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, 2007
Commission file number 1-12372
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CYTEC INDUSTRIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3268660
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No).
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 357-3100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
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None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |X| No | |
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes | | No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Yes | | No |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer |X| Accelerated filer | | Non-accelerated filer | |
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes | | No |X|
At June 29, 2007 the aggregate market value of common stock held by
non-affiliates was $3,085,156,660 based on the closing price ($63.77 per share)
of such stock on such date.
There were 47,649,640 shares of common stock outstanding on February 14, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Part of Form 10-K
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Portions of Proxy Statement for 2008 Annual Meeting Parts III, IV
Of Common Stockholders, dated March 11, 2008.
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 17
Part II.
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer 18
Purchases of Equity Securities
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 83
Item 9A. Controls and Procedures 83
Item 9B. Other Information 83
Part III.
Item 10. Directors and Executive Officers of the Registrant 84
Item 11. Executive Compensation 84
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 85
Matters
Item 13. Certain Relationships and Related Transactions 85
Item 14. Principal Accountant Fees and Services 85
Part IV.
Item 15. Exhibits and Financial Statement Schedules 86
Signatures 90
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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 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 or
any of our segments outlooks for the future, anticipated results of acquisitions
and divestitures, selling price and raw material cost trends, the effects of
changes in currency rates and forces within the industry, anticipated costs, 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, future legal settlements and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that are
not historical facts. Such statements are based upon our current beliefs and
expectations and are subject to significant risks and uncertainties. Actual
results may vary materially from those set forth in the forward-looking
statements.
The following factors, among others, could affect our anticipated results: our
ability to successfully complete planned or ongoing restructuring and capital
expansion projects, including realization of the anticipated results from such
projects; our ability to maintain or improve 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; changes in laws and
regulations or their interpretation, 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 and
changes in the laws applicable to these claims; 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.
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PART I
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Item 1. BUSINESS
We are a global specialty chemicals and materials company focused on developing,
manufacturing and selling value-added products. Our products serve a diverse
range of end markets including aerospace, adhesives, automotive and industrial
coatings, chemical intermediates, inks, mining and plastics. We use our
technology and application development expertise to create chemical and material
solutions that are formulated to perform specific and important functions for
our customers. We operate on a global basis with 36% of our 2007 revenues in
North America, 44% in Europe, 14% in Asia-Pacific and 6% in Latin America. We
have manufacturing and research facilities located in 18 countries. We had net
sales of $3,503.8 million and earnings from operations of $324.1 million in
2007, including a gain of $13.6 million on the sale of our water treatment and
acrylamide product lines. Cytec was incorporated as an independent public
company in December 1993.
On February 28, 2005, we completed the acquisition of the Surface Specialties
business ("Surface Specialties") of UCB SA ("UCB") for cash and stock valued at
approximately $1.8 billion. This acquisition complemented our existing product
offering to the coatings industry including the general industrial, automotive,
architectural, plastic, ink and wood sectors. For further details see Note 3 to
the Consolidated Financial Statements.
We sold our water treatment chemicals and acrylamide product lines with
estimated 2006 nine months sales while owned by Cytec of approximately $231
million, to Kemira Group ("Kemira") for approximately $245 million cash. The
closing of the sale was transacted in three phases. We recorded a pre-tax gain
of $75.5 million ($59.6 million after-tax) related to the first phase closing in
the fourth quarter of 2006, and a pre-tax gain of $13.6 ($13.3 after-tax) in
2007 from the second and third phase closings and other miscellaneous
adjustments. For further details see Note 4 to the Consolidated Financial
Statements.
We have four business segments: Cytec Performance Chemicals, Cytec Surface
Specialties, Cytec Engineered Materials and Building Block Chemicals. Cytec
Performance Chemicals and Cytec Surface Specialties are managed under one
executive leader, and are referred to collectively as Cytec Specialty Chemicals.
Cytec Performance Chemicals includes the following product lines: mining
chemicals, phosphines, polymer additives, specialty additives, specialty
urethanes and pressure sensitive adhesives. Cytec Surface Specialties product
lines include radiation-cured resins (Radcure resins), powder coating resins and
liquid coating resins. Included in the liquid coating resins product line are
waterborne resins, amino resins and solvent-based resins. Cytec Engineered
Materials principally includes advanced composites, carbon fiber, and structural
film adhesives. Building Block Chemicals principally includes acrylonitrile,
hydrocyanic acid, sulfuric acid and melamine.
Our corporate vision is to be a premier specialty chemicals and materials
company through customer focus, superior technology, operational excellence and
employee commitment. To achieve our corporate vision, our strategy includes the
following initiatives:
- Solutions for 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 waterborne 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.
- 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. Additionally, within the Cytec Surface Specialties
segment, we are developing hybrid resins, in which radiation-curable
properties are combined with water-based or powder-based technologies,
and in more complex applications, such as coil coating, automotive
repair, ultraviolet inkjet printing and flat-panel displays.
- Geographic expansion. We operate on a global basis with manufacturing
plants located in 18 countries. Our acquisition of Surface Specialties
gave us local manufacturing operations in high growth emerging markets
where we can continue to expand sales from existing production and add
new technologies as markets develop. For example, in 2007 we began
construction of a Radcure oligomer manufacturing facility at our site
near Shanghai, China with expected startup in the first half of 2008.
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- 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 such as six-sigma and lean manufacturing to
reduce our product costs by improving process yields, reducing batch
times, increasing capacity and improving and/or streamlining our
manufacturing processes.
Over the years, in the course of our ongoing operations, we have made a number
of other strategic business and product line acquisitions and dispositions. All
acquisitions have been recorded using the purchase method of accounting.
Accordingly, the results of operations of the acquired companies have been
included in our consolidated results from the dates of the respective
acquisitions.
Our management team regularly reviews our product line portfolio in terms of
strategic fit and capital allocation based on financial performance which
includes factors such as growth, profitability and return on net assets. 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 to insure our long-term competitiveness.
SEGMENT INFORMATION
Revenues from external customers, earnings from operations and total assets for
each of our four reportable segments can be found in Note 18 of the Notes to
Consolidated Financial Statements which is incorporated by reference herein.
Cytec Performance Chemicals
Set forth below are our primary product lines and major products in this segment
and their principal applications.
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Product Line Major Products Principal Applications
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Mining chemicals Promoters, collectors, solvent Mineral separation and processing
extractants, flocculants, for copper, alumina and other
frothers, filter and dewatering minerals
aids, antiscalants, dispersants,
depressants, defoamers and
reagents
Phosphines Solvent extractants, flame Mineral processing,
retardants, catalyst ligands, pharmaceutical, chemical and
high purity phosphine gas and electronic manufacturing, and
biocides fumigants
Polymer additives Ultraviolet light stabilizers Plastics, coatings, and fibers
and absorbers, high performance for: agricultural films,
antioxidants and antistatic automotive parts, architectural
agents lighting, housewares, packaging,
outdoor furniture, sporting goods,
toys and apparel
Specialty additives Surfactants, specialty monomers, Textiles, non-wovens and
acrylic stabilizers and PTZ(R) adhesives, super absorbent
Phenothiazine polymers, pharmaceuticals and
acrylic acid stabilizer
Specialty urethanes Polyurethane, resins, Breathable textile coatings,
isocyanates, carbamates and formulated polyurethane and epoxy
epoxy and polyurethane resin systems, adhesives, inks and
systems sealants
Adhesives Pressure sensitive adhesives: Signage, labels, tapes, graphics,
waterborne and solventborne medical and specialty customer
formulations
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We market our performance chemicals through specialized sales and technical
service staffs for each of our product lines. Sales are usually made directly to
large customers and through distributors to smaller customers. We have achieved
growth in our performance chemicals sales by finding new applications for our
existing products as well as developing new products. For a 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 is 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. Demand for mining chemicals is cyclical and varies with industry
conditions such as global demand, inventory levels and prices for the particular
minerals with respect to which our products have processing applications. We
strive to develop new technologies as well as new formulations tailored for
specific applications.
Phosphines
Our phosphine specialties are utilized for a variety of applications. We are a
leading supplier of ultra-high purity phosphine gas, used in semiconductor
manufacturing and light emitting diode applications, and have significant
positions in various phosphine derivative products including phosphonium salts
used in pharmaceutical catalysts and biocides. Included in the phosphine line
are organo phosphorus compounds. The compounds are used primarily as
intermediates and catalyst ligands for organic and chemical synthesis in the
pharmaceutical and chemical industries.
Polymer Additives
We are a global supplier to the plastics industry of specialty additives which
protect plastics from the ultraviolet radiation of sunlight and from oxidation.
We seek to enhance our position with new products based on proprietary
chemistries, such as our proprietary technology for CYASORB THT(R) 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. In 2006 and 2007, we restructured
our Polymer Addtives product line by discontinuing production of certain
commodity products to focus on our differentiated technology. The remaining
products are now made at our facility in West Virginia.
Specialty Additives
We are a leading global supplier of sulfosuccinate surfactants, acrylamide-based
specialty monomers, and PTZ(R) Phenothiazine. Sulfosuccinate surfactants and
acrylamide-based specialty monomers products are used in emulsion polymers,
paints, paper coatings, printing inks, and other diverse customer applications.
PTZ(R) Phenothiazine is used as an acrylic acid stabilizer.
Specialty Urethanes
As part of our acquisition of Surface Specialties, we acquired a specialty line
of polyurethane resins and systems. This plus our existing line of isocyanates,
carbamates and epoxy and polyurethane resin systems are used in high-performance
applications in industries such as aerospace, automotive, military, computers,
biomedical, textiles and electrical /electronics.
Pressure Sensitive 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, adhesives for medical (transdermal patch)
applications and removable adhesives.
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Cytec Surface Specialties
Set forth below are our primary product lines and major products in this segment
and their principal applications.
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Product Line Major Products Principal Applications
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Radcure resins Oligomers, monomers, Coatings and inks used in industrial
photo-initiators metal, wood and plastic coatings
including parquet, furniture, safety
glass interlayer, printing inks and
varnishes
Powder coating resins Conventional and ultraviolet Powder coatings for industrial and heavy
powders duty metal applications, appliance, white
goods, architecture and wood
Liquid coating resins Waterborne resins, solventborne Industrial coatings for automobiles, can,
resins, amino resins coil, metal fixtures, metal and wood
furniture, and heavy-duty industrial
machinery, architectural applications,
products used in abrasives, tires,
electronics, marine, sanitary and
swimming pools
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We market our surface specialty chemicals through specialized sales and
technical service staffs for each of our product lines. Sales are typically made
directly to large customers and through distributors to smaller customers.
Certain of our products, primarily amino resins, in this segment are
manufactured using melamine that is manufactured by our Building Block Chemicals
segment. For further discussion of raw materials, refer to "Customers and
Suppliers."
Radcure Resins
We are a leading producer of environmentally friendly, radiation-cured resins
for high-performance coatings and graphics applications which we acquired as
part of our acquisition of Surface Specialties. These resins are cured (dried
and hardened) by exposing them to ultraviolet or electron-beam radiation, rather
than heat which typically reduces processing costs and increases productivity.
Products such as inks, compact discs, DVDs, Flat panel displays, credit cards,
packaging, parquet & furniture utilize advanced resins like the ones we have
developed.
Powder Coating Resins
As part of our acquisition of Surface Specialties, we acquired polyester powder
resin technologies for the rapidly growing market for powder coatings. Today,
these coatings which are environmentally friendly account for a significant
portion of the industrial finishing market. We offer innovations such as powder
resins for super durable clearcoats, weather-resistant finishes and
ultraviolet-curing powder coating systems for heat-sensitive substrates such as
plastic and wood. These powder coatings provide original equipment manufacturers
with a number of cost and environmental benefits compared to traditional coating
systems.
Liquid Coating Resins
As part of our acquisition of Surface Specialties, we acquired a broad range of
waterborne and solventborne resins. Together with our amino resins product line,
we are now a market leader in resins for high-solids and waterborne coating
systems. Our extensive portfolio includes products based on seven chemistries:
acrylics, amino resins, epoxy systems, alkyds and polyesters, polyurethanes,
phenolics and unsaturated polyesters.
