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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, 2005
COMMISSION FILE NUMBER 1-12372
CYTEC INDUSTRIES INC.
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(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:
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, 2005 the aggregate market value of common stock held by
non-affiliates was $1,815,762,963 based on the closing price ($39.80) of such
stock on such date.
There were 46,392,768 shares of common stock outstanding on January 31, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS PART OF FORM 10-K
Portions of Proxy Statement for 2006 Annual Meeting Parts III, IV
Of Common Stockholders, dated March 20, 2006.
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CYTEC INDUSTRIES INC. AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Page
Part 1.
Item 1. Business 4
Item 1A. Risk Factors 13
Item 1B Unresolved Staff Comments 14
Item 2. Properties 15
Item 3. Legal Proceedings 17
Item 4. Submission Of Matters to a Vote of Security Holders 18
Part II.
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8 Financial Statements and Supplementary Data 37
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 74
Item 9A. Controls and Procedures 74
Item 9B. Other Information 74
Part III.
Item 10. Directors and Executive Officers of the Registrant 75
Item 11. Executive Compensation 76
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters 76
Item 13. Certain Relationships and Related Transactions 76
Item 14. Principal Accountant Fees and Services 76
Part IV.
Item 15. Exhibits and Financial Statement Schedules 77
Signatures
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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, pricing trends, the effects of changes in
currency rates and forces within the industry, the completion dates of and
anticipated expenditures for capital projects, expected sales growth,
operational excellence strategies and their results, expected annual effective
tax rates, our long-term goals and other statements of expectations, beliefs,
future plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical facts. Such statements
are based upon our current beliefs and expectations and are subject to
significant risks and uncertainties. Actual results may vary materially from
those set forth in the forward-looking statements.
The following factors, among others, could affect the anticipated results: the
ability to complete the successful integration of Surface Specialties, including
realization of anticipated synergies within the expected timeframes or at all,
and the ongoing operations of the business; the retention of current ratings on
our debt; changes in global and regional economies; the financial well-being of
end consumers of our products; changes in demand for our products or in the
quality, costs and availability of our raw materials and energy; customer
inventory reductions; the actions of competitors; currency and interest rate
fluctuations; technological change; our ability to renegotiate expiring
long-term contracts; changes in employee relations, including possible strikes;
government regulations, including those related to taxation and those particular
to the purchase, sale and manufacture of chemicals or operation of chemical
plants; governmental funding for those military programs that utilize our
products; litigation, including its inherent uncertainty and changes in the
number or severity of various types of claims brought against us; difficulties
in plant operations and materials transportation, including those caused by
hurricanes or other natural forces; environmental matters; returns on employee
benefit plan assets and changes in the discount rates used to estimate employee
benefit liabilities; changes in the medical cost trend rate; changes in
accounting principles or new accounting standards; political instability or
adverse treatment of foreign operations in any of the significant countries in
which we operate; war, terrorism or sabotage; epidemics; and other unforeseen
circumstances.
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.
-3-
PART I
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, plastics and water treatment. 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 40% of our 2005
revenues in North America, 40% in Europe, 14% in Asia-Pacific and 6% in Latin
America. We have manufacturing and research facilities located in 20 countries.
We had net sales of $2,925.7 million and earnings from operations of $160.5
million in 2005. 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 $1,774.3 million, net of working capital adjustments of $25.4
million. In connection with the acquisition, we also incurred transaction costs
of approximately $14.9 million. This acquisition complemented our existing
product offering to the coatings industry including the general industrial,
automotive, architectural, plastic, ink and wood sectors.
The Surface Specialties business had revenues of approximately $1,350 million in
2004 which included approximately $154 million of sales from the Surface
Specialties amino resins ("SSAR") product line. Pursuant to regulatory
approvals, we were required to divest SSAR. On August 31, 2005, we sold SSAR to
affiliates of INEOS Group Limited for cash consideration of $76.6 million
((euro)62.7 million at $1.22 per euro). This completed our commitments under
orders from the Federal Trade Commission and the European Community to divest
SSAR following our acquisition of the Surface Specialties business.
After giving effect to the acquisition and a subsequent reorganization, we
realigned our four business segments to include: 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 our water treatment chemicals,
mining chemicals, phosphine and phosphorous specialties, polymer additives and
specialty additives all of which were previously reported as Cytec Performance
Specialties, as well as urethanes and the acquired polyurethanes and pressure
sensitive adhesives product lines which were were previously included in Cytec
Surface Specialties. Cytec Surface Specialties includes radiation-cured resins
(Radcure resins), powder coating resins and liquid coating resins which include
various product lines such as water-borne resins and solvent based resins. Cytec
Engineered Materials principally includes advanced composites and structural
film adhesives. Building Block Chemicals principally includes acrylonitrile,
hydrocyanic acid, acrylamide, 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:
o 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 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.
o 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 application, such as coil coating, automotive
repair, ultraviolet inkjet printing and flat-panel displays.
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o Seek geographical expansion of our business. We operate on a global
basis with manufacturing plants located in 20 countries. Our recent
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. We can now service customers better in such countries
as China, Thailand, Malaysia, Korea and Brazil.
o 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.
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 million plus $5.4 million for working capital
adjustments. The proceeds of this transaction essentially recovered the carrying
value of our investment in CYRO. Net proceeds of the sale were used to reduce
debt incurred to fund the Surface Specialties acquisition.
In the course of our ongoing operations, we have made a number of 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 17 of the Notes to
Consolidated Financial Statements which are incorporated by reference herein.
This information has been restated to reflect our realigned reporting segments
which were changed in March 2005 in connection with the acquisition of Surface
Specialties and then again slightly in November 2005 in connection with certain
strategic decisions made by us.
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
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
Adhesives Pressure sensitive adhesives: Signage, labels, tapes, graphics,
water-borne and solvent-borne medical and specialty coaters
Specialty additives and Surfactants, specialty monomers, Textiles, non-wovens and
Phosphines acrylic stabilizers, solvent adhesives, super absorbent
extractants, flame retardants, products, mineral processing,
catalyst ligands, high purity pharmaceutical, chemical and
phosphine gas and biocides electronic manufacturing, and
fumigants
Specialty urethanes Polyurethanes and urethane Breathable textile coatings,
resins, carbamates and epoxy formulated polyurethane and epoxy
resin systems systems, adhesives, inks and
sealants
Water treatment chemicals Flocculants, coagulants, filter Water and wastewater treatment,
aids, drilling fluids and raw water clarification, process
production chemicals, scale water treatment, oil field
inhibitors, friction reducers drilling, production, recovery,
and mobility control polymers refining, sugar processing and
municipal waste
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-5-
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. Certain of our products in
this segment, primarily water treatment chemicals, are manufactured using
acrylamide that is manufactured by our Building Block Chemicals segment. For
further 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.
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.
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.
-6-
SPECIALTY ADDITIVES AND PHOSPHINES
We are a leading global supplier of acrylamide based specialty monomers and
sulfosuccinate surfactants. These products are used in emulsion polymers,
paints, paper coatings, printing inks, and other diverse customer applications.
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. In 2003, we acquired from Avecia
its organo phosphorus product line 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.
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 urethanes,
carbamates and epoxy resin systems are used in high-performance applications in
industries such as aerospace, automotive, military, computers, biomedical,
textiles and electrical / electronics.
WATER TREATMENT CHEMICALS
Our water treatment chemicals product line consists primarily of products for
use in applications such as treatment of industrial waste streams and industrial
influent water supplies to remove suspended solids, drilling mud conditioners
for oil service companies and as sewage conditioners for municipal wastewater
treatment. Increased demand for clean water, environmental regulations and
regional and global economic development have increased demand for our water
treatment chemicals. We also produce paper chemicals under a long-term
manufacturing supply agreement that expires in October 2008.
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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Liquid coating resins Water-borne and solvent-borne Automotive and industrial coatings for appliances,
epoxies, alkyds and acrylics, automobiles, containers, metal fixtures, metal and
cathodic electro-deposition resins, wood furniture, and heavy-duty industrial
phenolic resins, amino resins and machinery, architectural applications, products
additives used in textiles coating, abrasives, tires,
electronics, marine, sanitary and swimming pools
Powder coating resins Ultraviolet and conventional powders Powder coatings for industrial and heavy duty
metal applications, appliance, white goods,
architecture and wood
Radcure resins Oligomers, photo-initiators, Coatings and inks used in industrial metal, wood and plastic
monomers coatings including parquet, safety glass interlayer,
printing inks and varnishes
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We market our surface spec 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."
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
coating systems. Our extensive portfolio includes products based on seven
chemistries: acrylics, amino resins, epoxy systems, alkyds and polyesters,
polyurethanes, phenolics and unsaturated polyesters.
-7-
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.
POWDER COATING RESINS
As part of our acquisition of Surface Specialties, we acquired pioneering
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.
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.
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.
CYTEC ENGINEERED MATERIALS
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. Every major commercial aircraft program 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. In order to meet this demand, in 2004 we completed an
expansion of our production facility in Oestringen, Germany.
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.
-8-
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.
Approximately 35% of our demand for carbon fibers is sourced from Cytec Carbon
Fibers as discussed below. Refer to "Customers and Suppliers."
We market aerospace materials primarily through a dedicated sales and technical
service staff typically direct to customers.
CYTEC CARBON FIBERS
We manufacture and sell various high-performance grades of both
polyacrylonitrile ("PAN") type and pitch type carbon fibers. Carbon fibers 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. Approximately 60% of our carbon fiber production is utilized by
Cytec Engineered Materials with the balance being sold to third parties. We have
recently commenced a project to increase our production of PAN carbon fiber by
approximately 25%. This project is expected to be completed by the third quarter
of 2006.
BUILDING BLOCK CHEMICALS
Building Block Chemicals are manufactured primarily at our world-scale, highly
integrated Fortier facility. The Fortier facility is located on the bank of the
Mississippi 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, acrylamide, sulfuric acid and melamine
that are produced both for use internally within our other segments and for
merchant sale. We strive to operate our plants at capacity subject to market
conditions and raw material availability. Due to hurricane activity in the Gulf
region, our Fortier facility experienced reduced production levels during the
third quarter of 2005. This reduction in production level was primarily due to
our decision to safely shut down the facility in advance of the hurricanes and
the subsequent temporary loss of power and natural gas supply.
MELAMINE
American Melamine Industries ("AMEL"), a 50% owned manufacturing joint venture
with a subsidiary of DSM N.V. ("DSM"), operates the melamine manufacturing plant
with an annual production capacity of approximately 160 million pounds at our
Fortier facility. We typically use approximately 80% to 90% of our 50% share of
AMEL's production, primarily for the production of amino resins for our liquid
coating resins product line with the balance being sold to third parties. As
allowed by the terms of the joint venture agreement, DSM has given us notice of
termination of the joint venture effective August 1, 2007 and has nominated zero
output from AMEL during the first two months of 2006 citing high raw material
input costs, notably those impacted by North American natural gas pricing. DSM
has stated their intent to monitor raw material pricing in North America and
possibly resume production when economically attractive. We have served notice
to AMEL to operate the melamine plant to produce our half of the output
capacity. If DSM takes zero output from AMEL throughout 2006, we estimate that
it will have a negative economic impact to Cytec of approximately $5.0 million
due to the loss of certain efficiencies that accompany the plant when it
operates at capacity. DSM filed a lawsuit against us in 2006 seeking immediate
dissolution of AMEL or the appointment of a receiver for AMEL, the rescission of
the services agreement between Cytec and AMEL and compensatory damages. We
believe the lawsuit is without merit and we are vigorously defending against all
of the claims.
ACRYLONITRILE AND HYDROCYANIC ACID
We anticipate that over the near term we will internally use approximately 30%
of our current acrylonitrile production to produce acrylamide. 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. We sell hydrocyanic acid, a co-product of the manufacture of
acrylonitrile, under a long-term supply agreement to a tenant at our Fortier
site.
OTHER BUILDING BLOCK CHEMICALS
We manufacture and sell acrylamide and sulfuric acid. We anticipate that over
the near term we will internally use approximately 40% of our acrylamide
production capacity for the production of certain products primarily for our
Cytec Performance Chemicals segment with the balance being sold to third
parties. We 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.
-9-
We sell Building Block Chemicals to third parties through a direct sales force
and distributors.
ASSOCIATED COMPANY AND MINORITY INTERESTS
Through May 31, 2005, we had one associated company that was material to our
operations, CYRO Industries ("CYRO"), a 50% owned joint venture. Upon
acquisition of Surface Specialties, we acquired 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
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 three of our customers, including sales to these customers'
subcontractors, are significant to our Cytec Engineered Materials segment. The
loss of these customers 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 11 of the Notes to Consolidated Financial
Statements which are incorporated by reference herein.
A number of our customers operate in cyclical industries such as the aerospace,
automotive, mining and paper industries. 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 and the Building
Block Chemicals segment are propylene, ammonia, methanol derivatives, propylene
derivatives such as acrylic acid 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 raw materials have been volatile over time
and have risen sharply in 2005. Because natural gas is not easily transported,
the price may vary widely between geographic regions. The price of natural gas
in the U.S. is typically 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.
-10-
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 source our requirements of cationic monomers, important raw
materials in the water treatment chemicals and mining chemicals product lines,
from a single supplier under a long-term agreement. 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 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. Due to
the impact of both Hurricane Katrina and Hurricane Rita, there was a regional
disruption in the supply of natural gas.
We expect to continue to encounter tight markets for certain key raw materials
during 2006. 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 20 countries. Through our sales forces, third party distributors and agents,
we market our products internationally. Financial geographical information is
contained in Note 17 of the Notes to Consolidated Financial Statements which are
incorporated by reference herein.
International operations are subject to various risks which 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.
RESEARCH AND PROCESS DEVELOPMENT
During 2005, 2004 and 2003, we incurred $68.5 million, $40.0 million and $35.2
million, respectively, of research and process development expense. During 2005,
we also recorded a charge of $37.0 million in connection with the acquisition of
Surface Specialties for the write-off of acquired in-process research and
development.
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
200 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 7,300 employees of which about one-half are represented
by unions. We believe that our relations with employees and unions are generally
good.
-11-
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.
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 11 of the Notes
to Consolidated Financial Statements which are 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, 2005, we had $1,311.0 million of debt outstanding, and $350.0
million of availability under our five year revolving credit agreement. 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. A discussion of our debt is contained in Note
10 of the Notes to Consolidated Financial Statements which are incorporated
herein.
We consider our principal credit agreements ("PCA's") to be our five-year term
loan ($461.2 million outstanding at December 31, 2005) and $350.0 million
five-year revolving credit facilities (zero amount outstanding at December 31,
2005). 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 credit facilities
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 INTEGRATION OF SURFACE
SPECIALTIES AND OPERATING THE ACQUIRED BUSINESS WHICH COULD ADVERSELY AFFECT OUR
FINANCIAL PERFORMANCE OR OUR ABILITY TO COMPETE SUCCESSFULLY IN OUR MARKETS.
Integrating and operating the acquired businesses, and achieving the full
benefit and potential efficiencies from such acquisitions, requires substantial
management, financial and other resources and may pose several risks, some or
all of which could have a material adverse effect on our business, financial
condition or results of operations. These risks include:
o difficulties in assimilation of acquired personnel, operations and
technologies;
o the need to manage a significantly larger business with operations in
different locations around the world;
o diversion of management's attention from the ongoing development of
our existing businesses or other business concerns;
o failure to retain key personnel of the acquired business; and
o unforeseen operating difficulties and expenditures.
If we experience any of these difficulties our financial performance and ability
to compete successfully in any of our markets could be adversely affected.
DISPOSITION OR RESTRUCTURING CHARGES AND GOODWILL IMPAIRMENT OR ACQUISITION
INTANGIBLE IMPAIRMENT OR 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. Additionally, management regularly reviews the cost
effectiveness of its plant sites and/or asset 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 charges of $14.1 million in the fourth quarter of 2005.
Such charges could have a material adverse effect on our results of operations
in the period in which they are recorded. Another example is an event such as
the notice of termination by DSM of our manufacturing joint venture at the end
of its term on August 1, 2007. We are reviewing our go-forward options at the
end of the venture, and depending on various factors and assumptions such as
market demand and raw material costs it could lead to the recording of an
impairment charge related to the recoverability of the AMEL long-lived assets.
At December 31, 2005, the carrying value of our 50% share of AMEL's long-lived
assets was approximately $l5.0 million. Based on our current plans, the
estimated future cash flows are sufficient to support the carrying value of
these assets. For further discussion of AMEL, see "Building Block Chemicals
Segment, MELAMINE."
