestiture our internal uses of acrylonitrile to make acrylamide were treated
as internal transfers, and our internal uses of acrylamide to make certain of
our divested water treating chemicals were treated as intersegment sales. After
the divestiture, acrylonitrile used to make acrylamide is now a third party sale
and for the year this added 7% to sales. After excluding the above, selling
volumes increased 8% from the prior year when volumes were adversely impacted
due to plant shutdowns as a result of the hurricanes in the US gulf coast in the
third quarter of 2005. On a regional basis selling volumes in Asia/Pacific were
down due to sluggish demand for acrylonitrile for use in upgrading to acrylic
fiber. Selling volumes in Europe/Middle East/Africa improved due to increased
demand for imported acrylonitrile as a result of reduced regional supply.
Selling prices were up overall due to acrylonitrile and acrylamide as they
trended with increases in raw material costs.
Earnings from operations were $19.3, or 5% of sales, compared with $5.7, or 2%
of sales, in 2005. The increase in earnings reflects the higher selling volumes
(some due to the impact of the aforementioned hurricanes in 2005) and higher
selling prices. This was partially offset by higher raw material costs of $14.7
million, inefficiencies on lower melamine production, difficulties in our
sulfuric acid plant operations and higher costs due to a two week scheduled
acrylonitrile plant outage in the first quarter of 2006. Also included is
expense of $1.2 for stock options and stock-settled SARS related to SFAS 123R.
YEAR ENDED DECEMBER 31, 2005, COMPARED WITH YEAR ENDED DECEMBER 31, 2004
Consolidated Results
Net sales for 2005 were $2,925.7 compared with $1,721.3 for 2004, up 70% of
which 62% was due to the inclusion of sales from Surface Specialties which was
acquired on February 28, 2005, selling prices increased 6%, exchange rates
increased sales 1% and selling volumes were up 1%. Cytec Performance Chemicals
experienced a net increase in sales which resulted primarily from the addition
of sales of the acquired pressure sensitive adhesives and polyurethanes product
lines of Surface Specialties as well as from selling price increases. Cytec
Surface Specialties experienced a net increase in sales which resulted primarily
from the addition of sales related to the remainder of the acquired product
lines of Surface Specialties. Cytec Engineered Materials sales increase was
primarily volume related, primarily from increased sales to the large commercial
transport and commercial rotorcraft sectors. Building Block Chemicals sales
increased from higher selling prices, while volumes decreased. Net sales and
operating results for the Building Blocks segment were significantly impacted by
the effects of hurricanes Katrina and Rita in the U.S. gulf coast.
For a detailed discussion on revenues refer to the Segment Results section
below.
Manufacturing cost of sales was $2,313.7 compared with $1,303.1 during 2004.
This increase was primarily attributable to the following items: the inclusion
of the acquired Surface Specialties business; higher raw material and energy
costs of $98.4; a charge of $20.8 representing the excess of the fair value of
the finished goods inventory of the acquired business over normal manufacturing
cost and the direct impact from the hurricanes of $6.3 for maintenance and
repair costs, extra labor and related expenses, energy and start up costs. Also
included was approximately $5.0 of employee severance costs related to a
restructuring that occurred during the second half of 2005.
Pension expense increased $15.7 principally as a result of additional plans
acquired upon acquisition and to a lesser extent, the lowering of the discount
25
rate in the U.S. by 0.50% to reflect current market rates on fixed income
securities. Pension expense is primarily reported in manufacturing cost of
sales.
Selling and technical services was $213.6 versus $139.8 in the prior year. This
increase was primarily attributable to the following items: the inclusion of the
acquired Surface Specialties business; $3.5 of employee severance costs; $1.2 of
unfavorable exchange rate changes; and $4.4 from increased investments in people
and qualification work on a number of new aircraft platforms for our customers
in the Cytec Engineered Materials segment.
Research and process development was $68.5 versus $40.0 in the prior year. This
increase was primarily attributable to the inclusion of the acquired Surface
Specialties business and $0.8 related to restructuring charges.
The write-off of acquired in-process research and development of $37.0 was the
result of the Surface Specialties acquisition.
Administrative and general expenses were $102.1 versus $65.1 in the prior year.
This increase was primarily attributable to the following items: the inclusion
of the acquired Surface Specialties business; a charge of $2.4 related to the
settlement of a litigation matter and employee severance costs of $7.3. Included
in administrative expenses for the prior year period is a charge of $8.0 related
to the settlement of a federal carbon fiber class action lawsuit and several
other minor litigation matters.
Amortization of acquisition intangibles was $30.3 versus $5.6 in the prior year
due to the amortization of intangibles related to the acquired Surface
Specialties business.
Other income (expense), net was expense of $44.9 compared with income of $16.9
in the prior year. We entered into derivative contracts to economically hedge
currency and interest rate exposures associated with the Surface Specialties
acquisition. These contracts were settled following completion of the
acquisition and resulted in a loss of $19.2 during 2005. The foreign currency
contracts have matured. In anticipation of the long-term debt that was
subsequently issued in October, 2005 to refinance debt, we also entered into
interest rate derivatives which resulted in the recognition of a loss of $25.0
in 2005. Also included in 2005 was a charge of $4.4 for a settlement to resolve
a dispute over an environmental matter. Included in 2004 results was a net gain
of $26.8 related to derivative contracts entered into during the fourth quarter
to economically hedge currency and interest rate exposure associated with the
pending acquisition of Surface Specialties. Also included in 2004 results were
charges of $6.1 for settlement of several environmental remediation and toxic
tort lawsuits and a charge of $2.0 related to the settlement of a series of
disputed matters with the holder of our Series C Preferred Stock ("Series C
Stock").
Equity in earnings of associated companies was $7.9 versus $5.2 in the prior
year. The increase was primarily due to an increase in earnings by CYRO even
though the 2005 results include only the five months of results. We sold our 50%
ownership stake in CYRO on June 1, 2005.
Interest expense, net was $80.0 compared with $17.4 in the prior year. The
increase resulted from higher outstanding debt balances incurred in conjunction
with our acquisition of Surface Specialties and $22.0 of interest charges and
unamortized put premiums and rate lock agreements related to the optional
redemption of our Mandatory Par Put Remarketed Securities ("MOPPRS") in 2005.
Our 2005 effective tax rate on income from continuing operations was a tax
benefit of 33%. Our effective tax rate for continuing operations was favorably
impacted by a reduction in income tax expense of $12.2 related to a partial
resolution of a tax audit in Norway with respect to prior year tax returns and a
reduction in income tax expense of $16.2 recorded related to final approval of
the Internal Revenue Service's examination of our tax returns for the years 1999
through 2001. Also favorably impacting the rate were the losses of $44.2
incurred in the U.S. on interest rate and currency derivatives entered into in
connection with Surface Specialties acquisition and the $22.0 charge pertaining
to the optional redemption of the MOPPRS. The tax benefit on these losses was
recorded at 36.5%. Unfavorably impacting the 2005 tax rate was a charge of $37.0
for the write-off of in-process research and development expenses related to the
Surface Specialties acquisition for which no tax benefit was recorded. Excluding
these items, our underlying 2005 annual effective tax rate would have been 26%.
The comparable effective tax rate in 2004 was 24%, which excludes acquisition
related net currency and interest rate hedge gains. The increase in the
underlying annual effective tax rate versus last year was primarily attributable
to the addition of earnings from acquired Surface Specialties entities in
countries with higher tax rates than in countries for heritage Cytec.
Earnings from discontinued operations were $1.2 in 2005, net of taxes of $0.8
and reflect the results of Surface Specialties amino resins ("SSAR") product
line for the six months ended August 31, 2005, the date on which we divested
SSAR.
During 2004, we redeemed our Series C Stock, which had a liquidation value of
$0.1, for $10.0 in cash. The resulting charge to net earnings available to
26
common stockholders of $9.9 was recorded as a premium paid to redeem preferred
stock during 2004.
Net earnings available to common stockholders for 2005 were $59.1 ($1.27 per
diluted share) compared with $121.1 ($2.96 per diluted share). Included in the
full year ended December 31, 2005 were purchase accounting related charges of
$20.8 pre-tax (after-tax $15.2, or $0.33 per diluted share), related to acquired
inventories from Surface Specialties being recorded at fair value which exceeded
normal manufacturing cost, and $37.0 or $0.80 per diluted share related to the
write-off of in-process research and development costs of Surface Specialties, a
pre-tax charge of $44.2 million (after tax $28.1 or $0.61 per diluted share)
related to currency and interest rate derivative transactions associated with
the Surface Specialties acquisition, a pre-tax charge of $2.4 (after tax $1.8 or
$0.04 per diluted share) related to an anticipated settlement of a certain
litigation matter, a pre-tax charge of $22.0 (after-tax $14.0 or $0.30 per
diluted share) related to the optional redemption of our MOPPRS prior to their
maturity, an income tax benefit of $28.4, or $0.61 per diluted share, reflecting
favorable resolution of tax audits with respect to prior year tax returns,
employee restructuring costs of $16.8 (after tax net $12.4 or $0.27 per diluted
share), integration costs related to the acquired business of pre-tax $0.2
(after tax $0.1) and a $4.4 settlement to resolve a dispute over an
environmental matter (after tax $3.2 or $0.07 per diluted share).
Segment Results (Sales to external customers)
Year-to-year comparisons and analyses of changes in net sales by product line
segment and region are set forth below and reflect the new organizational and
reporting structure of our reportable segments for all periods presented.
Cytec Performance Chemicals
% Change Due to
-------------------------------------
Total Acquisition/
2005 2004 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------------------
North America $340.8 $293.8 16% 9% 7% -
Latin America 126.8 104.0 22% 4% 12% 6%
Asia/Pacific 118.5 106.7 11% 4% 6% 1%
Europe/Middle East/Africa 269.7 208.2 30% 6% 23% 1%
-------------------------------------------------------------------------
Total $855.8 $712.7 20% 7% 12% 1%
---------------------------------------------------------------------------------------------------------
Overall selling volume increased 12%, with the acquisition accounting for an
increase of 14%, partly offset by a decrease in base selling volumes of 2%,
primarily due to the sluggish demand in North American and Europe as well as our
decision to give up low margin business. On a regional basis, sales volume in
North America increased 7% with acquisitions accounting for 11%. The decrease in
base volumes is primarily attributable to the water treatment and polymer
additive product lines which were impacted by decisions to give up low margin
business and reduced demand. Sales volume in Europe/Middle East/Africa increased
23%, with acquisitions accounting for 24%, partly offset by a decrease in base
selling volume of 1% principally in the polymer additives product line. Sales
volumes in Asia were up 6% with the acquisition accounting for 12%. The decrease
in base volumes was principally in the polymer additives product line due to
decisions to give up low margin business. Sales volumes in Latin America
increased 12% primarily due to improved demand for mining chemicals for copper
mining applications. Selling prices increased as a result of implementation of
price increase initiatives to cover significantly higher raw material and energy
costs.
Earnings from operations were $56.6, or 7% of sales, compared with $57.5 or 8%
of sales in 2004. Earnings declined slightly as price increases of $47.1 and the
net favorable impact of exchange rate changes were offset by higher raw material
and energy costs of $35.8, a write-off of acquired in-process research and
development costs of $6.9, a charge of $2.5 for the excess of the fair value of
the finished goods inventory of the acquired business over normal manufacturing
cost and lower selling volumes compounded by reduced production levels at
certain facilities in response to lower demand levels.
27
Cytec Surface Specialties
% Change Due to
-------------------------------------
Total Acquisition/
2005 2004 % Change Price Volume Currency
---------------------------------------------------------------------------------------------------------
North America $ 329.6 $122.4 169% 3% 166% -
Latin America 50.7 16.2 213% -1% 210% 4%
Asia/Pacific 202.9 56.7 258% 1% 256% 1%
Europe/Middle East/Africa 660.9 65.7 906% 2% 903% 1%
-------------------------------------------------------------------------
Total $1,244.1 $261.0 377% 2% 374% 1%
---------------------------------------------------------------------------------------------------------
Selling volumes increased 374% as a result of the acquisition with base volumes
decreasing slightly for heritage businesses. In North America base business
declined 5% due to weak demand and Latin America, all of the volume increase is
acquisition related. In Asia/Pacific, base business grew 8% while in
Europe/Middle East/Africa, base volumes were down 2% due to weak demand.
Earnings from operations were $22.0, or 2% of sales, compared with earnings from
operations of $28.7 or 11% of sales in 2004. The decrease in earnings is
primarily attributable to the following factors: the write-off of acquired
in-process research and development costs of $30.1; a charge of $18.3 for the
excess of fair value of the finished goods inventory of the acquired business
over normal manufacturing costs; a decline in base business selling volumes
which decreased earnings by $6.5, and; higher raw material and energy costs of
$12.5 which were only partially recovered by selling price increases of $4.8.
Partially offsetting the above were the earnings of the acquired business of
$57.8 (excluding the acquired research and development and inventory charges
referred to above) and the net favorable impact of exchange rate changes.
Cytec Engineered Materials
% Change Due to
-------------------------------------
Total
2005 2004 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------------------
North America $349.2 $322.4 8% 1% 7% -
Latin America(1) 1.5 1.7 - - - -
Asia/Pacific 30.0 21.5 40% 3% 37% -
Europe/Middle East/Africa 160.9 141.4 14% 3% 11% -
-------------------------------------------------------------------------
Total $541.6 $487.0 11% 2% 9% -
---------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons are not meaningful.
Overall selling volumes increased 9%. Increased sales to the Europe/Middle
East/Africa, North America and Asia/Pacific regions primarily related to
increased volumes to the large commercial transport and commercial rotorcraft
sectors primarily due to increased build rates and new business.
Earnings from operations were $103.0, or 19% of sales, compared with $83.4, or
17% of sales, in 2004. The increase was primarily attributable to increased
earnings of $30.5 from higher selling volumes and price increases of $8.3
partially offset by higher raw material and energy costs of $5.6, manufacturing
difficulties in Europe and increased in technical, commercial and research of
$5.2 principally to support future growth initiatives.
Building Block Chemicals
% Change Due to
-------------------------------------
Total
2005 2004 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------------------
North America $ 149.2 $ 126.6 18% 18% - -
Latin America(1) 4.9 3.3 - - - -
Asia/Pacific 50.3 77.0 -35% 10% -45% -
Europe/Middle East/Africa 79.8 53.7 49% 21% 28% -
-------------------------------------------------------------------------
Total $284.2 $260.6 9% 16% -7% -
---------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons are not meaningful.
Sales were higher overall due to higher selling prices, primarily for
acrylonitrile, which were in line with the increase in raw material costs.
Selling volumes decreased 7% overall. Selling volumes to the Asia/Pacific region
decreased due to sluggish demand for acrylonitrile in light of higher selling
prices but were partially offset by increased volumes to the Europe/Middle
28
East/Africa region where local production outages increased demand for imported
acrylonitrile. Selling volumes in North America were impacted by reduced
industrial demand and the hurricanes in the U.S. Gulf region.
Earnings from operations were $5.7, or 2% of sales, compared with $15.6, or 6%
of sales, in 2004. The decrease in earnings reflects the impact from the
hurricanes of about $6.3 related to maintenance and repair costs, extra labor
and related expenses, energy and start up costs and the related lower production
levels which reduced fixed cost absorption by approximately $3.9. Higher selling
prices of $41.0 mostly offset increased raw material and energy costs of $44.6.
LIQUIDITY AND FINANCIAL CONDITION
At December 31, 2006, our cash balance was $23.6 compared with $68.6 at year end
2005.
Cash flows provided by operating activities were $201.0 compared with $227.5 for
2005. Trade accounts receivables increased $33.6 due to higher sales levels.
Inventories increased $54.3 due to higher raw material costs than the year ago
period, an increase to meet higher demand levels and a spike in Building Block
Chemicals inventory due to weather related issues delaying shipments scheduled
in December 2006 to January 2007. Accrued expenses increased $7.0 primarily due
to a net increase in restructuring accruals of $4.4. Other liabilities decreased
$52.8 principally due to contributions to our U.S. pension plans of $50.0.
Cash flows provided by investing activities were $104.1 for 2006 compared with
cash flow used for investing activities of $1,384.6 for 2005. Capital spending
for 2006 was $102.5, which compares to $105.3 in 2005. In 2006, we received
$206.6, net of cash transaction costs, for the completion of the first of three
phases of the sale of our water treatment chemicals and acrylamide product
lines. In 2005, we used $1,459.1 of cash for the acquisition of Surface
Specialties offset in part by $179.8 of proceeds from the sale of assets
including SSAR and CYRO.
Net cash flows used in financing activities were $354.4 in 2006 compared with
net cash flows provided by financing activities of $905.8 during 2005. The 2005
activity is primarily due to proceeds received for debt incurred related to the
purchase of Surface Specialties partially offset by the redemption of the MOPPRS
debt. During 2006, we had net debt repayments of $391.4, which were partially
offset by proceeds received on the exercise of stock options of $45.0.
In connection with the acquisition of Surface Specialties, we suspended our
stock buyback program in 2004 in order to maximize the funds available for debt
service and other corporate purposes. With the divestiture of our water
treatment and acrylamide business substantially completed and the net proceeds
used to pay down additional debt, we announced in February 2007 the
reinstatement of our stock buyback program. Approximately $69.0 remained
authorized under the buyback program as of that date. We anticipate the
repurchases will be made from time-to-time on the open market or in private
transactions and will be utilized for share-based compensation plans and other
corporate purposes.
As of December 31, 2006, our total debt of $943.6 is denominated approximately
51% in euros, 47% in dollars and the balance in various other currencies, after
taking into account euro/US dollar cross currency swaps and designated forwards.
As of December 31, 2006, we may borrow up to an additional $308.0 under our
$350.0 revolving credit facility (borrowing against this facility totaled $42.0
at December 31, 2006). Also at December 31, 2006, we had approximately $91.1 of
other various credit facilities, with outstanding borrowings of $47.4.
During 2006, we paid four quarterly cash dividends of $0.10 per common share
which aggregated $18.8. On February 9, 2007 the Board of Directors declared a
$0.10 per common share cash dividend, payable on February 26, 2007 to
shareholders of record as of February 12, 2007.
During the year, the Pension Protection Act of 2006 was enacted in the U.S. The
principal changes under this legislation relate to the way assets and
liabilities are valued to determine required pension contributions. This
legislation also impacts the timing and manner of required contributions to
under-funded pension plans. These changes could increase the funding
requirements for our U.S. pension plans. Accordingly, the amounts we might
contribute to these benefit plans in the future are subject to uncertainty. We
believe we have adequate liquidity to fund any increased funding requirements of
our U.S. pension plans that may occur due to the Pension Protection Act.
We believe that we have the ability to fund our operating cash requirements,
planned capital expenditures and dividends as well as the ability to meet our
debt service requirements for the foreseeable future from existing cash and from
internal cash generation. However, from time to time, based on such factors as
local tax regulations, prevailing interest rates and our plans for capital
investment or other investments, it may make economic sense to utilize our
existing credit lines in order to meet those cash requirements, which may
include debt-service related disbursements.
29
We have not guaranteed any indebtedness of our unconsolidated associated
company.
Excluding the impact of increasing raw materials costs, inflation is not
considered significant since the rate of inflation has remained relatively low
in recent years and investments in areas of the world where inflation poses a
significant risk are limited. The impact of increasing raw material costs are
discussed under "Customers and Suppliers" in "Business" in Item 1, herein.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations under long-term
agreements as of December 31, 2006:
Payments Due by Period
-------------------------------------------------------------------------
Less Than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
------------------------------------------------------------------------------------------------------------
Long-term debt $ 901.8 $1.4 $102.8 $ 345.9 $ 451.7
Operating leases 49.6 11.7 15.7 8.6 13.6
Purchase obligations 39.1 17.7 10.2 6.4 4.8
-------------------------------------------------------------------------
Total $ 990.5 $30.8 $ 128.7 $ 360.9 $ 470.1
------------------------------------------------------------------------------------------------------------
See Note 15 for additional information on our pension and postretirement plans
obligations.
We had net contractual commitments under currency forward contracts in U.S.
dollar equivalent amounts of $150.2, that all settle in less than one year.
(Refer to Item 7A as well as Note 7 of the Notes to Consolidated Financial
Statements included herein).
We had $75.1 of outstanding letters of credit, surety bonds and bank guarantees
at December 31, 2006 that are issued on our behalf in the ordinary course of
business to support certain of our performance obligations and commitments. The
instruments are typically renewed on an annual basis.
We do not have any unconsolidated limited purpose entities or any undisclosed
material transactions or commitments involving related persons or entities.
30
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion provides forward-looking quantitative and qualitative
information about our potential exposures to market risk arising from changes in
currency rates, commodity prices and interest rates. Actual results could differ
materially from those projected in this forward-looking analysis. Currencies are
in millions.
Market risk represents the potential loss arising from adverse changes in the
value of financial instruments. The risk of loss is assessed based on the
likelihood of adverse changes in fair values, cash flows or future earnings.
In the ordinary course of business, we are exposed to various market risks,
including fluctuations in currency rates, commodity prices and interest rates.
To manage the exposure related to these risks, we may engage in various
derivative transactions in accordance with our established policies. We do not
hold or issue financial instruments for trading or speculative purposes.
Moreover, we enter into financial instrument transactions with either major
financial institutions or highly-rated counterparties and make reasonable
attempts to diversify transactions among counterparties, thereby limiting
exposure to credit-related and performance-related risks.
Currency Risk: We periodically enter into currency forward contracts primarily
to hedge currency fluctuations of transactions denominated in currencies other
than the functional currency of the business. At December 31, 2006, the
principal transactions hedged involved accounts receivable, accounts payable and
intercompany loans. When hedging currency exposures, our practice is to hedge
such exposures with forward contracts denominated in the same currency and with
similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction.
At December 31, 2006, the currency and net contractual amounts of forward
contracts outstanding translated into U.S. dollar equivalent amounts were as
follows:
Buy
-------------------------------------------------------
Pound Canadian Australian U.S.
Sell Euro Sterling Dollar Dollar Dollar
------------------------------------------------------------------------------
U.S. Dollar $91.3 $8.5 $12.0 $14.5 -
Euro - 6.8 - - -
Norwegian Krone 1.5 - - - -
Japanese Yen - - - - $3.4
Brazilian Real - - - - 4.7
Taiwan Dollar - - - - 6.0
Other 1.5 - - - -
------------------------------------------------------------------------------
The unfavorable fair value of currency contracts, based on exchange rates at
December 31, 2006, was approximately $1.3. Assuming that year-end exchange rates
between the underlying currencies of all outstanding contracts and the various
hedged currencies were to adversely change by a hypothetical 10%, the fair value
of all outstanding contracts at year-end would decrease by approximately $14.2.
However, since these contracts hedge specific transactions, any change in the
fair value of the contracts would be offset by changes in the underlying value
of the transaction being hedged.
In September, 2005, we entered into (euro)207.9 of five year cross currency
swaps and (euro)207.9 of ten year cross currency swaps to effectively convert
the 5-Year Notes and 10-Year Notes into euro-denominated liabilities. The swaps
included an initial exchange of $500.0 on October 4, 2005 and will require final
principal exchanges of $250.0 on each settlement date of the 5-Year and 10-Year
Notes (October 1, 2010 and October 1, 2015), respectively. At the initial
principal exchange, we paid US dollars to counterparties and received euros.