We also market a broad range of additives to assist customers in formulating
high-performance coatings for protective and decorative applications. Along with
individual additives, we have developed formulated products that combine
multiple additives to achieve specific performance properties targeted to meet
the needs of diverse industries.
Cytec Engineered Materials
Our Cytec Engineered Materials segment manufactures and sells 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.
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Advanced composites are exceptionally strong and lightweight materials
manufactured by impregnating fabrics and tapes made from high performance fibers
(such as carbon fiber) with epoxy, bismaleimide, phenolic, polyimide and other
resins formulated or purchased by us.
Sales are dependent to a large degree on the commercial and military aircraft
build-rates and the number of applications and aircraft programs for which we
are a qualified supplier. The majority of commercial aircraft programs in the
Western world has qualified and uses certain of our products. We are a major
supplier to such military programs as the F-35 Joint Strike Fighter, the F/A-22
and F/A-18 combat aircraft and the C-17 transport aircraft. We have a number of
long-term agreements, expiring over various periods, to supply aerospace
customers with their requirements, subject to various exceptions, of various
specialty materials at prices that are generally fixed by year.
Advanced composites generally account for a higher percentage of the structural
weight on a military aircraft than on a commercial aircraft. They also account
for a higher percentage of the structural weight on newer design commercial
aircraft than older design commercial aircraft as technology progresses and
manufacturers design planes to achieve greater fuel efficiency. Advanced
composites made from carbon fibers and epoxy or bismaleimide resins are
primarily used for structural aircraft applications such as wing, tail and
rudder components, engine housings, and fuselage components while advanced
composites made from fiberglass or aramid materials and phenolic resins are
primarily used for secondary structure applications such as fairings and
interior aircraft applications such as sidewall, ceiling and floor panels and
storage and cargo bins. In addition, our ablatives are used in manufacturing
rocket nozzles and our carbon/carbon products are used in manufacturing aircraft
and other high performance brakes. We expect the demand for advanced composites
to continue to increase as new applications are developed.
Our aerospace adhesives and advanced composites also have various applications
in industrial, high performance automotive and selected recreational products.
We market aerospace materials primarily through a dedicated sales and technical
service staff typically direct to customers.
We purchase from third parties all of the aramid and glass fibers and much of
the carbon fibers and base resins used in the manufacture of composites. They
are mainly used as a reinforcement material for advanced composites used in the
aerospace and certain other industries and have many advantageous
characteristics such as light weight, high tensile strength and strong heat
resistance.
We manufacture and sell various high-performance grades of both
polyacrylonitrile ("PAN") type and pitch type carbon fibers. Approximately 65%
of our carbon fiber production is utilized internally (which represents
approximately 35% of our demand for carbon fiber) with the balance being sold to
third parties. We have announced our intention to build a new carbon fiber line
at our existing site in South Carolina. This project will be completed in two
phases and the first phase is forecasted to cost in a range of $200 to $250
million, take approximately three years to complete and increase our capacity of
PAN carbon fiber by approximately 50%. The first phase will include certain
infrastructure to support the second phase of this project. For additional
information refer to "Customers and Suppliers".
Building Block Chemicals
Building Block Chemicals are manufactured at our world-scale, highly integrated
Fortier facility. The Fortier facility is located on the bank of the Mississippi
River near New Orleans, Louisiana and has access to all major forms of
transportation and supplies of raw materials. This segment's product line
includes acrylonitrile, hydrocyanic acid (a co-product of acrylonitrile),
sulfuric acid and melamine which is produced both for use internally within our
other segments and for merchant sale. The integration of the facility comes from
its steam usage whereas the acrylonitrile and sulfuric acid production produces
excess steam which is used in the production of melamine. Additionally, a tenant
at the site purchases substantially all of the hydrocyanic acid we produce as
well as substantial amounts of the sulfuric acid we produce for the manufacture
of methyl methacrylate at the site. We strive to operate our plants at capacity
subject to market conditions and raw material availability.
Acrylonitrile and Hydrocyanic Acid
We expect to sell up to approximately 25% of our current acrylonitrile
production to an international trading company under a long-term distribution
agreement at a market based price. Another 30% is expected to be sold to Kemira
under long-term agreements to make acrylamide (the product line sold to Kemira
in October 2006) and the remainder is sold within the United States or exported
to international markets principally in Europe and Asia depending upon selling
prices in the regions. We sell substantially all of our hydrocyanic acid under a
long-term supply agreement to a tenant at our Fortier site.
-8-
Other Building Block Chemicals
We are the only manufacturer of melamine in North America and about 30% of our
approximately 150 million pound capacity is used internally to make amino
resins. Depending on market conditions, the remainder is marketed and sold to
third parties. Our ability to manufacture melamine at a competitive cost depends
primarily on the cost of ammonia (which is dependent on the cost of natural gas)
and freight rates.
We manufacture and sell sulfuric acid and regenerated sulfuric acid under a
long-term supply agreement to a tenant at our Fortier site and sell sulfuric
acid in the merchant marketplace.
Prices of Building Block Chemicals are sensitive to the stages of economic
cycles, raw material cost and availability, energy prices and currency rates, as
well as to periods of insufficient or excess capacity. Building Block Chemicals
and its competitors tend to operate their plants at capacity even in poor market
environments, which may result in strong downward pressure on product pricing.
We sell Building Block Chemicals to third parties through a direct sales force
and distributors.
Associated Company and Minority Interests
We own a 50% 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, results of operations, and
cash flows could be adversely affected.
Customers and Suppliers
Sales derived from any single customer did not exceed 10% of our consolidated
revenues for fiscal years 2007, 2006, and 2005. Sales to one of our customers,
including sales to this customer's subcontractors, are significant to our Cytec
Engineered Materials segment. The loss of this customer and related
subcontractors would have a material adverse effect on the operating results of
our Cytec Engineered Materials segment. Sales of hydrocyanic acid and the sale
and regeneration of sulfuric acid to one of our customers are significant to our
Building Block Chemicals segment. The loss of this customer would have a
material adverse effect on the operating results of our Building Block Chemicals
segment. Sales to one customer of our Cytec Surface Specialties segment are
significant to this segment and, if such sales were lost, would have a material
adverse effect on the operating results of our Cytec Surface Specialties
segment. A summary of various long-term customer supply agreements is disclosed
in Note 13, of the Notes to Consolidated Financial Statements which is
incorporated by reference herein.
A number of our customers operate in cyclical industries such as the aerospace,
automotive and mining. This in turn, causes demand for our products to also be
cyclical. Industry cycles also impact profitability of our Building Block
Chemicals' sales.
Key raw materials for the Cytec Specialty Chemicals segments are propylene
derivatives such as acrylic acid, methanol derivatives and natural gas for
energy. Key raw materials for the Cytec Engineered Materials segment are carbon
fiber and various resins. We require natural gas, propylene, ammonia and sulfur
to manufacture our Building Block Chemicals. These are typically available
although we have experienced tight markets for certain raw materials from time
to time.
-9-
Oil and natural gas are important indirect raw materials for many of our
products. The prices of both of these commodities have been volatile over time
and have risen sharply in the last few years significantly increasing the
purchase costs of many downstream products we purchase. Because natural gas is
not easily transported, the price may vary widely between geographic regions.
The price of natural gas in the U.S. has historically been higher than the price
in many other parts of the world. Many of our products compete with similar
products made with less expensive natural gas available elsewhere and we may not
be able to recover any or all of the increased cost of gas in manufacturing our
products.
Our Fortier facility is served principally by a single propylene pipeline owned
by a supplier. The contract with this supplier is up for renewal in 2008 and we
expect to renew our propylene supply contract with the supplier. We also have
arrangements to obtain propylene by rail as a back up facility.
To minimize reliance on any one supplier, we generally attempt to retain
multiple sources for high volume raw materials, other than our own Building
Block Chemicals. We are dependent on a limited number of suppliers for carbon
fibers that are used in many of our advanced composite products. As we
manufacture some of our own carbon fibers, the risk of future carbon fiber
supply limitations is somewhat reduced. Currently carbon fiber is in short
supply and until market capacity increases, shortages are possible. There can be
no assurance that the risk of encountering supply limitations can be entirely
eliminated.
Changes to raw material costs year on year are an important factor in
profitability. Raw material prices can increase or decrease based on supply and
demand and other market forces. We have from time to time experienced difficulty
procuring several key raw materials, such as but not limited to, methanol
derivatives, propylene, natural gas and carbon fiber, due to general market
conditions or conditions unique to a significant supplier. We may experience
supply disruptions of these and other materials in the future. During such
periods, prices of the relevant raw materials may increase significantly and
potentially adversely affect our profit margins. Additionally, such conditions,
if protracted, could result in our inability to manufacture our products,
resulting in lower than anticipated revenues.
We expect to continue to encounter tight markets for certain key raw materials
during 2008. 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 adversely affected.
International
We operate on a global basis, with manufacturing and research facilities located
in 18 countries. Through our sales forces, third party distributors and agents,
we market our products internationally. Geographical information is contained in
Note 18 of the Notes to Consolidated Financial Statements which are incorporated
by reference herein.
International operations are subject to various risks which may or may not be
present in U.S. operations. These risks include political instability, the
possibility of expropriation, restrictions on royalties, dividends and
remittances, instabilities of currencies, requirements for governmental
approvals for new ventures and local participation in operations such as local
equity ownership and workers' councils. Currency fluctuations between the
various currencies in which we do business have caused and will continue to
cause currency transaction gains and losses, which may be material. While we do
not currently believe that we are likely to suffer a material adverse effect on
our results of operations in connection with our existing international
operations, any of these events could have an adverse effect on our
international operations in the future by reducing the demand for our products,
affecting the prices at which we can sell our products or otherwise having an
adverse effect on our operating performance.
Research and Process Development
During 2007, 2006 and 2005, we incurred $75.7 million, $73.9 million and $68.5
million, respectively, of research and process development expense.
Trademarks and Patents
We have approximately 2,100 patents issued in various countries around the
world. We also have trademark applications and registrations for approximately
250 product names. We do not believe that the loss of patent or trademark
protection on any one product or process would have a material adverse effect on
our company. While the existence of a patent is prima facie evidence of its
validity, we cannot assure that any of our patents will not be challenged, nor
can we predict the outcome of any challenge.
-10-
Employees
We employ approximately 6,800 employees of whom about 50% are represented by
unions. We believe that our relations with employees and unions are generally
good. We were not able to reach a coordinated bargaining agreement for benefits
with our U.S. union representatives at the end of 2007 and we will start to
negotiate benefits with each union local separately over the next year.
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 justified.
Environmental Matters and REACH
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 of 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 13 of the Notes
to Consolidated Financial Statements which is incorporated by reference herein.
-11-
The Registration, Evaluation and Authorization of Chemicals ("REACH")
legislation became effective in the European Union on June 1, 2007. This
legislation requires manufacturers and importers of certain chemicals to
register certain chemicals and evaluate their potential impact on human health
and the environment. Under REACH, where warranted by a risk assessment,
specified uses of some hazardous substances may be restricted. Covered
substances must be pre-registered by December 31, 2008. Subsequently,
registration is required based on volume for covered substances manufactured or
imported into the European Union in quantities greater than one metric ton per
year. The European Commission is preparing technical guidance documents to
facilitate the implementation of REACH, which are now expected to be available
by June 2008. Currently, REACH is expected to take effect in three primary
stages over eleven years following the final effective date. The registration,
evaluation and authorization phases would require expenditures and resource
commitments, for example, in order to compile and file comprehensive reports,
including testing data, on each chemical substance and perform chemical safety
assessments. We do not expect to incur significant costs for REACH compliance in
2008. However, the overall cost of compliance over the next 10-15 years could be
substantial. In addition, it is possible that REACH may affect raw material
supply, customer demand for certain products, and our decision to continue to
manufacture and sell certain products in the European Union.
-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, 2007, we had $848.7 million of total debt outstanding, and
$400.0 million of availability under our five-year revolving credit agreement
and $58.3 million of availability under various non-U.S. credit facilities.