-13-
We test goodwill and indefinite-lived acquisition intangible assets 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 acquisition of Surface Specialties, we recorded goodwill
in the amount of $728.3 million and recorded acquisition intangibles of $490.4
million at December 31, 2005. In total, we had $1,012.2 million of goodwill, and
acquisition intangibles with a net carrying value of $491.5 million at December
31, 2005. 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 20 countries. Capital
spending for the years ended 2005, 2004 and 2003 was $105.3 million, $89.3
million and $93.8 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
Antofogasta, 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
Botlek, the Netherlands Cytec Performance Chemicals; Cytec Surface Specialties;
Building Block Chemicals
Bradford, U.K. Cytec Performance Chemicals
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
La Llagosta, Spain Cytec Surface Specialties
Langley, South Carolina Cytec Performance Chemicals; Cytec Surface Specialties
Lillestrom, Norway Cytec Surface Specialties
Longview, Washington Cytec Performance Chemicals
Mobile, Alabama Cytec Performance Chemicals
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
-15-
We own all of the foregoing facilities and their sites except for the land at
the Botlek, Indian Orchard, Lillestrom, New Castle, Pampa, Smyrna and
Shimonoseki facilities. The land is leased under long-term leases, except for
the Indian Orchard, New Castle and Pampa facilities. We are currently
negotiating our leases with our landlords for the Indian Orchard and Pampa
locations, and reviewing our options regarding these sites. We plan to relocate
our New Castle, Delaware operations to the new plant we are building at our
Kalamazoo, Michigan facility. We anticipate the relocation to be complete during
the last half of 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.
-16-
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, includes certain
predecessor entities being indemnified by us.
LEAD PIGMENT
We are among several defendants in approximately 30 cases in the U.S., in
which plaintiffs assert claims for personal injury, property damage, and other
claims for relief relating to one or more kinds of lead pigment that were used
as an ingredient decades ago in paint for use in buildings. The different suits
were brought by government entities and/or individual plaintiffs, on behalf of
themselves and others. The suits variously seek compensatory and punitive
damages and/or injunctive relief, including funds for the cost of monitoring,
detecting and removing lead based paint from buildings and for medical
monitoring; for personal injuries allegedly caused by ingestion of lead based
paint; and plaintiffs' attorneys' fees. We believe that the suits against us are
without merit, and we are vigorously defending against all such claims.
Accordingly, no loss contingency has been recorded.
In July 2005, the Supreme Court of Wisconsin held in a case in which we were one
of several defendants that Wisconsin's risk contribution doctrine applies to
bodily injury cases against manufacturers of white lead pigment. Under this
doctrine, manufacturers of white lead pigment may be liable for injuries caused
by white lead pigment based on their past market shares unless they can prove
they are not responsible for the white lead pigment which caused the injury in
question. Seven other courts have previously rejected the applicability of this
and similar doctrines to white lead pigment. We settled this case for an
immaterial amount. Although similar cases may be filed in Wisconsin, we intend
to vigorously defend ourselves if such case(s) are filed based on what we
believe to be our non-existent or diminutive market share. Accordingly, we do
not believe that our liability, if any, in such cases will be material, either
individually or in the aggregate and no loss contingency has been recorded.
We have access to a substantial amount of primary and excess general liability
insurance for property damage and believe these policies are available to cover
a significant portion of both our defense costs and indemnity costs, if any, for
lead pigment related property damage claims. We have agreements with two of our
insurers which provide that they will pay for approximately fifty percent (50%)
of our defense costs associated with lead pigment related property damage claims
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. The claimants allege exposure to asbestos at facilities that we either
formerly or currently own 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, and
we have no information that this pattern will change.
The following table presents information about the number of claimants involved
in asbestos cases with us:
Year Ended Year Ended
December 31, December 31,
2005 2004
------------------- --------------------
Number of claimants at beginning of period 27,947 26,955
Number of claimants associated with claims closed during period (11,949) (3,540)
Number of claimants associated with claims opened during period 2,113 4,532
------- -------
Number of claimants at end of period 18,111 27,947
------------------------------------------------------------------------------------------------------------------
-17-
OTHER
In 2006, we were named as a defendant in a series of civil cases alleging
violation of antitrust laws relating to the sale of methyl methacrylate, a
chemical manufactured and sold by CYRO, and seeking damages arising out of such
alleged violations. We sold our interest in CYRO to Degussa in 2005, and in
accordance with the terms of the sales agreement, we expect Degussa and CYRO to
provide us with full indemnity for any losses and expenses associated with these
cases.
In February 2006, a subsidiary of DSM filed a lawsuit against us seeking
immediate dissolution of AMEL, the melamine manufacturing joint venture between
DSM and Cytec or the appointment of a receiver for the joint venture, the
rescission of the services agreement between Cytec and AMEL and compensatory
damages. We believe this lawsuit is without merit and we are vigorously
defending against all of the claims.
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 11.0
million euros plus interest on the award at a rate of 7% per annum from July 28,
2004 until paid. We have obtained a court order in France to enforce the award,
which order is being appealed by SNF. No gain contingency has been recorded.
Subsequent to the arbitration award, SNF filed a complaint alleging criminal
violation of French and European Community antitrust laws relating to the
contract which was the subject of the arbitration proceedings. We believe that
the complaint is without merit.
In addition to liabilities with respect to the specific cases described above,
because the production of certain chemicals involves the use, handling,
processing, storage, transportation and disposal of hazardous materials, and
because certain of the 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 11 of the Notes to
Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-18-
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 January 31, 2006, there
were approximately 8,900 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
---------------------------------------------------------------------------
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
2004
High $38.76 $45.45 $49.99 $51.73
Low $32.97 $35.50 $44.31 $44.92
Dividends $ 0.10 $ 0.10 $ 0.10 $ 0.10
---------------------------------------------------------------------------
On February 9, 2006, our Board of Directors declared a quarterly cash dividend
of $0.10 per common share, payable on March 15, 2006 to stockholders of record
as of February 27, 2006.
Upon closing of our acquisition of the Surface Specialties business of UCB on
February 28, 2005, we issued 5,772,857 shares of our common stock to UCB as part
of the consideration. See Note 2 of the Notes to Consolidated Financial
Statements. The sale was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933 since no public offering was involved. Also, upon
closing, we entered into a stockholder's agreement with UCB which provides for
UCB to reduce its stake within five years from the closing date and contains
other customary terms and provisions.
See Part III, Item 11. "Executive Compensation" for information relating to our
equity compensation plans.
-19-
ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SUMMARY
(Dollars in millions, except per share amounts)
2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------
Statements of income data:
Net sales $2,925.7 $1,721.3 $1,471.8 $1,346.2 $1,387.1
Earnings from operations $ 160.5 (1) $ 167.7 (3) $ 144.1 $ 118.4 (7) $ 111.2 (9)
Earnings before discontinued operations,
accounting change, extraordinary
item and premium paid to redeem
preferred stock $ 57.9 (2) $ 131.0 (4) $ 92.8 $ 78.7 (8) $ 64.6 (10)
Earnings from discontinued operations,
net of taxes 1.2 - - - -
Cumulative effect of accounting change,
net of taxes -- - (13.6)(6) - -
Extraordinary gain, net of taxes -- - - - 4.9
Premium paid to redeem preferred stock -- (9.9) (5) - - -
------------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 59.1 $ 121.1 $ 79.2 $ 78.7 $ 69.5
==============================================================================================================================
Basic net earnings per common share:
Net earnings available to common
stockholders before accounting change and
extraordinary gain $ 1.28 $ 3.06 $ 2.38 $ 1.99 $ 1.61
Earnings from discontinued operations,
net of taxes 0.03 - - - -
Cumulative effect of accounting change,
net of taxes - - (0.35) - -
Extraordinary gain, net of taxes - - - - 0.12
------------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 1.31 $ 3.06 $ 2.03 $ 1.99 $ 1.73
===============================================================================================================================
Diluted net earnings per common share:
Net earnings available to common stockholders
before accounting change and
extraordinary gain $ 1.25 $ 2.96 $ 2.31 $ 1.94 $ 1.55
Earnings from discontinued operations,
net of taxes 0.02 - - - -
Cumulative effect of accounting change,
net of taxes - - (0.34) - -
Extraordinary gain, net of taxes - - - - $ 0.12
------------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 1.27 $ 2.96 $ 1.97 $ 1.94 $ 1.67
==============================================================================================================================
Cash dividends declared and paid
per common share: $ 0.40 $ 0.40 - - -
Balance sheet data:
Total assets $3,810.5 $2,251.6 $2,046.4 $1,785.2 $1,669.8
Long-term debt $1,225.5 $ 300.1 $ 416.2 $ 216.0 $ 314.7
==============================================================================================================================
(1) 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 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).
(2) In addition to the items in Note (1) 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.
(3) Includes a pre-tax charge of $8.0 ($6.2 after-tax) for various litigation
matters.
(4) In addition to the item in Note (3) 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.
(5) Represents a charge to net earnings available to common stockholders
resulting from the redemption of our Series C Preferred Stock.
(6) Represents the cumulative effect of adopting Statement of Financial
Accounting Standards ("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 and $1.6 in 2001 would have been recognized in the
determination of earnings from operations.
(7) 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.
(8) In addition to the items in Note (7) 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.
(9) Includes a restructuring pre-tax charge of $5.4 ($3.5 after-tax) and
pre-tax goodwill amortization of $9.7 ($6.3 after-tax) that is no longer
amortized under SFAS No. 142, "Goodwill and Other Intangible Assets."
(10) In addition to the restructuring charge in note (9) above, includes a
restructuring pre-tax charge of $2.3 ($1.5 after-tax) included in earnings
of associated companies.
-20-
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 which sells our
products to diverse major markets for aerospace, adhesives, automotive and
industrial coatings, chemical intermediates, inks, mining, plastics and water
treatment. Sales price and volume by region and the impact of exchange rates on
our reporting segments are important measures that are analyzed by management.
In the course of our ongoing operations, a number of strategic product line
acquisitions and dispositions have been made. The results of operations of the
acquired businesses have been included in our consolidated results from the
dates of the respective acquisitions. On February 28, 2005, we acquired the
Surface Specialties business of UCB in a transaction valued at $1,799.7. After
adjusting for a final working capital adjustment of $25.4 and transaction costs
incurred of $14.9, the acquisition was valued at $1,789.2. A further discussion
of acquisitions and dispositions can be found in Note 2 to the Notes to the
Consolidated Financial Statements contained herein.
We also report net sales in four geographic regions: North America, Latin
America, Asia/Pacific and Europe/Middle East/Africa. The destination of the sale
determines the region under which it is reported consistent with management's
view of the business. North America consists of the United States and Canada.
Latin America includes Mexico, Central America, South America and the Caribbean
Islands. Asia/Pacific is comprised of Asia, Australia and the islands of the
South Pacific Rim.
Raw material cost changes year on year are an important factor in profitability
especially in years of high volatility. Oil and natural gas costs are
significantly higher than the year ago period and many of our raw materials are
derived from these two commodities. Discussion of the year to year impact of raw
materials and energy is provided in our segment discussion. In addition, higher
global demand levels and, occasionally, operating difficulties at suppliers,
have limited the availability of certain of our raw materials. Hurricane
activity in the US Gulf region led to further increases in the cost of natural
gas and oil-related raw materials.
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, 2005 2004 2003
------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Manufacturing cost of sales 79.1 75.7 75.5
------------------------------------------------------------------------------
Gross profit 20.9 24.3 24.5
Selling and technical services 7.3 8.1 8.6
Research and process development 3.6 2.3 2.4
Administrative and general 3.5 3.8 3.3
Amortization of acquisition intangibles 1.0 0.3 0.3
------------------------------------------------------------------------------
Earnings from operations 5.5 9.8 9.9
------------------------------------------------------------------------------
Net earnings available to common stockholders 2.0 7.0 5.4
------------------------------------------------------------------------------
-21-
NET SALES BY SEGMENT AND GEOGRAPHIC AREA
EUROPE/
NORTH LATIN ASIA/ MIDDLE EAST/
NET SALES AMERICA AMERICA PACIFIC AFRICA TOTAL
-------------------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------
2003
Cytec Performance Chemicals $ 272.5 $ 77.9 $101.3 $ 171.9 $ 623.6
Cytec Surface Specialties 120.5 13.4 36.5 58.0 228.4
Cytec Engineered Materials 292.3 1.6 15.5 99.3 408.7
Building Block Chemicals 88.9 4.0 58.0 60.2 211.1
----------------------------------------------------------------------
Total $ 774.2 $ 96.9 $211.3 $ 389.4 $1,471.8
======================================================================
Net sales in the United States were $1,095.3, $802.4 and $719.7 for 2005, 2004
and 2003, respectively. International net sales were $1,830.4, $918.9, and
$752.1, or 63%, 53% and 51% of total net sales, for 2005, 2004 and 2003,
respectively.
For more information on our segments, refer to Note 17 of the Notes to
Consolidated Financial Statements and further discussions in "Segment Results,"
below.
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 US 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
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.
-22-
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
common stockholders of $9.9 was recorded as a premium paid to redeem preferred
stock during 2004.
-23-
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 ACQUISTION/
2005 2004 % CHANGE PRICE VOLUME/MIX CURRENCY
-------------------------------------------------------------------------------------------------------------------------------
North America $340.8 $293.8 16% 9% 7% 0%
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.
-24-
CYTEC SURFACE SPECIALTIES
% CHANGE DUE TO
---------------------------------------
TOTAL ACQUISTION/
2005 2004 % CHANGE PRICE VOLUME CURRENCY
-------------------------------------------------------------------------------------------------------------------------------
North America $ 329.6 $122.4 169% 3% 166% 0%
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 the 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% 0%
Latin America(1) 1.5 1.7 --- --- --- ---
Asia/Pacific 30.0 21.5 40% 3% 37% 0%
Europe/Middle East/Africa 160.9 141.4 14% 3% 11% 0%
--------------------------
Total $541.6 $487.0 11% 2% 9% 0%
===============================================================================================================================
(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% 0% 0%
Latin America(1) 4.9 3.3 --- --- --- ---
Asia/Pacific 50.3 77.0 -35% 10% -45% 0%
Europe/Middle East/Africa 79.8 53.7 49% 21% 28% 0%
---------------------------
Total $ 284.2 $260.6 9% 16% -7% 0%
=================================================================================================================================
(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
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 US Gulf region.
-25-
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.
YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003
CONSOLIDATED RESULTS
Net sales for 2004 were $1,721.3 compared with $1,471.8 during 2003. All
segments reported increased sales. In the two specialty chemicals segments sales
increased primarily due to increased selling volumes, the acquisitions completed
in the second half of 2003 and favorable exchange rates. The Cytec Engineered
Materials segment sales increase was primarily volume related and all product
lines participated. The Building Block Chemicals segment sales increased
principally due to higher selling prices which were driven by higher raw
material and energy costs offset somewhat by a decrease in sales volumes of
acrylonitrile and acrylamide.
For a detailed discussion on sales refer to the Segment Results section below.
Manufacturing cost of sales was $1,303.1 compared with $1,111.9 during 2003.
Cost of sales was primarily impacted by higher raw material and energy costs of
$69.0. Gross margin percent however, decreased by only 0.2% as the higher raw
material and energy costs were offset by increased selling prices of $42.1, the
net impact of exchange rates on operations outside of the United States of
$35.1, the fixed cost leverage from the increased production levels and a
favorable product mix.
Pension expense increased $5.1 principally as a result of our lowering the
discount rate in the U. S. by 0.5% to reflect current market rates on fixed
income securities and by the 2003 acquisitions which increased pension expense
by $0.3. Pension expense is primarily reported in manufacturing cost of sales.
Refer to "Critical Accounting Policies, Retirement Plans" for further discussion
on how changes in discount rates and return on asset assumptions can impact
annual expense.
Selling and technical services was $139.8 in 2004 versus $126.9 in the prior
year due to ongoing costs of the businesses in the Specialty Chemical segments
acquired in the second half of 2003, the impact of exchange rate changes on
operations outside of the United States of $4.2 and higher costs in the Cytec
Engineered Materials segment of $2.0 where we are investing in personnel,
product qualifications and commercialization of new products for our growth
initiatives.
Research and process development was $40.0 versus $35.2 in the prior year. This
increase was primarily the result of ongoing costs of the acquired businesses of
the Specialty Chemical segments completed in the second half of 2003, costs
associated with the start up of the newly renovated specialty chemicals
technology center and higher costs in the Cytec Engineered Materials segment
where we continue to invest for a number of future opportunities.