Upon final exchange, we will provide euros to counterparties and receive US
dollars. The swaps also call for a semi-annual exchange of fixed euro interest
payments for fixed US dollar interest receipts. With respect to the five year
swaps, we will receive 5.5% per annum and will pay 3.784% per annum on each
April 1 and October 1, through the maturity date of the five year swaps. With
respect to the ten year swaps, we will receive 6.0% per annum and will pay
4.5245% per annum on each April 1 and October 1, through the maturity date of
the ten year swaps. The cross currency swaps have been designated as cash flow
hedges of the changes in value of the future euro interest and principal
receipts that results from changes in the US dollar to euro exchange rates on
certain euro denominated intercompany receivables we have with one of our
subsidiaries. The cross currency swaps plus the euro denominated bank borrowings
and a portion of an intercompany Euro denominated loans payable naturally hedge
our euro denominated intercompany loans receivable and, further, provide a
partial hedge of our net investment in our Belgium-based subsidiary, Cytec
Surface Specialties SA/NV. From time to time we also enter into designated
forward euro contracts to adjust the amount of the net investment hedge. At
December 31, 2006, we had designated forward contracts to purchase (euro)58.0.
31
At December 31, 2006, the fair value of the five and ten year swaps were $(16.9)
and $(16.4), respectively. Assuming other factors are held constant, a
hypothetical increase/decrease of 10% in the euro exchange rate would cause an
increase/decrease of approximately $53.3 in the value of the hedging instruments
referred to above.
Commodity Price Risk: We use natural gas swaps, which are financially settled,
to hedge certain utility requirements. The maturities of these swaps correlate
highly to the actual purchases of the commodity and have the effect of securing
predetermined prices that we pay for the underlying commodity. While these
contracts are structured to limit our exposure to increases in commodity prices,
they can also limit the potential benefit we might have otherwise received from
decreases in commodity prices. These swaps are recognized on the balance sheet
at fair value, which will be reclassified into Manufacturing cost of sales
through June 2007 as these swaps are settled.
At December 31, 2006, we had outstanding natural gas swaps with a fair value
loss of $(4.3). Assuming that year-end natural gas prices were to decrease by a
hypothetical 10%, the value of these contracts would decrease by approximately
$2.1.
Interest Rate Risk: At December 31, 2006, our outstanding borrowings consisted
of $41.8 of short-term borrowings and long-term debt, including the current
portion, which had a carrying value of $901.8, a face value of $901.9 and a fair
value, based on dealer quoted values, of approximately $887.4.
Assuming other factors are held constant, a hypothetical increase/decrease of 1%
in the weighted-average prevailing interest rate on our variable rate debt
outstanding as of December 31, 2006, interest expense would increase/decrease by
approximately $1.4 for the next fiscal year and the fair value of the fixed rate
long-term debt would decrease/increase by approximately $35.4.
2007 OUTLOOK
In our February 1, 2007 press release, which was also furnished as an exhibit to
a current report on Form 8-K, we set forth our assumptions and management's best
estimate of the full year 2007 earnings at the time based on various assumptions
set forth in our press release. We forecasted diluted earnings per share in the
range of $3.60-$3.80, before any potential special items for the year. There can
be no assurance that sales or earnings will develop in the manner projected.
Actual results may differ materially. See "Comments on Forward Looking
Statements."
SIGNIFICANT ACCOUNTING ESTIMATES / CRITICAL ACCOUNTING POLICIES
Accounting principles generally accepted in the United States require management
to make certain estimates and assumptions. These estimates and assumptions
affect the reported amounts in the consolidated financial statements and the
notes thereto. The areas discussed below involve the use of significant judgment
in the preparation of our consolidated financial statements and changes in the
estimates and assumptions used may impact future results of operations and
financial condition.
Share-based Compensation
In December, 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R addresses the accounting for transactions in
which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. SFAS 123R supersedes Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
and requires companies to recognize compensation cost in an amount equal to the
fair value of share-based payments, such as stock options granted to employees.
On January 1, 2006, we adopted SFAS 123R using the modified prospective method.
With the adoption of SFAS 123R, the compensation cost for performance stock is
recorded based on the market value on the original date of grant, and not based
on the price of our common stock at the end of each reporting period as formerly
was required under APB No. 25. Compensation cost for stock appreciation rights
payable in cash ("cash-settled SARS") is recognized based on the fair value of
the award at the end of each period through the date of vesting, also a change
from APB No. 25. Compensation cost for stock appreciation rights payable in
shares ("stock-settled SARS") and stock options is recognized over the vesting
period based on the estimated fair value on the date of the grant. SFAS 123R
also requires that we estimate a forfeiture rate for all share-based awards. We
monitor share option exercise and employee termination patterns to estimate
forfeiture rates within the valuation model. The estimated fair values are based
on assumptions, including estimated lives, volatility, dividend yield, and
risk-free interest rates. These estimates also consider the probability that the
options and stock-settled SARS will be exercised prior to the end of their
contractual lives and the probability of termination or retirement of the
holder, which are based on reasonable facts but are subject to change based on a
variety of external factors.
32
Environmental and Other Contingent Liabilities
Accruals for environmental remediation and operating and maintenance costs
directly related to remediation, and other contingent liabilities are recorded
when it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated. Accruals are recorded at management's
best estimate of the ultimate expected liabilities, without any discount to
reflect the time value of money. These accruals are reviewed periodically and
adjusted, if necessary, as additional information becomes available.
The amount accrued for environment remediation reflects our assumptions about
remediation requirements at the contaminated site, the nature and cost of the
remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties at multi-party sites, and the number and
financial viability of other potentially responsible parties.
Included in other contingent liabilities are workers' compensation, product
liability and toxic tort claims. The amount accrued for other contingent
liabilities reflects our assumptions about the incidence, severity, indemnity
costs and dismissal rates for existing and future claims.
Our asbestos related contingent liabilities and related insurance receivables
are based on a study by the Actuarial and Analytics Practice of AON Risk
Consultants ("AON"). The study estimated our gross asbestos liabilities using a
frequency/severity approach. With this approach, the cost of future claim
filings due to asbestos related diseases are estimated as the product of the
future number of claims filed and the average value of those claims on a nominal
as opposed to discounted basis. Future claim frequency has been estimated using
our claims history and the Stallard/Manton Epidemiological Decay Model, a widely
used industry study. The Decay model assumes that future levels of claims
activity will gradually decrease from current levels by applying model-specific
decay factors that project this claim activity to wind down over the next 35 to
40 years. Our current levels are estimated based on our risk profile and our
historical claim experience. The estimated cost per claim is based on our
historical paid claims adjusted for inflation. Although these estimates and
assumptions are based on reasonable facts, they are subject to change based on
the actual outcome and a variety of external factors.
Accruals for environmental remediation and other contingent liabilities can
change substantially if our assumptions are not realized or due to actions by
governmental agencies or private parties. We cannot estimate any additional
amount of loss or range of loss in excess of the recorded amounts. Moreover,
environmental and other contingent liabilities are paid over an extended period,
and the timing of such payments cannot be predicted with any certainty. Accruals
for environmental and other contingent liabilities are recorded as other
noncurrent liabilities with any amounts expected to be paid out in the next
twelve months classified as accrued expenses.
Probable insurance recoveries for past and probable future indemnity costs are
recorded at management's best estimate of the ultimate expected receipts without
discounting to reflect the time value of money and are recorded as other assets.
A number of factors impact the estimates of insurance reimbursements. These
factors include the financial viability of the insurance companies, the method
in which losses will be allocated to the various insurance policies, how legal
and defense costs will be covered by the insurance policies, the interpretation
of the effect on coverage of various policy terms and limits and their
interrelationships, and historical recovery rates over the past ten years.
Defense and processing costs are expensed as incurred. Probable insurance
recoveries for defense and processing costs are recognized when the related
costs are incurred and are recorded as other assets.
Retirement Plans
We sponsor defined benefit pension and other postretirement benefit plans. The
postretirement plans provide medical and life insurance benefits to retirees who
meet minimum age and service requirements. Our most significant pension plans
are in the U.S., and constituted over 67% of our consolidated pension assets and
66% of projected benefit obligations as of December 31, 2006. The calculation of
our pension expense and pension liability associated with our defined benefit
pension plans requires the use of a number of assumptions. Changes in these
assumptions can result in different pension expense and liability amounts, and
actual experience can differ from the assumptions. We believe that the most
critical assumptions are the discount rate and the expected rate of return on
plan assets.
At the end of each year, we determine the discount rate to be used for pension
liabilities. In estimating this rate, we look to rates of return on high
quality, long-term corporate bonds that receive one of the two highest ratings
given by a recognized ratings agency. We discounted our U.S. future pension
liabilities using a rate of 5.85% at December 31, 2006. The discount rate used
to determine the value of liabilities has a significant effect on expense.
The expected rate of return on our U.S. plan assets, which was 8.5% for 2006,
33
reflects the long-term average rate of return expected on funds invested or to
be invested in the pension plans to provide for the benefits included in the
pension liability. We establish the expected rate of return at the beginning of
each fiscal year based upon information available to us at that time, including
the historical returns of major asset classes, the expected investment mix of
the plans' assets, and estimates of future long-term investment returns. The
U.S. pension plan's investment mix at December 31, 2006 approximated 70%
equities and 30% fixed income securities. Any differences between actual
experience and assumed experience are deferred as an unrecognized actuarial gain
or loss. The unrecognized net actuarial gain or loss is amortized into pension
expense in accordance with SFAS No. 87, "Employers' Accounting for Pensions."
Impairment of Goodwill
We have defined our segments as our SFAS No. 142 reporting units. Our four
business segments are Cytec Performance Chemicals, Cytec Surface Specialties,
Cytec Engineered Materials and Building Block Chemicals. Cytec Performance
Chemicals serves large, global industrial markets. Cytec Surface Specialties
serves the large, global coatings market. Cytec Engineered Materials serves
principally aerospace markets. Building Block Chemicals sells commodity chemical
intermediates to industrial users. The segments above reflect how we run our
company, manage the assets and the customer perspective.
We test goodwill for impairment on an annual basis. Goodwill of a reporting unit
will be tested for impairment between annual tests if events occur or
circumstances change that would likely reduce the fair value of the reporting
unit below its carrying value. We use a two-step process to test goodwill for
impairment. First, the reporting unit's fair value is compared to its carrying
value. We utilize a market multiple approach to determine fair value estimates.
Due to the cyclical nature of our reporting units, values are determined
utilizing a three year average. The three year period is comprised of the prior
year, current year and one year projected amounts. If the market multiple
approach yields a result which may indicate a possible impairment, a discounted
cash flow approach is utilized to more precisely determine the reporting unit's
fair value. If a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired, and the
second step of the impairment test would be performed. The second step of the
goodwill impairment test is used to measure the amount of the impairment loss.
In the second step, the implied fair value of the reporting unit's goodwill is
determined by allocating the reporting unit's fair value to all of its assets
and liabilities other than goodwill in a manner similar to a purchase price
allocation. The resulting implied fair value of the goodwill that results from
the application of this second step is then compared to the carrying amount of
the goodwill and an impairment charge is recorded for the difference.
These evaluations involve amounts that are based on management's best estimates
and judgments. Because of the uncertainty inherent in such estimates, actual
results may differ from these estimates. We are not aware of reasonably likely
events or circumstances that would result in different amounts being estimated
that would have a material impact on these assessments for impairment.
Impairment of Long-Lived Assets, Intangible Assets and Assets to be Disposed
Long-lived assets and intangible assets with determinable useful lives are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Assets with
indefinite useful lives are reviewed annually for impairment. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the assets to the future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets and would be charged to earnings.
Intangible assets with determinable useful lives are amortized over their
respective estimated useful lives. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less the costs to sell.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating
loss and tax credit carryforwards. A valuation allowance is provided when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
earnings in the period that includes the enactment date.
We intend to reinvest the unremitted earnings of international subsidiaries.
Accordingly, no provision has been made for U.S. or additional non-U.S. taxes
with respect to these earnings. In the event of repatriation to the U.S., such
earnings would be subject to U.S. income taxes in most cases. Foreign tax
credits would be available to substantially reduce the amount of U.S. tax
otherwise payable in future years.
34
Our annual effective tax rate is based on expected income, statutory tax rates
and tax planning opportunities available in various jurisdictions in which we
operate. Significant judgment is required in determining the annual effective
tax rate and in evaluating our tax positions.
We establish accruals for tax contingencies when, notwithstanding the reasonable
belief that our tax return positions are fully supported, we believe that
certain filing positions are likely to be challenged and moreover, that such
filing positions may not be fully sustained. We recognize the benefit of
uncertain tax positions that we have taken or expect to take on the income tax
returns we file if such tax position is probable of being sustained. We
continually evaluate our tax contingency accruals and will adjust such amounts
in light of changing facts and circumstances, including but not limited to
emerging case law, tax legislation, rulings by relevant tax authorities, and the
progress of ongoing tax audits. Settlement of a given tax contingency could
impact the income tax provision in the period of resolution. Our tax contingency
accruals are presented in the balance sheet within income taxes payable.
Acquisitions
We account for acquired businesses using the purchase method of accounting which
requires that the assets acquired and liabilities assumed be recorded at the
date of acquisition at their respective fair values. Our consolidated financial
statements and results of operations reflect an acquired business after the
completion of the acquisition. The cost to acquire a business, including
transaction costs, is allocated to the underlying net assets of the acquired
business in proportion to their respective fair values. Any excess of the
purchase price over the estimated fair values of the net assets acquired is
recorded as goodwill. Amounts allocated to acquired in-process research and
development are expensed at the date of acquisition.
The judgments made in determining the estimated fair value assigned to each
class of assets acquired and liabilities assumed, as well as asset lives, can
materially impact our results of operations. Accordingly, for significant items,
we typically obtain assistance from third party valuation specialists.
Determining the useful life of an intangible asset also requires judgment as
different types of intangible assets will have different useful lives and
certain assets may even be considered to have indefinite useful lives.
All of these judgments and estimates can materially impact our results of
operations.
Derivative Financial Instruments and Certain Hedging Activities
Our established policies allow the use of derivative instruments to manage
exposure to fluctuations in currency rates, certain commodity (e.g., natural
gas) prices, interest rates and equity prices. Derivative instruments currently
utilized include currency forward contracts and swaps, natural gas swaps, cross
currency swaps and interest rate swaps. We do not hold or issue derivative
financial instruments for trading or speculative purposes. We enter into
financial instrument transactions with either major financial institutions or
highly-rated counterparties and make reasonable attempts to diversify
transactions among counterparties, thereby limiting exposure to credit-related
and performance-related risks.
We use currency forward contracts primarily to hedge currency fluctuations of
third party and intercompany transactions denominated in currencies other than
the functional currency of the business. The principal transactions hedged
involve accounts receivable, accounts payable and loans. When hedging currency
exposures, our practice is to hedge such exposures with forward contracts
denominated in the same currency and with similar critical terms as the
underlying exposure, and therefore, the instruments are effective at generating
offsetting changes in the fair value, cash flows or future earnings of the
hedged item or transaction. Currency forward contracts are reported as either
assets or liabilities with changes in their fair value recorded in other income
(expense), net together with offsetting gain or loss on the hedged asset or
liability.
We use cross currency swaps to synthetically convert some of our U.S. dollar
denominated debt to hedge future cash flows from euro receipts on certain euro
denominated intercompany receivables we have with our subsidiaries against
changes in the US dollar to euro exchange rates. The cross currency swaps are
recorded as either assets or liabilities. Changes in fair value include both an
interest and an exchange component. The interest component is recorded in other
comprehensive income while the exchange component is recorded in other income
(expense), net together with the offsetting gain or loss on the hedged
intercompany receivables.
We use natural gas swaps, which are financially settled, to hedge a portion of
utility requirements at certain of our facilities. These swaps, which are highly
effective at achieving offsetting cash flows of the underlying natural gas
purchases, have been designated as cash flow hedges and are reported on the
consolidated balance sheets at fair value, with offsetting amounts included in
accumulated other comprehensive income/(loss) on an after-tax basis. Gains and
35
losses are reclassified into earnings, as a component of manufacturing cost of
sales in the period the hedged natural gas purchases affect earnings. The fair
values of all these instruments are based on quotes from third party financial
institutions.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
December 31,
2006 2005
----------------------
Assets
Current assets
Cash and cash equivalents $ 23.6 $ 68.6
Trade accounts receivable, less allowance for
doubtful accounts of $5.1 and $7.8 in 2006
and 2005, respectively 510.3 493.8
Due from related party 2.4 8.0
Other accounts receivable 79.1 65.9
Inventories 474.6 424.7
Deferred income taxes 9.2 14.2
Other current assets 15.4 31.4
Assets held for sale 38.8 -
----------------------
Total current assets 1,153.4 1,106.6
----------------------
Investment in associated companies 23.3 20.3
Plants, equipment and facilities, at cost 1,895.5 2,064.3
Less: accumulated depreciation (897.0) (988.8)
----------------------
Net plant investment 998.5 1,075.5
Acquisition intangibles, net of accumulated
amortization of $92.1 and $51.0
in 2006 and 2005, respectively 486.1 491.5
Goodwill 1,042.5 1,012.2
Deferred income taxes 36.5 46.6
Other assets 91.2 106.4
----------------------
Total assets $3,831.5 $3,859.1
----------------------
Liabilities
Current liabilities
Accounts payable $ 298.8 $ 278.6
Short-term borrowings 41.8 34.3
Current maturities of long-term debt 1.4 51.2
Accrued expenses 212.3 218.3
Income taxes payable 39.3 43.5
Deferred income taxes 2.0 2.7
Liabilities held for sale 16.3 -
----------------------
Total current liabilities 611.9 628.6
Long-term debt 900.4 1,225.5
Pension and other postretirement benefit liabilities 371.1 432.5
Other noncurrent liabilities 273.6 224.4
Deferred income taxes 104.4 110.0
Stockholders' equity
Preferred stock, 20,000,000 shares authorized;
none issued and outstanding - -
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 258.5 235.6
Retained earnings 1,333.0 1,149.7
Unearned compensation - (2.5)
Accumulated other comprehensive loss (5.7) (87.0)
Treasury stock, at cost, 510,006 shares in 2006
and 1,833,812 shares in 2005 (16.2) (58.2)
----------------------
Total stockholders' equity 1,570.1 1,238.1
----------------------
Total liabilities and stockholders' equity $3,831.5 $3,859.1
----------------------
See accompanying Notes to Consolidated Financial Statements
37
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
Years ended December 31,
2006 2005 2004
-----------------------------
Net sales $3,329.5 $2,925.7 $1,721.3
Manufacturing cost of sales 2,670.1 2,313.7 1,303.1
Selling and technical services 215.4 213.6 139.8
Research and process development 73.9 68.5 40.0
Administrative and general 102.9 102.1 65.1
Amortization of acquisition intangibles 37.8 30.3 5.6
Write-off of acquired in-process research and development - 37.0 -
Gain on sale of assets held for sale 75.5 - -
-----------------------------
Earnings from operations 304.9 160.5 167.7
Other income (expense), net 12.7 (44.9) 16.9
Equity in earnings of associated companies 3.2 7.9 5.2
Interest expense, net 55.5 80.0 17.4
-----------------------------
Earnings from continuing operations before income taxes and cumulative effect of accounting change 265.3 43.5 172.4
Income tax provision (benefit) 69.2 (14.4) 41.4
-----------------------------
Earnings from continuing operations before cumulative effect of accounting change 196.1 57.9 131.0
Cumulative effect of accounting change, net of taxes (1.2) - -
-----------------------------
Earnings from continuing operations 194.9 57.9 131.0
Earnings from discontinued operations, net of taxes - 1.2 -
-----------------------------
Net earnings 194.9 59.1 131.0
Premium paid to redeem preferred stock - - 9.9
-----------------------------
Net earnings available to common stockholders $ 194.9 $59.1 $ 121.1
-----------------------------
Basic net earnings per common share:
Earnings from continuing operations before cumulative effect of accounting change $ 4.13 $1.28 $ 3.06
Cumulative effect of accounting change, net of taxes (0.02) - -
Earnings from discontinued operations, net of taxes - 0.03 -
-----------------------------
Net earnings available to common stockholders $ 4.11 $1.31 $ 3.06
-----------------------------
Diluted net earnings per common share:
Earnings from continuing operations before cumulative effect of accounting change $ 4.03 $1.25 $ 2.96
Cumulative effect of accounting change, net of taxes (0.02) - -
Earnings from discontinued operations, net of taxes - 0.02 -
-----------------------------
Net earnings available to common stockholders $ 4.01 $1.27 $ 2.96
-----------------------------
Dividends per common share $ 0.40 $0.40 $ 0.40
-----------------------------
See accompanying Notes to Consolidated Financial Statements
38
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, (Dollars in millions) 2006 2005 2004
---------------------------
Cash flows provided by (used in) operating activities
Net earnings $ 194.9 $ 59.1 $131.0
Earnings from discontinued operations, net of taxes - 1.2 -
---------------------------
Earnings from continuing operations 194.9 57.9 131.0
Noncash items included in earnings from continuing operations:
Depreciation 111.2 110.8 86.6
Amortization 41.6 36.5 7.2
Share-based compensation 13.4 2.5 5.0
Deferred income taxes 15.7 (25.0) 19.6
Write-off of acquired in-process research and development - 37.0 -
Amortization of write-up to fair value of finished goods purchased in acquisition - 20.8 -
Gains on sales of assets - (1.3) -
Gain on sale of assets held for sale (75.5) - -
Asset impairment charges 29.3 - -
Unrealized net gains on derivative instruments - - (7.9)
Cumulative effect of accounting change 1.9 - -
Other (0.8) (2.4) (1.9)
Changes in operating assets and liabilities (excluding effect of acquisitions
and divestitures):
Trade accounts receivable (33.6) (12.9) (24.1)
Other receivables (7.9) 31.7 (2.0)
Inventories (54.3) 9.5 (46.8)
Other assets 16.3 21.5 0.4
Accounts payable 15.0 2.8 36.5
Accrued expenses (7.0) (19.3) (7.3)
Income taxes payable (6.4) (42.6) 7.9
Other liabilities (52.8) - (36.8)
---------------------------
Net cash provided by operating activities of continuing operations 201.0 227.5 167.4
Net cash provided by operating activities of discontinued operations - 4.9 -
---------------------------
Net cash provided by operating activities 201.0 232.4 167.4
---------------------------
Cash flows provided by (used in) investing activities
Acquisition of businesses, net of cash received - (1,459.1) (4.6)
Additions to plants, equipment and facilities (102.5) (105.3) (89.3)
Net proceeds received on sale of assets 206.6 105.5 0.7
Proceeds received on sale of discontinued business - 74.3 -
Advance payment received on land lease - - 9.1
---------------------------
Net cash provided by (used in) investing activities 104.1 (1,384.6) (84.1)
---------------------------
Cash flows provided by (used in) financing activities
Proceeds from long-term debt 241.2 1,438.4 -
Payments on long-term debt (632.8) (571.9) -
Change in short-term borrowings 0.2 45.9 (9.3)
Cash dividends (18.8) (17.8) (15.7)
Proceeds from the exercise of stock options 45.0 17.7 24.6
Deferred financing cost - (5.9) -
Excess tax benefits from share-based payments arrangements 10.7 - -
Purchase of treasury stock - - (13.1)
Redemption of Series C preferred stock - - (10.0)
Other 0.1 (0.6) 2.9
---------------------------
Net cash provided by (used in) financing activities (354.4) 905.8 (20.6)
---------------------------
Effect of currency rate changes on cash and cash equivalents 4.3 (8.8) 10.0
---------------------------
Increase (decrease) in cash and cash equivalents (45.0) (255.2) 72.7
Cash and cash equivalents, beginning of year 68.6 323.8 251.1
---------------------------
Cash and cash equivalents, end of year $ 23.6 $ 68.6 $323.8
---------------------------
See accompanying Notes to Consolidated Financial Statements
39
CYTEC INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in millions)
Unrealized
net
Years ended Additional (losses)
December 31, Additional Unearned Accumulated Minimum gains on Accumulated
2006, 2005 Preferred Common Paid-in Retained Compen- Pension Pension cash flow Translation Treasury
and 2004 Stock Stock Capital Earnings sation Liabilities Liability hedges Adjustments Stock Total
--------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31,
2003 $ 0.1 $ 0.5 $ 122.2 $1,003.4 $ (5.3) $ - $ (96.8) $ 0.3 $ 38.0 $(286.5) $775.9
--------------------------------------------------------------------------------------------------------------------------------
Net earnings - - - 131.0 - - - - - - $131.0
Other
comprehensive
income
Minimum
pension
liability
adjustment,
net of
taxes of
$17.6 - - - - - - (11.7) - - - (11.7)
Unrealized
net gains
on
derivative
instruments - - - - - - - (0.8) - - (0.8)
Translation
adjustments - - - - - - - - 35.3 - 35.3
-------
Comprehensive
income $153.8
Award of, and
changes in,
performance and
restricted stock - - 2.6 - (2.4) - - - - 0.3 0.5
Amortization of
performance and
restricted stock - - - - 4.6 - - - - - 4.6
Purchase of
treasury stock - - - - - - - - - (13.1) (13.1)
Redemption of
preferred stock (0.1) - - (9.9) - - - - - - (10.0)
Dividends: -
Common stock
outstanding - - - (15.7) - - - - - - (15.7)
Deferred and -
unvested
common stock - - - (0.3) - - - - - - (0.3)
Exercise of stock
options - - (13.7) - - - - - - 38.3 24.6
Tax benefit on
stock options - - 11.7 - - - - - - - 11.7
--------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2004 $ - $ 0.5 $ 122.8 $1,108.5 $ (3.1) $ - $ (108.5) $ (0.5) $ 73.3 $(261.0) $932.0
--------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
40
CYTEC INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(Dollars in millions)
Balance at
December 31, 2004 $- $0.5 $ 122.8 $1,108.5 $(3.1) $ - $(108.5) $(0.5) $ 73.3 $(261.0) $932.0
----------------------------------------------------------------------------------------------------------------------------------
Net earnings - - - 59.1 - - - - - $ 59.1
Other comprehensive
income:
Minimum pension
liability
adjustment, net
of taxes of $7.3 - - - - - - (11.7) - - - (11.7)
Reduction in
minimum pension
liability
resulting from
divestiture of
CYRO - - - - - - 4.6 - - - 4.6
Unrealized net
gains on
derivative
instruments - - - - - - - 0.9 - - 0.9
Translation
adjustments - - - - - - - - (45.1) - (45.1)
--------
Comprehensive income $ 7.8
Award of, and changes
in, performance and
restricted stock - - 1.7 - (2.1) - - - - (0.1) (0.5)
Amortization of
performance and
restricted stock - - - - 2.7 - - - - - 2.7
Issuance of common
stock related to
acquisition - - 109.2 - - - - - - 181.6 290.8
Dividends:
Common stock
outstanding - - - (17.8) - - - - - - (17.8)
Deferred and
unvested common
stock - - - (0.1) - - - - - - (0.1)
Exercise of stock
options - - (3.6) - - - - - - 21.3 17.7
Tax benefit on stock
options - - 5.5 - - - - - - - 5.5
----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2005 $- $0.5 $ 235.6 $1,149.7 $(2.5) $ - $ (115.6) $ 0.4 $ 28.2 $(58.2) $1,238.1
----------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of
adjustment resulting
from the adoption of
SAB 108 , net of tax - - - 7.5 - - - - - - 7.5
----------------------------------------------------------------------------------------------------------------------------------
Adjusted Balance at
January 1, 2006 $- $0.5 $ 235.6 $1,157.2 $(2.5) $ - $ (115.6) $ 0.4 $ 28.2 $ (58.2) $1,245.6
Net earnings - - - 194.9 - - - - - - 194.9
Other comprehensive
income:
Minimum pension
liability
adjustment, net
of taxes of
$11.5 - - - - - - 18.7 - - - 18.7
Unrealized net
gains on
derivative
instruments - - - - - - - 7.4 - - 7.4
Translation
adjustments - - - - - - - - 60.6 - 60.6
--------
Comprehensive income $ 281.6
--------
Adjustment resulting
from adoption
of SAFS 123R , net of
tax - - (3.1) - 2.5 - - - - - (0.6)
Dividends:
Common stock
outstanding - - - (18.8) - - - - - - (18.8)
Deferred and
unvested common
stock - - - (0.3) - - - - - - (0.3)
Share-based
compensation - - 13.4 - - - - - - (1.5) 11.9
Exercise of stock
options - - 1.9 - - - - - - 43.5 45.4
Excess tax benefit on
stock options - - 10.7 - - - - - - - 10.7
Adjustment resulting
from adoption of SFAS
158, net of tax - - - - - (102.3) 96.9 - - - (5.4)
----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2006 $- $0.5 $ 258.5 $1,333.0 $ - $ (102.3) $ - $ 7.8 $ 88.8 $ (16.2) 1,570.1
----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
41
CYTEC INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Currencies in millions, except per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Business and Consolidation Policy: We are a global specialty
chemicals and materials company focused on developing, manufacturing and selling
value-added products. Our products serve a diverse range of end markets
including aerospace, adhesives, automotive and industrial coatings, chemical
intermediates, inks, mining and plastics. We use our technology and application
development expertise to create chemical and material solutions that are
formulated to perform specific and important functions in the finished products
of our customers. We operate on a global basis with 37% of our 2006 revenues in
North America, 43% in Europe, 14% in Asia-Pacific and 6% in Latin America. We
have manufacturing and research facilities located in 19 countries. The
consolidated financial statements include the accounts of Cytec Industries Inc.