While we have substantially reduced our indebtedness and our debt-equity ratio
since our acquisition of Surface Specialties in 2005, 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 12 of the Notes to
Consolidated Financial Statements which is incorporated herein.
Under our $400.0 million five-year revolving credit facility, we are required to
meet financial ratios, including total consolidated debt to consolidated EBITDA
(as defined in the credit agreement) and consolidated EBITDA (as defined in the
credit agreement) 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 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 this agreement could be accelerated, and become immediately due and
payable, and we would not be able to borrow any additional funds under the
agreement while such default continued.
We may encounter difficulties in completing the information technology
integration of Surface Specialties.
We continue the process of implementing our Cytec Specialty Chemicals global
enterprise-wide planning systems for the acquired business of Surface
Specialties. The world-wide implementation is expected to be completed in 2009
and includes changes that involve internal control over financial reporting.
Although we expect this implementation to proceed without any material adverse
effects, the possibility exists that the migration to our global enterprise-wide
planning systems could adversely affect our internal control, our disclosure
control and procedures or our results of operations in future periods. We are
reviewing each system and site as they are being implemented and the control
affected by the implementation. Appropriate changes have been or will be made to
any affected internal control during the implementation.
Disposition or restructuring charges and goodwill impairment or acquisition
intangible impairment or other asset impairment charges may 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 assets at such sites. Long-lived assets
with determinable useful lives are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. We may find it necessary to record disposition, restructuring or
asset impairment charges in connection with such reviews. For example, we
recorded restructuring charges of approximately $6.2 million in 2007 principally
related to plant closures and employee severance. See Note 5 of the Notes to the
Consolidated Financial Statements for further details. Such charges could have a
material adverse effect on our results of operations in the period in which they
are recorded.
We test goodwill for impairment on an annual basis in our fourth fiscal quarter
and more often if events occur or circumstances change that would likely reduce
the fair value of a reporting unit to an amount below its carrying value. We
also test for other possible acquisition intangible impairments if events occur
or circumstances change that would likely reduce the fair value of the stated
assets. 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. See Critical Accounting Policies for further
discussion on our goodwill impairment testing.
In connection with the 2005 acquisition of Surface Specialties, we recorded
goodwill in the amount of $725.7 million and recorded acquisition intangibles of
$490.4 million. In total, we had $1,104.8 million of goodwill, and acquisition
intangibles with a net carrying value of $484.5 million at December 31, 2007.
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."
-13-
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 certain significant
customers may have an adverse effect on results of the affected segment and loss
of several significant customers may have an adverse effect on our consolidated
results.
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 18 countries. Capital
spending for the years ended 2007, 2006 and 2005 was $114.8 million, $102.5
million and $105.3 million, respectively.
Our capital expenditures are intended to provide increased capacity, to improve
the efficiency of production units, to improve the quality of our products, to
modernize or replace older facilities, or to install equipment for protection of
employees, neighboring communities and the environment.
Our manufacturing and research facilities and the segments served by each such
facility are as follows:
-----------------------------------------------------------------------------------------------------------------------
FACILITY SEGMENTS SERVED
-----------------------------------------------------------------------------------------------------------------------
Anaheim, California Cytec Engineered Materials
Antofagasta, Chile Cytec Performance Chemicals
Atequiza, Mexico Cytec Performance Chemicals
Avondale (Fortier), Louisiana Building Block Chemicals
Bassano, Italy Cytec Surface Specialties
Belmont (Willow Island), West Virginia Cytec Performance Chemicals
Bogota, Colombia Cytec Performance Chemicals; Cytec Surface Specialties
D'Aircraft (Anaheim), California Cytec Engineered Materials
Drogenbos, Belgium Cytec Performance Chemicals; Cytec Surface Specialties
Graz, Austria Cytec Surface Specialties
Greenville, South Carolina Cytec Engineered Materials
Greenville, Texas Cytec Engineered Materials
Gumi, Korea Cytec Performance Chemicals
Hamburg, Germany Cytec Surface Specialties
Havre de Grace, Maryland Cytec Engineered Materials
Indian Orchard, Massachusetts Cytec Performance Chemicals
Kalamazoo, Michigan Cytec Performance Chemicals; Cytec Surface Specialties; Cytec
Engineered Materials
La Llagosta, Spain Cytec Surface Specialties
Langley, South Carolina Cytec Performance Chemicals; Cytec Surface Specialties
Lillestrom, Norway Cytec Surface Specialties
Mount Pleasant, Tennessee Cytec Performance Chemicals
North Augusta, South Carolina Cytec Surface Specialties
Oestringen, Germany Cytec Engineered Materials
-15-
Olean, New York Cytec Performance Chemicals
Orange, California Cytec Engineered Materials
Pampa, Texas Cytec Surface Specialties
Rayong, Thailand Cytec Surface Specialties, Cytec Performance Chemicals
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
Tempe, Arizona Cytec Performance Chemicals
Wallingford, Connecticut Cytec Performance Chemicals; Cytec Surface Specialties
Welland, Canada Cytec Performance Chemicals
Werndorf, Austria Cytec Surface Specialties
Wiesbaden, Germany Cytec Surface Specialties
Winona, Minnesota Cytec Engineered Materials
Wrexham, U. K. Cytec Engineered Materials
-----------------------------------------------------------------------------------------------------------------------
We own all of the foregoing facilities and their sites except for the land at
the Indian Orchard, Lillestrom, Pampa and Shimonoseki facilities and the land
and the facilities at the Smyrna, Tempe, and Wiesbaden sites. We have long-term
leases and/or operating agreements for the Indian Orchard, Lillestrom,
Shimonoseki and Wiesbaden sites. The leases and/or operating agreements for the
Pampa and Smyrna sites are scheduled to expire within the next year, and we are
reviewing our options regarding these sites. 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. The municipal authorities in San Fernando, Spain have proposed
to expropriate for fair value our San Fernando site and we are reviewing our
options where to locate the manufacturing capacity.
-16-
Item 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is included in Note 13 of the Notes to
Consolidated Financial Statements and is incorporated herein by reference.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-17-
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES. (Currencies in millions, except per
share amounts)
Our stock is listed on the New York Stock Exchange. On February 14, 2008, there
were approximately 8,000 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
-------------------------------------------------------------------------------------------------------------------------------
2007
High $61.88 $64.50 $71.78 $68.02
Low $53.83 $54.72 $61.53 $57.61
Dividends $0.10 $0.10 $0.10 $0.10
2006
High $60.67 $62.30 $56.07 $58.90
Low $45.80 $51.46 $50.24 $52.20
Dividends $0.10 $0.10 $0.10 $0.10
-------------------------------------------------------------------------------------------------------------------------------
On January 30, 2008, our Board of Directors increased the regular dividend rate
by 25% and declared a quarterly cash dividend of $0.125 per common share,
payable on February 25, 2008 to stockholders of record as of February 11, 2008.
During the year ended December 31, 2007, we repurchased 1,252,800 shares of
common stock for $77.3 under our stock buyback program, which was suspended in
October 2004 and reinstated in February 2007. Approximately $69 remained
authorized under the buyback program as of that date. In December 2007, we
completed that authorization and announced a new authorization to repurchase up
to an additional $100.0 of our outstanding common stock. As of December 31 2007,
approximately $92 remained authorized under our new stock buyback program.
Pursuant to this program, shares can be repurchased in open market transactions
or privately negotiated transactions at our discretion.
------------------------------------------------------------------------------------------------------------------------
Approximate Dollar
Total Number of Shares Value of Shares That
Purchased as May Yet Be
Total Number of Average Price Part of Publicly Purchased
Period Shares Purchased Per Share Announced Program Under the Program
------------------------------------------------------------------------------------------------------------------------
March 1, 2007 -
March 31, 2007 170,000 $57.04 170,000 $59
------------------------------------------------------------------------------------------------------------------------
April 1, 2007 -
April 30, 2007 72,000 $55.64 72,000 $55
------------------------------------------------------------------------------------------------------------------------
May 1, 2007 -
May 31, 2007 78,000 $57.81 78,000 $51
------------------------------------------------------------------------------------------------------------------------
June 1, 2007 -
June 30, 2007 112,800 $60.75 112,000 $44
------------------------------------------------------------------------------------------------------------------------
August 1, 2007 -
August 31, 2007 182,000 $64.63 182,000 $32
------------------------------------------------------------------------------------------------------------------------
September 1, 2007 -
September 30, 2007 190,000 $66.94 190,000 $19
------------------------------------------------------------------------------------------------------------------------
November 1, 2007 -
November 30, 2007 185,000 $60.43 185,000 $8
------------------------------------------------------------------------------------------------------------------------
December 1, 2007 -
December 31, 2007 263,000 $62.74 263,000 $92
------------------------------------------------------------------------------------------------------------------------
See Part III, Item 11. "Executive Compensation" for information relating to our
equity compensation plans.
-18-
Item 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
Note: The selected financial data below has been restated to show the
retroactive application of Financial Accounting Standards Board ("FASB") Staff
Position No. AUG AIR-1, "Accounting for Planned Major Maintenance Activities"
("FSP AUG-AIR 1"), which we adopted on January 1, 2007. For further details see
Note 2 to the Consolidated Financial Statements. (Currencies in millions, except
per share amounts).
2007 2006 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------
Statements of income data:
Net sales $3,503.8 $3,329.5 $2,925.7 $1,721.3 $1,471.8
Earnings from operations $ 324.1(1), (5)$ 305.4 (3), (5)$ 162.1(6)$ 167.9 (8)$ 144.8
Earnings from continuing operations before
accounting change and premium paid to redeem
preferred stock $ 206.5(2) $ 196.4 (4) $ 58.9(7)$ 131.1 (9)$ 93.2
Earnings from discontinued operations, net of
taxes - - 1.2 - -
Cumulative effect of accounting change, net of
taxes - (1.2)(5) - - (13.6)(11)
Premium paid to redeem preferred stock - - - (9.9)(10) -
------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 206.5 $ 195.2 $ 60.1 $ 121.2 $ 79.6
------------------------------------------------------------------------------------------------------------------------
Basic net earnings per common share :
Net earnings available to common stockholders
before discontinued operations and accounting
change $ 4.29 $ 4.13 $ 1.30 $ 3.06 $ 2.39
Earnings from discontinued operations, net of
taxes - - 0.03 - -
Cumulative effect of accounting change, net of
taxes - (0.02) - - (0.35)
------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 4.29 $ 4.11 $ 1.33 $ 3.06 $ 2.04
------------------------------------------------------------------------------------------------------------------------
Diluted net earnings per common share:
Net earnings available to common stockholders
before discontinued operations and accounting
change $ 4.20 $ 4.03 $ 1.28 $ 2.97 $ 2.32
Earnings from discontinued operations, net of
taxes - - 0.02 - -
Cumulative effect of accounting change, net of
taxes - (0.02) - - (0.34)
------------------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders $ 4.20 $ 4.01 $ 1.30 $ 2.97 $ 1.98
------------------------------------------------------------------------------------------------------------------------
Cash dividends declared and paid per common share $ 0.40 $ 0.40 $ 0.40 $ 0.40 -
Balance sheet data:
Total assets $4,061.7 $3,830.5 $3,861.5 $2,254.8 $2,045.8
Long-term debt $ 705.3 $ 900.4 $1,225.5 $ 300.1 $ 416.2
------------------------------------------------------------------------------------------------------------------------
(1) Includes a pre-tax restructuring charge of $6.2 ($5.0 after-tax) for
restructuring initiatives and a pre-tax gain of $13.6 ($13.3 after-tax) for
the sale of certain product lines.
(2) In addition to the items in Note (1) above, includes $6.3 related to
various income tax rate changes in various jurisdictions.
(3) Includes pre-tax restructuring charges of $19.2 ($16.1 after-tax) primarily
related to plant closures, pre-tax impairment charges of $29.3 ($24.6
after-tax) related to two unprofitable manufacturing sites in Europe, a
pre-tax charge of $2.6 ($1.9 after-tax) related to a change in employee
benefit plans in the U.K., a pre-tax charge of $2.2 ($1.6 after-tax)
related to a contingent liability study update, pre-tax integration costs
of $1.7 ($1.3 after-tax) related to the Surface Specialties acquisition and
a pre-tax gain of $75.5 ($59.6 after-tax) for the sale of certain product
lines.