Administrative and general expenses were $65.1 versus $49.7 in the prior year.
Included in 2004 is a charge of $8.0 related to the settlement of the federal
carbon fiber class action lawsuit and several other minor litigation matters.
Also contributing to the increase were ongoing costs of the businesses of the
Specialty Chemical segments acquired in the second half of 2003 of approximately
$1.3, an increase in deferred compensation expense of $2.6 due to the increase
in our stock price versus the year ago period and the impact of exchange rate
changes on operations outside of the U.S. of $1.1. Additionally, we incurred
$2.0 in third party expenses related to implementing accounting and disclosure
control procedures as required by the Sarbanes-Oxley Act of 2002.
Other income, net was $16.9 compared with a loss of $5.7 in the prior year.
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. We entered into foreign currency contracts to offset the impact of
potential dollar to euro exchange rate fluctuations on the acquisition cost in
dollars and this resulted in a gain of $33.3. In anticipation of future
long-term debt that would be issued to partially finance the acquisition, we
also entered into interest rate hedges which resulted in the recognition of a
loss of $6.5. Also included in other income, net are charges of $6.2 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
Wyeth, partially offset by a gain of $2.0 related to the sale in 1999 of our
share of a methanol joint venture whereby we received additional proceeds
because the market price of methanol stayed above an agreed upon index over a
predetermined period of time. We also recorded $3.0 in other income, net, of
which $1.0 has been received, that relates to insurance recoveries and expected
recoveries from our insurers of lead-related defense costs which had been
previously expensed. Lead-related defense costs recognized during 2004 amounted
to $2.5. The prior year loss of $5.7 primarily resulted from the recognition of
currency losses whereby certain international subsidiaries held dollar
denominated assets while the U.S. dollar weakened.
-26-
Equity in earnings of associated companies was $5.2 versus $7.2 in the prior
year. Earnings from CYRO, our 50% owned acrylic plastics joint venture, remained
flat as compared with the prior year as increased sales volumes and selling
prices offset higher raw material costs. In addition, results for 2003 included
earnings of $1.8 from our former 50% owned Mitsui-Cytec joint venture. Refer to
Notes 2 and 6 of the Notes to Consolidated Financial Statements.
Interest expense, net was $17.4 compared with $16.2 in the prior year. The
increase resulted primarily from a higher outstanding weighted-average debt
balance during 2004.
Our effective tax rate in 2004 was 24.0% compared with 28.3% in 2003. This
reduction reflects our continued earnings growth in lower tax jurisdictions and,
to a lesser extent, a favorable international tax ruling received in the first
quarter of 2004. During the second quarter of 2004, we recorded a reduction of
our tax liabilities due to the completion of several years of tax audits in an
international tax jurisdiction that resulted in a reduction of $2.4 to our
income tax provision. These reductions were partially offset by the derivative
net gain noted above which was taxed at the higher incremental U.S. rate.
Net earnings available to common stockholders for 2004 were $121.1 ($2.96 per
diluted share). Net earnings available to common stockholders for 2004 included
a charge of $9.9 ($0.24 per diluted share) as a result of the redemption of our
Series C Stock. Our Series C Stock was originally issued in 1993 in conjunction
with our spin-off from American Cyanamid Company ("Cyanamid"). Wyeth became
beneficial owner of Series C Stock following its acquisition of Cyanamid in
1994. Net earnings available to common stockholders for 2003 were $79.2 ($1.97
per diluted share). Included in 2003 results is an after-tax, non-cash charge of
$13.6 ($0.34 per diluted share) reported as a cumulative effect of accounting
change related to the adoption of SFAS No.143, "Accounting for Asset Retirement
Obligations" which became effective January 1, 2003.
SEGMENT RESULTS (SALES TO EXTERNAL CUSTOMERS)
Year-to-year comparisons and analyses of changes in net sales by product line
segment and region are set forth below.
CYTEC PERFORMANCE CHEMICALS
% CHANGE DUE TO
---------------------------------------
TOTAL ACQUISTION/
2004 2003 % CHANGE PRICE VOLUME/MIX CURRENCY
-------------------------------------------------------------------------------------------------------------------------------
North America $293.8 $272.5 8% 1% 7% 0%
Latin America 104.0 77.9 34% -2% 33% 3%
Asia/Pacific 106.7 101.3 5% 0% 3% 2%
Europe/Middle East/Africa 208.2 171.9 21% 0% 13% 8%
--------------------------
Total $712.7 $623.6 14% 0% 11% 3%
===============================================================================================================================
Overall sales improved 14% with acquisitions accounting for 6%. The 5% increase
in base selling volumes was attributable to increased sales across all product
lines, mining chemicals and water treatment chemicals. On a regional basis,
sales volumes in Latin America increased 33% with acquisitions accounting for
11% and the remainder of the increase primarily due to improved demand for
mining chemicals from copper mining applications. Sales volumes were up 13% in
Europe/Middle East/Africa with acquisitions accounting for 4% and the remainder
of the increase primarily due to increased demand for water treatment chemicals
from full service providers and phosphine applications.
Earnings from operations were $57.5, or 8% of sales, compared with $35.7 or 6%
of sales in 2003. The increase in earnings was primarily attributable to
increased selling volumes, primarily due to acquisitions during the second half
of 2003, and the impact of exchange rate changes of $20.3 partly offset by
increased raw material and energy costs of $8.7.
-27-
CYTEC SURFACE SPECIALTIES
% CHANGE DUE TO
---------------------------------------
TOTAL
2004 2003 % CHANGE PRICE VOLUME/MIX CURRENCY
-------------------------------------------------------------------------------------------------------------------------------
North America $122.4 $120.5 2% -1% 3% 0%
Latin America 16.2 13.4 21% 0% 20% 1%
Asia/Pacific 56.7 36.5 55% -2% 55% 2%
Europe/Middle East/Africa 65.7 58.0 13% 1% 3% 9%
--------------------------
Total $261.0 $228.4 14% -1% 12% 3%
===============================================================================================================================
Overall selling volumes increased 12% with acquisitions accounting for 7%. Base
selling volumes increased for all product lines as a result of improved demand
and new business. On a regional basis, Asia/Pacific sales volumes increased 55%
with acquisitions accounting for 45%. Latin America sales volumes increased 20%
and resulted from increased demand for coatings. Europe/Middle East/Africa sales
were up 13% due to the favorable impact of exchange rate changes and increased
demand primarily for coatings chemicals.
Earnings from operations were $28.7, or 11% of sales, compared with $23.7, or
10% of sales, in 2003. The favorable impact from acquisitions, higher base sales
volumes, improved manufacturing operations and net favorable exchange rate
changes of $6.2 more than offset the effect of higher raw material and energy
costs of $3.4.
CYTEC ENGINEERED MATERIALS
% CHANGE DUE TO
---------------------------------------
TOTAL
2004 2003 % CHANGE PRICE VOLUME/MIX CURRENCY
-------------------------------------------------------------------------------------------------------------------------------
North America $322.4 $292.3 10% 0% 10% 0%
Latin America(1) 1.7 1.6 --- --- --- ---
Asia/Pacific 21.5 15.5 39% -1% 40% 0%
Europe/Middle East/Africa 141.4 99.3 42% -3% 40% 5%
--------------------------
Total $487.0 $408.7 19% -1% 19% 1%
-------------------------------------------- ------------- ------------ ---------------- --------- ---------------- -----------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 19% with the increases coming from large
commercial aircraft, regional and business jets and rotorcraft, military and
high performance automotive sectors. On a regional basis, the 10% increase in
North America sales volumes represented increased sales primarily to large
commercial aircraft, military, business and regional jet and rotorcraft
applications. Europe/Middle East/Africa sales volumes increased 40% principally
due to increased sales to large commercial aircraft and high performance
automotive applications as well as to business and regional jet and rotorcraft
applications. Asia/Pacific sales volumes increased 40% principally due to
increased sales for large commercial aircraft and regional and business jets.
The overall decrease in average selling price was primarily due to increased
volume rebates.
Earnings from operations were $83.4, or 17% of sales, compared with $66.0, or
16% of sales, in 2003. Higher earnings were principally due to the increase in
selling volumes partly offset by increased manufacturing and commercial costs to
service the higher demand levels and growth opportunities of this segment.
BUILDING BLOCK CHEMICALS
% CHANGE DUE TO
---------------------------------------
TOTAL
2004 2003 % CHANGE PRICE VOLUME/MIX CURRENCY
-------------------------------------------------------------------------------------------------------------------------------
North America $ 126.6 $ 88.9 43% 25% 18% 0%
Latin America(1) 3.3 4.0 --- --- --- ---
Asia/Pacific 77.0 58.0 33% 35% -2% 0%
Europe/Middle East/Africa 53.7 60.2 -11% 6% -23% 6%
---------------------------
Total $260.6 $211.1 23% 22% -1% 2%
===============================================================================================================================
(1) Due to the level of sales in this geographic region, percentage comparisons are not meaningful.
Global sales volumes declined slightly due in part to decreased acrylonitrile
production as a result of reduced propylene (the key raw material for
acrylonitrile) availability during the first quarter as well as a scheduled
plant maintenance shutdown during May, 2004. North America selling volumes were
up 18% with the majority due to increased acrylonitrile and sulfuric acid
business. Europe/Middle East/Africa volumes decreased as 2003 reflected
opportunistic sales in this region resulting from more favorable spot selling
prices versus the Asia/Pacific region. North America and Asia/Pacific selling
prices were up primarily reflecting partial recovery of higher raw material and
energy costs.
-28-
Earnings from operations were $15.6, or 6% of sales, compared with $20.7, or 10%
of sales, in 2003. The decrease in earnings was primarily due to the decrease in
volume and increased raw material and energy costs of $48.0, which were not
fully offset by price increases of $46.0.
LIQUIDITY AND FINANCIAL CONDITION
At December 31, 2005, our cash balance was $68.6 compared with $323.8 at year
end 2004. This decrease was primarily attributable to the use of cash to pay for
a portion of the purchase price of Surface Specialties and to reduce debt,
partially offset by cash generated from operations and sales of assets and
discontinued operations.
Cash flows provided by operating activities were $232.4 compared with $167.4 for
2004. Significant one-time non-cash acquisition related charges for the
write-off of acquired in-process research and development and amortization of
acquired finished goods step up to fair value negatively impacted earnings but
did not impact operating cash flow. The acquisition also resulted in significant
increases in non-cash depreciation and amortization expenses. Other receivables
reflect cash flows of $31.7 primarily due to the reimbursement from UCB for the
payment of $19.4 of pre-acquisition tax liabilities for which we have been
indemnified. Income taxes payable decreased $42.6 reflecting payment of the
pre-acquisition income tax liabilities of $19.9 and the favorable resolution of
several prior year tax matters which amounted to a reduction of income taxes
payable of $28.3. Inventories decreased $9.5 reflecting efforts to optimize
inventory levels. Other assets decreased $21.5 primarily from the cash
realization of gains on acquisition related derivative instruments that were
recognized in 2004. Accrued expenses decreased $19.3. Included in this are
payments against acquisition related accruals of $7.9, payments against prior
year incentive accruals higher than the current year accrual of $10.9, payment
of legal settlements of $10.4 of which $8.0 was accrued in 2004 and a payment of
$7.7 for losses on interest rate derivative instruments that were recognized in
2004. Partially offsetting these payments were net accruals for restructuring of
$10.5.
Cash flows used in investing activities were $1,385.2 for 2005 compared with
$84.1 for 2004. This increase was primarily attributable to the acquisition of
Surface Specialties. On February 28, 2005, we acquired Surface Specialties 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 an adjustment to the purchase price for
finalization of working capital amounts as of the acquisition date. After
considering the final working capital adjustment and transaction costs of $14.9,
the acquisition is valued at $1,789.2 of which $1,493.8 was paid in cash in 2005
and $4.6 was paid in cash in 2004. Assets acquired includes $34.7 in cash, so
the net cash used for the acquisition in 2005 totaled $1,459.1. The increase in
cash flows used in investing activities was partly offset by the sale of assets
of $105.5 of which $100.4 was received from the sale of our 50% investment in
CYRO. Also, $74.3 was received from the sale of SSAR, which was classified as a
discontinued operation. Capital spending for 2005 was $105.3, up from $89.3
primarily due to spending at acquired sites.
Net cash flows provided by financing activities were $906.4 in 2005
compared with net cash flows used in financing activities of $20.6 during 2004.
This increase primarily resulted from borrowings in connection with the
acquisition of Surface Specialties.
We financed the cash component with $600.0 under an unsecured 364-day credit
facility, $725.0 under an unsecured five-year term loan and the remaining $184.0
was paid from existing cash. 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 (collectively, the "Notes"). The Notes were offered
under our $600.0 shelf registration statement. We received $495.1 in net
proceeds from the offering after deducting the underwriting discount and other
offering expenses which we used to repay all amounts outstanding under our
unsecured 364-day facility and our revolving credit facility which were $417.5
and $66.2, respectively. The 364-day facility is now terminated. The Notes will
pay interest on each April 1 and October 1, commencing on April 1, 2006 through
their respective due dates. The Notes are unsecured and subordinated to any
secured indebtedness of Cytec. The Notes may be redeemed, in whole or in part,
at our option at any time subject to a prepayment adjustment. Our bank
agreements contain certain customary covenants with which we are in compliance
at December 31, 2005.
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 of Surface Specialties.
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. On September 29, 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.
-29-
In connection with the acquisition, we suspended our stock buy-back program and
do not anticipate making future stock buy-backs for at least two years from the
closing date in order to maximize the funds available for debt service and other
corporate purposes.
In order to take advantage of interest rates then in effect, we elected to
redeem the 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.
In conjunction with our note offering, we entered into (euro)207.9 of five year
and (euro)207.9 of ten year euro/US dollar 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 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 U.S.
dollars. The swaps also call for an 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. 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.
After accounting for the cross currency swaps, the "all-in" effective interest
rate including amortization of underwriters' discount and other offering costs
is approximately 4.0% and 4.7% for the 5-Year and 10-Year Notes, respectively.
The euro denominated bank borrowings including the impact of our euro/US dollar
cross currency swaps, naturally hedge our euro denominated intercompany
receivables and provide a partial hedge of our net investment in our
Belgium-based subsidiary, Cytec Surface Specialties SA/NV.
As of December 31, 2005, our total debt of $1,311.0 is denominated approximately
60% in euros, 38% in dollars and the balance denominated in various other
currencies, after taking into account the euro/US dollar cross currency swaps.
As of December 31, 2005, we may borrow up to $350.0 under our revolving credit
facility.
During 2005, we paid four quarterly cash dividends of $0.10 per common share
which aggregated $17.8. On February 9, 2006 the Board of Directors declared a
$0.10 per common share cash dividend, payable on March 15, 2006 to shareholders
of record as of February 27, 2006.
We believe that we have the ability to fund our operating cash requirements,
planned capital expenditures and dividends as well as the ability to meet our
debt service requirements for the foreseeable future from existing cash and from
internal cash generation. However, from time to time, based on such factors as
local tax regulations, prevailing interest rates and our plans for capital
investment or other investments, it may make economic sense to utilize our
existing credit lines in order to meet those cash requirements, which may
include debt-service related disbursements.
We have not guaranteed any indebtedness of our unconsolidated associated
company.
Excluding the impact of increasing raw materials 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.
-30-
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth our contractual obligations as of December 31,
2005:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
------------------------------------------------------------------------------------------------------------
Long-term debt $ 1,277.2 $51.1 $247.7 $ 526.7 $ 451.7
Operating leases 60.3 13.6 19.7 10.6 16.4
Purchase obligations 51.9 16.7 19.4 7.8 8.0
Unfunded employee benefits 15.2 1.5 4.3 3.0 6.4
-------------------------------------------------------------------------
Total $ 1,404.6 $82.9 $ 291.1 $ 548.1 $ 482.5
============================================================================================================
We had net contractual commitments under currency forward contracts in U.S.
dollar equivalent amounts of $42.4, that all settle in less than one year. At
December 31, 2005, we also had $10.5 of natural gas forward contracts that
settle in less than one year. (Refer to Item 7A as well as Note 5 of the Notes
to Consolidated Financial Statements included herein).
We had $46.6 of outstanding letters of credit, surety bonds and bank guarantees
at December 31, 2005 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.