and our subsidiaries on a consolidated basis. Intercompany transactions and
balances have been eliminated. The equity method of accounting is used for
investments in associated companies that we do not control, but for which we
have the ability to exercise significant influence on operating and financial
policy.
B. Inventories: Inventories are stated at the lower of cost or market. We
determine cost using the first-in, first-out method.
C. Currency Translation: Operations in our international subsidiaries are
recorded in local currencies which are also the functional currencies for
financial reporting purposes. The results of operations for our international
subsidiaries are translated from local currencies into U.S. dollars using the
average currency rate during each period which approximates the results that
would be obtained using actual currency rates on the dates of individual
transactions. Assets and liabilities are translated using currency rates at the
end of the period with translation adjustments recorded in accumulated
translation adjustments and recognized as a component of other comprehensive
income. Gains and losses on foreign currency transactions are recorded as
incurred in other income (expense), net.
D. Depreciation: Depreciation is provided on either the straight-line or the
straight-line composite method. Assets acquired in conjunction with the Surface
Specialties business ("Surface Specialties") of UCB SA ("UCB") and assets
outside the United States and Canada are depreciated on a straight-line basis
over the estimated useful lives of the assets. When these assets are retired or
disposed of, the net book value of assets are removed from the consolidated
balance sheet and the net gain or loss is included in the determination of
earnings from operations. Depreciation for the remainder of our assets in the
United States and Canada is provided primarily on a straight-line composite
method over the estimated useful lives of various classes of assets, with rates
periodically reviewed and adjusted if necessary. When such depreciable assets
are sold or otherwise retired from service, their costs plus demolition costs
less amounts realized on sale or salvage are charged or credited to the
accumulated depreciation account. Expenditures for maintenance and repairs are
charged to current operating expenses. Acquisitions, additions and betterments,
either to provide necessary capacity, improve the efficiency of production
units, modernize or replace older facilities or to install equipment for
protection of the environment, are capitalized. We capitalize interest costs
incurred during the period of construction of plants and equipment.
E. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed:
Long-lived assets and intangible assets with determinable useful lives are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the assets to the future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets and would be charged to earnings. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less the costs to sell. Intangible assets are amortized on a straight-line basis
over their respective estimated useful lives. Long-lived assets with indefinite
useful lives are tested for impairment annually and more often if circumstances
warrant.
F. Goodwill: We have defined our reportable segments as our reporting units for
our goodwill accounting. We test goodwill for impairment on an annual basis in
our fourth fiscal quarter and more often if events occur or circumstances change
that would likely reduce the fair value of a reporting unit to an amount below
its carrying value. When necessary, we record charges for goodwill impairments
for the amount by which the fair value is less than the carrying value of the
asset.
We use a two-step process to test goodwill for impairment. First, the reporting
unit's fair value is compared to its carrying value. We utilize a market
multiple approach to determine fair value estimates. Due to the cyclical nature
42
of our reporting units, market multiple values are determined utilizing a
three-year average. The three-year period is comprised of the prior year,
current year and one year of projected amounts. If the market multiple approach
yields a result which may indicate a possible impairment, a discounted cash flow
approach is utilized to more precisely determine the reporting unit's fair
value. If a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired, and the
second step of the impairment test would be performed. The second step of the
goodwill impairment test is used to measure the amount of the impairment loss.
In the second step, the implied fair value of the reporting unit's goodwill is
determined by allocating the reporting unit's fair value to all of its assets
and liabilities other than goodwill in a manner similar to a purchase price
allocation. The resulting implied fair value of the goodwill that results from
the application of this second step is then compared to the carrying amount of
the goodwill and an impairment charge would be recorded for the difference.
G. Cash and Cash Equivalents: Securities with maturities of three months or less
when purchased are considered to be cash equivalents.
H. Financial Instruments: Financial instruments are recorded at cost which
approximates fair value for cash and cash equivalents, receivables, certain
other assets, accounts payable, and certain other liabilities. Fair values are
determined through a combination of management estimates and information
obtained from third parties using the latest available market data. Long-term
debt is carried at amortized cost.
We use derivative instruments in accordance with our established policies to
manage exposure to fluctuations in currency exchange rates, interest rates and
certain commodity (e.g., natural gas) prices. We do not hold or issue derivative
financial instruments for trading or speculative purposes. We enter into
financial instrument transactions with either major financial institutions or
highly-rated counterparties and make reasonable attempts to diversify
transactions among counterparties, thereby limiting exposure to credit-related
and performance-related risks.
We use currency forward contracts to manage our exposure to fluctuations in
currency rates on third party and intercompany transactions denominated in
currencies other than the functional currency of the business. Our practice is
to hedge such exposures with forward contracts denominated in the same currency
and with similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction. These contracts
are reported on the consolidated balance sheet at their fair value with changes
in fair value recorded in other income (expense), net, together with the
offsetting gain or loss on the exposed asset, liability, or forecasted
transaction.
We use cross currency swaps to hedge future cash flows from euro receipts on
certain euro denominated intercompany receivables we have with our subsidiaries
against changes in the U.S. dollar to euro exchange rates. The cross currency
swaps are recorded at fair value as either assets or liabilities. Changes in
fair value include both an interest and an exchange component. The interest
component is recorded in accumulated other comprehensive income while the
exchange component is recorded in other income (expense), net together with the
offsetting gain or loss on the hedged intercompany receivables.
We use swaps to hedge certain of our utility requirements at our manufacturing
facilities. The maturities of these instruments correlate highly to the actual
purchases of the commodity and have the effect of securing predetermined prices
that we pay for the underlying commodity. While these contracts are structured
to limit our exposure to increases in commodity prices, they can also limit the
potential benefit we might have otherwise received from decreases in commodity
prices.
Financially settled forward contracts and swaps on commodities are reported at
fair value with offsetting amounts included in accumulated other comprehensive
income 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 commodity
purchases affect earnings.
I. Environmental and Other Contingent Liabilities: Accruals for environmental
remediation, maintenance and operating costs directly related to remediation,
and other contingent liabilities are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated.
It is our practice to conduct an analysis of our self-insured and insured
contingent liabilities annually and whenever circumstances change significantly.
Included in these liabilities are workers' compensation, product liability and
toxic tort claims.
Accruals for environmental liabilities and other contingent liabilities are
recorded as other liabilities with amounts expected to be paid out in the next
twelve months classified as accrued expenses at undiscounted amounts.
Probable insurance recoveries for past and future indemnity costs are recorded
in other receivables at our best estimate of the ultimate expected receipts at
undiscounted amounts. Defense and processing costs are expensed as incurred.
Probable insurance recoveries for defense and processing costs are recognized
only as actual costs are incurred.
43
In addition, we recognize the fair value of the liability for an asset
retirement obligation in the period in which it is incurred if a reasonable
estimate of fair value can be made. The present 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 we recognize a
gain or loss on settlement.
J. Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. We measure deferred tax assets and
liabilities using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the enactment date.
If repatriation of the undistributed earnings of our international subsidiaries
and associated companies is anticipated then income taxes are provided for such
earnings. We recognize the benefit of uncertain tax positions that we have taken
or expect to take on the income tax returns we file if such tax position is
probable of being sustained.
K. Postretirement Benefits: Costs are recognized as employees render the
services necessary to earn the related benefits. In September 2006, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Benefits, an amendment of FAS 87, 88,
106 and 132(R)" ("SFAS 158"). SFAS 158 requires an employer that sponsors
postretirement plans to recognize an asset or liability for the overfunded or
underfunded status of plans. Additionally, employers would be required to record
all unrecognized prior service costs and credits, unrecognized actuarial gains
and losses and any unrecognized transition obligations or assets in accumulated
other comprehensive income. Such amounts would be reclassified into earnings as
components of net periodic benefit cost/income pursuant to the recognition and
amortization provisions of the current applicable accounting literature.
Finally, SFAS 158 requires an employer to measure plan assets and benefit
obligations as of the date of the employer's statement of financial position, as
opposed to at an earlier measurement date as allowed previously. SFAS 158 does
not alter the basic approach to measuring plan assets, benefit obligations, or
net periodic benefit cost. Except for the measurement date requirement, SFAS 158
is effective for fiscal years ending after December 15, 2006. The measurement
date requirement will not be effective until fiscal years ending after December
15, 2008. We adopted SFAS 158 in the fourth quarter of 2006. The adoption of
SFAS 158 had no effect on our consolidated statements of income and cash flows
for the year ended December 31, 2006. SFAS 158 also did not have an effect on
our consolidated balance sheet as of December 31, 2005 or any other prior period
financial statements presented herein. See Note 15 for further discussion of the
effect of adoption SFAS 158.
L. Revenue Recognition: We recognize revenue when persuasive evidence of an
arrangement exists, the selling price is fixed or determinable, collection is
reasonably assured and title and risk of loss has passed to our customers.
Customer rebates are estimated and recognized as a reduction of sales as such
rebates are being earned.
M. Stock-Based Compensation:
In December, 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R addresses the accounting for transactions in
which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. SFAS 123R supersedes Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
and requires companies to recognize compensation cost in an amount equal to the
fair value of share-based payments, such as stock options granted to employees.
On January 1, 2006, we adopted SFAS 123R using the modified prospective method.
Under this method, we are required to record compensation cost for the unvested
portion of previously granted awards that remain outstanding as of January 1,
2006. Results for prior periods have not been restated. We previously accounted
for our share-based compensation under the recognition and measurement principle
of APB No. 25 and related interpretations. Prior to the SFAS 123R adoption, no
share-based compensation cost was reflected in net income for stock options, as
all stock options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant. Also, prior to the SFAS 123R
adoption, compensation cost for restricted ("non-vested") stock was recorded
based on the market value on the date of grant, and compensation cost for
performance stock was recorded based on the market price of our common stock at
the end of each period through the date of vesting. Compensation cost for
non-vested and performance stocks was charged to unearned compensation in
Stockholders' Equity and amortized to expense over the requisite vesting
periods. Stock appreciation rights payable in cash ("cash-settled SARS") were
accounted for as liabilities under APB 25. Compensation cost for cash-settled
SARS was recognized over the vesting period and through the life of the award
based on changes in the market price of our common stock over the market price
at the grant date.
44
With the adoption of SFAS 123R, unearned compensation cost of $2.5, net of
taxes, for non-vested and performance stocks was credited to additional paid-in
capital on January 1, 2006. The compensation cost for performance stock is
recorded based on the market value on the original date of grant, and not based
on the price of our common stock at the end of each reporting period as formerly
was required under APB No. 25. Compensation cost for cash-settled SARS is
recognized based on the fair value of the award at the end of each period
through the date of vesting, also a change from APB No. 25. Compensation cost
for non-vested stock is still based on the market value on the date of grant
under SFAS 123R. SFAS 123R requires that we estimate a forfeiture rate for all
share-based awards. We monitor share option exercise and employee termination
patterns to estimate forfeiture rates within the valuation model. Prior to the
SFAS 123R adoption, forfeitures were recorded as they occurred.
N. Newly Issued Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 is intended to clarify the accounting for uncertainty in income taxes
recognized in a company's financial statements in accordance with SFAS No. 109,
"Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on the related de-recognition, classification, interest and
penalties, accounting for interim periods, disclosure and transition of
uncertain tax positions. FIN 48 is effective for fiscal years beginning after
December 15, 2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. We are
currently assessing the expected effect of adopting FIN 48, and we do not
presently expect it to have a material impact on our consolidated financial
statements. However, we do expect to reclassify a portion of the unrecognized
tax benefits from current to non-current liabilities because payment of cash is
not anticipated within one year from the balance sheet date.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and requires additional
disclosures about fair-value measurements. SFAS 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments) and is intended to
increase the consistency of those measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. However, for some entities, the
application of SFAS 157 will change current practice. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We are still in the process of reviewing the impact. However, we
do not expect the adoption of SFAS 157 to have a material impact on our
consolidated financial statements.
In September 2006, the FASB issued Staff Position No. AUG AIR-1, "Accounting for
Planned Major Maintenance Activities" ("FSP"). This FSP would prohibit accruing
as a liability the future costs of periodic major overhauls and maintenance of
plant and equipment under the "accrue-in-advance" methodology, as the costs for
future planned major maintenance activities do not meet the definition of a
liability. Our scheduled turnaround activities in our Building Block Chemicals
segment are considered planned major maintenance activities. This FSP is
effective for fiscal years beginning after December 15, 2006, and retrospective
application would be required. The adoption of this FSP on January 1, 2007 will
change our current accounting. We estimate the impact of this new pronouncement
on our consolidated balance sheet to be an increase to our beginning adjusted
retained earnings as of January 1, 2007 of approximately $6.4 after the
retrospective adjustments are made.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 108, "Considering the Effects of Prior Year Misstatements
When Quantifying Misstatements in Current Year Financial Statements" ("SAB
108"). SAB 108 clarifies the staff's views regarding the process of quantifying
financial statement misstatements. The SEC staff believes registrants must
quantify errors using both a balance sheet and income statement approach and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 allows registrants to adjust prior year financial statements
for errors in the carrying amount of assets and liabilities as of the beginning
of this fiscal year that were immaterial under a company's previous method for
evaluating errors but material under the method prescribed by SAB 108, with an
offsetting adjustment being made to the opening balance of retained earnings. We
adopted SAB 108 during the fourth quarter of 2006, effective January 1, 2006. In
accordance with SAB 108, we have adjusted beginning retained earnings for fiscal
2006 in the accompanying consolidated financial statements related to the
eliminations or reductions of our general liability reserve, general inventory
reserve, and reserve for doubtful accounts for $2.2, $4.3, and $1.0, net of tax,
respectively. These reserves had been recorded principally on the books of
American Cyanamid Company ("Cyanamid"), our former parent company, before the
date of our spin-off in 1993 or shortly thereafter and remained on our financial
statements since that time. The reserves were recorded primarily to recognize
uncertainties regarding the valuations of various liabilities, inventories, and
accounts receivables assumed from Cyanamid in conjunction with the spin-off.
These previously unadjusted reserves were not considered material to our
financial statements under our old method of quantifying misstatements (i.e.,
the "income statement" approach). However, in accordance with the dual approach
outlined in SAB 108, management determined that the impact of previously
unadjusted reserves was material to our consolidated financial statements as of
January 1, 2006.
45
The impact of each of the items noted above on the January 1, 2006 balances are
presented below:
General liability reserve $ 3.6
General inventory reserve 7.0
Reserve for doubtful accounts 1.7
-------
Total 12.3
Less deferred tax impact (4.8)
-------
Adjustment to retained earnings $ 7.5
=======
O. Use of Estimates: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions. These estimates or assumptions affect the reported
amounts and disclosures. For example, estimates are used when accounting for
allowance for doubtful accounts, inventory valuations, useful lives of tangible
and intangible assets, recoverability of goodwill, accrued expenses,
environmental and other contingent liabilities, pension and other postretirement
benefits, income tax valuation allowances and assumptions utilized in
determining share-based compensation. Actual results could differ from these
estimates. Accounting estimates require the use of judgment regarding uncertain
future events and their related effects and, accordingly, may change as
additional information is obtained.
P. Reclassifications: Certain reclassifications to prior year balance sheet
information for inventories, other current assets, other assets, and deferred
tax assets and liabilities have been made.
46
2. ACQUISITION AND RELATED EVENTS
On February 28, 2005, we acquired the Surface Specialties business ("Surface
Specialties") of UCB SA ("UCB") for cash and stock valued at $1,799.7, of which
$1,508.9 ((euro)1,138.5 at 1.325 U.S. dollar per euro) was paid in cash and the
balance was paid in 5,772,857 shares of Cytec common stock ($290.8 at $50.37 per
Cytec share). During September 2005, we received $25.4 from UCB representing a
reduction of the purchase price for finalization of working capital amounts as
of the acquisition date. After considering the final working capital adjustment
and transaction costs incurred of $15.3, the acquisition was valued at $1,789.6.
The acquisition complemented our existing product lines by significantly
increasing our product offering to the coatings and additives industries
including the general industrial, automotive, architectural, plastic, graphic
arts and wood sectors.
In accordance with the purchase agreement, contingent consideration up to a
maximum of (euro)50.0 was to be determined in January 2006 based upon 2005
year-end results, of which (euro)20.0 ($26.5 at 1.325 U.S. dollar per euro) was
prepaid at closing. In view of the parties' expectation that the contingent
consideration would not be payable, we were refunded the payment during
September 2005 provided that a final year-end determination of the actual
contingent payment due, if any, would still be made. Subsequently, we determined
that no amounts were due under this agreement.
Upon closing, UCB became the owner of approximately 12.5% of our outstanding
common shares. We entered into a stockholder's agreement (the "Stockholder's
Agreement") with UCB which provides, subject to various exceptions, that UCB
must reduce its stake to less than 9% within three years, less than 7% within
four years and less than 5% within five years and which provides that UCB will
be prohibited from purchasing additional shares of our common stock or causing,
advocating or participating in a change of control in the ownership of Cytec.
The Stockholder's Agreement also contains customary terms and conditions
including an obligation of UCB to vote its shares of Cytec common stock in
accordance with our Board of Directors' recommendation on certain matters.
Pursuant to regulatory approvals, we were required to divest the Surface
Specialties amino resins ("SSAR") product line. On August 31, 2005, we sold SSAR
to affiliates of INEOS Group Limited ("INEOS") for cash consideration of
(euro)64.0 ($78.2 at 1.22 U.S. dollar per euro). In the fourth quarter of 2005,
we paid $1.6 to INEOS representing a reduction of the selling price for final
working capital adjustments as of the acquisition date. After considering the
final working capital adjustment, the sale was valued at $76.6 ($72.8 net of
disposition related expenses of $3.8). From acquisition through the date of
sale, SSAR was classified as a discontinued operation. Revenues of SSAR were
$74.3 for the six months ended August 31, 2005 (acquisition through date of
sale). The net proceeds realized from the divestiture of SSAR were used to
reduce acquisition related debt.
In late 2004, we entered into $642.9 of forward-starting interest rate swaps to
hedge the benchmark interest rate and credit spread on certain debt anticipated
to be issued in 2005 in connection with the acquisition. Due to a subsequent
reduction in borrowing requirements, we liquidated $25.0 of these swaps in March
2005 at a cost of $0.4 and $60.4 of these swaps in June 2005 at a cost of $3.7.