(4) In addition to the items in Note (3) above, includes a pre-tax $15.7 ($12.4
after-tax) gain related to resolution of a legal dispute and an income tax
benefit of $3.5 related to the completion of prior years tax audits,
partially offset by a $1.7 tax charge related to a taxable capital
reduction at our Thailand subsidiary.
(5) 2006 cumulative effect of accounting change represents the cumulative
effect of adopting SFAS No. 123(R). Pre-tax expenses resulting from the
application of SFAS No. 123(R) included in Earnings from Operations were
$11.6 in 2007 and $10.4 in 2006.
(6) Includes a non-deductible charge of $37.0 for the write-off of acquired
in-process research and development, a pre-tax charge of $20.8 ($15.4
after-tax) resulting from the amortization of the write-up to fair value of
acquired inventory, pre-tax restructuring charges of $16.8 ($12.4
after-tax) and pre-tax integration costs of $0.2 ($0.1 after-tax).
(7) In addition to the items in Note (6) 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.
(8) Includes a pre-tax charge of $8.0 ($6.2 after-tax) for various litigation
matters.
(9) In addition to the item in Note (8) 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.
(10) Represents a charge to net earnings available to common stockholders
resulting from the redemption of our Series C Preferred Stock.
(11) Represents the cumulative effect of adopting SFAS No. 143. Pre-tax expenses
resulting from SFAS No. 143 included in Earnings from Operations were $1.8
in 2003.
-19-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements. It is assumed that the reader is familiar with the description of
our business and risk factors contained in Part I of this report. Currency
amounts are in millions, except per share amounts. Percentages are approximate.
GENERAL
We are a global specialty chemicals and materials company and sell our products
to diverse major markets for aerospace, adhesives, automotive and industrial
coatings, chemical intermediates, inks, mining and plastics. Sales price and
volume by region and the impact of exchange rates on our reporting segments are
important measures that are analyzed by management and are provided in our
segment analysis.
In the course of our ongoing operations, a number of strategic product line
acquisitions and dispositions have been made. The results of operations of the
acquired businesses have been included in our consolidated results from the
dates of the respective acquisitions. On February 28, 2005, we acquired the
Surface Specialties business of UCB in a transaction valued at $1,789.6. In
addition, on October 2, 2006, we completed the initial closing on the sale of
our water treatment chemicals and acrylamide product lines for $208.0. The
second and the last phase of the closings were completed during 2007. A further
discussion of acquisitions and dispositions can be found in Notes 3 and 4 to the
Notes to the Consolidated Financial Statements contained herein.
We also report net sales in four geographic regions: North America, Latin
America, Asia/Pacific and Europe/Middle East/Africa. The destination of the sale
determines the region under which it is reported consistent with management's
view of the business. North America consists of the United States and Canada.
Latin America includes Mexico, Central America, South America and the Caribbean
Islands. Asia/Pacific is comprised of Asia, Australia and the islands of the
South Pacific Rim.
Raw material cost changes year on year are an important factor in profitability
especially in years of high volatility. Global oil and natural gas costs in
certain countries are highly volatile and many of our raw materials are derived
from these two commodities. Discussion of the year to year impact of raw
materials and energy is provided in our segment discussion. In addition, higher
global demand levels and, occasionally, operating difficulties at suppliers,
have limited the availability of certain of our raw materials.
On January 1, 2007, we adopted FSP AUG AIR-1 retroactively and accordingly,
prior financial statements have been restated. For further details see Note 2 to
the Consolidated Financial Statements.
On January 1, 2007, we adopted FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,
Accounting for Income Taxes" ("FIN 48"). For further details see Notes 1 and 14
to the Consolidated Financial Statements.
On January 1, 2006, we adopted Statement of Financial Accounting Standards
("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). For
further details see Note 6 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship that certain items in
our Consolidated Statements of Income bear to net sales:
Years Ended December 31, 2007 2006 2005
------------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Manufacturing cost of sales 78.6 80.2 79.0
------------------------------------------------------------------------------------------------------------
Gross profit 21.4 19.8 21.0
Selling and technical services 6.1 6.5 7.3
Research and process development 2.2 2.2 3.6
Administrative and general 3.2 3.1 3.5
Amortization of acquisition intangibles 1.1 1.1 1.0
Gain on sale of assets 0.4 2.3 -
------------------------------------------------------------------------------------------------------------
Earnings from operations 9.2 9.2 5.5
------------------------------------------------------------------------------------------------------------
Net earnings available to common stockholders 5.9 5.9 2.1
------------------------------------------------------------------------------------------------------------
-20-
NET SALES BY SEGMENT AND GEOGRAPHIC AREA
Europe/
North Latin Asia/ Middle East/
Net Sales America America Pacific Africa Total
--------------------------------------------------------------------------------------------------------------------------
2007
Cytec Performance Chemicals $262.6 $132.6 $130.3 $210.9 $736.4
Cytec Surface Specialties 347.5 72.7 284.5 935.7 1,640.4
Cytec Engineered Materials 418.5 1.1 51.9 198.3 669.8
Building Block Chemicals 246.1 3.7 31.8 175.6 457.2
----------------------------------------------------------------------
Total $1,274.7 $210.1 $498.5 $1,520.5 $3,503.8
----------------------------------------------------------------------
2006
Cytec Performance Chemicals $324.1 $128.8 $127.9 $284.3 $865.1
Cytec Surface Specialties 366.7 60.3 260.6 835.8 1,523.4
Cytec Engineered Materials 378.2 1.2 44.7 177.7 601.8
Building Block Chemicals 177.6 4.7 26.9 130.0 339.2
----------------------------------------------------------------------
Total $1,246.6 $195.0 $460.1 $1,427.8 $3,329.5
----------------------------------------------------------------------
2005
Cytec Performance Chemicals $340.8 $126.8 $118.5 $269.7 $855.8
Cytec Surface Specialties 329.6 50.7 202.9 660.9 1,244.1
Cytec Engineered Materials 349.2 1.5 30.0 160.9 541.6
Building Block Chemicals 149.2 4.9 50.3 79.8 284.2
----------------------------------------------------------------------
Total $1,168.8 $183.9 $401.7 $1,171.3 $2,925.7
----------------------------------------------------------------------
Net sales in the United States were $1,188.6, $1,162.2, and $1,095.3, for 2007,
2006 and 2005, respectively. International net sales were $2,315.2, $2,167.3,
and $1,830.4, or 66%, 65% and 63% of total net sales, for 2007, 2006 and 2005,
respectively.
For more information on our segments, refer to Note 18 of the Notes to
Consolidated Financial Statements and further discussions in "Segment Results"
below.
YEAR ENDED DECEMBER 31, 2007, COMPARED WITH YEAR ENDED DECEMBER 31, 2006
Consolidated Results
Net sales for 2007 were $3,503.8 compared with $3,329.5 for 2006, up 5%, of
which the divestiture of the water treatment chemicals and acrylamide product
lines decreased sales 6%. Excluding the reduction due to these divestitures,
sales were up 4% due to volume, 4% up due to price, and up 3% due to changes in
exchange rates. Cytec Performance Chemicals selling volumes were down 17%
attributable to the divestiture of the water treating chemicals product line.
Excluding the divestiture, selling volumes and prices were flat and changes in
exchange rates increased sales 2%. Cytec Surface Specialties selling volumes
decreased 3% while selling prices increased sales 5% and changes in exchange
rates increased sales 6%. Cytec Engineered Materials selling volumes increased
9% and selling prices increased 2%. Building Block Chemicals overall sales
volumes were up 24% and selling prices were up 11%. Building Block Chemical
sales volume declined 15% due to the divestiture of the acrylamide product line
which was more than offset by a 23% increase in selling volumes of acrylonitrile
to the purchaser of the divested product line.
For a detailed discussion on revenues refer to the Segment Results section
below.
Manufacturing cost of sales was $2,752.9 (78.6% of net sales) compared with
$2,669.6 (80.2% of net sales) for 2006. The $83.3 increase was primarily due to
$112.5 of costs related to higher selling volumes, $93.0 related to higher raw
material costs, and unfavorable currency exchange of $88.1. These were partially
offset by a reduction in manufacturing cost of sales of $168.1 due to the
divestiture of the water treatment chemicals and acrylamide product lines and
benefits related to the various restructuring initiatives and the shutdown of an
unprofitable manufacturing facility in Dijon, France. Also included in 2007 and
2006 manufacturing cost of sales were pre-tax costs of $5.7 and $47.6,
respectively, related to restructuring, asset impairment, and pension
curtailment/settlement costs. See Restructuring Activities section below and
Note 5 to the consolidated financial statements for additional detail of the net
restructuring and impairment charges.
-21-
Pension and other post employment benefits expense was $30.7 for 2007 versus
$55.0 in 2006. The $24.3 decrease from 2006 is primarily related to lower costs
due to the divestiture of the water treatment chemicals and acrylamide product
lines as well as 2006 included an additional $9.2 of pension curtailments and
plan settlements primarily related to European defined benefit pension plans.
Pension and other post employment benefit expense is reported in the expense
category that it relates to, which is primarily in manufacturing cost of sales.
For a detailed discussion on employee benefit plans, see Note 15 to the
consolidated financial statements.
Selling and technical services was $212.8 in 2007 versus $215.4 in the prior
year. The decrease of $2.6 was primarily due to lower costs of $15.2 due to the
divestiture of the water treatment chemicals and acrylamide product lines
partially offset by increases primarily due to exchange rate changes of $8.0 and
increased spending principally to support future growth programs. Included in
2006 are net restructuring charges of $1.1 and a benefit plan curtailment charge
as described above of $0.4.
Research and process development was $75.7 in 2007 versus $73.9 in the prior
year. The increase was primarily related to changes in exchange rates of $2.6
and increased spending principally to support future growth programs. Partially
offsetting this was a reduction in costs due to divestiture of the water
treatment chemicals and acrylamide product lines of $3.7. Also included in 2006
are restructuring charges of $1.2.
Administrative and general expenses were $113.2 in 2007 versus $102.9 in the
prior year. The increase in 2007 was primarily attributable to changes in
exchange rates of $4.1, higher compensation expenses and higher professional
services expenses. Included in 2006 are integration expenses of $1.4 associated
with the transition from UCB's information technology system infrastructure, a
benefit plan curtailment charge of $0.2 as described above and restructuring
charges of $1.9.
Amortization of acquisition intangibles was $38.7 in 2007 versus $37.8 in the
prior year. This increase was primarily attributable to changes in exchange
rates of $1.8. Included in 2006 is a write-off of $1.4 related to impaired
intangibles related to an unprofitable product line manufactured in Europe.
Gain on the sale of assets was $13.6 in 2007 compared to $75.5 in 2006 and
amounts in both years are related to the divestiture of the water treatment and
acrylamide product lines. See Note 4 of the Consolidated Financial Statements
for further information.
Other income (expense), net was expense of ($0.4) in 2007 compared with income
of $12.7 in the prior year. Included in 2006 is a gain of $15.7 in connection
with proceeds collected in an arbitration award in settlement of the commercial
dispute as discussed in Note 13 of the Consolidated Financial Statements.
Equity in earnings of associated companies was $1.4 in 2007 versus $3.2 in the
prior year. The decline is attributable to the lower sales at our associated
company.
Interest expense, net was $41.9 in 2007 compared with $55.5 in the prior year.
The decrease is primarily due to the lower average debt levels in 2007.