-31-
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, 2005, 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, 2005, the currency and net contractual amounts of forward
contracts outstanding translated into U. S. dollar equivalent amounts were as
follows:
BUY
---------------------------------------------------------------------
POUND CANADIAN AUSTRALIAN
SELL EURO STERLING DOLLAR DOLLAR U.S. 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 forward exchange rates at
December 31, 2005, was approximately $0.1. 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 $3.5.
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 our subsidiaries.
The cross currency swaps plus the euro denominated bank borrowings 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.
At December 31, 2005, the fair value of the five and ten year swaps were $5.8
and $2.7, 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 $49.2 in the value of the hedging instruments
referred to above.
-32-
COMMODITY PRICE RISK: We use natural gas forward contracts, which are physically
settled, to hedge certain utility requirements. The maturities of these
contracts 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. Because we
take physical delivery of the commodity, these contracts are not required to be
recognized on the balance sheet at fair value. Instead, realized gains and
losses are included in the cost of the commodity upon settlement of the
contract.
At December 31, 2005, the Building Block Chemicals segment Fortier plant's 2006
forecasted natural gas utility requirements were 37% hedged utilizing natural
gas forward contracts at an average cost of $8.84 per MMBTU. These contracts had
a notional value of $10.5 and have delivery dates from January 2006 through
December 2006. Based on year-end NYMEX prices, we had net unrealized gains on
our natural gas forward contracts at December 31, 2005 of $2.4. Assuming that
year-end natural gas prices were to decrease by a hypothetical 10%, the value of
these contracts would decrease by approximately $1.3.
At December 31, 2005 and 2004, we had outstanding natural gas swaps with a fair
value gain of $1.7 and a fair value loss of $(0.7), net of taxes, respectively.
INTEREST RATE RISK: At December 31, 2005, our outstanding borrowings consisted
of $34.3 of short-term borrowings and long-term debt, including the current
portion, which had a carrying value of $1,276.7, a face value of $1,277.2 and a
fair value, based on dealer quoted values, of approximately $1,243.5.
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, 2005, interest expense would increase/decrease by
approximately $1.3 for the next fiscal quarter and the fair value of the fixed
rate long-term debt would decrease/increase by approximately $39.1.
2006 OUTLOOK
In our February 9, 2006 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 2006 earnings at the time based on various assumptions
set forth in our press release. We forecast diluted earnings per share in the
range of $3.45-$3.70, before 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.
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.
-33-
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 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 accrued when the related costs
are incurred and are recorded as other assets.
RETIREMENT PLANS
We sponsor defined benefit pension and 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, 2005. The
calculation of our pension expense and pension liability associated with our
defined benefit pension plans requires the use of a number of assumptions that
we deem to be "critical accounting estimates." 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 5.6% at December 31, 2005. The discount rate used to
determine the value of liabilities has a significant effect on expense.
The expected rate of return on plan assets, which was 7.7% for 2005, 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, 2005 approximated 67% equities
and 33% 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 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 and Cytec Surface Specialties are managed under one executive
leadership, and are referred to collectively as Cytec Specialty 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.
-34-
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.
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 believes that
certain filing positions are likely to be challenged and moreover, that such
filing positions may not be fully 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.
-35-
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 COMMODITY HEDGING ACTIVITIES
Financial instruments reflected in the Consolidated Balance Sheets are recorded
at cost which approximates fair value for cash and cash equivalents, accounts
receivable, 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 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
forward contracts and 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 periodically enter into currency forward contracts primarily to hedge
currency fluctuations of transactions denominated in currencies other than the
functional currency of the business. The principal transactions hedged involve
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. 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 interest and principal
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 forward contracts, which are physically settled, to hedge
certain utility requirements. The maturities of these contracts 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. Because we take physical delivery of the
commodity, these contracts are not required to be recognized on the balance
sheet at fair value. Instead, realized gains and losses are included in the cost
of the commodity upon settlement of the contract.
We also use natural gas swaps, which are financially settled, to hedge utility
requirements at certain of our other 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
unrealized net (losses) gains on cash flow hedges on an after-tax basis. Gains
and losses are reclassified into earnings, as a component of manufacturing cost
of sales in the period the hedged natural gas purchases affect earnings.
-36-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CYTEC INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
December 31,
2005 2004
-------- --------
Assets
Current assets
Cash and cash equivalents $ 68.6 $ 323.8
Trade accounts receivable, less allowance for doubtful
accounts of $7.8 and $6.7 in 2005 and 2004, respectively 493.8 248.2
Due from related party 8.0 -
Other accounts receivable 65.9 54.1
Inventories 446.6 263.8
Deferred income taxes 12.2 23.3
Other current assets 27.5 29.3
-----------------------
Total current assets 1,122.6 942.5
Investment in associated companies 20.3 85.5
Plants, equipment and facilities, at cost 2,064.3 1,627.2
Less: accumulated depreciation (988.8) (948.6)
-----------------------
Net plant investment 1,075.5 678.6
Acquisition intangibles, net of accumulated
amortization of $51.0 and $23.1 in
2005 and 2004, respectively 491.5 66.8
Goodwill 1,012.2 342.4
Deferred income taxes - 54.6
Other assets 88.4 81.2
-----------------------
Total assets $3,810.5 $2,251.6
=======================
Liabilities
Current liabilities
Accounts payable $ 278.6 $ 138.1
Short-term borrowings 34.3 -
Current maturities of long-term debt 51.2 119.0
Accrued expenses 218.3 178.1
Income taxes payable 43.5 61.5
-----------------------
Total current liabilities 625.9 496.7
Long-term debt 1,225.5 300.1
Pension and other postretirement benefit liabilities 432.5 348.3
Other noncurrent liabilities 224.4 174.5
Deferred income taxes 64.1 -
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 235.6 122.8
Retained earnings 1,149.7 1,108.5
Accumulated other comprehensive income (loss):
Unearned compensation (2.5) (3.1)
Minimum pension liability (115.6) (108.5)
Unrealized net gains (losses) on cash flow
hedges 0.4 (0.5)
Accumulated translation adjustments 28.2 73.3
-----------------------
(89.5) (38.8)
Treasury stock, at cost, 1,833,812 shares in
2005 and 8,297,863 shares in 2004 (58.2) (261.0)
-----------------------
Total stockholders' equity 1,238.1 932.0
-----------------------
Total liabilities and stockholders' equity $3,810.5 $2,251.6
=======================
See accompanying Notes to Consolidated Financial Statements
-37-
CYTEC INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Years ended December 31,
2005 2004 2003
------------------------------
Net sales $2,925.7 $1,721.3 $1,471.8
Manufacturing cost of sales 2,313.7 1,303.1 1,111.9
Selling and technical services 213.6 139.8 126.9
Research and process development 68.5 40.0 35.2
Administrative and general 102.1 65.1 49.7
Amortization of acquisition intangibles 30.3 5.6 4.0
Write-off of acquired in-process research and development 37.0 - -
------------------------------
Earnings from operations 160.5 167.7 144.1
Other income (expense), net (44.9) 16.9 (5.7)
Equity in earnings of associated companies 7.9 5.2 7.2
Interest expense, net 80.0 17.4 16.2
------------------------------
Earnings from continuing operations before
income taxes and cumulative effect of
accounting change 43.5 172.4 129.4
Income tax (benefit) provision (14.4) 41.4 36.6
------------------------------
Earnings from continuing operations before
cumulative effect of accounting change 57.9 131.0 92.8
Cumulative effect of accounting change, net of taxes - - (13.6)
------------------------------
Earnings from continuing operations 57.9 131.0 79.2
Earnings from discontinued operations, net of taxes 1.2 - -
------------------------------
Net earnings 59.1 131.0 79.2
Premium paid to redeem preferred stock - 9.9 -
------------------------------
Net earnings available to common stockholders $ 59.1 $ 121.1 $ 79.2
==============================
Basic net earnings per common share:
Earnings from continuing operations before
cumulative effect of accounting change $ 1.28 $ 3.06 $ 2.38
Cumulative effect of accounting change, net of taxes - - (0.35)
Earnings from discontinued operations, net of taxes 0.03 - -
------------------------------
Net earnings available to common stockholders $ 1.31 $ 3.06 $ 2.03
==============================
Diluted net earnings per common share:
Earnings from continuing operations before
cumulative effect of accounting change $ 1.25 $ 2.96 $ 2.31
Cumulative effect of accounting change, net of taxes - - (0.34)
Earnings from discontinued operations, net of taxes 0.02 - -
------------------------------
Net earnings available to common stockholders $ 1.27 $ 2.96 $ 1.97
==============================
Dividends per common share $ 0.40 $ 0.40 $ -
==============================
See accompanying Notes to Consolidated Financial Statements
-38-
CYTEC INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
Years ended December 31,
2005 2004 2003
----------------------------------
Cash flows provided by (used in) operating activities
Net earnings $ 59.1 $131.0 $ 79.2
Earnings from discontinued operations, net of taxes 1.2 - -
----------------------------------
Earnings from continuing opeations 57.9 131.0 79.2
Noncash items included in earnings from continuing operations:
Dividends from associated companies less than
earnings (5.4) (2.6) (1.8)
Depreciation 110.8 86.6 85.9
Amortization 39.0 12.2 7.7
Deferred income taxes (25.0) 19.6 15.7
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 sale of assets (1.3) - -
Unrealized net gains on derivative instruments - (7.9) -
Cumulative effect of accounting change, net of taxes - - 13.6
Other 3.0 0.7 (0.5)
Changes in operating assets and liabilities (excluding effect of
acquisitions):
Trade accounts receivable (12.9) (24.1) 13.6
Other receivables 31.7 (2.0) (7.9)
Inventories 9.5 (46.8) (15.2)
Other assets 21.5 0.4 (1.1)
Accounts payable 2.8 36.5 (13.4)
Accrued expenses (19.3) (7.3) (8.6)
Income taxes payable (42.6) 7.9 9.2
Other liabilities - (36.8) (44.0)
-----------------------------------
Net cash provided by operating activities of continuing
operations 227.5 167.4 132.4
Net cash provided by operating activities of discontinued
operations 4.9 - -
-----------------------------------
Net cash provided by operating activities 232.4 167.4 132.4
Cash flows provided by (used in) investing activities
Acquisition of businesses, net of cash received (1,459.1) (4.6) (101.6)
Additions to plants, equipment and
facilities (105.3) (89.3) (93.8)
Proceeds received on sale of assets 105.5 0.7 0.1
Proceeds received on sale of discontinued business 74.3 - -
Minority interests (0.6) - -
Advance payment received on land lease - 9.1 -
-----------------------------------
Net cash used in investing activities (1,385.2) (84.1) (195.3)
-----------------------------------
Cash flows provided by (used in) financing activities
Proceeds from long-term debt 1,438.4 - 198.9
Payments on long-term debt (571.9) - (100.0)
Change in short-term borrowings 45.9 (9.3) (0.3)
Cash dividends (17.8) (15.7) -
Proceeds from the exercise of stock options and
warrants 17.7 24.6 14.5
Deferred financing cost (5.9) - -
Purchase of treasury stock - (13.1) (27.7)
Redemption of Series C preferred stock - (10.0) -
Proceeds from termination of interest rate swap - 2.9 -
-----------------------------------
Net cash provided by (used in) financing activities 906.4 (20.6) 85.4
-----------------------------------
Effect of currency rate changes on cash and cash equivalents (8.8) 10.0 18.6
Increase (decrease) in cash and cash equivalents (255.2) 72.7 41.1
Cash and cash equivalents, beginning of year 323.8 251.1 210.0
-----------------------------------
Cash and cash equivalents, end of year $ 68.6 $323.8 $ 251.1
===================================
See accompanying Notes to Consolidated Financial Statements
-39-
CYTEC INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
Additional Unrealized net
Years ended Additional Unearned Minimum (losses) gains Accumulated
December 31, 2005, Preferred Common Paid-in Retained Compen- Pension on Derivative Translation Treasury
2004 and 2003 Stock Stock Capital Earnings sation Liability Instruments Adjustments Stock Total
----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2002 $ 0.1 $ 0.5 $ 131.1 $ 924.2 $ (6.8) $ (98.0) $ - $ (18.8) $ (290.7) $641.6
---------------------------------------------------------------------------------------------------------------------------------
Net earnings - - - 79.2 - - - - - $ 79.2
Other comprehensive
income:
Minimum pension
liability
adjustment,
net of taxes of $2.4 - - - - - 1.2 - - - 1.2
Unrealized net
gains on
derivative
instruments - - - - - - 0.3 - - 0.3
Translation
adjustments - - - - - - - 56.8 - 56.8
------
Comprehensive income $137.5
Award of, and changes in,
performance and
restricted stock - - 2.3 - (0.4) - - - (1.7) 0.2
Amortization of
performance
and restricted
stock - - - - 1.9 - - - - 1.9
Purchase of treasury
stock - - - - - - - - (27.7) (27.7)
Exercise of stock
options - - (19.1) - - - - - 33.6 14.5
Tax benefit on
stock options - - 7.9 - - - - - - 7.9
---------------------------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------------------------
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
================================================================================================================================
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, plastics and water treatment. 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 40% of our 2005
revenues in North America, 40% in Europe, 14% in Asia-Pacific and 6% in Latin
America. We have manufacturing and research facilities located in 20 countries.
The consolidated financial statements include the accounts of Cytec 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. Transaction gains and losses 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. 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 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
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 units' 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.
-42-
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 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
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
or liability.
We use cross currency swaps to hedge future cash flows from euro interest and
principal 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 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 both forward contracts and swaps to hedge certain of our utility
requirements at our manufacturing facilities. The maturities of the forward
contracts 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.
Forward contracts that are physically settled are not required to be recognized
on the balance sheet at fair value. Instead, realized gains and losses are
included in the cost of the commodity upon settlement of the contract.
Financially settled forward contracts and swaps on commodities are reported at
fair value with offsetting amounts included in unrealized net gains (losses) on
cash flow hedges 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.
See Note 2 for information about our interest rate swap and currency forward
contract activity in connection with our acquisition of Surface Specialties.
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.
-43-
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 relate only to
actual costs incurred.
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.
K. POSTRETIREMENT BENEFITS: Costs are recognized as employees render the
services necessary to earn the related benefits.
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: We account for our stock based compensation under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO Employees ("APB 25") and related
interpretations. No stock-based compensation cost is reflected in net earnings
for stock options, as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of the grant.
Compensation cost for restricted stock is recorded based on the market value on
the date of grant, and compensation cost for performance stock is recorded based
on the market price of our common stock at the end of each period through the
date of vesting. The fair value of restricted and performance stock is charged
to unearned compensation in Stockholders' Equity and amortized to expense over
the requisite vesting periods. Stock appreciation rights ("SARS") payable in
cash and outstanding at December 31, 2005 are accounted for as a liability under
APB 25. Compensation cost for SARS is 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.
The following table illustrates the pro forma effect on net earnings available
to common stockholders and net earnings available to common stockholders per
share if we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS
123") to stock-based employee compensation (see Note 15 for information related
to our stock option valuation assumptions). Option forfeitures are accounted for
as they occurred and no amounts of compensation expense have been capitalized
into inventory or other assets, but instead are considered period expenses in
these pro forma amounts.
-44-
------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------
Net earnings available to common
stockholders as reported $59.1 $121.1 $79.2
Add: Stock based employee compensation
expense included in reported net income,
net of related tax effects 1.6 3.0 1.3
Deduct: Total stock based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 7.3 7.1 7.8
------------------------------------------------------------------------
Pro forma net earnings available to
common stockholders $53.4 $117.0 $72.7
========================================================================
Net earnings available to common
stockholders per share:
Basic, as reported $ 1.31 $ 3.06 $2.03
Basic, pro forma $ 1.18 $ 2.96 $1.87
Diluted, as reported $ 1.27 $ 2.96 $1.97
Diluted, pro forma $ 1.15 $ 2.87 $1.81
N. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In December, 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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. When SFAS 123R becomes effective, it will
replace SFAS 123 and supersede APB 25 and will require companies to recognize
compensation cost in an amount equal to the fair value of share-based payments,
such as stock options granted to employees. As required, we will adopt the new
standard effective January 1, 2006 utilizing the modified prospective basis as
allowed under SFAS 123R and we expect to record pre-tax incremental share-based
employee compensation expense of $10.5 in 2006.
In November 2005, the FASB issued FSP FAS123(R)-3, "Transition Election to
Accounting for the Tax Effects of Share Based Payment Awards." This FSP requires
an entity to follow either the transition guidance for the additional paid-in
capital pool as prescribed in SFAS No. 123R or the alternative transition method
as described in the FSP. An entity that adopts SFAS No. 123R using the modified
prospective application may make a one-time election to adopt the transition
method described in this FSP. An entity may take up to one year from the later
of its initial adoption of SFAS No. 123R or the effective date of this FSP to
evaluate its available transition alternatives and make its on-time election.