In September 2005, we settled the remaining outstanding swaps at the same time
that we priced our public debt offering. The termination payment of $27.4 was
paid in October 2005. The swaps were marked to market and recorded in earnings
until their termination. The net pre-tax impact of the mark to market value on
these swaps was a loss of $25.0 in 2005 and $6.5 in 2004, which was recorded in
other income (expense), net.
We had also previously entered into currency forward contracts that related to
approximately 87% of the euro exposure of (euro)1,190.0 for the cash component
of the Surface Specialties acquisition. The forward contracts, which matured on
February 28, 2005, were marked to market and recorded currently in earnings
until their maturity. The impact on earnings for the three months ended March
31, 2005 of the marked to market adjustment on these forward contracts was a net
pre-tax expense of $19.2 and was recorded in other income (expense), net. In
2004, we recorded a gain of $33.3 on currency forward transactions entered into
in connection with the acquisition.
The following table summarizes the estimated fair value of the assets acquired
and the liabilities assumed in the acquisition. We completed the purchase price
allocation in the first quarter of 2006.
---------------------------------------------------------------------
Cash $ 34.6
Current deferred tax assets 28.3
Other current assets 533.1
Assets of discontinued operations held for sale 91.8
Property, plant and equipment 447.9
Goodwill 725.7
Acquired intangible assets 490.4
Acquired in-process research and development 37.0
Other assets 31.7
---------------------------------------------------------------------
Total assets acquired $2,420.5
---------------------------------------------------------------------
Current liabilities $ 285.3
Liabilities of discontinued operations held for sale 26.5
Long-term deferred tax liabilities 181.9
Long-term debt 9.9
Other long-term liabilities 127.3
---------------------------------------------------------------------
Total liabilities assumed 630.9
---------------------------------------------------------------------
Net assets acquired $1,789.6
---------------------------------------------------------------------
47
The $725.7 of goodwill is not tax deductible, and $38.0 was allocated to our
Cytec Performance Chemicals segment and $687.7 was allocated to our Cytec
Surface Specialties segment. The acquired intangibles consist of
customer-related ($382.6), marketing-related ($96.5) and technology-related
intangibles ($11.3), and are being amortized on a straight-line basis over
periods of 15 years. Included in marketing-related intangibles is $45.7 relating
to certain trade names which were originally indefinite useful lives (see Note
11 for information on the revision to this conclusion to 40 year life in the
second quarter of 2006). Immediately following the acquisition, $37.0 of
acquired in-process research and development costs were written off.
The acquisition has been accounted for under the purchase method of accounting
and the results of operations have been included in the consolidated financial
statements from the date of acquisition.
Following are the unaudited pro forma combined results of operations for the
years ended December 31, 2005 and 2004 as if Cytec and Surface Specialties had
been combined and the sale of SSAR had been completed as of January 1, 2005.
Additionally, the write-off of in-process research and development costs and the
cost of sales effects of the inventory valuation adjustments were excluded from
the 2005 amounts as they are considered non-recurring charges. The pro forma
results do not include any anticipated cost savings or other effects of the
planned integration and are not indicative of the results which would have
actually occurred if the business combination had been in effect on the dates
indicated, or which may result in the future. The pro forma information set
forth below considers the following factors: the issuance of 5,772,857 shares of
our common stock to UCB in connection with the acquisition; the issuance of
acquisition-related debt of $1,325.0 at a weighted-average interest rate of
3.79% and the associated increase in interest expense, net of the after-tax
proceeds from the sale of SSAR used to pay down such debt; a net reduction in
cash and an associated reduction in interest income as a result of the on-hand
cash utilized to purchase Surface Specialties; increased amortization of
acquisition intangibles; decreased depreciation expense based on asset values
and estimated useful lives included in the valuation report; amortization of
deferred financing costs; and the tax effects of each of these items.
Years Ended December 31,
--------------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------------
Revenues $3,150.6 $ 2,917.3
Earnings from continuing operations $ 110.8 $ 164.4
Earnings from continuing operations per
common share:
Basic $ 2.40 $ 3.63
Diluted $ 2.34 $ 3.53
--------------------------------------------------------------------------------
3. DIVESTITURES
In July 2006, we announced we had reached a definitive agreement to sell our
water treatment chemicals and acrylamide product lines to Kemira Group
("Kemira"). In October 2006, we completed the first of three phases of the
closing, which included the product lines themselves, the related intellectual
property, the majority of the manufacturing sites and essentially all of the
sales, marketing, manufacturing, R&D and technical services personnel . The
manufacturing sites in the first phase included Mobile, Alabama, Longview,
Washington, Bradford, UK, and the acrylamide manufacturing plant at our Fortier,
Louisiana facility which will be operated by our personnel under a long term
manufacturing agreement. The sale of our Botlek manufacturing site in the
Netherlands was completed and transferred to Kemira in January 2007 as part of
the phase two closing, and certain net assets at various subsidiaries in
Asia/Pacific and Latin America are expected to close within the next three
months as the last phase. We will continue to supply acrylonitrile to the Kemira
acrylamide plants at Fortier and Botlek under long term supply agreements. In
addition, under various long term manufacturing agreements, we will manufacture
certain water treatment products for Kemira at several of our sites and Kemira
will manufacture for us certain mining chemicals at the Mobile, Alabama and
Longview, Washington sites and various other products at the Botlek site. These
contracts were all deemed to be at estimated fair value.
The timing of the flow of funds is as follows: approximately $208.0 was received
in October for the first closing, approximately $21.0 for the second closing in
January 2007, and an estimated $10.0 upon completion of the transfer of the
48
assets at the various subsidiaries. We also recorded a receivable of
approximately $6.0 as a result of a working capital adjustment from the first
phase closing we expect to receive per the terms of the contract in 2007,
bringing estimated total proceeds to $245.0. The remaining subsidiary net asset
closings are subject to certain conditions and the amounts could change due to
final working capital transferred. The 2006 nine month sales of the two product
lines while owned by Cytec were approximately $231.1. We recorded a pre-tax gain
of $75.5 ($59.6 after-tax) related to the first phase closing in the fourth
quarter of 2006, and expect a smaller gain in 2007 from the other closings.
The assets and liabilities of our water treatment chemicals and acrylamide
product lines included in the December 31 , 2006 consolidated balance sheet are
comprised of:
-------------------------------------------------------------
Accounts receivable $ 6.5
Inventories 4.3
Property, plant and equipment 26.6
Other assets 1.4
-------------------------------------------------------------
Assets held for sale $ 38.8
-------------------------------------------------------------
Accounts payable $ 3.4
Accrued liabilities 12.7
Other noncurrent liabilities 0.2
-------------------------------------------------------------
Liabilities held for sale $ 16.3
-------------------------------------------------------------
On June 1, 2005, we sold our 50% ownership in CYRO Industries ("CYRO") to our
joint venture partner Degussa Specialty Polymers, an affiliate of Degussa AG,
for cash consideration of $95.0 plus $5.4 for working capital adjustments. The
proceeds of this transaction essentially recovered the carrying value of our
investment in CYRO. As discussed in Note 2, SSAR was divested on August 31,
2005. Net proceeds of the sales were used to reduce debt incurred to fund the
Surface Specialties acquisition.
4. RESTRUCTURING OF OPERATIONS
In accordance with our policy, restructuring costs are included in our corporate
unallocated operating results consistent with management's view of its
businesses.
In 2006, based on forecasted cash flow information, we determined that our
manufacturing facility in Dijon, France and related intangible assets were
impaired. This facility manufactures solvent-borne alkyd and solvent-borne
acrylic based resins in our Cytec Surface Specialties ("CSS") segment, which are
used in the coating industry for sale in the European market. These mature
products are in a declining market with supplier overcapacity with severe price
erosion and are generating losses. We recorded an impairment charge of $15.5 to
write-down the carrying value of the manufacturing facility and related
intangible assets down to zero as we do not believe the assets are saleable and
the outlook for recovery of products it manufactures is not positive. Of the
impairment charge, $14.1 was charged to manufacturing cost of sales and $1.4 was
charged to amortization of acquisition intangibles. Also in 2006, after the
appropriate consultations with the Works Council, we decided to close the
facility and commence shutdown activities. At that time, we recorded a
restructuring charge of $8.4, based on estimated severance costs for eliminating
60 positions at our Dijon, France manufacturing site. In addition, we recorded a
net restructuring charge of $1.5 primarily for the severance costs for
eliminating 8 technical positions at our Indian Orchard, Massachusetts site, and
16 positions at our leased facilities in New Castle, Delaware, which operations
are relocating to our new manufacturing facility in Kalamazoo, Michigan. No
payments have been made as of December 31, 2006. The restructuring was charged
as follows: manufacturing cost of sales $7.8, selling and technical services
$0.6, research and process development $0.5, and administrative and general
$1.0.
In 2006, we recorded a restructuring charge of $22.5 of which $13.8 relates to
the impairment of fixed assets in Botlek related to our Polymer Additives
product line in our Performance Chemicals segment and the remainder relates to
the elimination of 38 positions. The restructuring costs included estimated cash
severance, reduction of prepaid pensions and retirement of fixed assets and were
charged as follows: manufacturing cost of sales $22.1, and selling expense $0.4.
Also during 2006, we recorded restructuring charges of $3.2, which related to
the elimination of a total of 35 positions associated with our Specialty
Chemicals segments. The restructuring costs, which were primarily severance
related, were charged to expense as follows: manufacturing cost of sales $1.3,
selling and technical services $0.9, research and process development $0.5 and
administrative and general $0.5.
In 2005, we recorded aggregate restructuring charges of $16.8, which related to
the elimination of 136 positions worldwide. Of the total of 136 positions, 22
related to our Cytec Engineered Materials segment and 114 related to our
Specialty Chemicals segments. The restructuring costs, which were primarily
severance related, were charged to expense as follows: manufacturing cost of
sales, $5.0; selling and technical services, $3.7; research and process
49
development, $0.8; and administrative and general, $7.3. In 2006 we reduced this
restructuring accrual by $2.5 primarily due to incurring less costs than
originally estimated as a result of fewer than expected personnel reductions
primarily due to attrition without severance and to personnel filling other open
positions. The adjustments in 2006 were charged/(credited) to expense as
follows: manufacturing cost of sales, ($1.9); selling and technical services
($0.8); research and process development, ($0.1); and administrative and general
$0.3.
A summary of the restructuring charges is outlined in the table below:
----------------------------------------------------------- -------------------------------------------------- -------------
2005 2006
Restructurings Restructurings Total
Asset 2005 and
Write- 2006 2006
Severance Severance downs Other Total Combined
----------------------------------------------------------- -------------------------------------------------- -------------
2005 charges $16.8 - - - - $16.8
Cash payments (6.3) - - - - (6.3)
----------------------------------------------------------- -------------------------------------------------- -------------
Balance
December 31, 2005 10.5 - - - - 10.5
----------------------------------------------------------- -------------------------------------------------- -------------
2006 charges - $ 19.5 $29.3 $2.3 $51.1 $51.1
Reduction of pension related prior
service costs - - - (0.7) (0.7) (0.7)
Reduction in estimated costs (2.5) - - - - (2.5)
Cash payments (7.0) (6.4) - (0.9) (7.3) (14.3)
Write-off of fixed assets and intangibles - - (29.3) - (29.3) (29.3)
Write-off of spare parts inventory - - - (0.7) (0.7) (0.7)
----------------------------------------------------------- -------------------------------------------------- -------------
Currency translation adjustments 0.4 0.4 - - 0.4 0.8
----------------------------------------------------------- -------------------------------------------------- -------------
Balance
December 31, 2006 $ 1.4 $ 13.5 $ - $ - $13.5 $14.9
----------------------------------------------------------- -------------------------------------------------- -------------
Cash payments related to the above restructurings are expected to be principally
completed in 2007, except for certain long-term severance payments.
5. SHARE-BASED COMPENSATION
As described in Note 1, we adopted SFAS 123R on January 1, 2006 and as a result,
we recorded additional charges related to stock options and stock appreciation
rights that are settled with common shares ("stock-settled SARS") of $10.4 for
the year ended December 31, 2006. The effect on net earnings, cash provided by
operating activities, and cash provided by financing activities were $6.7,
$(10.7), and $10.7, respectively, for the year ended December 31, 2006. The
effect on basic and diluted earnings per share was a reduction of $0.14 per
share for the year ended December 31, 2006. The adoption of SFAS 123R was
recorded as of January 1, 2006 and resulted in a non-cash charge for the
cumulative effect of a change in accounting principle of $2.5 ($1.6 after-tax)
for cash-settled SARS (as a result of the new requirement to record expense at
fair value) and a non-cash credit of $0.6 ($0.4 after-tax) for non-vested and
performance stocks (forfeitures estimated now, as well as grant date only market
value of the shares under award), for a net after-tax charge of $1.2. The effect
on basic and diluted earnings per share for the cumulative effect charge was
$0.02 per share.
The following table illustrates the effect on the net earnings and earnings per
share if we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", to all share-based employee compensation for the years ended
December 31, 2005 and 2004. Option forfeitures were accounted for as they
occurred and no amounts of compensation expense have been capitalized into
inventory or other assets, but instead were considered period expenses in the
pro forma amounts below:
Year Ended Year Ended
December 31, December 31,
2005 2004
--------------------------------------------------------------------------------
Net earnings as reported $ 59.1 $ 121.1
Add:
Stock-based compensation expense
included in reported net earnings, net of
related tax effects 1.6 3.0
Deduct:
Total stock-based compensation expense
determined under fair-value-based method for all
awards, net of related tax effects 7.3 7.1
--------------------------------------------------------------------------------
Pro forma net earnings $ 53.4 $ 117.0
--------------------------------------------------------------------------------
Net earnings per share:
Basic, as reported $ 1.31 $ 3.06
Basic, pro forma $ 1.18 $ 2.96
Diluted, as reported $ 1.27 $ 2.96
Diluted, pro forma $ 1.15 $ 2.87
--------------------------------------------------------------------------------
50
For stock options granted before January 1, 2005, the fair value of each stock
option grant was estimated on the date of grant using the Black-Scholes option
pricing model. For stock options and stock-settled SARS granted after January 1,
2005, the fair value of each award is estimated on the date of grant using a
binomial-lattice option valuation model. Stock-settled SARS are economically
valued the same as stock options. The binomial-lattice model considers
characteristics of fair value option pricing that are not available under the
Black-Scholes model. Similar to the Black-Scholes model, the binomial-lattice
model takes into account variables such as volatility, dividend yield, and
risk-free interest rate. However, in addition, the binomial-lattice model
considers the contractual term of the option, the probability that the option
will be exercised prior to the end of its contractual life, and the probability
of termination or retirement of the option holder in computing the value of the
option. For these reasons, we believe that the binomial-lattice model provides a
fair value that is more representative of actual experience and future expected
experience than the value calculated in previous years using Black-Scholes. The
weighted average assumptions for the years ended December 31, 2006, 2005 and
2004 are noted in the following table:
-------------------------------------------------------------------------------
2006 2005 2004
-------------------------------------------------------------------------------
Expected life (years) 5.7 5.8 5.7
Expected volatility 37.6% 38.5% 46.6%
Expected dividend yield 0.81% 0.84% 1.0%
Range of risk-free interest rate 4.4% - 4.7% 2.1% - 4.2% 3.4%
Weighted-average fair value per option $19.01 $17.78 $16.21
-------------------------------------------------------------------------------
The expected life of options granted is derived from the output of the option
valuation model and represents the period of time that options granted are
expected to be outstanding. Expected volatilities are based on the combination
of implied market volatility and our long-term historical volatility. The
risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of grant. SFAS 123R
specifies that initial accruals be based on the estimated number of instruments
for which the requisite service is expected to be rendered. Therefore, we are
required to incorporate the probability of pre-vesting forfeiture in determining
the number of expected vested options. The forfeiture rate is based on the
historical forfeiture experience and prospective actuarial analysis.
Stock Award and Incentive Plan:
The 1993 Stock Award and Incentive Plan (the "1993 Plan") provides for grants of
a variety of awards, such as stock options (including incentive stock options
and nonqualified stock options), non-vested stock (including performance stock),
stock appreciation rights (including those settled with common shares) and
deferred stock awards and dividend equivalents. At December 31, 2006, there are
approximately 5,600,000 shares reserved for issuance under the 1993 Plan.
We have utilized the stock option component of the 1993 Plan to provide for the
granting of nonqualified stock options and stock-settled SARS with an exercise
price at 100% of the market price on the date the grant. Options and
stock-settled SARS are generally exercisable in installments of one third per
year commencing one year after the date of grant and annually thereafter, with
contract lives of generally 10 years from the date of grant.
51
A summary of stock options and stock-settled SARS activity for the year ended
December 31, 2006 is presented below.
Weighted
Weighted Average
Average Remaining
Exercise Contractual Aggregate
Options and Stock-Settled SARS Number of Price Per Life Intrinsic
Activity: Units Unit (Years) Value
--------------------------------------------------------------------------------
Outstanding at December 31, 2005 5,137,923 $32.79
Granted 651,800 49.56
Exercised (1,365,912) 32.98
Forfeited (83,891) 45.73
--------------------------------------------------------------------------------
Outstanding at December 31, 2006 4,339,920 $35.00 5.2 $93.4
--------------------------------------------------------------------------------
Exercisable at December 31, 2006 3,251,454 $30.91 4.1 $83.2
--------------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted
Average
Nonvested Options and Stock-Settled Number of Grant Date Fair
SARS: Units Value Per Unit
-------------------------------------------------------------------------
Nonvested at December 31, 2005 1,101,746 $13.49
Granted 651,800 19.01
Vested (605,605) 16.84
Forfeited (59,475) 18.69
-------------------------------------------------------------------------
Nonvested at December 31, 2006 1,088,466 $18.24
-------------------------------------------------------------------------
A summary of stock options activity for the year ended December 31, 2005 and
2004 is presented below.
2005 2004
----------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-----------------------------------------------------------------------------------------
Shares under option:
Outstanding at beginning of year 5,344,434 $30.47 6,320,110 $28.31
Granted 534,900 47.61 545,070 37.14
Exercised (688,736) 25.88 (1,217,487) 20.20
Forfeited (52,675) 38.88 (303,259) 38.57
-----------------------------------------------------------------------------------------
Outstanding at end of year 5,137,923 $32.79 5,344,434 $30.47
-----------------------------------------------------------------------------------------
Options exercisable at end of year 4,036,177 $30.89 4,049,069 $30.40
-----------------------------------------------------------------------------------------
During the year ended December 31, 2006, we granted 651,800 stock-settled SARS
and did not grant any stock options. We did not grant any stock-settled SARS
before 2006. Stock-settled SARS are deemed to be equity-based awards under SFAS
123R. The weighted-average grant-date fair value of stock options and the
stock-settled SARS granted during the years ended December 31, 2006, 2005, and
2004 was $19.01, $17.78, and $16.21 per share, respectively. The total intrinsic
value of stock options exercised during the years ended December 31, 2006, 2005,
and 2004 was $29.4, $15.5, and $25.6, respectively. Treasury shares have been
utilized and reissued upon stock option exercises. The total fair value of stock
options vested during the years ended December 31, 2006, 2005, and 2004 was
approximately $9.2, $9.1, and $10.9, respectively .
As of December 31, 2006, there was approximately $8.9 of total unrecognized
compensation cost related to stock options and stock-settled SARS. That cost is
expected to be recognized over a weighted-average period of 1.6 years as the
majority of our awards vest over three years. Compensation cost related to stock
options and stock-settled SARS capitalized in inventory as of December 31, 2006
was approximately $0.4.
Prior to the adoption of SFAS 123R, we presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the
52
Statement of Cash Flows. SFAS 123R requires that the cash flows resulting from
tax benefits in excess of the compensation cost recognized for those options
(excess tax benefits) be classified as financing cash flows. Total tax benefit
realized from stock options exercised was $10.8, $5.4 and $11.6, for the years
ended December 31, 2006, 2005 and 2004, respectively. Cash received from stock
options exercised was $45.0, $17.7, and $24.6 for the years ended December 31,
2006, 2005, and 2004, respectively. As mentioned previously, our 1993 Plan also
provides for the granting of cash-settled SARS, which were granted during 2004
and 2005. Cash-settled SARS are liability-classified awards under the provisions
of SFAS 123R. Intrinsic value and cash used to settle cash-settled SARS was $0.4
and $0.1 for the years ended December 31, 2006, and 2005, respectively. There
were no cash-settled SARS exercised during 2004 as they are exercisable in
installments of one-third per year commencing one year after the date of grant
and annually thereafter, with contract lives of 10 years from the date of grant.
The total amount of before-tax expense recognized for cash-settled SARS was $3.6
(including cumulative effect of SFAS 123R), $0.1, and $1.0 for the years ended
December 31, 2006, 2005 and 2004, respectively. The liability related to our
cash-settled SARS was $4.3 at December 31, 2006.
As provided under the 1993 Plan, we have also issued non-vested stock and
performance stock. Non-vested stock is subject to certain restrictions on
ownership and transferability that lapse upon vesting. Performance stock payouts
are based on the attainment of certain financial performance objectives and may
vary depending on the degree to which the performance objectives are met.
Performance stock awarded in 2004 and 2005 relate to the 2006 and 2007
performance periods, respectively. During 2006, we granted 7,192 shares of
non-vested stock to eight non-employee directors, which vest on the third
anniversary of the date of grant. The estimated fair value of the non-vested
stock on the date of grant was $61.09 per share which was equal to the closing
market price of our stock on the date of the grant. We did not grant any
performance stock in 2006. The total amount of share-based compensation expense
recognized for non-vested and performance stock was $1.1, $2.7, and $4.6 for the
years ended December 31, 2006, 2005 and 2004, respectively.
In the event of a "change of control" (as defined in the 1993 Plan and
interpreted in accordance with the American Jobs Creation Act of 2004), (i) any
award under the 1993 Plan carrying a right to exercise that was not previously
exercisable and vested will become fully exercisable and vested, (ii) the
restrictions, deferral limitations, payment conditions and forfeiture applicable
to any other award granted under the 1993 Plan will lapse and such awards will
be deemed fully vested and (iii) any performance conditions imposed with respect
to awards shall be deemed to be fully achieved.
In November 2005, the FASB issued FASB Staff Position 123(R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-based Payment
Awards" (" FSP 123R- 3"). FSP 123R-3 provides an elective alternative transition
method of calculating the additional paid-in capital pool ("APIC Pool") of
excess tax benefits available to absorb tax deficiencies recognized subsequent
to the adoption of SFAS 123R to the method otherwise required by paragraph 81 of
SFAS 123R. After evaluating the alternative methods, we elected the alternative
transition method described in FSP 123R-3 and used this method to estimate our
APIC Pool upon adoption of SFAS 123R. Upon adoption of SFAS 123R, we calculated
our APIC Pool to be $41.4. Exercises of stock options for the year ended
December 31, 2006 increased the APIC Pool to $52.0.
6. EARNINGS PER SHARE (EPS)
Basic earnings per common share excludes dilution and is computed by dividing
net earnings by the weighted-average number of common shares outstanding (which
includes shares outstanding, less performance and 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 by the sum of the weighted-average number of common shares
outstanding for the period adjusted (i.e., increased) for all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued and any proceeds of the issuance had been used to repurchase
common stock at the average market price during the period. The proceeds are
assumed to be the sum of the amount to be paid to the Company upon exercise of
options, the amount of compensation cost attributed to future services and not
yet recognized and the amount of income taxes that would be credited to or
deducted from capital upon exercise.