The effective income tax rate for 2007 was a tax provision of 27.1% ($76.7)
compared to a tax provision of 26.1% ($69.4) for 2006. The 2007 effective tax
rate was unfavorably impacted by a shift in our earnings to higher tax
jurisdictions, changes in U.S. tax laws regarding export incentives, and a
French restructuring charge for which no tax benefit was given due to the
unlikely utilization of related net operating losses. The rate was favorably
affected by the relatively low tax expense of $0.3 with respect to the $13.6
gain recorded on the water business divestiture, U.S. manufacturing incentives
and a net tax benefit of $6.3 to primarily adjust our deferred taxes for
recently enacted tax legislation that lowered the corporate income tax rate in a
number of jurisdictions beginning in 2008. Excluding these items and accrued
interest and penalties from uncertain tax positions, the underlying estimated
annual tax rate for the year ended December 31, 2007 was 29.3%, with a
normalized rate of approximately 30.3% including such interest and penalties.
The 2006 effective tax rate was positively impacted by an arbitration award in
settlement of a commercial dispute, a portion of which was recorded in a lower
tax entity resulting in an effective rate of 20.0%, the gain on the divestiture
of the water treatment and acrylamide product lines recorded at a 21% rate, and
a reduction in tax expense of $3.5 as a result of the completion of prior years
U.S. tax audits. The rate was also favorably impacted by the change in statutory
tax rates with respect to deferred tax assets and liabilities recorded in
certain countries. These results were partially offset by a reduction of
earnings of divested product lines in lower tax jurisdictions, the zero tax
benefit on a French restructuring charge due to insufficient earnings to realize
its net deferred tax asset, a tax benefit from a restructuring charge recorded
at 29.6% and a $1.7 tax charge associated with a capital reduction with respect
to a foreign subsidiary. In 2006 a tax benefit of $0.7 was allocated to the
cumulative effect of accounting change. Excluding these items, the underlying
annual tax rate for 2006 was 26.8%.
Net earnings for 2007 were $206.5 ($4.20 per diluted share) compared with net
earnings of $195.2 ($4.01 per diluted share) in 2006. Included in 2007 results
were an after-tax gain of $13.3 ($0.27 per diluted share) on the sale of the
water treatment chemicals product line to Kemira, a $6.3 benefit for tax
adjustments primarily related to tax rate changes in various jurisdictions
($0.13 per diluted share) and net restructuring charges of $5.0 after-tax charge
($0.10 per diluted share). The improvement in net earnings is primarily related
to the net effect of the aforementioned items, higher selling volumes, and
increased selling prices partially offset by higher raw materials, higher
operating expenses as discussed above, and a smaller gain on the product line
divestiture as compared to 2006.
-22-
Included in the 2006 results are an after-tax gain of $59.6 ($1.23 per diluted
share) related to the first phase of the sale of the water treatment and
acrylamide product lines, after-tax net restructuring and impairment charges of
$40.6 ($0.84 per diluted share), an after-tax charge of $1.6 ($0.03 per diluted
share) related to completion of a detailed update of our asbestos contingent
liability, net of insurance recoveries, after-tax costs of $1.3 ($0.03 per
diluted share) related to Surface Specialties integration, an after-tax gain of
$12.4 ($0.26 per diluted share) related to a favorable resolution of a legal
dispute, an after-tax charge of $1.9 ($0.04 per diluted share) related to a
change in employee benefit plans in the U.K., and the cumulative effect of an
accounting change after-tax charge of $1.2 ($0.02 per diluted share) related to
the adoption of SFAS 123R.
Segment Results (Sales to external customers)
Year-to-year comparisons and analyses of changes in net sales by segment and
region are set forth below.
Cytec Performance Chemicals
------------------------------------------------------------------------------------------------------------------------------------
% Change Due to
-------------------------------------------------------
Total Acquisition/
2007 2006 % Change Price Volume/Mix Divestiture Currency
---------------------------------------------------------------------------------------------------
North America $262.6 $324.1 -19% 1% -4% -16% -
Latin America 132.6 128.8 3% -1% 7% -4% 1%
Asia/Pacific 130.3 127.9 2% - 5% -5% 2%
Europe/Middle East/Africa 210.9 284.3 -26% 1% - -31% 5%
---------------------------------------------------------------------------------------------------
Total $736.4 $865.1 -15% - - -17% 2%
------------------------------------------------------------------------------------------------------------------------------------
Excluding the divestiture of the water treating chemicals product line, volumes
were flat due to increases in the mining chemicals as a result of new business
and general market growth offset by decreases in specialty additives, phosphines
and specialty urethanes. On a regional basis, North America sales volumes
declined across all product lines primarily due to weaker market demand while
the sales volume increase in Latin America was primarily attributable to the
mining chemicals product line as a result of increased demand. The Asia/Pacific
volume increase is primarily due to higher demand levels for mining chemicals
and the specialty additives product lines.
Earnings from operations were $71.1, or 10% of sales, compared with $68.4 or 8%
of sales in 2006. The $2.7 increase in earnings is primarily attributable to
slightly higher selling prices of $2.6, favorable volume/mix of approximately
$7.9 due to higher sales of more profitable product lines, favorable changes in
exchange rates of $4.3 and cost reduction of $10.0 primarily due to savings from
restructuring activities. These were partially offset by higher raw material
costs of approximately $14.4, higher operating costs of $5.0, and the loss of
$2.7 of profitability associated with the divested water treatment product line.
Cytec Surface Specialties
-----------------------------------------------------------------------------------------------------------------------
% Change Due to
-----------------------------------------
Total
2007 2006 % Change Price Volume/Mix Currency
-----------------------------------------------------------------------------------------------------------------------
North America $347.5 $366.7 -5% 3% -8% -
Latin America 72.7 60.3 20% - 15% 5%
Asia/Pacific 284.5 260.6 9% 5% 2% 2%
Europe/Middle East/Africa 935.7 835.8 12% 6% -3% 9%
---------------------------------------------------------------------- --------------
Total $1,640.4 $1,523.4 8% 5% -3% 6%
-----------------------------------------------------------------------------------------------------------------------
Overall selling volumes decreased 3% primarily due to weak demand across most
product lines in North America and price competition in liquid coating resins as
well as the impact of discontinuing certain unprofitable solventborne production
in Europe. Volumes increased in Asia/Pacific due to strong demand for liquid
coating resins and Radcure resins partially offset by lower powder coating
resins where we gave up low profit business. In Latin America volumes were up
across all product lines principally due to improved demand. Overall selling
prices increased 5%. Selling prices for liquid coating and powder coating resins
were higher in all regions while Radcure prices were up in Europe and
Asia/Pacific but down in North America and Latin America.
-23-
Earnings from operations were $99.7, or 6% of sales, compared with earnings from
operations of $95.5, or 6% of sales in 2006. The $4.2 increase in earnings is
primarily attributable to higher selling prices of $73.8 and changes in exchange
rates with a favorable impact of approximately $4.6. These were partially offset
by higher raw material costs of $46.9, lower selling volumes of $15.8, and
higher manufacturing and operating expenses of $12.0.
Cytec Engineered Materials
---------------------------------------------------------------------------------------------------------------------------------
% Change Due to
----------------------------------------
Total
2007 2006 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------------------------------------------
North America $418.5 $378.2 11% 3% 8% -
Latin America(1) 1.1 1.2 - - - -
Asia/Pacific 51.9 44.7 16% 1% 15% -
Europe/Middle East/Africa 198.3 177.7 12% 1% 8% 3%
---------------------------------------------------------------------- -------------
Total $669.8 $601.8 11% 2% 9% -
---------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 9% primarily due to higher sales to the large
commercial aircraft sector across most regions predominantly related to higher
production levels on the existing Boeing and other aircraft programs and ramp up
of the 787 program as well as higher sales to the business jet sector and launch
vehicle sector for the crew launch vehicle partially offset by lower sales to
Airbus. The increase in Asia/Pacific sales selling volumes were primarily due to
the aforementioned increases in build-rates in the large commercial aircraft
sector.
Earnings from operations were $132.3, or 20% of sales, compared with $106.0, or
18% of sales, in 2006. The $26.3 increase in earnings is primarily attributable
to higher volumes of $32.8 and higher selling prices of $11.5. These increases
were partially offset by higher manufacturing and operating expenses of $14.9
related to the higher manufacturing volumes as well as additional spending to
support future growth programs, higher raw materials of $2.6, and changes in
exchange rates with an unfavorable impact of $3.1. Operating earnings in 2006
included a $2.4 charge related to the curtailment/settlement of a U.K. pension
plan.
Building Block Chemicals
------------------------------------------------------------------------------------------------------------------------------------
% Change Due to
----------------------------------------------------
Total
2007 2006 % Change Price Volume/Mix Divestiture Currency
------------------------------------------------------------------------------------------------------------------------------------
North America $ 246.1 $ 177.6 39% 8% 36% -5% -
Latin America(1) 3.7 4.7 - - - - -
Asia/Pacific 31.8 26.9 18% 20% - -2% -
Europe/Middle East/Africa 175.6 130.0 35% 14% 50% -29% -
-----------------------------------------------------------------------------------------------
Total $457.2 $339.2 35% 11% 39% -15% -
------------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall sales volumes were up 24%. Sales volume declined 15% due to the
divestiture of the acrylamide product line which was more than offset by a 23%
increase in selling volumes of acrylonitrile to the purchaser of the divested
product line. Acrylonitrile is the key raw material to make acrylamide and prior
to the divestiture our internal uses of acrylonitrile to make acrylamide were
treated as internal transfers. Sales volumes were also up another 16% primarily
due to increased capacity available following our takeover of the melamine
manufacturing facility in August 2006, which previously was a 50-50 joint
venture with a third party and higher demand levels for acrylonitrile. Sales
volumes were up in all regions except Asia/Pacific where they were flat.
Acrylonitrile volumes were up in 2007 as some shipments in late December 2006
were delayed to 2007 due to weather conditions in the Gulf Coast of the U.S. as
well as the acrylonitrile manufacturing facility shutdown in 2006 due to a
scheduled maintenance turnaround. Overall selling prices were up 11% with higher
prices in acrylonitrile and melamine. Prices were up in all regions as they
trended with increases in the raw material prices and higher demand.
Earnings from operations were $23.8, or 5% of sales, compared with $19.8, or 6%
of sales, in 2006. The $4.0 increase in earnings is primarily attributable to
selling price increases of $36.7 and a $37.0 positive impact from higher selling
volumes of acrylonitrile and melamine. These were partially offset by lower
earnings of $9.3 due to the divestiture of the acrylamide product line, $29.1 of
higher raw material costs as well as $32.0 of higher manufacturing costs related
to the higher volumes and acquiring 100% of the melamine manufacturing facility
discussed above.
-24-
YEAR ENDED DECEMBER 31, 2006, COMPARED WITH YEAR ENDED DECEMBER 31, 2005
Consolidated Results
Net sales for 2006 were $3,329.5 compared with $2,925.7 for 2005, up 14%, of
which 7% was due to the inclusion of sales from Surface Specialties for a full
year (acquired on February 28, 2005). The divestiture of the water treatment and
acrylamide product lines on October 1, 2006 decreased sales 2%. Excluding these
two factors, selling volumes were up 6%, selling prices increased 2% and changes
in exchange rates increased sales 1%. Cytec Performance Chemicals experienced a
net increase in sales which resulted primarily from higher selling volumes, the
addition of sales of the acquired pressure sensitive adhesives and polyurethanes
product lines of Surface Specialties as well as from selling price increases.
This was partially offset by decreased sales due to the divestiture of the water
treatment chemicals product line. Cytec Surface Specialties experienced a net
increase in sales which resulted primarily from the addition of sales related to
the acquired product lines of Surface Specialties for a full year and higher
selling volumes. The Cytec Engineered Materials sales increase was principally
volume related, primarily from increased sales to the large commercial transport
and commercial rotorcraft sectors. Building Block Chemicals sales increased from
higher selling volumes and selling prices, partially offset by decreased sales
due to the divestiture of the acrylamide product line. Net sales and operating
results for the Building Blocks segment in 2005 were significantly impacted by
the effects of hurricanes Katrina and Rita in the U.S. gulf coast.
For a detailed discussion on revenues refer to the Segment Results section
below.