This FSP became effective in November 2005. We are evaluating the impact of the
adoption of this FSP in connection with our adoption of SFAS No. 123R.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An amendment
of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No.
43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Additionally, SFAS No. 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is required to be adopted by us in
the first quarter of 2006. We have determined that the adoption of SFAS 151 will
not have a material impact on our consolidated financial statements.
O. USE OF ESTIMATES: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles require 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 within stock
option valuation models. 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.
-45-
2. ACQUISITIONS AND DISPOSITIONS
2005 ACTIVITY
On February 28, 2005, we acquired the Surface Specialties 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 $14.9, the acquisition was valued at $1,789.2. The acquisition complements
our existing product lines by significantly increasing our product offering to
the coatings and additives industries including the general industrial,
automotive, architectural, plastic, graphic arts and wood sectors.
In accordance with the purchase agreement, contingent consideration up to a
maximum of (euro)50.0 was to be determined in January 2006 based upon 2005
year-end results, of which (euro)20.0 ($26.5 at $1.325 per euro) was prepaid at
closing. In view of the parties' expectation that the contingent consideration
would not be payable, we were refunded the payment during September 2005
provided that a final year-end determination of the actual contingent payment
due, if any, would still be made. Subsequently, we determined that no amounts
were due under this agreement.
Upon closing, UCB became the owner of approximately 12.5% of our outstanding
common shares. We entered into a stockholder's agreement (the "Stockholder's
Agreement") with UCB which provides, subject to various exceptions, that UCB
must reduce its stake to less than 9% within three years, less than 7% within
four years and less than 5% within five years and which provides that UCB will
be prohibited from purchasing additional shares of our common stock or causing,
advocating or participating in a change of control in the ownership of Cytec.
The Stockholder's Agreement also contains customary terms and conditions
including an obligation of UCB to vote its shares of Cytec common stock in
accordance with our Board of Directors' recommendation on certain matters.
Pursuant to regulatory approvals, we were required to divest the Surface
Specialties amino resins ("SSAR") product line. On August 31, 2005, we sold SSAR
to affiliates of INEOS Group Limited ("INEOS") for cash consideration of
(euro)64.0 ($78.2 at 1.22 U.S. dollar per euro). In the fourth quarter 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). Since acquisition, and 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. At December 31, 2005, of the $3.8 of
disposition related expenses, $1.5 remained to be paid.
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 currently 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 for the year ended December 31, 2005,
which was recorded in other income (expense), net. We recorded a loss of $6.5 on
these swaps in 2004.
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 have substantially completed
the purchase price allocation and our own internal assessment. As part of this
assessment we contracted with a third party to perform a physical verification
of the fixed assets acquired at certain significant manufacturing facilities. We
are awaiting the final report of the third party. Accordingly, the property,
plant and equipment, goodwill and deferred taxes are subject to a final
adjustment.
-46-
---------------------------------------------------------------------
Cash $ 34.6
Current deferred tax assets 27.8
Other current assets 532.7
Assets of discontinued operations 91.8
Property, plant and equipment 449.2
Goodwill 728.3
Acquired intangible assets 490.4
Acquired in-process research and development 37.0
Other assets 34.2
---------------------------------------------------------------------
Total assets acquired $2,426.0
=====================================================================
Current liabilities $ 286.1
Liabilities of discontinued operations 26.5
Long-term deferred tax liabilities 187.3
Long-term debt 9.9
Other long-term liabilities 127.0
---------------------------------------------------------------------
Total liabilities assumed 636.8
---------------------------------------------------------------------
Net assets acquired $1,789.2
=====================================================================
The $728.3 of goodwill is not tax deductible and, $38.0 was allocated to our
Cytec Performance Chemicals segment and $690.3 was allocated to our Cytec
Surface Specialties segment. Included in acquired intangible assets is $45.7
relating to certain trade names which have indefinite useful lives. The
remaining intangibles that were acquired were assigned to customer-related
($382.6), marketing-related ($50.8) and technology-related intangibles ($11.3),
and are being amortized over periods of 10 to 15 years. Immediately following
the acquisition, $37.0 of acquired in-process research and development costs
were written off.
Following are the unaudited pro forma combined results of continuing 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, 2004. Additionally, the write-off of in-process research and
development costs and inventory valuation adjustments were excluded from the
2005 and 2004 amounts as they are considered non-recurring charges. The pro
forma results include estimates and assumptions which are subject to adjustment
pending our finalization of the purchase price allocation. However, 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
===============================================================================
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. Net proceeds of the sale were also used to reduce debt
incurred to fund the Surface Specialties acquisition.
2003 TRANSACTIONS: In July 2003, we acquired substantially all of the assets and
liabilities of the metal extractant products ("MEP") and intermediates and
stabilizers ("I&S") product lines of Avecia Investments Limited ("Avecia") for
approximately $96.1 in cash, net of cash acquired. The MEP product line, which
had sales in 2002 of approximately $29.0 (unaudited) broadened our product line
for the mining industry with differentiated technology. The I&S product line
broadened our customer base and added new products and manufacturing
technologies. The I&S product line had sales in 2002 of approximately $36.0
(unaudited). Both the MEP and I&S product lines are reported as part of the
Cytec Performance Chemicals segment.
-47-
In conjunction with this acquisition, we acquired various working capital and
plant, equipment and facilities and recorded amortizable acquisition intangibles
of $24.4 (technology-based intangibles of $9.1, marketing-related intangibles of
$0.7, and customer-related intangibles of $14.6 with estimated lives ranging
from 12 to 15 years) and goodwill of $8.4. This goodwill is recorded as part of
the Cytec Performance Chemicals segment.
In September 2003, we dissolved our Mitsui Cytec Ltd ("MCY") joint venture with
Mitsui Chemicals Inc. ("Mitsui"). The joint venture's sales in 2002 were
approximately $59.0. The transaction resulted in the recognition of
customer-related amortizable acquisition intangibles of $7.0 and goodwill of
$4.6. This goodwill is recorded as part of the Cytec Surface Specialties
segment.
The dissolution of the joint venture occurred as follows. MCY sold the water
treatment business to a separate subsidiary of Mitsui for its fair value which
approximated its net book value of approximately $8.8. No gain or loss resulted
from this transaction. Mitsui's equity interest in MCY was then purchased by us
for approximately $11.5 in a two-step process whereby MCY paid approximately
$7.8 and we paid approximately $3.7 for the remainder. We assumed the debt of
the joint venture of $9.7.
The result of the transaction was such that we now own 100% of MCY's coatings
resins product line (2002 sales of approximately $22.0) and the associated
assets and liabilities of the product line that includes a manufacturing
facility in Shimonoseki, Japan. This is now reported as part of the Cytec
Surface Specialties segment. Mitsui now owns 100% of the water treatment product
line and the associated assets and liabilities of the product line that includes
a production facility in Mobarra, Japan.
All of our acquisitions have 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.
3. RESTRUCTURING OF OPERATIONS
In 2005, we recorded aggregate restructuring charges of $16.8, which related to
the elimination of 136 positions worldwide. Of the total of 136 positions, 22
related to our Cytec Engineered Materials segment and 114 related to our
Specialty Chemicals segments. The restructuring costs, which were primarily
severance related, were charged to expense as follows: manufacturing cost of
sales, $5.0; selling and technical services, $3.7; research and process
development, $0.8 and administrative and general, $7.3. These costs were not
recorded in the operating results of the respective business segment as they
were included in our corporate unallocated operating results.
A summary of the 2005 restructuring charges is outlined in the table below:
CYTEC
ENGINEERED CYTEC SPECIALTY
MATERIALS CHEMICALS TOTAL
-----------------------------------------------------------------------------
2005 charges $1.6 $ 15.2 $16.8
Cash payments - 6.3 6.3
-----------------------------------------------------------------------------
Balance at
December 31, 2005 $ 1.6 $8.9 $ 10.5
-----------------------------------------------------------------------------
Cash payments are expected to be substantially completed in 2006 except for
certain long-term severance payments.
4. EARNINGS PER SHARE
Basic earnings per common share excludes dilution and is computed by utilizing
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 utilizing the
weighted-average number of common shares outstanding for the period adjusted
(i.e., increased) for all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued and any
proceeds of the issuance had been used to repurchase common stock at the average
market price during the period. The proceeds used to repurchase common stock are
assumed to be the sum of the amount to be paid to us 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. Preferred stock dividends were paid on preferred
shares through the date at which it was redeemed.
-48-
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, 2005 2004 2003
----------------------------------------------------------------------------
Weighted average shares outstanding: 45,241,738 39,548,312 38,957,611
Effect of dilutive shares:
Options 1,044,924 1,148,311 1,082,652
Performance/Restricted Stock 95,487 133,328 118,413
---------------------------------------------------------------------------
Adjusted average shares outstanding 46,382,149 40,829,951 40,158,676
===========================================================================
Stock options to purchase 912,200, 407,450 and 1,328,100 shares of common stock
at a weighted-average price per share of $47.82, $48.10 and $43.25 were
outstanding during 2005, 2004 and 2003, respectively. These stock options were
excluded from the above calculation because their inclusion would have had an
anti-dilutive effect on earnings per share.
5. DERIVATIVE FINANCIAL INSTRUMENTS AND COMMODITY HEDGING ACTIVITIES
DERIVATIVE FINANCIAL INSTRUMENTS
In September 2005, we entered into (euro)207.9 of five year cross currency swaps
and (euro)207.9 of ten year cross currency swaps. The swaps included an initial
exchange of $500.0 on October 4, 2005 and will require final principal exchanges
of $250.0 each on the settlement date of the 5-Year Note due October 1, 2010 and
10-Year Notes due October 1, 2015 as defined in Note 10. At the initial
principal exchange, we paid U.S. dollars to counterparties and received euros.
Upon final exchange, we will provide euros to counterparties and receive U.S.
dollars. The swaps also call for a semi-annual exchange of fixed euro interest
payments for fixed U.S. dollar interest receipts. With respect to the five year
swaps, we will receive 5.5% per annum and will pay 3.784% per annum on each
April 1 and October 1, through the maturity date of the five year swaps. With
respect to the ten year swaps, we will receive 6.0% per annum and will pay
4.5245% per annum on each April 1 and October 1, through the maturity date of
the ten year swaps. The cross currency swaps have been designated as cash flow
hedges of the changes in value of the future euro interest and principal
receipts that result from changes in the U.S. dollar to euro exchange rates on
certain euro denominated intercompany receivables we have with our subsidiaries.
At December 31, 2005, the fair values of the five and ten year swaps were $5.8
and $2.7, respectively. Euro denominated bank borrowings naturally hedge the
remainder of our euro denominated intercompany loans receivable and provide a
partial hedge of our net investment in our Belgium based subsidiary, Cytec
Surface Specialties SA/NV.
At December 31, 2005 and 2004, the currency and net contractual amounts of
forward contracts outstanding translated into U.S. dollar equivalent amounts
were as follows:
2005 2004
Buy Buy
Pound Canadian Australian U.S. Pound Canadian
Sell Euro Sterling Dollar Dollar Dollar Euro Sterling Dollar
----------------------------------------------------------------------------------- ------------------------------------
U.S. Dollar $ 11.8 $ - $ 3.5 $ 4.5 $ - $ 24.2 $ 1.0 $ 2.5
Euro - 7.3 - - - - 0.9 -
Norwegian Krone 2.4 - - - 7.8 6.3 - -
Japanese Yen - - - 3.8 - - - -
Other 1.3 - - - - 0.8 - -
----------------------------------------------------------------------------------- ------------------------------------
-49-
The fair value of currency contracts, based on forward exchange rates at
December 31, 2005 and 2004 was approximately $0.1 and $0.6, respectively.
COMMODITY HEDGING ACTIVITIES
At December 31, 2005, the Building Block Chemicals segment Fortier plant's 2006
forecasted natural gas utility requirements were 37% hedged utilizing natural
gas forward contract at an average cost of $8.84 per MMBTU. These contracts
totaled $10.5 and have delivery dates from January 2006 through December 2006.
Based on year end NYMEX prices, we had net unrealized gains/(losses) on our
natural gas forward contracts at December 31, 2005 and 2004 of $2.4 and $(1.6),
respectively.
At December 31, 2005 and 2004, we had outstanding natural gas swaps with a fair
value gain/(loss) of $1.7 and ($0.7), net of taxes, respectively.
See Note 2 for information about our interest rate swap and currency forward
contract activity in connection with our acquisition of Surface Specialties.
6. EQUITY IN EARNINGS OF ASSOCIATED COMPANIES AND MINORITY INTERESTS
Through May 31, 2005, we had one associated company that was material to our
operations, CYRO. Sales to associated companies, primarily CYRO, amounted to
$18.7, $38.3 and $37.4 in 2005, 2004 and 2003, respectively. Amounts due from
CYRO at December 31, 2004 totaled $8.3. We have determined that the profit or
loss on sales to our associated companies for inventory that they held is
immaterial; therefore, no adjustments have been made to eliminate such profit or
loss.
Fees received from associated companies, primarily CYRO, were $0.8 through May
31, 2005, and $2.3 and $7.8 in 2004 and 2003, respectively. Fees from CYRO are
recorded in manufacturing cost of sales and are related primarily to
manufacturing services provided to CYRO at our Fortier, Louisiana manufacturing
complex. We continue to provide CYRO with these services.
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 $0.6 for the year ended
December 31, 2005. The minority ownership interests in the net assets of these
entities are included in other noncurrent liabilities and totaled $2.1 as of
December 31, 2005.
7. INVENTORIES
December 31, 2005 2004
=============================================================
Finished goods $288.4 $165.0
Work in proress 26.3 20.6
Raw materials and supplies 131.9 78.2
------------------------------------------------------------
Total inventories $446.6 $263.8
============================================================
8. PLANTS, EQUIPMENT AND FACILITIES
DECEMBER 31, 2005 2004
-------------------------------------------------------------------------
Land and land improvements $ 85.6 $ 34.7
Buildings 327.8 249.8
Machinery and equipment 1,596.9 1,298.3
Construction in Progress 54.0 44.4
-------------------------------------------------------------------------
Plants, Equipment and Facilities, At Cost $ 2,064.3 $1,627.2
-------------------------------------------------------------------------
The average composite depreciation rates utilized in the U.S. and Canada,
expressed as a percentage of the average depreciable property in service, were
5.2% in 2005, 5.8% in 2004 and 6.1% in 2003. Gross cost of the assets
depreciated under the composite method in the U.S. and Canada totaled $1,185.6
and $1,163.9 as of December 31, 2005 and 2004, 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.
-50-
9. GOODWILL AND OTHER ACQUISITION INTANGIBLES
Following are the changes in goodwill by segment. The 2003 beginning balances
have been restated to reflect our new organizational structure (see Note 17).
CYTEC CYTEC CYTEC
PERFORMANCE SURFACE ENGINEERED
CHEMICALS SPECIALTIES MATERIALS CORPORATE TOTAL
-----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2003 $ 55.4 $ 25.6 $252.4 $ 0.6 $ 334.0
2003 acquisitions 10.5 2.5 - - 13.0
Purchase adjustment (1) - - (4.7) - (4.7)
Currency exchange (2.7) 0.2 (0.2) 0.1 (2.6)
-----------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $ 63.2 $ 28.3 $247.5 $ 0.7 $ 339.7
Purchase adjustment (2) (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 acquisitions 38.0 690.3 - - 728.3
Currency exchange (1.5) (50.9) 0.2 - (52.2)
Purchase adjustment (3) - - (6.3) - (6.3)
-----------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005 $101.5 $668.7 $241.3 $ 0.7 $1,012.2
=====================================================================================================
(1) Purchase accounting adjustment relates to the recognition of deferred tax
assets relating to an acquisition that occurred in a prior reporting
period.
(2) Purchase accounting adjustments relate to various items, primarily revision
of pension liabilities associated with our September 2003 acquisition of
certain product lines of Avecia.
(3) We recorded a reduction to goodwill of $6.3 as a result of the favorable
resolution of a tax contingency related to an acquisition that occurred in
a prior reporting period.