In calculating basic and diluted earnings available to common stockholders per
share, there are no adjustments to income (the numerator) other than the premium
paid to redeem preferred stock of $9.9 in 2004. The following shows the
reconciliation of the weighted average shares (the denominator) used in the
calculation of diluted earnings per share:
--------------------------------------------------------------------------------
December 31, 2006 2005 2004
--------------------------------------------------------------------------------
Weighted average shares outstanding 47,453,263 45,241,738 39,548,312
Effect of dilutive shares:
Options 1,118,462 1,044,924 1,148,311
Performance/Non-vested shares 58,080 95,487 133,328
--------------------------------------------------------------------------------
Adjusted average shares outstanding 48,629,805 46,382,149 40,829,951
--------------------------------------------------------------------------------
Outstanding stock options to purchase 10,500 shares, 912,200 shares and 407,450
shares of common stock at year end 2006, 2005 and 2004, respectively, were
53
excluded from the above calculation because their inclusion would have had an
anti-dilutive effect on earnings per share. In addition, 609,260 outstanding
stock-settled SARS at December 31, 2006, were excluded from the above
calculation due to their anti-dilutive effect on earnings per share.
7. DERIVATIVE FINANCIAL INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES
Derivative Financial Instruments
In September 2005, we entered into (euro)207.9 of five year cross currency swaps
and (euro)207.9 of ten year cross currency swaps. The swaps included an initial
exchange of $500.0 on October 4, 2005 and will require final principal exchanges
of $250.0 each on the settlement date of the 5-Year Note due October 1, 2010 and
10-Year Notes due October 1, 2015 as defined in Note 12. At the initial
principal exchange, we paid U.S. dollars to counterparties and received euros.
Upon final exchange, we will provide euros to counterparties and receive U.S.
dollars. The swaps also call for a semi-annual exchange of fixed euro interest
payments for fixed U.S. dollar interest receipts. With respect to the five year
swaps, we will receive 5.5% per annum and will pay 3.784% per annum on each
April 1 and October 1, through the maturity date of the five year swaps. With
respect to the ten year swaps, we will receive 6.0% per annum and will pay
4.5245% per annum on each April 1 and October 1, through the maturity date of
the ten year swaps. The cross currency swaps have been designated as cash flow
hedges of the changes in value of the future euro interest and principal
receipts that result from changes in the U.S. dollar to euro exchange rates on
certain euro denominated intercompany receivables we have with one of our
subsidiaries. The fair value of the five year swap was $(16.9) and $5.8 at
December 31, 2006 and 2005, respectively. The fair value of the ten year swap
was $(16.4) and $2.7 at December 31, 2006 and 2005, respectively. Euro
denominated bank borrowings and a portion of the intercompany Euro denominated
loans payable of one of our subsidiaries are used to provide a partial hedge of
our net investment in our Belgium-based subsidiary, Cytec Surface Specialties
SA/NV. From time to time we also enter into designated forward euro contracts to
adjust the amount of the net investment hedge. At December 31, 2006, we had
designated forward contracts to purchase (euro)58.0 and did not have any
designated forward contracts at December 31, 2005.
At December 31, 2006 and 2005, the currency and net contractual amounts of
forward contracts outstanding translated into U.S. dollar equivalent amounts
were as follows:
December 31, Buy
2006 ----------------------------------------------------------
Pound Canadian Australian U.S.
Sell Euro Sterling Dollar Dollar Dollar
-------------------------------------------------------------------------------
U.S. Dollar $91.3 $8.5 $12.0 $14.5 -
Euro - 6.8 - - -
Norwegian Krone 1.5 - - - -
Japanese Yen - - - - $3.4
Brazilian Real - - - - 4.7
Taiwan Dollar - - - - 6.0
Other 1.5 - - - -
-------------------------------------------------------------------------------
December 31, Buy
2005 ----------------------------------------------------------
Pound Canadian Australian U.S.
Sell Euro Sterling Dollar Dollar Dollar
-------------------------------------------------------------------------------
U.S. Dollar $11.8 - $3.5 $4.5 -
Euro - $7.3 - - -
Norwegian Krone 2.4 - - - $7.8
Japanese Yen - - - 3.8 -
Other 1.3 - - - -
-------------------------------------------------------------------------------
The fair value of currency contracts, based on exchange rates at December 31,
2006 and 2005 was approximately $1.3 unfavorable and $0.1 favorable,
respectively.
54
Commodity Hedging Activities
At December 31, 2006 and 2005, we had outstanding natural gas swaps with a fair
value gain/(loss) of $(4.3) and $1.7, net of taxes, respectively.
8. ASSOCIATED COMPANY AND MINORITY INTERESTS
Upon acquisition of Surface Specialties, Cytec acquired a 50% ownership interest
in SK Cytec Co., Ltd. ("SK Cytec"), a joint venture that manufactures and sells
certain similar products to those sold by Surface Specialties. The operations of
SK Cytec are not material to the results of our operations.
Upon acquisition of Surface Specialties, we also acquired ownership interests in
two majority-owned entities for which the net assets and results of operations
are consolidated. The earnings associated with the minority ownership interests
are included in other income (expense), net and totaled $0.8 and $0.7 for the
years ended December 31, 2006 and 2005, respectively. The minority ownership
interests in the net assets of these entities are included in other noncurrent
liabilities and totaled $2.2 and $2.1 as of December 31, 2006 and 2005,
respectively.
9. INVENTORIES
Inventories consisted of the following:
December 31, 2006 2005
------------------------------------------------------------------------
Finished goods $333.4 $288.4
Work in progress 26.4 26.3
Raw materials and supplies 114.8 110.0
------------------------------------------------------------------------
Total inventories $474.6 $424.7
------------------------------------------------------------------------
10. PLANTS, EQUIPMENT AND FACILITIES
December 31, 2006 2005
------------------------------------------------------------------------
Land and land improvements $ 88.9 $ 85.6
Buildings 288.8 327.8
Machinery and equipment 1,451.8 1,596.9
Construction in progress 66.0 54.0
------------------------------------------------------------------------
Plants, equipment and facilities, at cost $ 1,895.5 $ 2,064.3
------------------------------------------------------------------------
The average composite depreciation rates utilized in the U.S. and Canada,
expressed as a percentage of the average depreciable property in service, were
4.9% in 2006, 5.2% in 2005 and 5.8% in 2004. Gross cost of the assets
depreciated under the composite method in the U.S. and Canada totaled $1,152.5
and $1,185.6 as of December 31, 2006 and 2005, respectively. Depreciation is
calculated using the straight line depreciation method for assets at the
remainder of our locations with the estimated useful lives of these assets
ranging from 4 to 40 years.
11. GOODWILL AND OTHER ACQUISITION INTANGIBLES
Following are the changes in goodwill by segment.
Cytec Cytec Cytec
Performance Surface Engineered
Chemicals Specialties Materials Corporate Total
-------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2004 $ 63.2 $ 28.3 $ 247.5 $ 0.7 $ 339.7
Purchase adjustment (1) (0.1) - - - (0.1)
Currency exchange 1.9 1.0 (0.1) - 2.8
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ 65.0 $ 29.3 $247.4 $ 0.7 $ 342.4
2005 acquisition 38.0 690.3 - - 728.3
Purchase adjustment (2) - - (6.3) - (6.3)
Currency exchange (1.5) (50.9) 0.2 - (52.2)
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ 101.5 $668.7 $241.3 $ 0.7 $1,012.2
2006 divestiture (15.2) - - - (15.2)
Purchase adjustment (3) - (3.3) - - (3.3)
Currency exchange 1.9 47.0 (0.1) - 48.8
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2006 $ 88.2 $712.4 $241.2 $ 0.7 $1,042.5
-------------------------------------------------------------------------------------------------------------------------
(1) Includes purchase accounting adjustments related to various items, primarily
for revision of pension liabilities associated with our 2003 acquisition of
certain product lines of Avecia.
(2) Includes a reduction of $6.3 as a result of the favorable resolution of a
tax contingency related to a prior acquisition. (3) Includes a reduction of
$1.2 from final purchase price allocation adjustments and a $1.4 reduction
related to the reversal of a
domestic and international valuation allowance, for a total of $2.6, which
represents the closing purchase price allocation adjustment for the 2005
Surface Specialties acquisition made early in 2006, and a $0.7 reduction
related to pre-acquisition tax attributes associated with the same
acquisition recorded later in 2006.
55
Other acquisition intangibles consisted of the following major classes:
Weighted
Average
Useful Life Gross Carrying Accumulated Net Carrying
(years) Value Amortization Value
-------------------------------------------------------------------------------------------------------------
December 31, 2006 2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------------
Technology-based 15.2 $53.9 $52.2 $(19.1) $(15.0) $34.8 $37.2
Marketing-related < 2.0 1.9 - (1.2) - 0.7 -
Marketing-related 15.8 62.3 58.9 (15.0) (9.0) 47.3 49.9
Marketing-related 40.0 43.6 - (0.5) - 43.1 -
Marketing-related Indefinite - 41.8 - - - 41.8
Customer-related 15.0 416.5 389.6 (56.3) (27.0) 360.2 362.6
------------------------------------------------------------------
Total $578.2 $ 542.5 $(92.1) $(51.0) $486.1 $ 491.5
-------------------------------------------------------------------------------------------------------------
Amortization of acquisition intangibles for the year ended December 31, 2006 and
2005 was $37.8 and $30.3, respectively. Amortization expense for the year ended
December 31, 2006 includes $1.4 related to the impairment of certain
marketing-related assets as a result of closing our manufacturing facility in
France (see Note 4). Amortization expense for the year ended December 31, 2005
includes ten months of amortization of the acquisition intangibles associated
with our purchase of Surface Specialties. Assuming no change in the gross
carrying amount of acquisition intangibles and the currency exchange rates
remain constant, the estimated future amortization expense for the year 2007 is
$35.1, for the years 2008 through 2009 is $34.5 per year, and for the years 2010
through 2011 is $34.3 per year.
At December 31, 2005, $41.8 of marketing-related intangibles related to trade
names in the Radcure product line purchased in the Surface Specialties
acquisition were classified as having indefinite lives. Management performed its
annual review of non-amortizable intangible assets in the second quarter of 2006
following completion of the 2006 strategic planning process. As a result, the
strategic plan included decisions to cease utilization of two minor trade names
in the Radcure portfolio, one in September 2006 and the other by the end of
2007. As of June 30, 2006, the fair value of these two trade names was
determined to be $1.8 and have been reclassified accordingly in the table above.
The first has been fully amortized during the second quarter and the second is
being amortized through the end of 2007. In addition, management revised its
estimate of the useful life of the remaining Radcure trade name portfolio from
indefinite to an estimated life of 40 years. As of December 31, 2006, the
remaining portion of the Radcure trade name had a fair value of $43.8. This has
also been reclassified in the table above and amortization of these trade names
began effective July 1, 2006.
12. DEBT
Long-term debt, including the current portion, consisted of the following:
December 31,
------------
2006 2005
---------------------------------------------------------
Carrying Carrying
Face Value Face Value
---------------------------------------------------------
Five-Year Term Loan Due February 15, 2010 $ 52.6 $ 52.6 $ 461.2 $ 461.2
Five-Year Revolving Credit Line Due February 15, 2010 42.0 42.0 - -
6.75% Notes Due March 15, 2008 100.0 99.3 100.0 98.8
5.5% Notes Due October 1, 2010 250.0 249.7 250.0 249.6
4.6% Notes Due July 1, 2013 200.0 201.5 200.0 201.7
6.0% Notes Due October 1, 2015 250.0 249.4 250.0 249.4
Other 7.3 7.3 16.0 16.0
---------------------------------------------------------
$ 901.9 $ 901.8 $ 1,277.2 $ 1,276.7
Less: Current maturities 1.4 1.4 51.2 51.2
---------------------------------------------------------
Long-term Debt $ 900.5 $ 900.4 $ 1,226.0 $ 1,225.5
-----------------------------------------------------------------------------------------------------------------------
56
The fair value of our long-term debt, including the current portion, based on
dealer quoted values, was $887.4 at December 31, 2006, and $1,243.5 at December
31, 2005.
In February 2005, we entered into credit agreements totaling $1,775.0 in
preparation for our acquisition of Surface Specialties. The agreements included
a $725.0 unsecured 5-year term loan facility, a $700.0 364-day credit facility,
and a $350.0 5-year revolving credit facility. We borrowed $725.0 under the term
loan facility and $600.0 under the 364-day credit facility both at interest
rates based on a floating LIBOR rate plus an applicable margin which is based on
our credit rating and is subject to change (1.0% at December 31, 2006). The
$725.0 facility requires amortization payments equal to the lesser of $72.5 or
the then outstanding balance by December 31 of each year from 2005 through 2008
with a final payment due February 15, 2010. As of December 31, 2006, we have
prepaid all of the December payments through 2008. The revolving credit facility
provides additional liquidity for general corporate purposes. Borrowing against
this facility totaled $42.0 at December 31, 2006. At December 31, 2005, we had
no outstanding borrowing against this facility. The facilities contain covenants
that are customary for such facilities; including subsequent amendments to allow
prepayments under the term loan to be applied in forward order of maturity and,
pursuant to an amendment dated December 31, 2005, to add back specified
restructuring charges in the determination of EBITDA under the revolving credit
and term loan facilities.
In order to take advantage of current interest rates, we elected to redeem the
Mandatory Par Put Remarketed Securities ("MOPPRS") in May, 2005, at the optional
redemption price of $141.0. The optional redemption price represented the $120.0
principal amount of the securities and a $21.0 pre-tax interest charge for
redemption prior to their final maturity. The redemption provided us with the
ability to refinance this debt at a significantly lower cost and a shorter
tenor. Upon redemption, we recognized additional interest expense of $1.0 from
amounts related to the unamortized put premium and rate lock agreements for
these securities. The total expense of $22.0 was recorded in 2005 in interest
expense, net.
During October 2005, we sold $250.0 principal amount of 5.5% Notes due October
1, 2010 and $250.0 principal amount of 6.0% Notes due October 1, 2015 (the
"5-Year Notes" and the "10-Year Notes," respectively, and collectively, the
"Notes"). The Notes were offered under our $600.0 shelf registration statement.
We received approximately $495.1 in net proceeds from the offering after
deducting the underwriting discount and other estimated offering expenses. The
net proceeds from the offering were used to repay all amounts outstanding under
our unsecured 364-day facility and our revolving credit facility, which was
approximately $417.5 and $66.2, respectively. The 364-day facility is now
terminated. The Notes pay interest on each April 1 and October 1, commencing on
April 1, 2006 through their respective due dates. The Notes are unsecured and
may be redeemed in whole or in part, at our option at any time subject to a
prepayment adjustment.
The weighted average interest rate on all of our debt was 4.9% for 2006 and 4.4%
for 2005. The weighted-average interest rate on short-term borrowing outstanding
as of December 31, 2006 and 2005 was 4.6% and 4.7%, respectively.
At December 31, 2006 and 2005, we had approximately $91.1 and $92.4,
respectively, of non-U.S. credit facilities. There were outstanding borrowings
of $47.4 and $48.7 under these facilities at December 31, 2006 and 2005,
respectively.
Cash payments during the years ended December 31, 2006, 2005 and 2004, included
interest of $56.1, $75.3 and $20.2, respectively. Included in interest expense,
net, for the years ended December 31, 2006, 2005 and 2004, is interest income of
$1.6, $3.7 and $5.5, respectively.
As of December 31, 2006, we may borrow up to an additional $308.0 under our
$350.0 revolving credit facility. Borrowing against this facility totaled $42.0
at December 31, 2006.
Maturities of long-term debt for the next five years follow:
-----------------------------------------------------------------
Payments Due by year
-----------------------------------------------------------------
2007 2008 2009 2010 2011 Thereafter Total
-----------------------------------------------------------------
Long-term debt $ 1.4 $101.4 $1.4 $345.9 $ - $ 451.7 $ 901.8
-----------------------------------------------------------------
57
13. CONTINGENCIES AND COMMITMENTS
Environmental and Related Matters
We are subject to substantial costs arising out of environmental laws and
regulations, which include obligations to remove or limit the effects on the
environment of the disposal or release of certain wastes or substances at
various sites or to pay compensation to others for doing so.
Our most significant environmental liabilities relate to remediation and
regulatory closure obligations at manufacturing sites now or formerly owned by
us. We are 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 us, despite the involvement of other
PRPs. In some cases, we are one of several hundred identified PRPs, while in
others we are the only one or one of only a few. Generally, where there are a
number of financially solvent PRPs, liability has been apportioned, or we
believe, based on our 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 our business, we are
informed of, and receive inquiries with respect to, additional sites that may be
environmentally impaired and for which we may be responsible.
As of December 31, 2006 and 2005, the aggregate environmental related accruals
were $102.7 and $102.9, respectively, of which $7.4 and $7.5, respectively, are
included in accrued expenses with the remainder included in other noncurrent
liabilities. Environmental remediation spending, for the years ended December
31, 2006, 2005 and 2004, was $4.8, $6.6 and $9.4, respectively. In 2005, we
increased our reserves by $4.4 as a result of our agreement in principle to
settle claims by a third party for the costs of environmental remediation at a
manufacturing site operated by the former American Cyanamid Company ("Cyanamid")
prior to 1944. In connection with our spin-off from Cyanamid in 1993, we agreed
to indemnify Cyanamid for claims of this nature. Under the terms of the
settlement, the third party released all claims and indemnified us against
third-party environmental remediation claims arising from the alleged
contamination at the site. Although we believed that we had meritorious defenses
to this claim, we agreed to the settlement to avoid incurring additional legal
fees and any risk of an adverse outcome in any related litigation. During 2004,
we recorded a pre-tax charge of $6.1 in connection with the settlement of
several environmental and toxic tort lawsuits which were all related to a single
manufacturing site operated by Cyanamid prior to 1963. The full settlement which
was paid in 2004 amounted to $8.6, of which $2.5 was charged against a
previously established environmental remediation reserve for these matters.
These accruals can change substantially due to such factors as additional
information on the nature or extent of contamination, methods of remediation
required, changes in the apportionment of costs among responsible parties and
other actions by governmental agencies or private parties or if we are named in
a new matter and determine that an accrual needs to be provided or if we
determine that we are not liable and no longer require an accrual.
At December 31, 2006 and 2005, the asset retirement liability was $43.1 and
$40.1, respectively, which is included in other liabilities. Accretion and
depreciation expense for the years ended December 31, 2006, 2005 and 2004
totaled $4.1, $3.1 and $1.6, respectively.
Other Contingencies
We are the subject of numerous lawsuits and claims incidental to the conduct of
our or certain of our predecessors' businesses, including lawsuits and claims
relating to product liability, personal injury including asbestos,
environmental, contractual, employment and intellectual property matters.
As of December 31, 2006 and 2005, the aggregate self-insured and insured
contingent liability was $72.4 and $65.8, respectively, and the related
insurance recovery receivable was $40.9 and $37.7, respectively. The asbestos
liability included in the above amounts at December 31, 2006 and 2005 was $54.6
and $47.8, respectively, and the related insurance receivable was $38.1 and
$34.7, respectively. We anticipate receiving a net tax benefit for payment of
those claims for which full insurance recovery is not realized.
Asbestos
The following table presents information about the number of claimants involved
in asbestos cases with us:
Year Ended Year Ended
December 31, December 31,
2006 2005
------------------- --------------------
Number of claimants at beginning of period 22,200 27,500
Number of claimants associated with claims closed during period (15,800) (12,500)
Number of claimants associated with claims opened during period 2,200 7,200
------- -------
Number of claimants at end of period 8,600 22,200
------------------------------------------------------------------------------------------------------------------
58
Numbers in the foregoing table are rounded to the nearest hundred and are based
on information as received by us which may lag actual court filing dates by
several months or more. Claims are recorded as closed when a claimant is
dismissed or severed from a case. Claims are opened whenever a new claim is
brought, including from a claimant previously dismissed or severed from another
case. The significant decline in the number of claimants during 2006 and 2005
primarily reflects disposition of a large number of unwarranted filings in
Mississippi made immediately prior to the institution of tort reform legislation
in that state effective January 1, 2003.
The claimants allege exposure to asbestos at facilities formerly or currently
owned by us or from products that we formerly manufactured for specialized
applications. Most of these cases involve numerous defendants, sometimes as many
as several hundred. Historically, most of the closed asbestos claims against us
have been dismissed without any indemnity payment by us, however, we have no
information that this pattern will continue.
During the third quarter of 2006, the Actuarial and Analytics Practice of AON
Risk Consultants ("AON") completed a study of our asbestos related contingent
liabilities and related insurance receivables. We previously commissioned a
similar study from AON in 2003. For these studies, we provided AON with, among
other things, detailed data for the past ten years on the incidence of claims,
the incidence of malignancy claims, indemnity payments for malignancy and
non-malignancy claims, and dismissal rates by claim. The actuarial methodology
employed by AON was primarily based on epidemiological data assumptions
regarding asbestos disease manifestation, the information provided by us, and
the estimates of claim filing and indemnity costs that may occur in the future.
In conjunction with AON, we also conducted a detailed review of our insurance
position and estimated insurance recoveries. We expect to recover close to 54%
of our future indemnity costs and certain defense and processing costs already
incurred. We anticipate updating the study approximately every three years or
earlier if circumstances warrant. We are in the process of negotiating coverage
in place and commutation agreements with several of our insurance carriers.
As a result of the findings from the 2006 AON study, we recorded an increase of
$9.0 to our self insured and insured contingent liabilities for pending and
anticipated probable future claims and recorded a higher receivable for probable
insurance recoveries for past, pending and future claims of $6.8. The reserve
increase is attributable to higher settlement values which more than offset a
decrease in number of claimants. The increase in the receivable is a result of
the higher gross liability plus an increase in overall projected insurance
recovery rates.
Most of our insurance is with carriers with investment grade ratings and only
those with such ratings or other solvent carriers were included in the
estimation of the recovery of indemnity and incurred defense costs.
It should be noted that the ultimate liability and related insurance recovery
for all pending and anticipated future claims cannot be determined with
certainty due to the difficulty of forecasting the numerous variables that can
affect the amount of the liability and insurance recovery. These variables
include but are not limited to: (i) significant changes in the number of future
claims; (ii) significant changes in the average cost of resolving claims; (iii)
changes in the nature of claims received; (iv) changes in the laws applicable to
these claims; and (v) financial viability of co-defendants and insurers.
Lead Pigment
We are among several defendants in approximately 35 cases in the U.S., in which
plaintiffs assert claims for personal injury, property damage, and other claims
for relief relating to one or more kinds of lead pigment that were used as an
ingredient decades ago in paint for use in buildings. The different suits were
brought by government entities and/or individual plaintiffs, on behalf of
themselves and others. The suits variously seek compensatory and punitive
damages and/or injunctive relief, including funds for the cost of monitoring,
detecting and removing lead based paint from buildings and for medical
monitoring; for personal injuries allegedly caused by ingestion of lead based
paint; and plaintiffs' attorneys' fees. We believe that the suits against us are
without merit, and we are vigorously defending against all such claims.
Accordingly, no loss contingency has been recorded.
In July, 2005, the Supreme Court of Wisconsin held in a case in which we were
one of several defendants that Wisconsin's risk contribution doctrine applies to
bodily injury cases against manufacturers of white lead pigment. Under this
doctrine, manufacturers of white lead pigment may be liable for injuries caused
by white lead pigment based on their past market shares unless they can prove
they are not responsible for the white lead pigment which caused the injury in
question. Seven other courts have previously rejected the applicability of this
and similar doctrines to white lead pigment. We settled this case for an
immaterial amount. Although we are a defendant to three more similar cases in
Wisconsin and additional actions may be filed in Wisconsin, we intend to
vigorously defend ourselves if such case(s) are filed based on what we believe
to be our non-existent or diminutive market share. Accordingly, we do not
believe that our liability, if any, in such cases will be material, either
individually or in the aggregate and no loss contingency has been recorded.
59
We have access to a substantial amount of primary and excess general liability
insurance for property damage and believe these policies are available to cover
a significant portion of both our defense costs and indemnity costs, if any, for
lead pigment related property damage claims. We have agreements with two of our
insurers which provide that they will pay for approximately fifty percent (50%)
of our defense costs associated with lead pigment related property damage
claims.