Manufacturing cost of sales was $2,669.6 compared with $2,312.1 for 2005. Most
of the increase is associated with higher selling volumes, the inclusion of
expenses for a full year relating to Surface Specialties, higher raw material
costs of $60.3, unfavorable currency exchange on raw materials and energy of
$12.5, partially offset by reduction in manufacturing cost of sales due to the
October 1, 2006 divestiture of the water treatment chemicals and acrylamide
product lines. The results for 2006 also include an impairment and restructuring
charge of $22.1 related to the Polymer Additives product line, an impairment and
restructuring charge of $20.9 for an unprofitable manufacturing facility in
France, a charge of $1.0 for restructuring of a manufacturing site in the U.S.,
a $2.2 net increase in asbestos related contingent liabilities, a $2.6 charge
related to a change in employee benefit plans in the U.K., and a charge of $2.0
related to stock options and stock-settled SARS due to the application of SFAS
123R. These were partially offset by a net restructuring charge reversal of
$0.7. See restructuring section below for additional detail of the net
restructuring and impairment charges. The 2005 results include $20.8 of
amortization of the excess of the fair value of the finished goods inventory for
the acquired Surface Specialties business over normal manufacturing cost.
Pension expense increased $20.8 principally as a result of a full year of
expense for the additional plans and employees acquired upon the Surface
Specialties acquisition in 2005, curtailments and settlements, and to a lesser
extent, the lowering of the discount rate at the beginning of 2006 in the U.S.
by 0.15% to reflect current market rates on fixed income securities. Pension
expense is primarily reported in manufacturing cost of sales.
Selling and technical services was $215.4 in 2006 versus $213.6 in the prior
year. The increase was primarily attributable to the inclusion of expenses for a
full year relating to Surface Specialties and charges related to stock options
and stock-settled SARS due to the application of SFAS 123R of $3.2. Partially
offsetting this was a reduction in costs due to the divestiture of the water
treatment chemicals and acrylamide product lines. Also included in 2006 are net
restructuring charges of $1.1 and a benefit plan curtailment charge as described
above of $0.4. Included in amounts for 2005 was $3.5 for employee severance
costs.
Research and process development was $73.9 in 2006 versus $68.5 in the prior
year. The increase was primarily attributable to the inclusion of expenses for a
full year relating to Surface Specialties and charges related to stock options
and stock-settled SARS due to the application of SFAS 123R of $0.6. Partially
offsetting this was a reduction in costs due to divestiture of the water
treatment chemicals and acrylamide product lines. Also included in 2006 are
restructuring charges of $1.0. Included in amounts for 2005 are restructuring
charges of $0.8.
Administrative and general expenses were $102.9 in 2006 versus $102.1 in the
prior year. The increase was primarily attributable to the inclusion of expenses
for a full year relating to Surface Specialties and charges related to stock
options and stock-settled SARS due to the application of SFAS 123R of $4.6. Also
included in 2006 are integration expenses of $1.4 associated with transitioning
away from UCB's information technology system infrastructure, a benefit plan
curtailment charge of $0.2 as described above and restructuring charges of $1.8.
Included in amounts for 2005 are employee severance costs of $7.3 and a charge
of $2.4 related to the settlement of a litigation matter.
Amortization of acquisition intangibles was $37.8 in 2006 versus $30.3 in the
prior year. This increase was primarily attributable to the inclusion of
amortization expense for a full year relating to Surface Specialties, the
write-off of $1.4 related to impaired intangibles related to an unprofitable
product line manufactured in Europe and $0.6 of higher amortization of certain
Radcure trademarks due to a change in their estimated useful lives.
-25-
The write-off of acquired in-process research and development of $37.0 in the
prior year was related to the Surface Specialties acquisition.
The divestiture gain of $75.5 is attributable to the phase one closing of the
water treatment and acrylamide product lines. See Note 3 of the Consolidated
Financial Statements for further information.
Other income (expense), net was income of $12.7 in 2006 compared with expense of
$44.9 in the prior year. Included in 2006 is a gain of $15.7 in connection with
proceeds collected in an arbitration award in settlement of the commercial
dispute as discussed in Note 13 of the Consolidated Financial Statements.
Included in 2005 is a loss of $44.2 related to derivative contracts entered to
hedge currency and interest rate exposure associated with the acquisition of
Surface Specialties and a charge of $4.4 for a settlement to resolve a dispute
over an environmental matter.
Equity in earnings of associated companies was $3.2 versus $7.9 in the prior
year. On June 1, 2005, we sold our 50% ownership stake in CYRO Industries
("CYRO") to our joint venture partner Degussa Specialty Polymers, a company of
Degussa AG, which subsequently reduced our equity earnings.
Interest expense, net was $55.5 in 2006 compared with $80.0 in the prior year.
The amount for 2005 includes $21.0 of interest charges and $1.0 of unamortized
put premiums and rate lock agreements related to the optional redemption of the
Mandatory Par Put Remarketed Securities (MOPPRS) in May 2005. Excluding these
2005 charges, interest expense is down due to the reduction in the outstanding
weighted-average debt balance during 2006 as we used our free cash flow and
proceeds from the divestiture to pay down debt.
The effective income tax rate for 2006 was a tax provision of 26.1% ($69.4)
compared to a tax benefit of 30.6% ($13.8) for 2005. The 2006 effective rate was
positively impacted by an arbitration award in settlement of a commercial
dispute, a portion of which was recorded in a lower tax entity resulting in an
effective rate of 20%. Also favorably impacting the rate was a 21% tax rate
associated with the gain on the divestiture of the water treatment and
acrylamide product lines and a $3.5 reduction of tax expense as a result of the
completion of prior years U.S. tax audits. The rate was also favorably impacted
by the change in statutory tax rates with respect to deferred tax assets and
liabilities recorded in certain countries. These results were partially offset
by a reduction of earnings of divested product lines in lower tax jurisdictions,
the zero tax benefit on a French restructuring charge due to insufficient
earnings to realize its net deferred tax asset, a tax benefit from a
restructuring charge recorded at 29.6% and a $1.7 tax charge associated with a
capital reduction with respect to a foreign subsidiary. Excluding these items,
the underlying annual tax rate for 2006 was 26.8%.
The 2005 effective tax rate was favorably impacted by hedging losses incurred in
the U.S. in connection with the Surface Specialties acquisition, the MOPPRS
redemption, and reduction in tax expense of $12.2 due to partial resolution of a
tax audit in Norway and a reduction in income tax expense of $16.2 related to
final approval of the Internal Revenue Service's examination of our tax returns
for the years 1999 through 2001. The rate was unfavorably impacted by the
write-off of acquired in-process research and development expenses related to
the Surface Specialties acquisition, for which there is no tax benefit.
Excluding these items, the underlying annual tax rate for 2005 would have been
26%.
Earnings from discontinued operations were $1.2 in 2005 and reflect the results
of Surface Specialties amino resins ("SSAR") product line. SSAR was divested on
August 31, 2005.
The adoption of SFAS 123R was recorded as of January 1, 2006 and resulted in a
non-cash charge for the cumulative effect of a change in accounting principle of
$1.2, net of tax benefit of $0.7.
Net earnings for 2006 were $195.2 ($4.01 per diluted share) compared with net
earnings for 2005 of $60.1 ($1.30 per diluted share). Included in the 2006
results are an after-tax gain of $59.6 ($1.23 per diluted share) related to the
first phase of the sale of the water treatment and acrylamide product lines,
after-tax net restructuring and impairment charges of $40.6 ($0.84 per diluted
share), an after-tax charge of $1.6 ($0.03 per diluted share) related to
completion of a detailed update of our asbestos contingent liability, net of
insurance recoveries, after-tax costs of $1.3 ($0.03 per diluted share) related
to Surface Specialties integration, an after-tax gain of $12.4 ($0.26 per
diluted share) related to a favorable resolution of a legal dispute, an
after-tax charge of $1.9 ($0.04 per diluted share) related to a change in
employee benefit plans in the U.K. and the cumulative effect of an accounting
change after-tax charge of $1.2 ($0.02 per diluted share) related to the
adoption of SFAS 123R. The improvement in net earnings is primarily related to
the net effect of the aforementioned special items, higher selling volumes,
increased selling prices, inclusion of a full year of earnings from Surface
Specialties, increased production levels and the benefits of our recent
restructuring initiatives partially offset by higher raw material costs.
-26-
Net earnings for 2005 included the write-off of $37.0 ($0.80 per diluted share)
of in-process research and development costs; a $15.2 ($0.33 per diluted share)
after-tax amortization charge from the write-up to fair value of the acquired
inventory that was subsequently sold; $0.1 after-tax integration costs related
to the acquired business; a charge of $1.8 ($0.04 per diluted share) after-tax
for settlement of a certain litigation matter; $12.4 ($0.27 per diluted share)
after-tax employee restructuring costs; a $3.2 ($0.07 per diluted share)
settlement to resolve a dispute over an environmental matter; $14.0 ($0.30 per
diluted share) after-tax interest charges and unamortized put premiums related
to the redemption of the MOPPRS prior to their final maturity; a $28.1 ($0.61
per diluted share) after-tax charge related to currency and interest rate
derivative transactions associated with the Surface Specialties acquisition, all
of which were partially offset by the higher overall sales attributable to the
acquisition; and an income tax benefit of $28.4 ($0.61 per diluted share)
reflecting favorable resolution of tax audits with respect to prior year tax
returns.
Segment Results (Sales to external customers)
Year-to-year comparisons and analyses of changes in net sales by segment and
region are set forth below.
Cytec Performance Chemicals
------------------------------------------------------------------------------------------------------------------------------------
% Change Due to
-----------------------------------------------------
Total Acquisition/
2006 2005 % Change Price Volume/Mix Divestiture Currency
------------------------------------------------------------------------------------------------------------------------------------
North America $324.1 $340.8 -5% 3% -5% -3% -
Latin America 128.8 126.8 1% 1% - -2% 2%
Asia/Pacific 127.9 118.5 8% - 7% 1% -
Europe/Middle East/Africa 284.3 269.7 6% -1% 11% -5% 1%
-------------------------------------------------------------------------------------------------
Total $865.1 $855.8 1% 1% 3% -3% -
------------------------------------------------------------------------------------------------------------------------------------
Overall selling volumes increased 3% due to increases in the mining chemicals,
phosphines, pressure sensitive adhesives and specialty additives product lines
due to market growth and commercialization of new technologies. This was
partially offset by decreased selling volumes primarily in the specialty
urethanes product line due to competitive price pressure. The inclusion of full
year sales attributable to pressure sensitive adhesives and polyurethane product
lines of Surface Specialties added 2% to sales and the divestiture of the water
treatment chemicals product line decreased sales 5%. On a regional basis, North
America sales volumes declined primarily in water treatment chemicals due to low
demand from the paper sector and our decision to reduce sales on low profit
accounts and in urethane specialties due to a technology shift in the market
that affected our customer. The sales volume increase in Asia/Pacific is
primarily in mining chemicals and phosphines mostly due to higher demand levels.
Sales volume in Europe/Middle East/Africa increased 11% as a result of overall
improved demand.
Earnings from operations were $68.4, or 8% of sales, compared with $56.6 or 7%
of sales in 2005. The increase in earnings is primarily attributable to
increased selling volumes, slightly higher selling prices, benefits of
restructuring initiatives and the inclusion of the full year Surface Specialties
product lines. Partially offsetting these were higher raw material costs of
$28.1, the divestiture of the water treatment chemicals product line and expense
of $3.6 for stock options and stock-settled SARS related to SFAS 123R. 2005
results also included $2.6 for the excess of the fair value of the finished
goods inventory over normal manufacturing cost related to the Surface
Specialties acquisition and $7.0 of in-process research and development cost
write-offs related to the Surface Specialties acquisition.