Other acquisition intangibles consisted of the following major classes:
WEIGHTED
AVERAGE
USEFUL LIFE GROSS CARRYING ACCUMULATED
(YEARS) VALUE AMORTIZATION NET CARRYING VALUE
---------------------------------------------------------- -------------------------------------------
DECEMBER 31, 2005 2005 2004 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------
Technology-based 15.2 $52.2 $42.5 $(15.0) $(12.2) $37.2 $30.3
Marketing-related 15.4 58.9 11.6 (9.0) (4.0) 49.9 7.6
Marketing-related Indefinite 41.8 - - - 41.8 -
Customer-related 15.0 389.6 35.8 (27.0) (6.9) 362.6 28.9
----------------------------------------------------------------
Total $542.5 $89.9 $(51.0) $(23.1) $491.5 $66.8
------------------------------------------------------------------------------------------------------
Amortization of acquisition intangibles for the year ended December 31, 2005,
2004 and 2003 was $30.3, $5.6, and $4.0, respectively. 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 2006 is $33.9, for the years 2007 through 2009 is $33.8 per
year, and for the year 2010 is $33.7. Included in marketing-related intangibles
at December 31, 2005 is $41.8 relating to certain trade names purchased upon
acquisition of Surface Specialties which have indefinite useful lives.
10. DEBT
Long-term debt, including the current portion, consisted of the following:
-51-
DECEMBER 31,
2005 2004
CARRYING CARRYING
FACE VALUE FACE VALUE
-----------------------------------------
Five-Year Term Loan Due February 15, 2010 $461.2 $ 461.2 $ - $ -
6.75% Notes Due March 15, 2008 100.0 98.8 100.0 98.2
5.5% Notes Due October 1, 2010 250.0 249.6 - -
6.846% Mandatory Par Put Remarketed Securities ("MOPPRS") - - 120.0 119.0
4.6% Notes Due July 1, 2013 200.0 201.7 200.0 201.9
6.0% Notes Due October 1, 2015 250.0 249.4 - -
Other 16.0 16.0 - -
-----------------------------------------
$ 1,277.2 $ 1,276.7 $ 420.0 $ 419.1
Less: Current maturities 51.2 51.2 120.0 119.0
-----------------------------------------
Long-term Debt $ 1,226.0 $ 1,225.5 $ 300.0 $ 300.1
---------------------------------------------------------------------------------------------------
The fair value of our long-term debt, including the current portion, based on
dealer quoted values, was $1,243.5 at December 31, 2005, and $418.8 at December
31, 2004.
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, 2005). 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, 2005, we have
prepaid $30.5 of the $72.5 amortization payment due on December 31, 2006. The
revolving credit facility provides additional liquidity for general corporate
purposes. 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 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
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 will 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 long-term debt was 4.4% for 2005 and 5.7%
for 2004.
At December 31, 2005 and 2004, we had available for short-term use approximately
$92.4 and $16.5, respectively, of non-U.S. dollar denominated credit facilities.
There were outstanding borrowings of $48.7 and $0.0 under these facilities at
December 31, 2005 and 2004, respectively.
Cash payments during the years ended December 31, 2005, 2004 and 2003, included
interest of $75.3, $20.2 and $18.2, respectively. Included in interest expense,
net, for the years ended December 31, 2005, 2004 and 2003, is interest income of
$3.7, $5.5 and $3.8, respectively.
At December 31, 2005, we had no outstanding borrowings under our 5-year
revolving credit facility.
-52-
11. 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, 2005 and 2004, the aggregate environmental related accruals
were $102.9 and $70.7, respectively, of which $7.5 and $10.0, respectively, are
included in accrued expenses with the remainder included in other noncurrent
liabilities. The increase in environmental related accruals was primarily
related to liabilities assumed upon our acquisition of Surface Specialties which
are associated with the remediation of certain manufacturing sites primarily
located in Europe. Environmental remediation spending, for the years ended
December 31, 2005, 2004 and 2003, was $6.6, $9.4 and $9.3, respectively. In the
first quarter of 2005, we increased our reserves by $4.4 as a result of our
agreement in principle to settle claims by a third party for the costs of
environmental remediation at a manufacturing site operated by the former
American Cyanamid Company ("Cyanamid") prior to 1944. In connection with our
spin-off from Cyanamid in 1993, we agreed to indemnify Cyanamid for claims of
this nature. Under the terms of the settlement which was finalized in the second
quarter of 2005, the third party has released all claims and indemnified us
against third-party environmental remediation claims arising from the alleged
contamination at the site. Although we believed that we had meritorious defenses
to this claim, we agreed to the settlement to avoid incurring additional legal
fees and any risk of an adverse outcome in any related litigation. 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.
On January 1, 2003, as a result of the adoption of SFAS 143, we recorded an
after tax charge of $13.6 for the cumulative effect of prior years for
depreciation of the additional costs and accretion expense on the asset
retirement liability. At December 31, 2005 and 2004, the asset retirement
liability was $39.1 and $22.3, respectively, which is included in other
liabilities. Accretion and depreciation expense for the years ended December 31,
2005, 2004 and 2003 were $3.1, $1.8 and $1.8, 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, 2005 and 2004, the aggregate self-insured and insured
contingent liability was $65.8 and $68.4, respectively, and the related
insurance recovery receivable was $37.7 and $37.9, respectively. The asbestos
liability included in the above amounts at December 31, 2005 and 2004 was $47.8
and $50.4, respectively, and the related insurance receivable was $34.7 and
$34.2, 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:
-53-
Year Ended Year Ended
December 31, December 31,
2005 2004
--------------------------------------
Number of claimants at beginning of period 27,947 26,955
Number of claimants associated with claims closed during period (11,949) (3,540)
Number of claimants associated with claims opened during period 2,113 4,532
--------------------------------------
Number of claimants at end of period 18,111 27,947
-------------------------------------------------------------------------------------------------------------
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, and we have no
information that this pattern will change.
Our asbestos liability and related insurance receivable is based on a study we
commissioned in 2003 by the Actuarial and Analytics Practice of AON Risk
Consultants ("AON"). We provided AON with, among other things, detailed data for
the past ten years on the incidence of claims, the incidence of malignancy
claims, indemnity payments for malignancy and non-malignancy claims, and
dismissal rates by claim. The actuarial methodology employed by AON was
primarily based on epidemiological data assumptions regarding asbestos disease
manifestation, the information provided by us, and the estimates of claim filing
and indemnity costs that may occur in the future. In conjunction with AON, we
also conducted a detailed review of our insurance policies and estimated
insurance recoveries in 2003. We expect to recover close to 50% of our future
indemnity costs and certain defense and processing costs already incurred. Most
of our insurance is with carriers with investment grade ratings and only those
with such ratings were included in the estimation of the recovery of indemnity
and defense costs. We anticipate updating the study approximately every three
years or earlier if circumstances warrant.
It should be noted that the ultimate liability and related insurance recovery
for all pending and anticipated future claims cannot be determined with
certainty due to the difficulty of forecasting the numerous variables that can
affect the amount of the liability and insurance recovery. These variables
include but are not limited to: (i) significant changes in the number of future
claims; (ii) significant changes in the average cost of resolving claims; (iii)
changes in the nature of claims received; (iv) changes in the laws applicable to
these claims; and (v) financial viability of co-defendants and insurers.
LEAD PIGMENT
We are among several defendants in approximately 30 cases, in which
plaintiffs assert claims for personal injury, property damage, and other claims
for relief relating to one or more kinds of lead pigment that were used as an
ingredient decades ago in paint for use in buildings. The different suits were
brought by government entities and/or individual plaintiffs, on behalf of
themselves and others. The suits variously seek compensatory and punitive
damages and/or injunctive relief, including funds for the cost of monitoring,
detecting and removing lead based paint from buildings and for medical
monitoring; for personal injuries allegedly caused by ingestion of lead based
paint; and plaintiffs' attorneys' fees. We believe that the suits against us are
without merit, and we are vigorously defending against all such claims.
Accordingly, no loss contingency has been recorded.
In July 2005, the Supreme Court of Wisconsin held in a case in which we were one
of several defendants that Wisconsin's risk contribution doctrine applies to
bodily injury cases against manufacturers of white lead pigment. Under this
doctrine, manufacturers of white lead pigment may be liable for injuries caused
by white lead pigment based on their past market shares unless they can prove
they are not responsible for the white lead pigment which caused the injury in
question. Seven other courts have previously rejected the applicability of this
and similar doctrines to white lead pigment. We settled this case for an
immaterial amount. Although similar cases may be filed in Wisconsin, we intend
to vigorously defend ourselves if such case(s) are filed based on what we
believe to be our non-existent or diminutive market share. Accordingly, we do
not believe that our liability, if any, in such cases will be material, either
individually or in the aggregate and no loss contingency has been recorded.
We have access to a substantial amount of primary and excess general liability
insurance for property damage and believe these policies are available to cover
a significant portion of both our defense costs and indemnity costs, if any, for
lead pigment-related property damage claims. We have agreements in principle
with several 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 defense costs
from additional insurers.
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.
-54-
In the second quarter of 2005, we increased our reserves by $2.4 as a result of
our agreement in principle, which was signed in the third quarter, to settle
certain claims by a third party for $2.7.
In 2006, we were named as a defendant in a series of civil cases alleging
violation of antitrust laws relating to the sale of methyl methacrylate, a
chemical manufactured and sold by CYRO, and seeking damages arising out of such
alleged violations. We sold our interest in CYRO to Degussa in 2005, and in
accordance with the terms of the sales agreement, we expect that Degussa and
CYRO to provide us with full indemnity for any losses and expenses associated
with these cases.
In February 2006, a subsidiary of DSM filed a lawsuit against us seeking
immediate dissolution of AMEL, the melamine manufacturing joint venture between
DSM and Cytec or the appointment of a receiver for the joint venture, the
rescission of the services agreement between Cytec and AMEL and compensatory
damages. We believe this lawsuit is without merit and we are vigorously
defending against all of the claims.
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.
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
euros plus interest on the award at the rate of 7% per annum from July 28, 2004.
We have obtained a court order in France to enforce the award, which order is
being appealed by SNF. No gain contingency has been recorded. Subsequent to the
arbitration award, SNF filed a complaint alleging criminal violation of French
and European Community antitrust laws relating to the contract which was the
subject of the arbitration proceedings. We believe that the complaint is without
merit.
COMMITMENTS
Rental expense under property and equipment leases was $14.3 in 2005, $10.8 in
2004 and $10.2 in 2003. 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, 2005, are:
Operating
Leases
----------------------------------------
2006 $13.6
2007 11.0
2008 8.7
2009 6.7
2010 3.9
Thereafter 16.4
------
Total minimum lease payments $60.3
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.
-55-
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 December 31, 2011. Price is
determined by a formula based on the raw materials used to manufacture
hydrocyanic acid and to a lesser extent on the selling 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 December 31, 2011.
The price for regenerated sulfuric acid is cost based and the price for sulfuric
acid is set between the price for regenerated 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.
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, 2005, obligations under such agreements totaled $51.9.
We had $46.6 of outstanding letters of credit, surety bonds and bank guarantees
at December 31, 2005 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.
12. INCOME TAXES
The income tax provision (benefit) is based on earnings (losses) from continuing
operations before income taxes and, in 2003, before the cumulative effect of
accounting change as follows:
---------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------
U. S. $(22.3) $105.1 $ 68.7
Non-U.S. 65.8 67.3 60.7
---------------------------------------------------------------------
Total 43.5 $172.4 $129.4
---------------------------------------------------------------------
The components of the income tax provision (benefit) are as follows:
---------------------------------------------------------------------
2005 2004 2003
---------------------------------------------------------------------
Current:
U. S. Federal $ (8.6) $ 6.3 $ 1.9
Non-U.S. 27.3 12.8 16.2
Other, principally state 1.5 2.2 1.4
--------------------------------------------------------------------
Total 20.2 21.3 19.5
--------------------------------------------------------------------
Deferred:
U. S. Federal (8.3) 20.3 10.4
Non-U.S. (23.5) (0.1) 0.9
Other, principally state (2.8) (0.1) 5.8
--------------------------------------------------------------------
Total (34.6) 20.1 17.1
--------------------------------------------------------------------
Total income tax provision (benefit) $(14.4) $ 41.4 $ 36.6
--------------------------------------------------------------------
Income taxes paid in 2005, 2004 and 2003 were $64.4, $16.6 and $14.7,
respectively and include non-U.S. taxes of $59.8, $15.7 and $12.0 in 2005, 2004
and 2003, respectively. For 2005, $19.9 of pre-acquisition income taxes were
paid by the acquired Surface Specialties entities of which $19.4 has been
reimbursed to us from UCB.
-56-
U. S. and non-U.S. earnings (losses) 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 situs 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, 2005 2004
Deferred tax assets:
----------------------------------------------------------------------------
Allowance for bad debts $ 4.8 $ 2.5
Self insurance accruals 24.5 26.4
Operating accruals 14.4 14.9
Environmental accruals 32.1 26.7
Pension and postretirement benefit liabilities 164.0 149.1
Employee benefit accruals 15.4 18.9
Tax credit carry forwards 18.4 13.9
Net operating losses 39.4 13.1
Other 25.2 4.0
----------------------------------------------------------------------------
Gross deferred tax assets 338.2 269.5
----------------------------------------------------------------------------
Valuation allowance (23.2) (12.2)
----------------------------------------------------------------------------
Total net deferred tax assets 315.0 257.3
----------------------------------------------------------------------------
Deferred tax liabilities:
Inventory (7.5) (11.1)
Plants, equipment and facilities (180.6) (124.4)
Insurance receivables (11.3) (13.4)
Intangibles (158.4) (30.4)
Other (8.9) (0.1)
----------------------------------------------------------------------------
Gross deferred tax liabilities (366.7) (179.4)
----------------------------------------------------------------------------
Net deferred tax assets / (liabilities) $ (51.7) $ 77.9
============================================================================
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. We completed our evaluation of
this repatriation provision in 2005 and concluded that no earnings will be
repatriated under the Act. In addition, at December 31, 2005 no provision has
been made for U.S. or additional non-U.S. taxes on the undistributed earnings of
international subsidiaries totaling $476.2 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.
We have U.S. research and development tax credit carryforwards of $5.0 available
as of December 31, 2005 to offset future U.S. tax liabilities. These
carryforwards begin to expire at various dates starting in 2022 through 2025.
U.S. foreign tax credit carryforwards of $7.0 are available 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 2015. We also have $3.4 of state tax credits of which
$2.4 will be carried forward indefinitely with the balance to expire at various
dates starting in 2006. Additionally, we have $3.0 of foreign jurisdiction tax
credits mainly related to our operations in Belgium and Mexico, of which $0.7
will expire in 2007 with the balance having an unlimited carryforward period.
At December 31, 2005, we have U.S. federal income tax net operating loss
carryforwards of $9.3 relating to a 1998 acquisition 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 2010 through 2018. In addition, we have foreign net
operating losses totaling $24.1, 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 $5.9 expire at various dates starting in 2006 through 2013, while
$18.2 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 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 $23.2 and $12.2 as of December 31, 2005 and 2004. For
2005, the $11.0 valuation allowance activity primarily consisted of a $0.6
decrease for various stated deferred tax assets, offset by an increase to the
valuation allowance for foreign net operating losses and other foreign deferred
tax assets ($3.0), and acquired Surface Specialties deferred tax assets ($8.6),
the latter of which was recorded as an offset to goodwill. 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.
-57-
The Internal Revenue Service (the "IRS") has completed and closed its audits of
our tax returns through 2001. 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 these audits, we also recorded a reduction in tax
expense of approximately $16.2. The IRS is also currently conducting audits of
our tax returns for the years 2002 and 2003. We believe that adequate provisions
for all outstanding issues have been made for all open years.
In May, 2005, we received a final notice from the Norwegian Assessment Board
disclosing an increase to taxable income with respect to a 1999 restructuring of
certain of our European operations. The tax liability attributable to this
assessment, excluding interest and possible penalties, was approximately 84.0
Norwegian krone ($12.4). This final assessment reflects 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, to reflect
such final assessment. We have retained tax counsel to assist in our defense of
the final assessment since the issue will likely be litigated given our vigorous
defense in protesting the increase of taxable income.
We also received a separate notice from the Norwegian tax authorities in 2005
disclosing a complete termination of pleadings regarding a potential Norway
permanent establishment ("PE") with respect to an affiliate of one of our
subsidiaries. Given the favorable resolution of this PE issue with respect to
one of our subsidiaries, we have adjusted our tax contingency reserves
accordingly and recorded a reduction in tax expense of $5.4, including interest,
in the second quarter ended June 30, 2005.
Notwithstanding our meritorious defenses in these matters, in prior years as
these matters developed, we accrued for the potential unfavorable outcome of
this dispute for the full amount of the tax liability of the assessment
including interest thereon.