Other
During 2004, we signed a stipulation of settlement with plaintiffs in a federal
class action lawsuit on behalf of purchasers of carbon fiber. As a result of
this and several other related litigation matters, in 2004 we recorded a pre-tax
charge of $8.0 which is included in administrative and general. In 2005, we
increased our reserves by $2.4 as a result of our agreement to settle certain
claims by a third party for $2.7.
We commenced binding arbitration proceedings against SNF SA ("SNF"), in 2000 to
resolve a commercial dispute relating to SNF's failure to purchase agreed
amounts of acrylamide under a long-term agreement. In July, 2004, the
arbitrators awarded us damages and interest aggregating approximately (euro)11.0
plus interest on the award at a rate of 7% per annum from July 28, 2004 until
paid. After further proceedings in France, we collected (euro)12.2 ($15.7)
related to the arbitration award including interest in the second quarter of
2006. Subsequent to the arbitration award, SNF filed a complaint alleging
criminal violation of French and European Community antitrust laws relating to
the contract which was the subject of the arbitration proceedings which
complaint was dismissed in December 2006. SNF has also filed a final appeal of
the court order which allowed us to enforce the award and a separate complaint
in France seeking compensation from Cytec for (euro)54.0 in damages it allegedly
suffered as a result of our attachment on various SNF receivables and bank
accounts to secure enforcement of the arbitration award. We believe that the
appeal and complaint are without merit.
In February 2006, a subsidiary of DSM filed a lawsuit against us seeking
immediate dissolution of American Melamine Industries ("AMEL"), the melamine
manufacturing joint venture between DSM and Cytec, or the appointment of a
receiver for the joint venture, the rescission of the manufacturing services
agreement between Cytec and AMEL and compensatory damages. In May 2006, the
court denied DSM's request for relief. In July 2006, DSM agreed to pay us $7.4
to settle past and future obligations under the manufacturing services
agreement, dismiss the lawsuit, and agreed to transfer their 50% interest in
AMEL to us. The agreement was effective August 1, 2006. On August 1, 2006 we
recorded $4.5 of income as a credit to manufacturing cost of sales pertaining to
a payment from DSM.
Periodically, we enter into settlement discussions for lawsuits or claims for
which we have meritorious defenses and for which an unfavorable outcome against
us is not probable. In such instances, no loss contingency is recorded since a
loss is not probable and it is our policy to accrue defense costs as incurred.
Typically, we consider these types of settlements in fairly limited
circumstances usually related to the avoidance of future defense costs and/or
the elimination of any risk of an unfavorable outcome. Such settlements, if any,
are recorded when it is probable a liability has been incurred, typically upon
entering into a settlement agreement.
While it is not feasible to predict the outcome of all pending environmental
matters, lawsuits and claims, it is reasonably possible that there will be a
necessity for future provisions for costs for environmental matters and for
other contingent liabilities that we believe, will not have a material adverse
effect on our consolidated financial position, but could be material to our
consolidated results of operations or cash flows in any one accounting period.
We cannot estimate any additional amount of loss or range of loss in excess of
the recorded amounts. Moreover, many of these liabilities are paid over an
extended period, and the timing of such payments cannot be predicted with any
certainty.
From time to time, we are also included in legal proceedings as a plaintiff
involving tax, contract, patent protection, environmental and other legal
matters. Gain contingencies related to these matters, if any, are recorded when
they are realized.
Commitments
Rental expense under property and equipment leases was $15.6 in 2006, $14.3 in
2005 and $10.8 in 2004. Estimated future minimum rental expenses under property
and equipment leases that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 2006, are:
60
Operating Leases
-------------------------------------------------------------------
2007 $ 11.7
2008 8.7
2009 7.0
2010 5.0
2011 3.6
Thereafter 13.6
--------------------
Total minimum lease payments $ 49.6
-------------------------------------------------------------------
We frequently enter into long-term contracts with customers with terms that vary
depending on specific industry practices. Our business is not substantially
dependent on any single contract or any series of related contracts. Set forth
below are more specific terms about our significant sales contracts.
We have the option to sell, and an affiliate of an international trading company
is obligated to buy, up to approximately 40% of our production capacity of
acrylonitrile per year under a long-term distributorship agreement that is
scheduled to expire on May 1, 2008. The price under this distributorship
agreement is market-based less certain costs and commissions.
We are obligated to sell, and a tenant at our Fortier facility is obligated to
buy, substantially all of our nominal production capacity of hydrocyanic acid
under an agreement with an initial term expiring May 30, 2013. Price is
determined by a formula based on the raw materials used to manufacture
hydrocyanic acid and to a lesser extent on the quoted market price of such
tenant's product based on hydrocyanic acid and is adjusted periodically.
We are obligated to sell sulfuric acid, and also to regenerate used sulfuric
acid, and a tenant at our Fortier facility is obligated to buy such product and
services, under an agreement with an initial term expiring May 30, 2013. The
price for regenerated sulfuric acid is cost based and the price for sulfuric
acid is set between the price for merchant sulfuric acid and a market price for
sulfuric acid and both prices are adjusted periodically. The cost to regenerate
sulfuric acid is substantially in excess of the cost of producing sulfuric acid.
Regenerated sulfuric acid and sulfuric acid are produced in the same plant at
the same time.
We are obligated to manufacture a customer's requirements for certain resins
utilized in the automotive industry under long-term manufacturing agreements
which may be terminated on December 31 of any year upon two years prior written
notice.
We are obligated to sell and, subject to certain exceptions, an aerospace
customer is obligated to buy its requirements of various specialty materials for
products related to certain aircraft programs, under an agreement which is
scheduled to expire at the end of 2013. The agreement specifies price which is
fixed annually.
We are obligated to supply acrylonitrile to the Kemira acrylamide plants at
Fortier and Botlek under a long term supply agreement. In addition, under
various long term manufacturing agreements, we are committed to manufacture for
and sell to Kemira certain water treatment products at several of our sites and
we are committed to purchase certain mining chemicals manufactured at Kemira's
Mobile, Alabama and Longview, Washington sites and various other products at the
Botlek site which Kemira will manufacture and sell to us.
The Cytec Engineered Materials segment is party to a number of long-term supply
and pricing agreements that cover various time periods. Such agreements are
common practice in the aerospace and aircraft manufacturing industries.
We frequently enter into long-term agreements in order to lock-in price and
availability of raw materials and services required to operate our businesses.
At December 31, 2006, obligations under such agreements totaled $39.1.
We had $75.1 of outstanding letters of credit, surety bonds and bank guarantees
at December 31, 2006 that are issued on our behalf in the ordinary course of
business to support certain of our performance obligations and commitments. The
instruments are typically renewed on an annual basis.
14. INCOME TAXES
The income tax provision (benefit) is based on earnings (losses) from continuing
operations before income taxes and in 2006, before the cumulative effect of
accounting change as follows:
--------------------------------------------------------------------------------
2006 2005 2004
--------------------------------------------------------------------------------
U.S. $ 96.0 $ (22.3) $105.1
Non-U.S. 169.3 65.8 67.3
--------------------------------------------------------------------------------
Total $ 265.3 $ 43.5 $172.4
--------------------------------------------------------------------------------
61
The components of the income tax provision (benefit) are as follows:
--------------------------------------------------------------------------------
2006 2005 2004
--------------------------------------------------------------------------------
Current:
U.S.Federal $ 17.8 $ (8.6) $ 6.3
Non-U.S. 43.1 27.3 12.8
Other, principally state 2.1 1.5 2.2
--------------------------------------------------------------------------------
Total 63.0 20.2 21.3
--------------------------------------------------------------------------------
Deferred:
U.S. Federal 10.1 (8.3) 20.3
Non-U.S. (6.2) (23.5) (0.1)
Other, principally state 2.3 (2.8) (0.1)
--------------------------------------------------------------------------------
Total 6.2 (34.6) 20.1
--------------------------------------------------------------------------------
Total income tax provision (benefit) $ 69.2 $ (14.4) $ 41.4
--------------------------------------------------------------------------------
Income taxes paid in 2006, 2005 and 2004 were $67.5, $64.4 and $16.6,
respectively, and include non-U.S. taxes of $56.9, $59.8 and $15.7 in 2006, 2005
and 2004, respectively. Income taxes related to pre-acquisition tax period of
the Surface Specialties entities paid in 2006 and 2005 were $9.4 and $18.0,
respectively, for which $7.6 in 2006 and $17.8 in 2005 has been reimbursed to us
from UCB SA pursuant to the Stock and Asset Purchase Agreement.
U.S. and non-U.S. earnings of consolidated companies, before income taxes,
include all earnings derived from operations in the respective U.S and non-U.S.
geographic areas; whereas provisions (benefits) for income taxes include all
income taxes payable to (receivable from) U.S. Federal, non-U.S. and other
governments as applicable, regardless of the sites in which the taxable income
(loss) is generated.
The temporary differences that give rise to a significant portion of deferred
tax assets and liabilities were as follows:
----------------------------------------------------------------------------
December 31, 2006 2005
Deferred tax assets:
----------------------------------------------------------------------------
Allowance for bad debts $ 3.4 $ 4.8
Self insurance accruals 26.8 24.5
Operating accruals 11.1 14.4
Environmental accruals 21.2 32.1
Pension and postretirement benefit liabilities 136.7 164.0
Employee benefit accruals 23.5 15.3
Tax credit carry forwards 18.2 18.4
Net operating losses 54.8 39.3
Other 24.0 25.2
----------------------------------------------------------------------------
Gross deferred tax assets 319.7 338.0
----------------------------------------------------------------------------
Valuation allowance (27.8) (23.2)
----------------------------------------------------------------------------
Total net deferred tax assets 291.9 314.8
----------------------------------------------------------------------------
Deferred tax liabilities:
Inventory (8.9) (7.5)
Plants, equipment and facilities (171.7) (180.6)
Insurance receivables (13.7) (11.3)
Intangibles (157.5) (158.4)
Other (0.8) (8.9)
----------------------------------------------------------------------------
Gross deferred tax liabilities (352.6) (366.7)
----------------------------------------------------------------------------
Net deferred tax assets / (liabilities) $ (60.7) $ (51.9)
----------------------------------------------------------------------------
The American Jobs Creation Act of 2004 (the "Act") introduced a special one-time
dividend received deduction on the repatriation of certain foreign earnings to a
U.S. taxpayer provided certain criteria are met. In 2005 we completed our
evaluation of this repatriation provision and concluded that no earnings would
be repatriated under the Act. In addition, no provision has been made for U.S.
or additional non-U.S. taxes on the undistributed earnings of international
subsidiaries totaling $551.3 since we intend to reinvest these earnings. It is
not practicable to calculate the unrecognized deferred tax liability on such
earnings. U.S foreign tax credits would be available to substantially reduce any
amount of additional U.S. tax that might be payable on these earnings in the
event of a distribution.
62
As of December 31, 2006 we estimate that we will fully utilize our remaining
U.S. research and development tax credit carryforwards of $2.0. We have U.S.
foreign tax credit carryforwards of $10.4 available as of December 31, 2006 to
offset future U.S. tax liabilities. The Act extended the period of time over
which U.S. foreign tax credits may be carried forward from five years to ten
years. Accordingly, such U.S. foreign tax credits will now expire at various
dates starting in 2011 through 2016. We also have $3.6 of state tax credits of
which $2.5 will be carried forward indefinitely with the balance to expire at
various dates starting in 2007. Additionally, we have $3.6 of foreign
jurisdiction tax credits mainly related to our operations in Belgium and Korea,
of which $0.1 will expire in 2009 with the balance having an unlimited carried
forward period.
At December 31, 2006, we have U.S. federal income tax net operating loss
carryforwards of $7.9 relating to our 1998 acquisition of The American Materials
& Technologies Corporation available to offset future taxable income.
Utilization of those loss carryforwards is limited under certain provisions of
the Internal Revenue Code. The carryforwards begin to expire at various dates
starting in 2011 through 2018. In addition, we have foreign net operating losses
totaling $40.0, primarily related to our operations in Europe, Canada and China.
These net operating losses are available to offset future taxable income in the
respective foreign countries. Of the total carryforwards, approximately $4.3
expire at various dates starting in 2007 through 2012, while $35.7 can be
utilized over an indefinite period.
Our long-term earnings trend makes it more likely than not that we will generate
sufficient taxable income on a consolidated basis to realize our net deferred
tax assets with the exception of certain state net operating losses and state
tax credits, and various foreign deferred tax assets. Accordingly, we have
recorded a valuation allowance of $27.8 and $23.2 as of December 31, 2006 and
2005. For 2006, the $4.6 valuation allowance activity primarily consisted of a
$4.4 decrease for acquired Surface Specialties deferred tax assets, offset by an
increase to the valuation allowance for foreign net operating losses and other
foreign deferred tax assets ($8.6), and various state deferred tax assets
($0.4). As of December 31, 2006, $15.9 of the valuation allowance is
attributable to U.S. state tax attributes and $11.9 primarily relates to foreign
net operating losses. As of December 31, 2005, $15.7 of the valuation allowance
is attributable to U.S. state tax attributes and $7.5 primarily relates to
foreign net operating losses.
The Internal Revenue Service (the "IRS") has completed and closed its audits of
our tax returns through 2003. In May, 2006, we received notice that the Internal
Revenue Service approved the final settlement with respect to a federal income
tax audit for the 2002 and 2003 calendar years. Such approval resulted in a
minor tax refund, which was recorded in the second quarter of 2006. We also
recorded a reduction in tax expense of approximately $3.5 during the second
quarter of 2006 to reflect the final resolution of this audit. In January, 2005,
we were notified that the Congressional Joint Committee on Taxation (the "Joint
Committee") approved the final IRS examination findings for the years 1999
through 2001. Joint Committee also approved a separate tax refund claim filed by
us for 1998 at that time. The approval by Joint Committee resulted in a tax
refund of approximately $0.2 and $0.1 for the years 1998 and 2000 respectively,
which was recorded in 2005. As a result of the resolution of the 1999 through
2001 audit, we also recorded a reduction in tax expense of approximately $16.2.
The IRS is also currently preparing to conduct audits of our tax returns for the
years 2004 and 2005 commencing in 2007. We believe that adequate provisions for
all outstanding issues have been made for all open years.
In 2005, we received a final assessment notice from the Norwegian Assessment
Board disclosing an increase to taxable income with respect to a 1999
restructuring of certain of our European operations. The tax liability
attributable to this assessment, excluding interest and possible penalties, was
approximately 84.0 Norwegian krone ($13.4). We retained tax counsel to assist in
our vigorous defense in protesting this taxable income increase. Notwithstanding
our meritorious defenses in these matters, in prior years as these matters
developed, we accrued for the potential unfavorable outcome of this dispute for
the full amount of the tax liability, including interest thereon.
This final assessment notice reflected a 20.7 Norwegian krone decrease in the
assessed tax liability compared with the prior audit report issued by the tax
authorities. As a result, we recorded a corresponding reduction in tax expense
of approximately $4.2, including interest, in 2005 to reflect this final
assessment.
In 2005, we also received notice from the Norwegian authorities demanding a tax
payment of 56.0 Norwegian krone ($8.5) plus accrued interest regarding this
matter, and we remitted this amount as a deposit pending the final resolution of
this dispute.
During the third quarter of 2006, we contested the final assessment before a
Norwegian tribunal. In October 2006, we received notification that the Norwegian
court has issued a decision in favor of the Norwegian tax authorities sustaining
the entire assessment. We are currently appealing the Norwegian court decision.
In the event the Norwegian authorities ultimately prevail in their assessment,
approximately 22.0 Norwegian krone ($3.5) of tax related to this matter will be
remitted in subsequently filed tax returns beginning with the 2005 taxable
period in accordance with Norwegian law. As a result, we remitted 4.4 Norwegian
krone ($0.7) of additional tax in 2006 for the 2005 taxable period related to
this dispute. Accordingly, the accrued balance at December 31, 2006 for this
63
contingency was 24.7 Norwegian krone ($3.9), which represents our remaining
liability (including interest and penalties) regarding this matter in the event
we ultimately accept the Norwegian's court decision as final.
We also received a separate notice from the Norwegian tax authorities in the
second quarter of 2005 disclosing a complete termination of pleadings regarding
a potential Norway permanent establishment ("PE") with respect to a Company
affiliate. Given the favorable resolution of this PE issue, we further adjusted
our contingency reserves accordingly and recorded a reduction in tax expense of
$5.4, including interest, in the second quarter ended June 30, 2005.
A reconciliation of our effective tax rate to the U.S. federal income tax rate
is as follows:
------------------------------------------------------------------------------
2006 2005 2004
------------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
Research and development credit (0.7) (5.2) (1.8)
Income subject to other than
the federal income tax rate (10.1) (21.1) (7.1)
Change in tax rates (0.5) (1.1) (1.1)
State taxes, net of federal benefits 0.6 (3.7) (2.8)
Valuation allowance 3.6 5.6 4.4
Acquired in-process research
and development write-off - 29.8 -
Extraterritorial income exclusion (0.9) (7.8) (1.8)
Favorable resolution of prior
Year audits (1.3) (65.0) -
Other (credits) charges, net 0.4 0.5 (0.8)
------------------------------------------------------------------------------
Effective tax rate 26.1% (33.0)% 24.0%
------------------------------------------------------------------------------
The 2006 effective tax rate was positively impacted by an arbitration award in
settlement of a commercial dispute, a portion of which was recorded in a lower
tax entity resulting in an effective rate of 20.0%, the gain on the divestiture
of the water treatment and acrylamide product lines recorded at a 21% rate, and
a reduction in tax expense of $3.5 as a result of the completion of prior years
U.S. tax audits. The rate was also favorably impacted by the change in statutory
tax rates with respect to deferred tax assets and liabilities recorded in
certain countries. These results were partially offset by a reduction of
earnings of divested product lines in lower tax jurisdictions, the zero tax
benefit on a French restructuring charge due to insufficient earnings to realize
its net deferred tax asset, a tax benefit from a restructuring charge recorded
at 29.6% and a $1.7 tax charge associated with a capital reduction with respect
to a foreign subsidiary.
Our 2005 effective tax rate was favorably impacted by hedging losses incurred in
the U.S. in connection with the Surface Specialties acquisition, the MOPPRS
redemption, and reduction in tax expense due to the completion of tax audits for
various years as discussed above. The rate was unfavorably impacted by the
write-off of acquired in-process research and development expenses related to
the Surface Specialties acquisition for which there is no tax benefit and the
increase in the valuation allowance for certain state and foreign deferred tax
assets.
In 2006 a tax benefit of $0.7 was allocated to the cumulative effect of
accounting change and, in 2005 tax expense of $0.8 related to discontinued
operations.
Tax benefits on stock option exercises were $10.8, $5.5 and $11.7 for 2006, 2005
and 2004, respectively.
15. EMPLOYEE BENEFIT PLANS
We have defined benefit and defined contribution pension plans that cover
employees in a number of countries. Almost all of the plans provide defined
benefits based on years of service and career average salary. We also sponsor
postretirement and post employment benefit plans in certain countries. The
postretirement plans provide medical and life insurance benefits to retirees who
meet minimum age and service requirements. The medical plans are contributory
and non-contributory with certain participant's contributions adjusted annually;
the life insurance plans are non-contributory. The postretirement plans include
a cap on our share of costs for recent and future retirees. The post employment
plans provide salary continuation, disability related benefits, severance pay
and continuation of health costs during the period after employment but before
retirement.
As described in Note 1, we adopted SFAS 158 during the fourth quarter of 2006.
SFAS 158 required us to recognize the funded status (i.e., the difference
between the fair value of plan assets and the projected benefit obligations) of
64
our pension plans in the December 31, 2006 balance sheet, with a corresponding
adjustment to accumulated other comprehensive income, net of tax. The adjustment
to accumulated other comprehensive income at adoption represents the net
unrecognized actuarial losses, unrecognized prior service costs, and
unrecognized transition obligation, each net of income taxes, remaining from the
initial adoption of SFAS 87, "Employers' Accounting for Pensions" ("SFAS 87"),
all of which were previously netted against the plan's funded status in our
balance sheet pursuant to the provisions of SFAS 87. These amounts will be
subsequently recognized as net periodic pension cost as required by SFAS 87.
Further, actuarial gains and losses that arise in subsequent periods and are not
recognized as net periodic pension cost in the same periods will be recognized
as a component of other comprehensive income. Those amounts will be subsequently
recognized as a component of net periodic pension cost on the same basis as the
amounts recognized in accumulated other comprehensive income upon adoption of
SFAS 158. The effects of adopting the provisions of SFAS 158 on our balance
sheet at December 31, 2006 are presented in the following table. The adoption of
SFAS158 had no effect on our consolidated statement of income for the year ended
December 31, 2006, or for any prior period presented, and it will not affect our
operating results in future periods. Had we not been required to adopt SFAS 158
at December 31, 2006, we would have continued to recognize an additional minimum
liability pursuant to the provisions of SFAS 87. The effect of recognizing the
additional minimum liability is included in table below in the column labeled
"Prior to Adopting SFAS 158".
At December 31, 2006
Prior to Effect of As Reported
Adopting Adopting at December 31,
SFAS 158 SFAS 158 2006
----------------------------------------------------------
Intangible asset $ 0.8 $ (0.8) $ -
Prepaid pension 72.3 (69.1) 3.2
Current pension and other postretirement
benefit liabilities (20.0) 1.6 (18.4)
Long term pension and other postretirement
benefit liabilities (428.5) 63.3 (365.2)
Accumulated other comprehensive income,
exclusive of deferred taxes 159.3 5.0 164.3
The enactment of The Medicare Prescription Drug, Improvement and Modernization
Act of 2003 resulted in a reduction of our accumulated postretirement benefit
obligation ("APBO") of approximately $31.7 in 2004, which we recognized as a
reduction in unrecognized net actuarial loss. This reduction in the APBO results
from an ongoing tax-free government subsidy which began in 2006, for
prescription drug benefits provided to plan participants if such benefits are
determined to be actuarially equivalent to those offered by Medicare. Based on
the current guidance for determining actuarial equivalence, we determined that
some of the plan participants qualify for the subsidy. We amortize the
unrecognized net actuarial loss over the average remaining service life of
employees eligible for postretirement medical benefits. The net periodic
postretirement benefit cost was reduced by $4.2 and $3.9, respectively, for the
years ended December 31, 2006 and 2005.
We use a measurement date of December 31 for the U.S. and Canadian pension and
postretirement benefit plans and use a measurement date of November 30 for the
majority of all other pension plans.