Cytec Surface Specialties
------------------------------------------------------------------------------------------------------------------------------------
% Change Due to
------------------------------------------------------
Total
2006 2005 % Change Price Volume/Mix Acquisition Currency
------------------------------------------------------------------------------------------------------------------------------------
North America $366.7 $329.6 11% 4% -6% 13% -
Latin America 60.3 50.7 19% -2% - 14% 7%
Asia/Pacific 260.6 202.9 29% -4% 19% 13% 1%
Europe/Middle East/Africa 835.8 660.9 27% - 7% 18% 2%
--------------------------------------------------------------------------------------------------
Total $1,523.4 $1,244.1 22% - 5% 15% 2%
------------------------------------------------------------------------------------------------------------------------------------
Overall selling volumes increased 5% primarily in the Radcure resins and powder
coating resins product lines. The inclusion of full year sales attributable to
Surface Specialties added $192.0 to sales. In North America volumes declined due
to reduced demand levels from the automotive and architectural sectors in the
liquid coating resins product line. In Asia/Pacific and Europe/Middle
East/Africa volumes increased 19% and 7%, respectively, due to improved demand
and new business. Selling prices declined in Asia primarily due to price
competition in lower technology products.
-27-
Earnings from operations were $95.5, or 6% of sales, compared with earnings from
operations of $22.0, or 2% of sales in 2005. The increase in earnings is
primarily attributable to the increased selling volumes, the benefits of
restructuring initiatives and the inclusion of a full year results from Surface
Specialties. Partially offsetting these are higher raw material costs of $7.8
which were not offset by selling price increases and expense of $3.2 for stock
options and stock-settled SARS related to SFAS 123R. 2005 results include the
write-off of in-process research and development costs of $30.1 and a charge of
$18.2 for the excess of the fair value of the finished goods inventory over
normal manufacturing cost related to the Surface Specialties acquisition.
Cytec Engineered Materials
---------------------------------------------------------------------------------------------------------------------------------
% Change Due to
----------------------------------------
Total
2006 2005 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------------------------------------------
North America $378.2 $349.2 8% 2% 6% -
Latin America(1) 1.2 1.5 - - - -
Asia/Pacific 44.7 30.0 49% 4% 45% -
Europe/Middle East/Africa 177.7 160.9 11% 3% 8% -
------------------------------------------------------------------------------------
Total $601.8 $541.6 11% 2% 9% -
---------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall selling volumes increased 9% primarily from higher sales to the large
commercial aircraft, rotorcraft and business jet sector partially offset by
lower sales in the high performance auto sector due to the completion of a
program in early 2006 and lower sales to the launch vehicle sector. Net selling
prices increased 2% due to price increases in all regions and across a number of
markets. North America, Europe, and Asia/Pacific sales volumes increased 6%, 8%,
and 45%, respectively, with the increases coming primarily from the large
commercial aircraft and military sectors due to increased aircraft build rates.
Earnings from operations were $106.0, or 18% of sales, compared with $103.0, or
19% of sales, in 2005. The impact of the increased sales volume and prices on
operating earnings was partially offset by increased raw material costs of $9.7,
increased costs in manufacturing to support the higher production volumes, some
plant inefficiencies, planned higher technical service and research expenses,
lower production rates in one of our carbon fiber plants due to trial runs of
new product and costs to startup a carbon fiber manufacturing line that was
previously idled. Also included is expense of $2.4 for stock options and
stock-settled SARS related to SFAS 123R and a $2.4 pension curtailment charge
due to a change from a defined benefit pension plan to a defined contribution
pension plan in the U.K.
Building Block Chemicals
------------------------------------------------------------------------------------------------------------------------------------
% Change Due to
----------------------------------------
Total
2006 2005 % Change Price Volume/Mix Divestiture Currency
------------------------------------------------------------------------------------------------------------------------------------
North America $ 177.6 $ 149.2 19% 7% 14% -2% -
Latin America(1) 4.7 4.9 - - - - -
Asia/Pacific 26.9 50.3 -46% 3% -49% - -
Europe/Middle East/Africa 130.0 79.8 63% 17% 58% -13% 1%
-----------------------------------------------------------------------------------------------
Total $339.2 $284.2 19% 9% 15% -5% -
------------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Overall sales volumes are 10% higher and selling prices are 9% higher, both
primarily related to acrylonitrile. The divestiture of the acrylamide product
line on October 1, 2006 reduced sales 5% but was more than fully offset by
increased sales of acrylonitrile to the purchaser of the acrylamide product
line. Acrylonitrile is the key raw material to make acrylamide and prior to the
divestiture our internal uses of acrylonitrile to make acrylamide were treated
as internal transfers, and our internal uses of acrylamide to make certain of
our divested water treating chemicals were treated as intersegment sales. After
the divestiture, acrylonitrile used to make acrylamide is now a third party sale
and for the year this added 7% to sales. After excluding the above, selling
volumes increased 8% from the prior year when volumes were adversely impacted
due to plant shutdowns as a result of the hurricanes in the U.S. gulf coast in
the third quarter of 2005. On a regional basis selling volumes in Asia/Pacific
were down due to sluggish demand for acrylonitrile for use in upgrading to
acrylic fiber. Selling volumes in Europe/Middle East/Africa improved due to
increased demand for imported acrylonitrile as a result of reduced regional
supply. Selling prices were up overall due to acrylonitrile and acrylamide as
they trended with increases in raw material costs.
Earnings from operations were $19.8, or 6% of sales, compared with $7.3, or 3%
of sales, in 2005. The increase in earnings reflects the higher selling volumes
(some due to the impact of the aforementioned hurricanes in 2005) and higher
selling prices. This was partially offset by higher raw material costs of $14.7,
inefficiencies on lower melamine production, difficulties in our sulfuric acid
plant operations and higher costs due to a two week scheduled acrylonitrile
plant outage in the first quarter of 2006. Also included is expense of $1.2 for
stock options and stock-settled SARS related to SFAS 123R.
-28-
RESTRUCTURING ACTIVITIES
In accordance with our accounting policy, restructuring costs are included in
our corporate unallocated operating results for segment reporting purposes
consistent with management's view of its businesses.
In 2007, we recorded total net restructuring charges of $6.2 ($5.0 after-tax),
which were charged to expense as follows: manufacturing cost of sales $5.7, and
administrative and general of $0.5.
Details of 2007 restructuring initiatives are as follows:
We decided to cease manufacturing of several mature products at our Willow
Island, West Virginia plant. The discontinued products were part of the polymer
additives business in our Cytec Performance Chemicals segment. As a result, we
recorded a restructuring charge of $2.6 to 2007 manufacturing cost of sales
primarily related to severance and other benefits for 63 employees who are
expected to be retained through May 2008. This charge also included the
write-off of excess raw materials and spare parts. An additional restructuring
charge of $2.9 to manufacturing cost of sales is expected to occur in the first
half of 2008. This relates to the remainder of the severance and other benefits
which will be accrued as they are earned as well as decontamination expenses
which will be expensed as incurred. Minimal savings from this restructuring
initiative were realized in 2007. A one-time cash benefit of $17.2 from working
capital reductions is expected to be realized through the first quarter of 2009.
Once all actions have taken place in 2008, annualized before tax savings from
these restructuring initiatives are projected to be $1.2. These benefits are net
of lost earnings due to an annual sales reduction of $31.5.
We also announced the restructuring of our liquid coating resins plant in
Wallingford, Connecticut in order to exit a mature product line and consolidate
and automate certain operations at the site. Liquid coating resins are part of
the Cytec Surface Specialties segment. We recorded a restructuring charge of
$1.4 to 2007 manufacturing cost of sales relating to severance and other
benefits for 31 employees. An additional restructuring charge of $0.4 is
expected to be recorded in 2008, primarily related to the remainder of the
severance and other benefits which will be accrued as they are earned. The
economic benefit of this restructuring is derived from the combination of
ceasing operations of one manufacturing line and supplying the volume on a
consolidated operating basis. A one-time cash benefit of $1.7 from working
capital reductions is expected to be realized from this initiative, of which
$1.0 was realized in 2007. Annualized before tax benefits of $4.7 are projected
to be realized beginning in 2008 as a result of this restructuring initiative,
of which $0.5 was realized in 2007. These benefits are net of lost earnings due
to an annual sales reduction of $6.8. Asset retirements on both these projects
will be recorded when production ceases and will be charged to the composite
depreciation reserve in accordance with our accounting policy. The remaining
reserve relating to this restructuring initiative is expected to be paid by
2009.
We also incurred additional net restructuring charges of $2.2 in 2007 relating
to restructurings initiatives announced in 2006 and 2005. These charges were
comprised of $2.5 related to the Dijon restructuring and a net credit of $0.3
related to lower costs than anticipated for prior restructuring initiatives. In
addition, a non-cash charge of $0.3 was recognized and cash payments of $11.5
were incurred for the 2006 restructuring initiatives.
In 2006, we recorded total restructuring charges of $51.1 ($42.3 after-tax) in
connection with several restructuring initiatives, including related asset
impairments of $29.3 ($24.6 after-tax). In the aggregate these costs were
charged to expense as follows: manufacturing cost of sales $45.2, selling and
technical services $2.0, administrative and general $1.5, research and process
development $1.0, and amortization of acquisition intangibles $1.4.
Details of 2006 restructuring initiatives are as follows:
Based on forecasted cash flow information, we determined that our manufacturing
facility in Dijon, France and related intangible assets were impaired. This
facility manufactured solventborne alkyd and solventborne acrylic based resins
for our Cytec Surface Specialties segment, which are used in the coating
industry for sale in the European market. These mature products were in a
declining market with supplier overcapacity with severe price erosion and were
generating losses. We recorded an impairment charge of $15.5 to write-down the
carrying value of the manufacturing facility and related intangible assets down
to zero as we did not believe the assets were saleable and the outlook for
recovery of products it manufactured was not positive. Also in 2006, after the
appropriate consultations with the Works Council, we decided to close the
facility and commence shutdown activities. At that time, we recorded a
restructuring charge of $8.4, based on estimated severance costs for eliminating
60 positions at our Dijon, France manufacturing site. In addition, we recorded a
net restructuring charge of $1.5 primarily for the severance costs for
eliminating 8 positions at our Indian Orchard, Massachusetts site, and 16
positions at our leased facilities in New Castle, Delaware, which operations
have relocated to our new manufacturing facility in Kalamazoo, Michigan. The
restructuring was charged as follows: manufacturing cost of sales $7.8, selling
and technical services $0.6, research and process development $0.5, and
administrative and general $1.0. No payments were made in 2006. In 2007, the
Dijon restructuring reserve was reduced by $7.7 for cash payments primarily
related to severance and the balance is expected to be paid by the beginning of
2009. In addition, a non-cash charge of $0.3 for asset impairment at the Indian
Orchard facility was charged against the reserve and all cash payments for
severance of the 8 positions in Indian Orchard and 16 positions in New Castle
were made in 2007 for a total of $1.3 and the reserve is now depleted. This
decision resulted in a reduction in annual revenues of approximately $24.0;
however, net annual before tax benefits of approximately $2.9 were expected to
begin in 2007 as a result of these restructuring initiatives. Savings realized
in 2007 were $2.4 and are projected to be $2.9 beginning in 2008.
-29-
We recorded a restructuring charge of $22.5 of which $13.8 related to the
impairment of fixed assets in Botlek related to our polymer additives product
line in our Cytec Performance Chemicals segment and the remainder related to the
elimination of 38 positions. This initiative includes the cessation of
manufacturing of two light stabilizer products in Botlek. Manufacture of one of
these products, which had sales of approximately $12.0 in 2005, has been
consolidated at our facility in West Virginia; the other product, representing
2005 sales of approximately $6.0, has been exited. The restructuring costs
included estimated cash severance, reduction of prepaid pensions and retirement
of fixed assets and were charged as follows: manufacturing cost of sales $22.1,
and selling expense $0.4. In 2007, this restructuring reserve was reduced by
$1.6 for cash payments primarily related to severance and the balance of the
reserve is expected to be paid in 2008. Expected annualized savings of
approximately $6.5 were realized in 2007 from this restructuring initiative.
We also recorded restructuring charges of $3.2 related to the elimination of 35
positions associated with our Cytec Specialty Chemicals segments as we continue
our efforts to take advantage of synergies from the 2005 acquisition, and to
mitigate continuing costs related to the 2006 divestiture of our water treatment
chemicals and acrylamide product lines. The restructuring costs, which were
primarily severance related, were charged to expense as follows: manufacturing
cost of sales $1.3, selling and technical services $0.9, research and process
development $0.5 and administrative and general $0.5. In 2007, cash payments
primarily related to severance of $0.9 were made and the remaining reserve is
expected to be paid by 2009. Expected annualized savings of approximately $5.9
were realized in 2007 as a result of these restructuring initiatives.