In October 2005, we received notice from the Norwegian authorities demanding a
tax payment of 56.0 Norwegian krone ($8.5) plus accrued interest with respect to
the 1999 restructuring. We remitted this deposit with the tax authorities
pending final resolution of this matter. Based on the Norwegian demand notice,
we also determined that $22.0 Norwegian krone ($3.3) related to this issue will
be remitted in subsequent tax return filings without an interest charge until
this dispute is resolved. In light of these events, we reevaluated our total
liability (including interest) on the potential unfavorable outcome of this
dispute, and recorded a reduction in tax expense of 16.9 Norwegian krone ($2.6)
to adjust the interest component of this liability accordingly. Assuming the
dispute resolution process follows a normal course, a complete resolution of the
Norwegian issue will probably occur in late 2006 or early 2007.
A reconciliation of our effective tax rate to the U.S. federal income tax rate
is as follows:
-------------------------------------------------------------------------------
2005 2004 2003
-------------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
Research and development credit (5.2) (1.8) (3.2)
Income subject to other than
the federal income tax rate (21.1) (7.1) (6.3)
Change in tax rates (1.1) (1.1) -
State taxes, net of federal benefits (3.7) (2.8) 2.0
Valuation allowance 5.6 4.4 3.6
Acquired in-process research and
development write-off 29.8 - -
Extraterritorial income exclusion (7.8) (1.8) (1.6)
Favorable resolution of prior year audits (65.0) - -
Other (credits) charges, net 0.5 (0.8) (1.2)
-----------------------------------------------------------------------------
Effective tax rate (33.0)% 24.0% 28.3%
=============================================================================
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.
-58-
In 2003 a tax benefit of $7.3 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 of $5.5, $11.7 and $7.9 were allocated
directly to stockholders' equity for 2005, 2004 and 2003, respectively.
13. EMPLOYEE BENEFIT PLANS
We have defined benefit 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 accounting for the postretirement plans anticipates
future cost-sharing and changes to the plans. 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.
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 beginning 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 of determining actuarial equivalence, we have been able to determine
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 $3.9 and $2.4, respectively, for the
years ended December 31, 2005 and 2004.
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
--------------------------------- ---------------------------------------
2005 2004 2003 2005 2004 2003
--------------------------------- ---------------------------------------
NET PERIODIC COST:
Service cost $ 21.4 $ 14.4 $ 12.5 $ 1.3 $ 1.0 $ 1.4
Interest cost 41.3 34.7 32.5 13.7 14.3 16.6
Expected return on plan assets (42.1) (38.9) (35.5) (4.7) (4.9) (5.0)
Net amortization and deferral 15.8 7.8 3.4 (10.6) (10.6) (10.7)
Curtailment/Settlement (2.7) - - - - -
--------------------------------- ---------------------------------------
Net periodic expense (credit) $ 33.7 $ 18.0 $ 12.9 $ (0.3) $ (0.2) 2.3
================================= =======================================
WEIGHTED-AVERAGE ASSUMPTIONS
USED TO DETERMINE NET PERIODIC
COST, DURING THE YEAR:
Discount rate 5.4% 6.0% 6.4% 5.8% 6.3% 6.8%
Expected return on plan assets 7.7% 8.0% 8.1% 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 5.3% 5.6% 6.1% 5.6% 5.8% 6.3%
Rate of compensation increase 3%-10% 3%-10% 3%-10% - - -
==========================================================================
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% - 65% stocks and 35% - 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 2005 and 2004. 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 7.7%
and 8.0% 2005 and 2004, respectively. For postretirement plans, all of which are
assets held in the U.S., the expected rate of return was 6.5% in 2005 and 2004,
based on the same investment return assumptions and an assumed asset allocation
of 55% in stocks and 45% fixed income securities in 2005 and 2004. 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.
-59-
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.
`ension plan, the assumed rate of return was 6.25% in 2005. This return is based
on assumed rates of return of 9% for stocks and 5% for fixed income securities
and an assumed asset allocation of 31% stocks and 69% fixed income securities.
-60-
Pension Plans Postretirement Plans
--------------------------------- ---------------------------------
2005 2004 2003 2005 2004 2003
--------------------------------- ---------------------------------
Change in benefit obligation:
Benefit obligation at January 1 $ 646.2 $ 565.4 $ 489.1 $ 248.6 $ 271.5 $ 253.6
Addition of plans - 2.1 0.7 - - -
Service cost 21.4 14.4 12.5 1.3 1.0 1.4
Interest cost 41.3 34.7 32.5 13.7 14.3 16.6
Amendments 2.4 (0.1) (0.2) - - -
Acquisitions 137.4 - 18.2 - - 2.7
Translation difference (29.0) 10.2 16.1 - 0.1 0.1
Actuarial gains/(losses) 42.2 44.5 21.2 14.9 (15.7) 20.1
Employee contributions 1.4 0.9 0.5 4.0 3.4 2.6
Benefits paid (31.8) (25.9) (25.2) (24.4) (26.0) (25.6)
Curtailments/Settlements (1.0) - - - - -
--------------------------------- ---------------------------------
Benefit obligation at December 31 $ 830.5 $ 646.2 $ 565.4 $ 258.1 $ 248.6 $ 271.5
--------------------------------- ---------------------------------
Accumulated benefit obligation at
December 31 $ 769.7 $ 617.3 $ 544.2 $ - $ - $ -
Change in plan assets:
Fair value of plan assets at January 1 $ 485.3 $ 430.5 $ 350.0 $ 71.6 $ 74.6 $ 70.5
Addition of multiple plans - - 0.3 - - -
Actual return on plan assets 39.1 39.2 52.5 3.0 3.8 8.3
Company contributions 14.4 32.2 27.5 15.9 15.8 18.7
Employee contributions 1.4 0.9 0.5 4.0 3.4 2.7
Acquisitions 65.8 - 10.7 - - -
Translation difference (20.0) 8.4 14.2 - - -
Benefits paid (31.3) (25.9) (25.2) (24.3) (26.0) (25.6)
--------------------------------- ---------------------------------
Fair value of plan assets at
December 31 $ 554.7 $ 485.3 $ 430.5 $ 70.2 $ 71.6 $ 74.6
Funded status: $ (275.8) $ (160.9) $ (134.9) $ (187.9) $ (177.0) $ (196.9)
Unrecognized actuarial losses 241.3 212.4 174.1 37.3 20.6 35.0
Unrecognized prior service cost 0.7 0.9 0.3 (63.9) (74.5) (85.1)
Other contributions 0.7 - - - - -
Unrecognized net transition
obligation 4.0 - - - - -
--------------------------------- ---------------------------------
Net amount recognized $ (29.1) $ 52.4 $ 39.5 $ (214.5) $ (230.9) $ (247.0)
--------------------------------- ---------------------------------
Amounts recognized in the
consolidated balance sheets
consists of:
Prepaid benefit cost $ 15.7 $ 24.1 $ 10.6 $ - $ - $ -
Accrued benefit cost (239.7) (147.9) (118.1) (214.5) (230.9) (247.0)
Intangible asset 5.4 5.6 6.2 - - -
Accumulated other comprehensive
income, exclusive of deferred taxes 189.5 170.6 140.8 - - -
--------------------------------- ---------------------------------
Net amount recognized $ (29.1) $ 52.4 $ 39.5 $ (214.5) $ (230.9) $ (247.0)
================================================================================================================
The accrued postretirement benefit cost recognized in the consolidated balance
sheets at December 31, 2005 and 2004 includes $20.0 in accrued expenses at each
date with the balance reported in pension and other postretirement benefit
liabilities.
-61-
We recorded a non-cash after-tax minimum pension liability adjustment charge of
$7.1 and $11.5 to Other Comprehensive Income in 2005 and 2004, respectively, and
a credit of $1.2 in 2003. The charges to Other Comprehensive Income did not
trigger any special funding requirements. As of December 31, 2005, $4.2 was owed
to one of our U.S. pension plans and is due on or before September 15, 2006.
The assumed rate of future increases in the per capita cost of healthcare
benefits (healthcare cost trend rate) is 9.0% in 2006, 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:
2005 2004
------------------ ------------------
1% 1% 1% 1%
Increase Decrease Increase Decrease
------------------ ------------------
Approximate effect on the total of service
and interest cost components of other $ 1.5 ($1.2) $ 1.5 ($1.2)
postretirement benefit cost
Approximate effect on accumulated
postretirement benefit obligation $24.8 ($21.4) $23.9 ($21.2)
================================================================================
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, 2005 2004 2005 2004 2005 2004
--------------------------------------------------------------------------------
Projected benefit
obligation ($544.5) ($506.2) ($201.1) ($68.4) ($745.6) ($574.6)
Accumulated benefit
obligation (524.0) (489.0) (168.9) (63.8) (692.9) (552.8)
Fair value of plan assets 369.6 369.9 107.5 48.9 477.1 418.8
================================================================================
The asset allocation for our U.S. pension plans and postretirement plans at the
end of 2005 and 2004, and the target allocation for 2006, by asset category, are
as follows:
U.S. Pension Plans Postretirement Plans
------------------------------------------------ ----------------------------- ------------------
Target Percentage of Plan Target Percentage of Plan
Allocation Assets at Year End Allocation Assets at Year End
Asset Category 2006 2005 2004 Asset Category 2006 2005 2004
----------------------------- ------------------ ----------------------------- ------------------
Equity Securities 66% 67% 63% Equity Securities 55% 55% 55%
Fixed Income 34% 33% 37% Fixed Income 45% 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 2006 2005 2004
----------------------------- ------------------
Equity Securities 41% 37% 41%
Fixed Income 47% 53% 52%
Cash and other 12% 10% 7%
----------------------------- ------------------
Total 100% 100% 100%
================================================
The total fair value of U.S. pension and postretirement plan assets was $439.8
and $441.5 at December 31, 2005 and 2004. 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:
-62-
EXPECTED EMPLOYER CONTRIBUTIONS PENSION PLANS POSTRETIREMENT PLANS
---------------------------------------- ---------------------- ----------------------------------------------------------
2006 $10.2 $19.3
The following table reflects total benefits expected to be paid from the plan
and / or our assets:
POSTRETIREMENT BENEFITS POSTRETIREMENT BENEFITS
PRIOR TO MEDICARE PART D ANTICIPATED MEDICARE PART
EXPECTED BENEFIT PAYMENTS PENSION BENEFITS SUBSIDY D SUBSIDY
---------------------------------------- ---------------------- -------------------------- ----------------------------
2006 $23.6 $22.3 $3.0
2007 24.7 22.9 3.2
2008 25.8 23.1 3.3
2009 27.2 23.2 3.4
2010 28.7 23.3 3.5
2011-2015 174.1 114.2 18.5
---------------------------------------- ---------------------- -------------------------- ----------------------------
The following table reflects the expected cash flows for the non-U.S. plans:
EXPECTED EMPLOYER CONTRIBUTIONS PENSION PLANS POSTRETIREMENT PLANS
---------------------------------------- ---------------------- ------------------------
2006 $ 13.6 $ 0.1
---------------------------------------- ---------------------- ------------------------
The following table reflects the total benefits expected to be paid from the
plans and/or our assets:
EXPECTED BENEFIT PAYMENTS PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------------------------- ---------------------- ------------------------
2006 $ 8.2 $0.1
2007 7.6 0.1
2008 9.0 0.1
2009 9.1 0.1
2010 9.8 0.1
2011-2015 46.0 0.8
---------------------------------------- ---------------------- ------------------------
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:
2005 2004 2003
-----------------------------------------------------------------
U.S. Profit Growth Sharing $ 3.0 $ 9.1 $ 5.5
Savings Plan 8.0 7.0 6.1
-------------------------------
Total $11.0 $ 16.1 $ 11.6
-------------------------------
Non-U.S.
Others $ 2.7 $ 1.2 $ 1.2
=================================================================
We also sponsor post employment plans that, 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.
-63-
14. OTHER
Following are our accrued expenses:
-------------------------------------------------------------------
December 31, 2005 2004
-------------------------------------------------------------------
Employee benefits $ 18.2 $ 30.1
Other postretirement employee benefits 20.0 20.0
Salaries and wages 45.1 19.1
Taxes other than income taxes 8.9 7.2
Environmental 7.5 10.0
Interest 12.5 7.8
Restructuring costs 10.2 0.1
Customer rebates 18.3 4.4
All other 77.6 79.4
-------------------------------------------------------------------
Total $ 218.3 $ 178.1
===================================================================
The balance in due from related party of $8.0 represents amounts to be received
from UCB for certain preacquisition tax liabilities which we have or will pay in
connection with the acquisition of Surface Specialties. Additionally, in
connection with certain transition services agreements entered into with UCB in
connection with the acquisition of Surface Specialties, included in accrued
expenses at December 31, 2005 are $0.8 related to such agreements. Through
December 31, 2005, results of operations reflect expenses of $12.5 recognized
under these agreements.
15. COMMON STOCK
We are authorized to issue 150 million shares of common stock with a par value
of $.01 per share, of which 46,298,828 shares were outstanding at December 31,
2005. A summary of changes in common stock issued and treasury stock is
presented below.
COMMON STOCK TREASURY STOCK
--------------------------------------
Balance at December 31, 2002 48,132,640 9,332,671
Purchase of treasury stock - 838,200
Issuance pursuant to stock option plan - (1,079,792)
Awards of performance stock and restricted stock - (80,731)
Forfeitures and deferrals of stock awards - 129,549
--------------------------------------
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
=========================================================================================================
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 2005 and 2004, four quarterly cash
dividends of $0.10 per share were declared and paid totaling $17.8 and $15.7,
respectively. No cash dividends on common shares were declared or paid during
2003.
On February 9, 2006, the Board of Directors declared a quarterly cash dividend
of $0.10 per common share, payable on March 15, 2006 to stockholders of record
as of February 27, 2006.
In March 2003, we announced an authorization to repurchase up to an additional
$100.0 of our outstanding common stock. Repurchases were made from time to time
on the open market or in private transactions and the shares obtained under this
authorization are anticipated to be utilized for stock option plans, benefit
plans and other corporate purposes. During 2004, we repurchased 388,300 shares
of our common stock at a cost of $13.1. During 2003, we repurchased 838,200
shares of our stock at a cost of $27.7 that completed the previous stock
repurchase authorization and included $18.1 under the new authorization. In
connection with the acquisition of Surface Specialties, we suspended the stock
buy-back program and do not anticipate making future stock buy-backs for at
least two years from the closing date in order to maximize the funds available
for debt service and other corporate purposes.
-64-
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), restricted
stock (including performance shares),stock appreciation rights (including those
settled with common shares) and deferred stock awards and dividend equivalents.
In addition, automatic formula grants of restricted stock and nonqualified stock
options are awarded to non-employee directors. At December 31, 2005, there are
approximately 6,889,999 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 at 100% of the market price on the date
the option is granted. Options are generally exercisable in cumulative
installments of 33 1/(3)% per year commencing one year after the date of grant
and annually thereafter, with contract lives of generally 10 years from the date
of grant.
A summary of stock options activity is presented below.
2005 2004 2003
----------------------- ----------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------------------------------------------------------------------------------------------------------------
Shares under option:
Outstanding at beginning of year 5,344,434 $30.47 6,320,110 $28.31 6,692,689 $26.15
Granted 534,900 47.61 545,070 37.14 873,600 27.06
Exercised (688,736) 25.88 (1,217,487) 20.20 (1,079,792) 13.44
Forfeited (52,675) 38.88 (303,259) 38.57 (166,387) 31.68
------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT END OF YEAR 5,137,923 $35.45 5,344,434 $30.47 6,320,110 $28.31
------------------------------------------------------------------------------------------------------------------
OPTIONS EXERCISABLE AT END OF YEAR 4,036,177 $30.89 4,049,069 $30.40 4,687,172 $28.64
==================================================================================================================
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAING AVERAGE WEIGHTED
CONTRACTUAL EXERCISE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE(YEARS) PRICE EXERCISABLE PRICE
------------------------------------------------------------------------------------------------------------------
$ 6.46 1,859 2.36 $ 6.46 1,859 $ 6.46
20.44 593,180 3.06 20.44 593,180 20.44
23.31-28.56 1,810,550 5.40 25.28 1,566,951 25.05
29.56-35.09 676,752 5.12 33.25 673,416 33.25
36.25-38.62 523,231 7.86 37.18 186,720 37.29
40.00-44.50 620,451 1.15 40.28 620,451 40.28
46.94-49.39 901,400 6.09 47.74 384,600 47.94
53.29-55.00 10,500 3.34 54.76 9,000 55.00
------------------------------------------------------------------------------------------------------------------
$ 6.46-55.00 5,137,923 4.95 $35.45 4,036,177 $30.89
==================================================================================================================
As provided under the 1993 Plan, we have also issued restricted stock and
performance stock. Restricted shares are subject to certain restrictions on
ownership and transferability that lapse upon vesting. Performance share payouts
are based on the attainment of certain financial performance objectives and may
vary depending on the degree to which the performance objectives are met.