Pension Plans Postretirement Plans
-----------------------------------------------------------------------
2006 2005 2004 2006 2005 2004
-----------------------------------------------------------------------
Net periodic cost:
Service cost $ 25.0 $ 21.4 $ 14.4 $ 1.3 $ 1.3 $ 1.0
Interest cost 44.9 41.3 34.7 13.8 13.7 14.3
Expected return on plan assets (43.6) (42.1) (38.9) (4.7) (4.7) (4.9)
Net amortization and deferral 22.9 15.8 7.8 (9.9) (10.6) (10.6)
Curtailment/Settlement 5.3 (2.7) - - - -
-----------------------------------------------------------------------
Net periodic expense (credit) $54.5 $33.7 $ 18.0 $ 0.5 $ (0.3) $ (0.2)
-----------------------------------------------------------------------
Weighted-average assumptions used to determine net
periodic costs, during
the year
Discount rate 5.1% 5.4% 6.0% 5.6% 5.8% 6.3%
Expected return on plan assets 7.5% 7.7% 8.0% 6.5% 6.5% 6.5%
Rate of compensation increase 3%-10% 3%-10% 3%-10% - - -
Weighted-average assumptions used to determine
benefit obligations, end of
the year
Discount rate 5.4% 5.3% 5.6% 5.9% 5.6% 5.8%
Rate of compensation increase 3%-10% 3%-10% 3%-10% - - -
-----------------------------------------------------------------------
65
The expected rate of return on U.S. plan assets was determined by examining the
annualized rates of return over the past five and ten year periods for the major
U.S. stock and bond indexes and the estimated long-term asset mix of the plan
assets of 55-70% stocks and 30-45% bonds, including cash equivalents ("fixed
income securities"). Since the long-term average annualized return is
approximately 9%-11% for stocks and 5%-7% for fixed income securities, the
expected long-term weighted average return was estimated to be 8.5% for the U.S.
pension plans in 2006 and 2005. This return is based on an assumed allocation of
assets of 62% stocks and 38% in fixed income securities, with long-term
investment returns of 10% and 6%, respectively. The expected long-term weighted
average return on all of our pension plans, including the U.S. plans, was 7.5%,
and 7.7% for 2006 and 2005, respectively. The expected return on non-U.S. plan
assets is also based on the historical rates of return of the various asset
classes in each country and the corresponding asset mix. In the Netherlands,
where we have our largest non-U.S. pension plan, the assumed rate of return was
5.5% in 2006. This return is based on assumed rates of return of 8% for stocks
and 5% for fixed income securities and an assumed asset allocation of 15% stocks
and 85% fixed income securities.
For U.S. and non-U.S. postretirement plans (all of assets are held in the U.S.),
the expected rate of return was 6.5% in 2006 and 2005, based on the same
investment return assumptions and an assumed asset allocation of 55% in stocks
and 45% fixed income securities in 2006 and 2005. The investment strategy for
our worldwide benefit plan assets is to maintain broadly-diversified portfolios
of stocks, bonds and money market instruments that, along with periodic plan
contributions, provide the necessary liquidity for ongoing benefit obligations.
Pension Plans Postretirement Plans
------------------------------------ -------------------------------------
2006 2005 2004 2006 2005 2004
------------------------------------ -------------------------------------
Change in benefit obligation:
Benefit obligation at January 1 $830.5 $646.2 $565.4 $258.1 $248.6 $271.5
Addition of plans 2.8 - 2.1 - - -
Service cost 25.0 21.4 14.4 1.3 1.3 1.0
Interest cost 44.9 41.3 34.7 13.8 13.7 14.3
Amendments 1.5 2.4 (0.1) - - -
Acquisitions - 137.4 - - - -
Translation difference 29.1 (29.0) 10.2 0.1 - 0.1
Actuarial (gains)/losses (4.6) 42.2 44.5 (8.2) 14.9 (15.7)
Employee contributions 1.7 1.4 0.9 3.8 4.0 3.4
Company contributions (1) (1.7) - - - - -
Benefits paid (33.6) (31.8) (25.9) (26.2) (24.4) (26.0)
Curtailments/Settlements (2) (19.6) (1.0) - - - -
------------------------------------ -------------------------------------
Benefit obligation at December 31 $876.0 $830.5 $646.2 $242.7 $258.1 $248.6
------------------------------------ -------------------------------------
Accumulated benefit obligation at
December 31 $814.6 $769.7 $617.3 $ - $ - $ -
Change in plan assets:
Fair value of plan assets at January 1 $554.7 $485.3 $430.5 $70.2 $71.6 $74.6
Actual return on plan assets 62.9 39.1 39.2 8.2 3.0 3.8
Company contributions 72.1 14.4 32.2 15.3 15.9 15.8
Employee contributions 1.7 1.4 0.9 3.8 4.0 3.4
Acquisitions - 65.8 - - - -
Translation difference 19.8 (20.0) 8.4 - - -
Settlements (11.6) - - - - -
Others (2.5) - - - - -
Benefits paid (33.6) (31.3) (25.9) (28.2) (24.3) (26.0)
------------------------------------ -------------------------------------
Fair value of plan assets at
December 31 $663.5 $554.7 $485.3 $69.3 $70.2 $71.6
------------------------------------ -------------------------------------
(1) Represents post-measurement date contribution.
(2) Includes various curtailments and settlements, including the impacts of:
divestiture of the water treatment and acrylamide product lines,
restructuring of Polymer Additive operations in the Netherlands, change in
the U.K. from defined benefit plan to defined contribution plan, and employee
turnover at several European subsidiaries.
66
As required by SFAS 158, the following information is presented as of December
31, 2006:
Pension Postretirement
Plans Plans
----------- --------------
2006 2006
----------- --------------
Funded status, end of year:
Fair value of plan assets $ 663.5 $ 69.3
Benefit obligations (876.0) (242.7)
----------- --------------
Funded status (212.5) (173.4)
----------- --------------
Amounts recognized in the consolidated
balance sheet consist of:
Noncurrent asset $ 3.2 $ -
Current liability (4.9) (13.5)
Noncurrent liabiltiy (210.8) (159.9)
----------- --------------
Total amount recognized $(212.5) $(173.4)
----------- --------------
Amounts recognized in accumulated other
comprehensive income consist of:
Net actuarial loss $ 190.2 $ 24.9
Prior service cost/(credit) 2.4 (53.4)
Transition obligation 0.2 -
----------- --------------
Total $ 192.8 $ (28.5)
----------- --------------
Estimated amortization to be recognized in
accumulated other comprehensive income
in 2007 consist of:
Net actuarial loss $ 16.1 $ 0.4
Prior service cost/(credit) 0.3 (10.6)
----------- --------------
Total $ 16.4 $ (10.2)
----------- --------------
67
As required by SFAS 87, the following information is presented for December 31,
2005 and 2004 (this disclosure is no longer applicable under SFAS 158 and
therefore, 2006 information is not presented):
Pension Plans Postretirement Plans
-------------------- -----------------------
2005 2004 2005 2004
-------------------- -----------------------
Funded status: $(275.8) $(160.9) $(187.9) $(177.0)
Unrecognized actuarial losses 241.3 212.4 37.3 20.6
Unrecognized prior service cost 0.7 0.9 (63.9) (74.5)
Other contributions 0.7 - - -
Unrecognized net transition
obligation 4.0 - - -
-------------------- -----------------------
Net amount recognized $ (29.1) $ 52.4 $(214.5) $(230.9)
-------------------- -----------------------
Amounts recognized in the
consolidated balance sheets
consists of:
Prepaid benefit cost $ 15.7 $ 24.1 $ - $ -
Accrued benefit cost (239.7) (147.9) (214.5) (230.9)
Intangible asset 5.4 5.6 - -
Accumulated other comprehensive
income, exclusive of deferred
taxes 189.5 170.6 - -
-------------------- -----------------------
Net amount recognized $ (29.1) $ 52.4 $(214.5) $(230.9)
-------------------- -----------------------
The accrued pension and postretirement benefit cost recognized in the
consolidated balance sheets at December 31, 2006 and 2005 includes $18.4 and
$20.0 in accrued expenses, respectively, with the balance reported in pension
and other postretirement benefit liabilities.
Under SFAS 87, we recorded a non-cash after-tax minimum pension liability
adjustment of ($18.7) and $7.1 to accumulated other comprehensive income in 2006
and 2005, respectively. At the adoption of SFAS 158, we adjusted our pension
liability to the funded position with a corresponding non-cash after-tax charge
of $5.4 to accumulated other comprehensive income. The adjustment to accumulated
other comprehensive income did not trigger additional fundings.
The assumed rate of future increases in the per capita cost of healthcare
benefits (healthcare cost trend rate) is 9.0% in 2007, decreasing to ultimate
trend of 5.0% in 2010. The healthcare cost trend rate has a significant effect
on the reported amounts of accumulated postretirement benefit obligation
("APBO") and related expense. A 1.0% change in assumed health care cost trend
rates would have the following effect:
2006 2005
----------------------- -----------------------
1% Increase 1% Decrease 1% Increase 1% Decrease
----------------------- -----------------------
Approximate effect on the total
of service and interest cost
components of other
postretirement benefit cost $ 1.4 $ (1.3) $ 1.5 $ (1.2)
Approximate effect on accumulated
postretirement benefit
obligation $21.0 $(18.9) $24.8 $(21.4)
---------------------- ----------------------
The following information is presented for those plans with an accumulated
benefit obligation in excess of plan assets:
U.S. Plans Non-U.S. Plans Total
------------------ ------------------- ------------------
December 31, 2006 2005 2006 2005 2006 2005
-----------------------------------------------------------------------------------------
Projected benefit
obligation $ (575.8) $(544.5) $(210.4) $(201.1) $(786.2) $(745.6)
Accumulated benefit
obligation (551.4) (524.0) (188.6) (168.9) (740.0) (692.9)
Fair value of plan assets 445.7 369.6 135.3 107.5 581.0 477.1
-----------------------------------------------------------------------------------------
68
The asset allocation for our U.S. and non-U.S. pension plans and postretirement
plans at the end of 2006 and 2005, and the target allocation for 2007, by asset
category, are as follows:
U.S. Pension Plans Postretirement Plans
---------------------------------------------- ---------------------------- -------------------
Percentage of Plan
Target Assets at Year Target Percentage of Plan
Allocation End Allocation Assets at Year End
Asset Category 2007 2006 2005 Asset Category 2007 2006 2005
-------------------------- ------------------ ---------------------------- -------------------
Equity Securities 69% 70% 67% Equity Securities 50% 55% 55%
Fixed Income 31% 30% 33% Fixed Income 50% 45% 45%
--------- ------------------ ----------- -------------------
Total 100% 100% 100% Total 100% 100% 100%
---------------------------------------------- -------------------------------------------------
Non-U.S. Pension Plans
----------------------------------------------
Target Percentage of Plan
Allocation Assets at Year
End
Asset Category 2007 2006 2005
-------------------------- ------------------
Equity Securities 37% 37% 37%
Fixed Income 54% 52% 53%
Cash and other 9% 11% 10%
-------------------------- ------------------
Total 100% 100% 100%
----------------------------------------------
The total fair value of U.S. pension and postretirement plan assets was $515.0
and $439.8 at December 31, 2006 and 2005. We use a combination of active and
passive stock and bond managers to invest the assets of pension and
postretirement plans. The managers are selected based on an analysis of, among
other things, their historical investment results, frequency of management
turnover, cost structure, and assets under management. Assets are periodically
reallocated among the investment managers to maintain the appropriate asset mix
and occasionally transferred to new or existing managers in the event that a
manager is terminated.
The following table reflects expected cash flows for the U.S. pension and
postretirement benefit plans:
Expected Employer Contributions Pension Plans Postretirement Plans
-------------------------------- ---------------------- ----------------------
2007 $26.5 $13.4
The following table reflects total benefits expected to be paid from the plan
and / or our assets:
Postretirement Plans
----------------------------------------------------------
Prior to Medicare Part D Anticipated Medicare Part D
Expected Benefit Payments Pension Plans Subsidy Subsidy
---------------------------------------- ---------------------- -------------------------- ----------------------------
2007 $25.6 $24.2 $3.0
2008 26.9 24.5 3.1
2009 28.3 24.7 3.1
2010 29.8 24.5 3.2
2011 31.6 24.1 3.1
2012-2016 190.3 111.2 14.6
--------------------------------------------------------------------------------------------------------------------------------
The following table reflects the expected cash flows for the non-U.S. plans:
Expected Employer Contributions Pension Plans Postretirement Plans
------------------------------- -------------------- ------------------------
2007 $ 9.9 $ 0.1
------------------------------- -------------------- ------------------------
The following table reflects the total benefits expected to be paid from the
plans and/or our assets:
Postretirement Benefits
Expected Benefit Payments Pension Benefits
---------------------------- ---------------------- ------------------------
2007 $ 8.8 $0.1
2008 9.5 0.1
2009 9.4 0.1
2010 12.0 0.1
2011 11.3 0.2
2012-2016 72.2 0.8
-----------------------------------------------------------------------------
69
We also sponsor various defined contribution retirement plans in a number of
countries, consisting primarily of savings, profit growth and profit sharing
plans. Contributions to the savings plans are based on matching a percentage of
employees' contributions. Contributions to the profit growth and profit sharing
plans are generally based on our financial performance. Amounts expensed related
to these plans are as follows:
2006 2005 2004
--------------------------------------------------------------
U.S.
Profit Growth Sharing $ 7.6 $ 4.1 $ 9.1
Savings Plan 7.6 8.0 7.0
-------------------------------------
Total $ 15.2 $ 12.1 $ 16.1
-------------------------------------
Non-U.S.
Others $ 3.3 $ 2.7 $ 1.2
--------------------------------------------------------------
In addition to defined benefit pension and defined contribution retirement
plans, we sponsor post employment plans in a number of countries. Those plans,
in certain circumstances, provide salary continuation, disability related
benefits, severance pay and continuation of health care coverage during the
period after employment but before retirement.
Certain of our benefit plans provide for enhanced benefits in the event of a
"change of control" as defined in the plans.
16. OTHER
Following are our accrued expenses:
--------------------------------------------------------------------------------
December 31, 2006 2005
--------------------------------------------------------------------------------
Employee benefits $ 23.3 $ 18.2
Pension and other postretirement employee benefits 18.4 20.0
Salaries and wages 45.0 45.1
Taxes other than income taxes 6.1 8.9
Environmental 7.4 7.5
Interest 12.6 12.5
Restructuring costs 14.9 10.5
Customer rebates 17.6 18.3
All other 67.0 77.3
--------------------------------------------------------------------------------
Total $ 212.3 $ 218.3
--------------------------------------------------------------------------------
At December 31, 2006 and 2005, due from related party was $2.4 and $8.0,
respectively. The balance in due from related party represents amounts to be
received from UCB for certain pre-acquisition tax liabilities which we have or
will pay in connection with the acquisition of Surface Specialties.
Additionally, in connection with the acquisition of Surface Specialties, we
entered into certain transition services agreements with UCB. For the year ended
December 31, 2006 and 2005, results of operations reflect expenses of $1.1 and
$12.5, recognized respectively, under these agreements.
17. COMMON STOCK AND PREFERRED STOCK
We are authorized to issue 150 million shares of common stock with a par value
of $.01 per share, of which 47,622,634 shares were outstanding at December 31,
2006. A summary of changes in common stock issued and treasury stock is
presented below.
70
Common Stock Treasury Stock
--------------------- --------------------
Balance at December 31, 2003 48,132,640 9,139,897
Purchase of treasury stock - 388,300
Issuance pursuant to stock option plan - (1,217,487)
Awards of performance stock and restricted stock - (64,654)
Forfeitures and deferrals of stock awards - 51,807
--------------------- --------------------
Balance at December 31, 2004 48,132,640 8,297,863
Issuance related to acquisition of Surface Specialties - (5,772,857)
Issuance pursuant to stock option plan - (688,736)
Awards of performance stock and restricted stock - (53,345)
Forfeitures and deferrals of stock awards - 50,887
--------------------- --------------------
Balance at December 31, 2005 48,132,640 1,833,812
Issuance pursuant to stock option plan - (1,365,912)
Awards of restricted stock - (1,798)
Forfeitures and deferrals of stock awards - 43,904
--------------------- --------------------
Balance at December 31, 2006 48,132,640 510,006
--------------------------------------------------------------------------------------------------
Treasury stock, when reissued, is relieved at the average cost of the shares in
treasury.
In January 2004, the Board of Directors approved the initiation of a common
stock quarterly cash dividend program. During 2006, 2005, and 2004, four
quarterly cash dividends of $0.10 per share were declared and paid totaling
$18.8, $17.8, and $15.7, respectively.
On February 1, 2007, the Board of Directors declared a quarterly cash dividend
of $0.10 per common share, payable on February 26, 2007 to stockholders of
record as of February 12, 2007.
As of December 17, 1993, we had issued to Cyanamid, a subsidiary of Wyeth, eight
million shares of preferred stock in conjunction with our spin-off from
Cyanamid. Through September, 2004, only 4,000 shares of Series C Cumulative
Preferred Stock (the "Series C Stock") had remained outstanding. The Series C
Stock, which had a redemption value of $25 per share, was redeemed on September
30, 2004 for $10.0 in cash. A charge to net earnings available to common
stockholders of $9.9 was recorded as a premium paid to redeem preferred stock.
The $10.0 payment was not tax deductible. We also settled a series of disputed
matters with Wyeth at a cost of $2.0 which was recorded during 2004 in other
income (expense), net. The Series C shares were subsequently retired. The Series
C Stock had an annual dividend of $1.83 per share (7.32%).
We are authorized to issue 20 million shares of preferred stock with a par value
of $.01 per share in one or more classes or series with rights and privileges as
adopted by the Board of Directors. There were no shares of preferred stock
outstanding at December 31, 2006 and 2005.
In connection with the acquisition of Surface Specialties, we suspended our
stock buyback program in 2004 in order to maximize the funds available for debt
service and other corporate purposes. With the divestiture of our water
treatment and acrylamide business substantially completed and the net proceeds
used to pay down additional debt, we announced in February 2007 the
reinstatement of our stock buyback program. Approximately $69.0 remained
authorized under the buyback program as of that date. We anticipate the
repurchases will be made from time-to-time on the open market or in private
transactions and will be utilized for share-based compensation plans and other
corporate purposes.
18. OPERATIONS BY SEGMENT AND GEOGRAPHIC AREAS AND IDENTIFIABLE ASSETS
Cytec Performance Chemicals includes our mining chemicals, phosphine and
phosphorous specialties, polymer additives and specialty additives, urethanes,
polyurethanes and pressure sensitive adhesives product lines. Cytec Surface
Specialties includes low energy-cured (Radcure) resins, powder coating resins
and liquid coating resins which includes various product lines such as
water-borne resins and solvent based resins. Cytec Engineered Materials
principally includes advanced composites and film adhesives. Building Block
Chemicals principally includes acrylonitrile, hydrocyanic acid, sulfuric acid
and melamine.
The accounting policies of the reportable segments are the same as those
described in Note 1. All intersegment sales prices are cost based. We evaluate
the performance of our operating segments primarily based on earnings from
operations of the respective segment. As described in Note 4, restructuring
costs and impairment charges related to unprofitable sites are not charged to
our operating segments consistent with management's view of its businesses.
71
Following is selected information in relation to our continuing operations for
the periods indicated:
Cytec Cytec Cytec Building Total
Performance Surface Engineered Block Segments
Chemicals Specialties Materials Chemicals
-------------------------------------------------------------------------------------------
2006
Net sales to external customers $865.1 $1,523.4 $601.8 $339.2 $3,329.5
Intersegment net sales 7.0 - - 77.1 84.1
------------------------------------------------------------
Total net sales 872.1 1,523.4 601.8 416.3 3,413.6
Earnings from operations 68.4 95.5 106.0 19.3 289.2
Percentage of sales 7.8% 6.3% 17.6% 4.6% 8.5%
Total assets 744.8 2,126.1 577.0 166.1 3,614.0
Capital expenditures 25.5 29.3 34.3 11.7 100.8
Depreciation and amortization 34.4 73.5 11.5 22.6 142.0
-------------------------------------------------------------------------------------------
2005
Net sales to external customers $855.8 $1,244.1 $541.6 $284.2 $2,925.7
Intersegment net sales 5.6 - - 85.3 90.9
------------------------------------------------------------
Total net sales 861.4 1,244.1 541.6 369.5 3,016.6
Earnings from operations 56.6 22.0 103.0 5.7 187.3
Percentage of sales 6.6% 1.8% 19.0% 1.5% 6.2%
Total assets 864.6 1,970.5 532.2 192.0 3,559.3
Capital expenditures 46.2 27.9 19.3 10.9 104.3
Depreciation and amortization 38.0 58.6 11.0 24.4 132.0
-------------------------------------------------------------------------------------------
2004
Net sales to external customers $712.7 $261.0 $487.0 $260.6 $1,721.3
Intersegment net sales 5.0 - - 85.0 90.0
------------------------------------------------------------
Total net sales 717.7 261.0 487.0 345.6 1,811.3
Earnings from operations 57.5 28.7 83.4 15.6 185.2
Percentage of sales 8.0% 11.0% 17.1% 4.5% 10.2%
Total assets 713.0 165.0 515.4 189.7 1,583.1
Capital expenditures 43.0 12.6 19.1 12.2 86.9
Depreciation and amortization 37.5 13.7 10.7 25.5 87.4
-------------------------------------------------------------------------------------------
The following table provides a reconciliation of selected segment information to
corresponding amounts contained in our consolidated financial statements:
2006 2005 2004
----------------------------------------------------------------------------
Net sales:
Net sales from segments $3,413.6 $3,016.6 $1,811.3
Elimination of intersegment revenue (84.1) (90.9) (90.0)
----------------------------------------------------------------------------
Total consolidated net sales $3,329.5 $2,925.7 $1,721.3
----------------------------------------------------------------------------
Earnings from operations:
Earnings from segments (1) $ 289.2 $ 187.3 $ 185.2
Corporate unallocated (2) 15.7 (26.8) (17.5)
----------------------------------------------------------------------------
Total consolidated earnings from operations $ 304.9 $ 160.5 $ 167.7
----------------------------------------------------------------------------
Total assets:
Assets from segments $3,614.0 $3,559.3 $1,583.1
Other assets (3) 217.5 299.8 668.5
----------------------------------------------------------------------------
Total consolidated assets $3,831.5 $3,859.1 $2,251.6
----------------------------------------------------------------------------
(1) Includes charges resulting from application of SFAS No. 123(R) of $10.4 in
2006. Includes $37.0 write-off of acquired in-process research and
development costs and $20.8 representing the excess of the fair market
value of the finished goods inventory of the acquired business over normal
manufacturing costs (see Note 2) in 2005.
(2) Includes restructuring charges of $21.8 primarily related to plant
closures, impairment charges of $29.3 related to two unprofitable
manufacturing sites in Europe, charge of $2.6 related to a change in
employee benefit plans in the U.K., charge of $2.2 related to a contingent
liability study update, and a pre-tax gain of $75.5 related to the first
phase of the sale of the Water Treatment and acrylamide product lines in
2006. Includes $16.8 of restructuring charges in 2005, and $8.0 in 2004
relating to the settlement of a class action law suit on behalf of
purchasers of carbon fiber and other related matters.
(3) Includes cash and cash equivalents at December 31, 2006, 2005 and 2004 of
$23.6, $68.6 and $323.8, respectively.
72
Operations by Geographic Areas: Net sales to unaffiliated customers presented
below are based upon the sales destination, which is consistent with how we
manage our businesses. U.S. exports included in net sales are based upon the
sales destination and represent direct sales of U.S.-based entities to
unaffiliated customers outside of the United States. Identifiable assets are
those assets used in our operations in each geographic area. Unallocated assets
are primarily cash and cash equivalents, miscellaneous receivables, construction
in progress, deferred taxes and the fair values of derivatives.
2006 2005 2004
----------------------------------------------------------------------
Net Sales
United States $1,162.2 $1,095.3 $ 802.4
Other Americas 279.3 257.4 188.0
Asia / Pacific 460.1 401.7 261.9
Europe, Middle East and Africa 1,427.9 1,171.3 469.0
----------------------------------------------------------------------
Total $3,329.5 $2,925.7 $1,721.3
----------------------------------------------------------------------
U.S. exports included in net sales above
Other Americas $ 93.4 $ 82.1 $ 70.7
Asia / Pacific 84.9 88.7 102.7
Europe, Middle East and Africa 160.9 90.6 61.0
----------------------------------------------------------------------
Total $ 339.2 $ 261.4 $ 234.4
----------------------------------------------------------------------
Identifiable assets
United States $1,513.9 $1,576.5 $1,001.9
Other Americas 180.1 183.6 148.1
Asia / Pacific 242.3 223.3 82.7
Europe, Middle East and Africa 1,565.0 1,482.5 306.5
----------------------------------------------------------------------
Total $3,501.3 $3,465.9 $1,539.2
----------------------------------------------------------------------
Equity in net assets of and advances
to associated companies 23.3 20.3 85.5
Unallocated assets (1) 306.9 372.9 626.9
----------------------------------------------------------------------
Total assets $3,831.5 $3,859.1 $2,251.6
----------------------------------------------------------------------
(1) Includes cash and cash equivalents at December 31, 2006, 2005 and 2004 of
$23.6, $68.6 and $323.8, respectively.