Performance shares awarded in 2003, 2004 and 2005 relate to the 2005, 2006 and
2007 performance periods, respectively. The total amount of stock-based
compensation expense recognized for restricted stock and performance stock was
$2.7 in 2005, $4.6 in 2004 and $2.0 in 2003. A summary of restricted stock and
performance stock activity is as follows:
------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------
Outstanding awards - beginning of year 210,401 230,580 297,655
New awards granted 53,345 65,204 80,731
Shares with restrictions lapsed(1) (54,006) (15,159) (13,739)
Restricted shares forfeited (5,000) (70,224) (134,067)
-----------------------------------------------------------------------------------------------------------
Outstanding awards - end of year 204,740 210,401 230,580
-----------------------------------------------------------------------------------------------------------
Weighted average market value of new awards on award date $47.92 $36.84 $26.93
-----------------------------------------------------------------------------------------------------------
(1) Shares with restrictions that lapsed in each period above include shares
deferred by certain participants. We issued these participants equivalent
deferred stock awards that will be distributed in the form of shares of
common stock, generally following termination of employment.
-65-
The compensation costs that have been charged against income for restricted
stock and performance stock awards have been noted above. The effects of
applying the fair value method provided under SFAS No. 123 are shown in Note 1
and are not necessarily indicative of future amounts.
In the event of a "change of control" (as defined in the 1993 Plan), (i) any
award under the 1993 Plan carrying a right to exercise that was not previously
exercisable and vested will become fully exercisable and vested, (ii) the
restrictions, deferral limitations, payment conditions and forfeiture applicable
to any other award granted under the 1993 Plan will lapse and such awards will
be deemed fully vested and (iii) any performance conditions imposed with respect
to awards shall be deemed to be fully achieved.
The fair value of options granted before January 1, 2005 was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
2004 2003
--------------------------------------------------------
Expected life (years) 5.7 5.6
Expected volatility 46.6% 47.3%
Expected dividend yield 1.0% -
Risk-free interest rate 3.4% 2.9%
Weighted average fair
value of options granted
during the year $16.21 $12.69
-------------------------------------------------------
For stock options granted after January 1, 2005, the fair value of each option
award is estimated on the date of grant using a binomial-lattice option
valuation model. 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 model takes into account
variables such as volatility, dividend yield rate, and risk free interest rate.
However, in addition, the binomial model considers the contractual term of the
option, the probability that the option will be exercised prior to the end of
its contractual life, and the probability of termination or retirement of the
option holder in computing the value of the option. For these reasons, we
believe that the binomial-lattice model provides a fair value that is more
representative of actual experience and future expected experience than the
value calculated in previous years, using Black-Scholes. The assumptions for the
year ended December 31, 2005 are noted in the following table:
2005
------------------------------------------------
Expected life (years) 5.8
Expected volatility 38.5%
Expected dividend yield 0.84%
Range of risk-free interest rate 2.1% - 4.2%
Weighted average
fair value per option
granted during the year $17.78
------------------------------------------------
16. PREFERRED STOCK
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, 2005 and 2004.
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%).
-66-
17. OPERATIONS BY SEGMENT AND GEOGRAPHIC AREAS AND IDENTIFIABLE ASSETS
SEGMENTS: We have restated segment information for all periods presented in
order to reflect our current organizational structure as we announced in October
2005.
Cytec Performance Chemicals includes our water treatment chemicals, 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, acrylamide, 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.
Following is selected information in relation to our continuing operations for
the periods indicated:
Cytec Cytec Cytec Building
Performance Surface Engineered Block Total
Chemicals Specialties Materials Chemicals Segments
==========================================================================================
------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------
2003
Net sales to external customers $ 623.6 $ 228.4 $ 408.7 $ 211.1 $ 1,471.8
Intersegment net sales - - - 65.7 65.7
--------------------------------------------------------
Total net sales 623.6 228.4 408.7 276.8 1,537.5
Earnings from operations 35.7 23.7 66.0 21.9 147.3
Percentage of sales 5.7% 10.4% 16.1% 7.9% 9.6%
Total assets 612.9 214.6 478.9 197.5 1,503.9
Capital expenditures 51.2 12.9 18.3 10.0 92.4
Depreciation and amortization 36.5 13.8 11.3 27.3 88.9
------------------------------------------------------------------------------------------
-67-
The following table provides a reconciliation of selected segment information to
corresponding amounts contained in our consolidated financial statements:
2005 2004 2003
------------------------------------------------------------------------------
Net sales:
Net sales from segments $ 3,016.6 $ 1,811.3 $ 1,537.5
Elimination of intersegment revenue (90.9) (90.0) (65.7)
------------------------------------------------------------------------------
Total consolidated net sales $ 2,925.7 $ 1,721.3 $ 1,471.8
------------------------------------------------------------------------------
Earnings from operations:
Earnings from segments (1) $ 187.3 $ 185.2 $ 147.4
Corporate unallocated (2) (26.8) (17.5) (3.3)
------------------------------------------------------------------------------
Total consolidated earnings from operations $ 160.5 $ 167.7 $ 144.1
------------------------------------------------------------------------------
Total assets:
Assets from segments $ 3,559.3 $ 1,583.1
Other assets (3) 251.2 668.5
------------------------------------------------------------------
Total consolidated assets $ 3,810.5 $ 2,251.6
================================================================================
(1) 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).
(2) Includes $16.8 of restructuring charges in 2005 (see Note 3), 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 (see Note 11).
(3) Includes cash and cash equivalents at December 31, 2005 and 2004 of $68.6
and $323.8, respectively.
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. Earnings from operations
are also based upon destination and consist of total net sales less operating
expenses. 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 and the fair values of
derivatives.
-68-
------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------
Net Sales
United States $ 1,095.3 $ 802.4 $ 719.7
Other Americas 257.4 188.0 151.6
Asia / Pacific 401.7 261.9 211.1
Europe, Middle East and Africa 1,171.3 469.0 389.4
------------------------------------------------------------------------------
Total $ 2,925.7 $ 1,721.3 $ 1,471.8
------------------------------------------------------------------------------
U.S. exports included in net sales above
Other Americas $ 82.1 $ 70.7 $ 47.8
Asia / Pacific 88.7 102.7 85.2
Europe, Middle East and Africa 90.6 61.0 53.6
------------------------------------------------------------------------------
Total $ 261.4 $ 234.4 $ 186.6
------------------------------------------------------------------------------
Earnings from operations
United States (1) $ 17.4 $ 69.7 $ 58.3
Other Americas 48.7 31.2 27.3
Asia / Pacific 39.5 30.3 22.0
Europe, Middle East and Africa 54.9 36.5 36.5
------------------------------------------------------------------------------
Total $ 160.5 $ 167.7 $ 144.1
==============================================================================
Identifiable assets
United States $ 1,576.5 $ 1,001.9
Other Americas 183.6 148.1
Asia and Pacific 223.3 82.7
Europe, Middle East and Africa 1,482.5 306.5
------------------------------------------------------------------
Total 3,465.9 1,539.2
------------------------------------------------------------------
Equity in net assets of and advances
to associated companies 20.3 85.5
Unallocated assets (2) 324.3 626.9
------------------------------------------------------------------
Total assets $ 3,810.5 $ 2,251.6
==================================================================
(1) In 2005, includes a $37.0 write-off in of acquired in-process research and
development costs,$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), and $8.0 in 2004 relating to the
settlement of a class action lawsuit in the U.S. on behalf of purchasers of
carbon fiber and other related matters (see Note 11).
(2) Includes cash and cash equivalents at December 31, 2005 and 2004 of $68.6
and $323.8, respectively.
18. 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 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 perform ongoing credit evaluations of our customers' financial condition and
generally require no 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.
-69-
International operations are subject to various risks which 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.
-70-
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, 2005 and 2004, 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, 2005. 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, 2005 and 2004, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2005, 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 Note 11 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," effective January 1, 2003.
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, 2005, 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, 2006 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting. This report includes an explanatory paragraph stating that management
excluded from its assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005, the internal control
over financial reporting of the Surface Specialties business of UCB S.A.
associated with total assets of $969 million as of December 31, 2005 and total
revenues of $1,075 million for the year ended December 31, 2005.
/s/ KPMG LLP
Short Hills, New Jersey
February 27, 2006
-71-
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, 2005, 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, 2005, 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, 2005, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
The Company acquired the Surface Specialties business of UCB S.A. ("Surface
Specialties") during the year ended December 31, 2005. Management excluded from
its assessment of the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005, Surface Specialties' internal
control over financial reporting associated with total assets of $969 million,
and total revenues of $1,075 million included in the consolidated financial
statements of the Company as of and for the year ended December 31, 2005. Our
audit of internal control over financial reporting of the Company also excluded
an evaluation of the internal control over financial reporting of Surface
Specialties.
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, 2005 and 2004, 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, 2005, and our
report dated February 27, 2006 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Short Hills, New Jersey
February 27, 2006
-72-
QUARTERLY DATA (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1Q 2Q 3Q 4Q YEAR
-------------------------------------------------------------------------------------------------------------------
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 $0.44 $ 1.31
Diluted net earnings (loss) per share (2) $ (0.16) $ 0.25 $ 0.75 $0.43 $ 1.27
2004
Net sales $ 415.2 $422.0 $433.5 $450.6 $1,721.3
Gross profit (1) 105.1 110.4 101.1 101.6 418.2
Net earnings available to common
stockholders 33.2 31.2 10.5 46.2 121.1
Basic net earnings available to common
stockholders per share (2) $ 0.85 $ 0.80 $ 0.27 $ 1.17 $ 3.06
Diluted net earnings available to common
stockholders per share (2) $ 0.83 $ 0.77 $ 0.26 $ 1.13 $ 2.96
(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.
-73-
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, 2005. 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
controls 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 controls over financial reporting was
carried out. Management excluded from its evaluation an assessment of the
internal controls over financial reporting for the Surface Specialties business,
as described below. 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 controls over financial
reporting were effective as of December 31, 2005.
On February 28, 2005, we acquired Surface Specialties from UCB SA. Management
excluded from its assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005, Surface Specialties' internal
controls over financial reporting. As of December 31, 2005, total assets
associated with Surface Specialties were $969 million, representing 25% of our
total assets. For the year ended December 31, 2005, total revenues associated
with Surface Specialties were $1,075 million, representing 37% of our total
revenue.
ATTESTATION REPORT
Management's assessment of the effectiveness of internal controls over financial
reporting as of December 31, 2005 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
There were no changes in our internal controls over financial reporting during
the fiscal quarter ended December 31, 2005 identified in the above-referenced
evaluations that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
-74-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the executive officers of
Cytec. Each such person serves at the pleasure of the Board of Directors of
Cytec.
Name Age Positions
D. Lilley 59 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 52 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 47 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 four years.
S. C. Speak 48 Mr. Speak was elected as an officer in September 2004. He has been President of Cytec
Engineered Materials since January 2002, having previously served as Vice President and
General Manager, North America and Pacific Rim and other executive positions in Cytec
Engineered Materials for more than two years.
W. N. Avrin 50 Mr. Avrin is Vice President, Corporate and Business Development and has held this
position for more than five years.
D. M. Drillock 48 Mr. Drillock was elected Vice President, Controller and Investor Relations in April
2002. He previously served as Controller for more than four years.
J. E. Marosits 53 Mr. Marosits was elected Vice President, Human Resources in July 2002. For more than
four years prior to that, he had been our Director, Human Resources for Building Block
Chemicals and Corporate Manager, Labor Relations.
R. Smith 47 Mr. Smith was elected Vice President, General Counsel and Secretary effective January 1,
2002, having previously served as Assistant General Counsel for more than two years
prior thereto.
T. P. Wozniak 52 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 2006 Annual Meeting of Common Stockholders, dated March 20,
2006.
-75-
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
"Executive Compensation," the "Employment and Severance Arrangements," the
"Compensation under Retirement Plans," the "Compensation of Directors," the
"Compensation and Management Development Committee Report," the "Equity
Compensation Plan Information," and the "Performance Graph" sections of our
definitive Proxy Statement for our 2006 Annual Meeting of Common Stockholders,
dated March 20, 2006.
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
2006 Annual Meeting of Common Stockholders, dated March 20, 2006.
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 2006 Annual Meeting of Common Stockholders, dated March 20,
2006.
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
2006 Annual Meeting of Common Stockholders, dated March 20, 2006.
-76-
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, 2005 and 2004
Consolidated Statements of Income for the Years ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the Years ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 2005, 2004 and 2003
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).
-77-
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).
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.
10.1(c) Letter Amendment No. 2 to Term Agreement dated as of November 11,
2005.
10.1(d) Letter Amendment No. 3 to Term Loan Agreement dated 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.
10.1(g) Letter Amendment No. 2 to Credit Agreement dated as of 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 January
1, 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).
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 from January 21, 2004 (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.
10.2(d)(vi) Form of Performance Cash Award letter used for grants to officers
from February 9, 2006.
-78-
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 September
12, 2003 (incorporated by reference to exhibit 10.12(f) to
Cytec's quarterly report on Form 10-Q for the quarter ended
September 30, 2003).
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 October 14, 1999 (incorporated by reference to
exhibit 10.13(k) to Cytec's quarterly report on Form 10-Q for the
quarter ended September 30, 1999).
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.
10.3 Relocation Agreement for Shane Fleming dated December 11, 2005.
10.4 Restricted Stock Award Agreement for James P. Cronin dated March
1, 2005.
10.5 Restricted Stock Award Agreement for William N. Avrin dated March
1, 2005.
10.6 Settlement Agreement by and between Cytec Surface Specialties NV
and Benoit Van Assche dated November 30, 2005.
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10.7 Employment Agreement by and between Benoit Van Assche and UCB
dated June 29, 1998.
10.8 Supplementary Pension for Collective Life Management Code for
Cytec Surface Specialities NV dated November 24, 2005.
10.9 Group Insurance Precautionary Plan for Cytec Surface
Specialities NV dated August 8, 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 J. E. Akitt, C.A. Davis, A.G. Fernandes, L.
L. Hoynes, Jr., B. C. Johnson, W. P. Powell, 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.
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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, 2006 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, 2006 /S/ DAVID LILLEY
---------------------------------------
D. Lilley
Chairman, President and Chief Executive
Officer
DATE: February 28, 2006 /S/ J. P. CRONIN
---------------------------------
J. P. Cronin, Executive Vice President,
Chief Financial and Accounting Officer
*
-----------------------------------
J. E. Akitt, Director
*
-----------------------------------
C.A. Davis, Director
*
-----------------------------------
A.G. Fernandes, Director
*
-----------------------------------
L. L. Hoynes, Jr., Director
*By: /S/R. SMITH
---------------------
Attorney-in-Fact
*
-----------------------------------
B. C. Johnson, Director
*
-----------------------------------
W. P. Powell, Director
*
-----------------------------------
J. R. Satrum, Director
*
-----------------------------------
R. P. Sharpe, Director
*
-----------------------------------
J. R. Stanley, Director
DATE: February 28, 2006
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(in millions)
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.
ADDITIONS OR
(DEDUCTIONS)
CHARGED OR
BALANCE (CREDITED) OTHER ADDITIONS BALANCE
DESCRIPTION 12/31/2002 TO EXPENSES OR (DEDUCTIONS) 12/31/2003
----------- ---------- ----------- --------------- ----------
Reserves deducted from
related assets:
Doubtful accounts
receivable $ 8.8 $ 0.2 $ (l.4) (1) $ 7.6
Deferred tax asset
valuation allowance - - $ 4.6 (2) $ 4.6
Environmental accruals $ 83.7 $ 1.8 $ (5.9) (3) $ 79.6
Total investments, advances
and other assets
$ 17.0 - $ (17.0) (4) $ -
(1) Principally bad debts written off, less recoveries.
(2) Attributable to U. S. state income tax net operating loss
carryforwards.
(3) Environmental remediation spending of $9.3, net of $1.7 currency
exchange and $1.7 for the gross up of a certain liability and
related receivable.
(4) Liquidation of associated company and write-off of preferred
stock of company in bankruptcy both of which were fully reserved.