19. Risks and Uncertainties
Our revenues are largely dependent on the continued operation of our various
manufacturing facilities. There are many risks involved in operating chemical
manufacturing plants, including the breakdown, failure or substandard
performance of equipment, operating errors, natural disasters, the need to
comply with directives of, and maintain all necessary permits from, government
agencies and potential terrorist attacks. Our operations can be adversely
affected by raw material shortages, labor force shortages or work stoppages and
events impeding or increasing the cost of transporting our raw materials and
finished products. The occurrence of material operational problems, including
but not limited to the above events, may have a material adverse effect on the
productivity and profitability of a particular manufacturing facility. With
respect to certain facilities, such events could have a material effect on our
company as a whole.
Our operations are also subject to various hazards incident to the production of
industrial chemicals. These include the use, handling, processing, storage and
transportation of certain hazardous materials. Under certain circumstances,
these hazards could cause personal injury and loss of life, severe damage to and
destruction of property and equipment, environmental damage and suspension of
operations. Claims arising from any future catastrophic occurrence at one of our
locations may result in Cytec being named as a defendant in lawsuits asserting
potentially large claims.
We perform ongoing credit evaluations of our customers' financial condition and
generally do not require collateral from our customers. We are exposed to credit
losses in the event of nonperformance by counterparties on derivative
instruments. The counterparties to these transactions are major financial
institutions, thus we consider the risk of default to be minimal. We typically
do not require collateral or other security to support potential credit risk.
73
International operations are subject to various risks which may or may not be
present in U.S. operations. These risks include political instability, the
possibility of expropriation, restrictions on royalties, dividends and
remittances, instabilities of currencies, requirements for governmental
approvals for new ventures and local participation in operations such as local
equity ownership and workers' councils. Currency fluctuations between the U.S.
dollar and the currencies in which we do business have caused and will continue
to cause foreign currency transaction gains and losses, which may be material.
While we do not currently believe that we are likely to suffer a material
adverse effect on our results of operations in connection with our existing
international operations, any of these events could have an adverse effect on
our international operations in the future by reducing the demand for our
products, affecting the prices at which we can sell our products or otherwise
having an adverse effect on our operating performance.
74
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cytec Industries Inc.:
We have audited the accompanying consolidated balance sheets of Cytec Industries
Inc. and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2006. In
connection with our audits of the consolidated financial statements, we also
have audited the consolidated financial statement schedule, "Schedule II -
Valuation and Qualifying Accounts." These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2006 and 2005, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Notes 1 and 5 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123R, "Share-Based Payment", and the Securities and Exchange
Commission's Staff Accounting Bulletin 108, "Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in Current Year Financial
Statements", effective January 1, 2006. Also, as discussed in Notes 1 and 15 to
the consolidated financial statements, the Company adopted SFAS No. 158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R", at the end of
2006.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 27, 2007 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Short Hills, New Jersey
February 27, 2007
75
The Board of Directors and Stockholders
Cytec Industries Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Cytec
Industries Inc. and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Cytec Industries Inc. and subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2006, and our
report dated February 27, 2007 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Short Hills, New Jersey
February 27, 2007
76
QUARTERLY DATA (UNAUDITED)
(Dollars in millions, except per share amounts) 1Q 2Q 3Q 4Q Year
-----------------------------------------------------------------------------------------------------------------
2006
Net sales $819.4 $853.1 $863.4 $793.6 $3,329.5
Gross profit (1) 173.5 164.9 164.9 156.0 659.4
Net earnings 38.0 48.4 25.0 83.5 194.9
Basic net earnings per share (2) $0.81 $1.02 $0.52 $1.74 $4.11
Diluted net earnings per share (2) $0.79 $1.00 $0.51 $1.70 $4.01
2005
Net sales $563.9 $813.4 $760.8 $787.6 $2,925.7
Gross profit (1) 123.6 174.3 161.2 152.9 612.0
Net earnings (loss) (6.5) 11.9 35.4 18.3 59.1
Basic net earnings (loss) per share (2) $(0.16) $0.26 $0.77 $0.40 $1.31
Diluted net earnings (loss) per share (2) $(0.16) $0.25 $0.75 $0.39 $1.27
(1) Gross profit is derived by subtracting manufacturing cost of sales from net
sales.
(2) The sum of the quarters may not equal the full year basic and diluted
earnings per share since each period is calculated separately.
77
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
An evaluation was carried out by our management, under the supervision and with
the participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Exchange Act), as of December 31, 2006. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our current disclosure controls and procedures are effective.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) of the Exchange
Act. Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, an evaluation
of the effectiveness of our internal control over financial reporting was
carried out. Management's evaluation was based on the criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this evaluation,
management has concluded that our internal control over financial reporting was
effective as of December 31, 2006.
Attestation Report
Management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2006 has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report which is included
herein.
Changes in Internal Control
The Surface Specialties business of UCB SA was acquired on February 28, 2005.
Management excluded this business from its December 31, 2005 assessment of the
Company's internal control over financial reporting in accordance with
Securities and Exchange commission guidance. This guidance allows the omission
of an assessment of internal control of the acquired businesses in the year of
acquisition. The acquired business generally utilizes separate information and
accounting systems and processes and are included in management's assessment of
internal control for the year ended December 31, 2006. The inclusion of this
business represents a material change in the internal control processes that
were subject to management's assessment in 2006 as compared to those that were
included in management's assessment as of December 31, 2005.
We continue the process of implementing our Cytec Specialty Chemicals global
enterprise-wide planning systems for the acquired business of Surface
Specialties. The world-wide implementation is expected to be completed in early
2009 and includes changes that involve internal control over financial
reporting. Although we expect this implementation to proceed without any
material adverse effects, the possibility exists that the migration to our
global enterprise-wide planning systems could adversely affect our internal
control, our disclosure control and procedures or our results of operations in
future periods. We are reviewing each system and site as they are being
implemented and the control affected by the implementation. Appropriate changes
have been or will be made to any affected internal control during the
implementation. We will test all significant modified controls resulting from
the implementation to ensure they are functioning effectively.
With the exception of the Surface Specialties acquisition as noted above, there
were no changes in internal control over financial reporting that occurred
during the calendar year 2006 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Item 9B. OTHER INFORMATION
Not applicable.
78
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning our executive officers. Each
such person serves at the pleasure of our Board of Directors.
Name Age Positions
---- --- ---------
D. Lilley 60 Mr. Lilley is Chairman of the Board, President and Chief Executive Officer. He was
elected Chairman in January 1999 and President and Chief Executive Officer in May 1998,
having previously served as President and Chief Operating Officer from January 1997.
J. P. Cronin 53 Mr. Cronin is Executive Vice President and Chief Financial Officer, having previously
served as Vice President and Chief Financial Officer from our inception in 1993 until he
was elected an Executive Vice President in September 1996.
S. D. Fleming 48 Mr. Fleming has been President of Cytec Specialty Chemicals since October 2005. He was
elected as an officer in September 2004. He previously served as President of Cytec
Performance Specialties, Vice President, Phosphine and Mining Chemicals and other
executive positions in our specialty chemicals businesses for more than three years.
S. C. Speak 49 Mr. Speak was elected as an officer in September 2004. He has been President of Cytec
Engineered Materials for more than five years.
W. N. Avrin 51 Mr. Avrin is Vice President, Corporate and Business Development and has held this
position for more than five years.
D. M. Drillock 49 Mr. Drillock was elected Vice President, Controller and Investor Relations in April
2002. He previously served as Controller for more than one year.
J. E. Marosits 54 Mr. Marosits was elected Vice President, Human Resources in July 2002. For more than
one year prior to that, he had been our Director, Human Resources for Building Block
Chemicals and Corporate Manager, Labor Relations.
R. Smith 48 Mr. Smith is Vice President, General Counsel and Secretary, and has held this position
for more than five years.
T. P. Wozniak 53 Mr. Wozniak is Treasurer of Cytec and has held this position for more than five years.
We have a specific Code of Ethics which is applicable to our chief executive
officer, our chief financial officer, our chief accounting officer and our
controller. This code sets forth certain of our expectations, including that the
officers will act with honesty and integrity, will avoid actual and apparent
conflicts of interest, will comply with all applicable laws, will disclose
information that is complete and understandable and will act in good faith and
responsibly. The Code also requires the prompt reporting of violations to the
Chair of the Audit Committee. A current copy of the Code is available on our
website accessible at www.Cytec.com. We will disclose information regarding any
amendment to the Code or any waiver from any of its provisions on the same
website. There have never been any waivers granted regarding our Code.
The remainder of the information required by this Item is incorporated by
reference from the "Election of Directors" section of our definitive Proxy
Statement for our 2007 Annual Meeting of Common Stockholders, dated March 9,
2007.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
"Summary Compensation Table", the "Grants of Plan-Based Awards", the
"Outstanding Equity Awards at Fiscal Year-End", the "Option Exercises and Stock
Vested", the "Pension Benefits", the "Nonqualified Deferred Compensation", the
"Director Compensation Tables", the "Compensation Discussion and Analysis", the
"Potential Payments Upon Termination or Change-In-Control", and "Performance
Graph" section of our definitive Proxy Statement for our 2007 Annual Meeting of
Common Stockholders, dated March 9, 2007.
79
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from the
"Cytec Stock Ownership by Directors & Officers" and the "Security Ownership of
Certain Beneficial Owners" sections of our definitive Proxy Statement for our
2007 Annual Meeting of Common Stockholders, dated March 9, 2007.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
"Certain Relationships and Related Transactions" section of our definitive Proxy
Statement for our 2007 Annual Meeting of Common Stockholders, dated March 9,
2007.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference from the
"Fees Paid to the Auditors" section of our definitive Proxy Statement for our
2007 Annual Meeting of Common Stockholders, dated March 9, 2007.
80
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) List of Financial Statements:
Cytec Industries Inc. and Subsidiaries Consolidated
Financial Statements (Refer to Item 8):
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Income for the Years ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the Years ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
(a)(2) Cytec Industries Inc. and Subsidiaries Financial
Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules, other than "Schedule II---Valuation and Qualifying
Accounts," are omitted because of the absence of the
conditions under which they are required or because the
information called for are included in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits
Exhibit No. Description
----------- -----------
3.1(a) Certificate of Incorporation (incorporated by reference to exhibit 3.1(a) to Cytec's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
3.1(b) Certificate of Amendment to Certificate of Incorporation dated May 13, 1997 (incorporated by
reference to exhibit 3.1(a) to Cytec's quarterly report on Form 10-Q for the quarter ended June 30,
1997).
3.1(c) Conformed copy of the Cytec's certificate of incorporation, as amended (incorporated by
reference to exhibit 3(c) to Cytec's registration statement on Form S-8,
registration number 333-45577).
3.2 By-laws, as amended through January 22, 2002 (incorporated by reference to Exhibit 3.2 to Cytec's
annual report on Form 10-K for the year ended December 31, 2001).
4.1 Form of Common Stock Certificate (incorporated by reference to exhibit 4.1 to Cytec's registration
statement on Form 10).
4.2(a) Indenture, dated as of March 15, 1998 between the Cytec and PNC Bank, National Association as
Trustee (incorporated by reference to Exhibit 4.1 of Cytec's current report on Form 8-K, dated
March 18, 1998).
4.2(b) Supplemental Indenture, dated as of May 11, 1998 between the Cytec and PNC Bank National
Association, as Trustee (incorporated by reference to Exhibit 4.2 to Cytec's quarterly report on
Form 10-Q for the quarter ended March 31, 1998).
4.3 6.75% Global Note due March 15, 2008 (incorporated by reference to Exhibit 4.3 of Cytec's current
report on Form 8-K dated March 18, 1998).
4.4 Stockholder's Agreement dated as of February 28, 2005 between Cytec and UCB SA
(incorporated by reference to Exhibit 99.1 of Cytec's current report on Form 8-K dated
March 4, 2005).
81
Exhibit No. Description
----------- -----------
4.5 4.60% Senior Note due 2013 (incorporated by reference to Exhibit 4.2 to Cytec's quarterly report
on Form 10-Q for the quarter ended June 30, 2003).
4.6 5.500% Senior Note due 2010 (incorporated by reference to Exhibit 4.1 to Cytec's current report on
Form 8-K, dated October 4, 2005).
4.7 6.000% Senior Note due 2015 (incorporated by reference to Exhibit 4.2 to Cytec's current report on
Form 8-K, dated October 4, 2005).
10.1(a) Five Year Term Loan Agreement dated as of February 15, 2005, among the Cytec, the banks named
therein and Citigroup Global Markets, Inc., as lead arranger and book manager ("Term Agreement")
(incorporated by reference to exhibit 99.2 to Cytec's current report on Form 8-K dated February 15,
2005).
10.1(b) Letter Amendment No. 1 to Term Agreement dated as of March 1, 2005 (incorporated by
reference to Exhibit 10.1(b) to Cytec's annual report on Form 10-K for the year ended
December 31, 2005).
10.1(c) Letter Amendment No. 2 to Term Agreement dated as of November 11, 2005 (incorporated
by reference to Exhibit 10.1(c) to Cytec's annual report on Form 10-K for the year ended
December 31, 2005).
10.1(d) Letter Amendment No. 3 to Term Loan Agreement dated December 31, 2005 (incorporated by
reference to Exhibit 10.1(d) to Cytec's annual report on Form 10-K for the year ended
December 31, 2005).
10.1(e) Five Year Credit Agreement dated as of February 15, 2005, among the Cytec, the banks
named therein and Citigroup Global Markets, Inc., as lead arranger and book manager
("Credit Agreement")(incorporated by reference to exhibit 99.3 to Cytec's current
report on form 8-K dated February 15, 2005).
10.1(f) Letter Amendment No. 1 to Credit Agreement dated as of November 18, 2005 (incorporated
by reference to Exhibit 10.1(f) to Cytec's annual report on Form 10-K for the year ended
December 31, 2005).
10.1(g) Letter Amendment No. 2 to Credit Agreement dated as of December 31, 2005 (incorporated
by reference to Exhibit 10.1(g) to Cytec's annual report on Form 10-K for the year ended
December 31, 2005).
10.2 Executive Compensation Plans and Arrangements (incorporated by reference to exhibit 10.12 to
Cytec's annual report on Form 10-K for the year ended December 31, 2003).
10.2(a) 1993 Stock Award and Incentive Plan, as amended through December 7, 2006.
10.2(b) Form of Performance Stock Award/Performance Cash Award Grant Letter (incorporated by reference to
exhibit 10.12(b) to Cytec's annual report on Form 10-K for the year ended December 31, 1999).
10.2(c) Rule No. 1 under 1993 Stock Award and Incentive Plan as amended through January 20, 2003
(incorporated by reference to exhibit 10.12(c) to Cytec's Annual Report on Form 10-K for the year
ended December 31, 2002).
10.2(d)(i) Form of Stock Option Grant Letter (incorporated by reference to exhibit 10.13(d) of Cytec's annual
report on Form 10-K for the year ended December 31, 1998).
10.2(d)(ii) Form of Stock Option Grant Letter used for grants to officers from January 21, 2002 through January
19, 2004 (incorporated by reference to Exhibit 10.12(d)(ii) to Cytec's annual report on Form 10-K
for the year ended December 31, 2001).
82
Exhibit No. Description
----------- -----------
10.2(d)(iii) Form of Stock Option Grant Letter used for grants to officers from January 21, 2004 through
February 8, 2006 (incorporated by reference to exhibit 10.12 to Cytec's annual report on Form 10-K
for the year ended December 31, 2003).
10.2(d)(iv) Form of Performance Stock Award Grant Letter used for grants to officers during 2004 and 2005
(incorporated by reference to exhibit 10.12 to Cytec's annual report on Form 10-K for the year
ended December 31, 2003).
10.2(d)(v) Form of common stock settled Stock Appreciation Rights ("SARs") Award letter used for grants to
officers from February 9, 2006 (incorporated by reference to Exhibit 10.2(d)(v) to Cytec's annual
report on Form 10-K for the year ended December 31, 2005).
10.2(d)(vi) Form of Performance Cash Award letter used for grants to officers from February 9, 2006.
10.2(e) Rule No. 2, as amended through January 27, 1997, under 1993 Stock Award and Incentive Plan
(incorporated by reference to exhibit 10.13(e) to Cytec's annual report on Form 10-K for the year
ended December 31, 1996).
10.2(f) Executive Income Continuity Plan, as amended through February 28, 2007.
10.2(g) Key Manager Income Continuity Plan, as amended through September 12, 2003 (incorporated by
reference to exhibit 10.12(g) to Cytec's quarterly report on Form 10-Q for the quarter ended
September 30, 2003).
10.2(h) Employee Income Continuity Plan, as amended through September 12, 2003 (incorporated by reference
to exhibit 10.12(h) to Cytec's quarterly report on Form 10-Q for the quarter ended September 30,
2003).
10.2(i) Cytec Excess Retirement Benefit Plan, as amended through May 11, 2000 (incorporated by
reference to exhibit 10.12(j) to Cytec's quarterly report on Form 10-Q for the quarter
ended June 30, 2000).
10.2(j) Cytec Supplemental Employees Retirement Plan, as amended through April 13, 2000 (incorporated by
reference to exhibit 10.12(k) to Cytec's quarterly report on Form 10-Q for the quarter ended June
30, 2000).
10.2(k) Cytec Executive Supplemental Employees Retirement Plan, as amended through February 28, 2007.
10.2(l) Cytec Compensation Tax Equalization Plan (incorporated by reference to exhibit 10(G) to Cytec's
quarterly report on Form 10-Q for the quarter ended September 30, 1994).
10.2(m) Cytec Supplemental Savings and Profit Sharing Plan, as amended and restated through July 22, 2003
(incorporated by reference to exhibit 4.4 to Cytec's Registration Statement on Form S-8,
registration number 333-107221).
10.2(n) Amended and Restated Trust Agreement effective as of December 15, 1994 between the Cytec and
Vanguard Fiduciary Trust Company, as successor trustee (incorporated by reference to exhibit
10.12(p) to Cytec's annual report on Form 10-K for the year ended December 31, 1999).
10.2(o) Deferred Compensation Plan as amended through December 9, 2002 (incorporated by reference
to exhibit 10.12(o) to Cytec's annual report on Form 10-K for the year ended December 31, 2002).
10.2(p) Rule No. 4 under 1993 Stock Award and Incentive Plan as amended (incorporated by
reference to Exhibit 10.2(p) to Cytec's annual report on Form 10-K for the year ended
December 31, 2005).
83
Exhibit No. Description
----------- -----------
10.2(q) Relocation Agreement for Shane Fleming dated December 11, 2005 (incorporated by reference
to Exhibit 10.3 to Cytec's annual report on Form 10-K for the year ended December 31, 2005).
10.2(r) Restricted Stock Award Agreement for James P. Cronin dated March 1, 2005 (incorporated by
reference to Exhibit 10.4 to Cytec's annual report on Form 10-K for the year ended
December 31, 2005).
10.2(s) Restricted Stock Award Agreement for William N. Avrin dated March 1, 2005 (incorporated by
reference to Exhibit 10.5 to Cytec's annual report on Form 10-K for the year ended December 31,
2005).
10.2(t) Supplementary Pension for Collective Life Management Code for Cytec Surface Specialties
NV dated November 24, 2005 (incorporated by reference to Exhibit 10.8 to Cytec's annual
report on Form 10-K for the year ended December 31, 2005).
10.2(u) Group Insurance Precautionary Plan for Cytec Surface Specialties NV dated August 8, 2005
(incorporated by reference to Exhibit 10.9 to Cytec's annual report on Form 10-K for the year ended
December 31, 2005).
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
24(a-i) Powers of Attorney of C.A. Davis, A.G. Fernandes, L. L. Hoynes, Jr., B. C. Johnson, W. P. Powell,
T.W. Rabaut, J. R. Satrum, R. P. Sharpe and J. R. Stanley.
31.1 Certification of David Lilley, Chief Executive Officer pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of James P. Cronin, Chief Financial Officer pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of David Lilley, Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of James P. Cronin, Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, we have duly caused this report to be signed on our behalf by the
undersigned, thereunto duly authorized.
CYTEC INDUSTRIES INC.
(Registrant)
DATE: February 28, 2007 By: /s/ David Lilley
--------------------------
D. Lilley
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on our behalf and in the
capacities and on the dates indicated.
DATE: February 28, 2007 /s/ David Lilley
----------------
D. Lilley
Chairman, President and Chief Executive Officer
DATE: February 28, 2007 /S/ J. P. Cronin
---------------------------------
J. P. Cronin, Executive Vice President,
Chief Financial and Accounting Officer
*
-----------------------------------
C.A. Davis, Director
*
-----------------------------------
A.G. Fernandes, Director
*
-----------------------------------
L.L. Hoynes, Jr., Director
*By: /S/ R. Smith
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Attorney-in-Fact
*
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B. C. Johnson, Director
*
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W. P. Powell, Director
*
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T.W. Rabaut, Director
*
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J. R. Satrum, Director
*
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R. P. Sharpe, Director
*
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J. R. Stanley, Director
DATE: February 28, 2007
85
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2006, 2005 and 2004
(in millions)
Additions or
(deductions)
charged or
Balance (credited) Other additions Balance
Description 12/31/2005 to expenses or (deductions) 12/31/2006
----------- ---------- ----------- ------------- ----------
Reserves deducted from related assets:
Doubtful accounts
receivable $ 7.8 $ (0.8) $ (1.9) (1) $ 5.1
Deferred tax asset
valuation allowance $ 23.2 $ 9.6 $ (5.0) (2) $ 27.8
Environmental accruals $ 102.9 $ 0.5 $ (0.7) (3) $ 102.7
(1) Principally bad debts written off, less recoveries and a reduction of $1.7 due to adoption of SAB 108.
(2) Primarily attributable to adjustments of acquired Surface Specialties deferred taxes and related valuation allowance.
(3) Environmental remediation spending of $4.8 offset by a favorable currency exchange of $4.1.
Additions or
(deductions)
charged or
Balance (credited) Other additions Balance
Description 12/31/2004 to expenses or (deductions) 12/31/2005
----------- ---------- ----------- ------------- ----------
Reserves deducted from
related assets:
Doubtful accounts
receivable $ 6.7 $ 0.9 $ 0.2 (1) $ 7.8
Deferred tax asset
valuation allowance $ 12.2 $ 2.2 $ 8.8 (2) $ 23.2
Environmental accruals $ 70.7 $ 1.7 $ 30.5 (3) $ 102.9
(1) Principally bad debts written off, less recoveries.
(2) Primarily attributable to the Surface Specialties acquisition.
(3) Environmental remediation spending net of $6.6, $(3.1) currency exchange
and $40.2 related to the Surface Specialties acquisition.
Additions or
(deductions)
charged or
Balance (credited) Other additions Balance
Description 12/31/2003 to expenses or (deductions) 12/31/2004
----------- ---------- ----------- ------------- ----------
Reserves deducted from
related assets:
Doubtful accounts
receivable $ 7.6 $ 0.4 $ (l.3) (1) $ 6.7
Deferred tax asset
valuation allowance $ 4.6 - $ 7.6 (2) $ 12.2
Environmental accruals $ 79.6 $ (0.1) $ (8.8) (3) $ 70.7
(1) Principally bad debts written off, less recoveries.
(2) Primarily attributable to U.S. state income tax net operating loss and credit carryforwards.
(3) Environmental remediation spending, net of $0.6 currency exchange.