In 2005, we recorded aggregate restructuring charges of $16.8, principally
related to our formation of Cytec Specialty Chemicals whereby we combined our
specialty chemicals product lines into one organization. As a result of 2005
restructuring initiatives, a total of 136 positions were eliminated. Of the 136
positions, 22 were related to our Cytec Engineered Materials segment and 114
were related to our Cytec Specialty Chemicals segments. In 2007, all payments
relating to severance for the Cytec Engineered Materials segment were completed.
The remaining 2005 restructuring reserve balance relates to severance for the
Cytec Specialty Chemicals segment which will be paid through 2009. See Note 5 of
the Consolidated Financial Statements for a further summary of the restructuring
charges.
LIQUIDITY AND FINANCIAL CONDITION
At December 31, 2007, our cash balance was $76.8 compared with $23.6 at year end
2006.
Cash flows provided by operating activities were $269.8 compared with $201.0 for
2006. A significant portion of the improvement over the prior year is
attributable to increased earnings. In 2007, trade accounts receivables
increased $38.8 due to higher sales levels. Inventories increased $21.7 due to
higher overall raw material costs and, in the Specialty Materials segment,
higher inventory levels to meet increasing demand. Other receivables decreased
$10.1 which includes payments received for certain supplier rebates of $1.9, and
insurance and claim recoveries of $4.1. Other liabilities decreased $51.5
principally due to contributions to our pension and post retirement plans net of
accrued expenses of $44.1.
Cash flows used in investing activities were $76.1 for 2007 compared with cash
flows provided by investing activities of $104.1 for 2006. In 2006, we received
$206.6, net of cash transaction costs, for the completion of the first of three
phases of the sale of our water treatment chemicals and acrylamide product
lines. In 2007, we received $38.7 for the second and third phases of the
aforementioned divestiture. Capital spending for 2007 was $114.8, which compares
to $102.5 in 2006 with most of the increase due to capacity expansions in
waterborne and Radcure resins, engineering work on a new carbon fiber line, and
new safety and compliance initiatives.
Net cash flows used in financing activities were $144.0 in 2007 compared with
$354.4 for 2006. The 2007 financing cash flows were driven by net debt
repayments of $99.0 and treasury stock repurchases of 1,252,800 shares for
$77.3. These were partially offset by proceeds received on the exercise of stock
options of $39.3 and excess tax benefits from share-based payment arrangements
of $11.7. During 2006, we had net debt repayments of $391.4, which were
partially offset by proceeds received on the exercise of stock options of $45.0
and excess tax benefits from share-based payment arrangements of $10.7. In June
2007, we amended and restated our revolving credit agreement to increase the
facility from $350.0 to $400.0, and extend the maturity date to June 2012. There
was no borrowing against the $400.0 unsecured five-year revolving credit
facility at December 31, 2007. Also at December 31, 2007, we had $104.6 of
non-U.S. credit facilities, with outstanding borrowings of $46.3.
-30-
In February 2007, we announced the reinstatement of our stock buyback program
authorized in 2003. Approximately $69.0 remained authorized under the buyback
program as of that date. In December 2007, we completed that authorization and
announced a new authorization to repurchase up to an additional $100.0 of our
outstanding common stock. As of December 31, 2007, approximately $92 remained
authorized under our new stock buyback program. The repurchases are made from
time to time on the open market or in private transactions and the shares
obtained under this authorization are anticipated to be utilized for stock
option plans, benefit plans and other corporate purposes.
As of December 31, 2007, our total debt of $848.7 is denominated approximately
59% in Euros, 38% in dollars and the balance in other currencies, after taking
into account Euro/U.S. dollar cross currency swaps.
During 2007, we paid four quarterly cash dividends of $0.10 per common share
which aggregated $19.1. On January 30, 2008, the Board of Directors increased
the regular dividend rate by 25% and declared a $0.125 per common share cash
dividend, payable on February 25, 2008 to shareholders of record as of February
11, 2008.
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 a $100.0 scheduled debt
payment due March 15, 2008, which we intend to repay using a combination of our
cash and, if necessary, part of our unused revolver.
We have not guaranteed any indebtedness of our unconsolidated associated
company.
Excluding the impact of increasing raw materials costs, inflation is not
considered significant since the rate of inflation has remained relatively low
in recent years and investments in areas of the world where inflation poses a
significant risk are limited. The impact of increasing raw material costs are
discussed under "Customers and Suppliers" in "Business" in Item 1, herein.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations under long-term
agreements as of December 31, 2007:
--------------------------------------------------------------------------------------------------------------
Payments Due by Period
--------------------------------------------------------------------------
Less Than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
--------------------------------------------------------------------------------------------------------------
Long-term debt $ 806.3 $101.5 $252.9 $ - $ 451.9
Interest payments (1) $186.8 $38.2 $60.4 $37.0 $51.2
Operating leases $65.3 $15.1 $18.7 $9.6 $21.9
Pension and postretirement
plans obligations (2) $49.2 $49.2
Purchase obligations $41.9 $19.2 $13.4 $6.8 $2.5
Other noncurrent liabilities (3):
Environmental liabilities (2) $7.4 $7.4
Cross currency swap (4) $112.2 $56.1 $56.1
--------------------------------------------------------------------------
Total $ 1,269.1 $230.6 $ 401.5 $ 53.4 $ 583.6
--------------------------------------------------------------------------------------------------------------
(1) Includes variable interest rate payments on $42.0 of debt using the LIBOR
rates at December 31, 2007.
(2) Expected cash flows for our pension and postretirement plans obligations
and environmental liabilities for years beyond 2008 were excluded as
specific payment dates could not be reasonably estimated. Amounts reflected
to be paid in less than one year are based on our budget and actual amounts
paid in 2008 may vary significantly for pension. See notes 13
(environmental) and 15 (pension) for more information on these liabilities.
(3) Included in other noncurrent liabilities on our consolidated balance sheets
at December 31, 2007, were $70.1 of contingent liabilities (principally
asbestos related liabilities) and $45.7 of asset retirement obligations. As
specific payment dates for these items are unknown, the related balances
have not been reflected in the "Payments Due by Period" section of the
table above.
(4) Related balances are based on unfavorable fair values (at December 31, 2007
exchange rate) of the foreign exchange component of the cross currency
swaps. Actual cash flows upon settlements will be based on the fair values
on the related maturity dates.
As of December 31, 2007, the amount of unrecognized tax benefits (FIN 48
liabilities) was $42.4 (gross). As specific payment dates can not be reasonably
estimated, the related balances have not been reflected in the "Payments Due by
Period" section of the table above.
-31-
We had net contractual commitments under currency forward contracts in U.S.
dollar equivalent amounts of $118.1, that all settle in less than one year.
(Refer to Item 7A as well as Note 8 of the Notes to Consolidated Financial
Statements included herein).
We had $39.7 of outstanding letters of credit, surety bonds and bank guarantees
at December 31, 2007 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.
-32-
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 respective entity. At December 31, 2007, the
principal transactions hedged involved accounts receivable, accounts payable and
intercompany loans. When hedging currency exposures, our practice is to hedge
such exposures with forward contracts denominated in the same currency and with
similar critical terms as the underlying exposure, and therefore, the
instruments are effective at generating offsetting changes in the fair value,
cash flows or future earnings of the hedged item or transaction.
At December 31, 2007, the currency and net contractual amounts of forward
contracts outstanding translated into U.S. dollar equivalent amounts were as
follows:
December 31, 2007 Buy
------------------------------------------------------------------------------------------------------------------------
Sell U.S. Dollar Euro Pound Sterling Australian Dollar Canadian Dollar Others
------------------------------------------------------------------------------------------------------------------------
U.S. Dollar $ - $ 11.1 $ 13.7 $ 15.0 $ 31.7 $ 6.4
------------------------------------------------------------------------------------------------------------------------
Pound Sterling $ - $ 5.4 - - - -
------------------------------------------------------------------------------------------------------------------------
Japanese Yen $ 7.6 $ - - - - -
------------------------------------------------------------------------------------------------------------------------
Malaysian Ringgit $ - $ 4.9 - - - -
------------------------------------------------------------------------------------------------------------------------
Norwegian Krone $ 7.2 $ - - - - -
------------------------------------------------------------------------------------------------------------------------
Taiwan Dollar $ 7.4 $ - - - - -
------------------------------------------------------------------------------------------------------------------------
Others $ 3.6 $ 4.1 - - - -
------------------------------------------------------------------------------------------------------------------------
The favorable fair value of currency contracts, based on exchange rates at
December 31, 2007, was approximately $1.3. Assuming that year-end exchange rates
between the underlying currencies of all outstanding contracts and the various
hedged currencies were to adversely change by a hypothetical 10%, the fair value
of all outstanding contracts at year-end would decrease by approximately $11.3.
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 five-year notes and ten-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 five-year and
ten-year notes (October 1, 2010 and October 1, 2015), respectively. 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 3.78% 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
4.52% 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 U.S. dollar to Euro exchange rates on
certain Euro denominated intercompany receivables we have with one of our
subsidiaries. At December 31, 2007, the fair value of the five and ten year
swaps were $(39.8) and $(31.4), respectively. Assuming other factors are held
constant, a hypothetical increase/decrease of 10% in the Euro exchange rate
would cause an increase/decrease of approximately $57.1 in the value of the
hedging instruments referred to above.
-33-
A portion of an intercompany Euro denominated loans payable naturally hedges our
net investment in our Belgium-based subsidiary, Cytec Surface Specialties SA/NV.
From time to time we also enter into designated forward Euro contracts to adjust
the amount of the net investment hedge. At December 31, 2007, we had no
designated forward contracts.
Commodity Price Risk: We use natural gas swaps to hedge a portion of our utility
requirements at certain of our North American manufacturing facilities. The
maturities of these swaps correlate highly to the actual purchases of the
commodity and have the effect of securing predetermined prices that we pay for
the underlying commodity. While these contracts are structured to limit our
exposure to increases in commodity prices, they can also limit the potential
benefit we might have otherwise received from decreases in commodity prices.
These swaps are recognized on the balance sheet at fair value, which will be
reclassified into manufacturing cost of sales through October 2008 as the hedged
natural gas purchases affect earnings. For a detailed discussion on natural gas
swaps, see Critical Accounting Policies - Commodity Price Risk section below.
At December 31, 2007, we had outstanding natural gas swaps with a fair value
loss of $(0.7) net of taxes. Assuming that year-end natural gas prices were to
decrease by a hypothetical 10%, the value of these contracts would decrease by
approximately $1.2.
Interest Rate Risk: At December 31, 2007, our outstanding borrowings consisted
of $42.0 of short-term variable rate borrowings and long-term debt, including
the current portion, which had a carrying value of $806.7, a face value of
$806.3 and a fair value, based on dealer quoted values, of approximately $803.2.
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, 2007, interest expense would increase/decrease by
approximately $0.4 for the next fiscal year and the fair value of the fixed rate
long-term debt would decrease/increase by approximately $30.0.
2008 OUTLOOK
In our January 30, 2008 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 2008 earnings at the time based on various assumptions
set forth in our press release. We forecasted diluted earnings per share in the
range of $4.15-$4.35, before any potential special items for the year. We also
forecasted 2008 capital expenditures to be in a range of $180.0 to $200.0. There
can be no assurance that sales or earnings will develop in the manner projected.
Actual results may differ materially. See "Comments on Forward Looking
Statements."
SIGNIFICANT ACCOUNTING ESTIMATES / CRITICAL ACCOUNTING POLICIES
Accounting principles generally accepted in the United States require management
to make certain estimates and assumptions. These estimates and assumptions
affect the reported amounts in the consolidated financial statements and the
notes thereto. The areas discussed below involve the use of significant judgment
in the preparation of our consolidated financial statements and changes in the
estimates and assumptions used may impact future results of operations and
financial condition.
Share-based Compensation
In December 2004, the FASB issued SFAS 123R. SFAS 123R addresses the accounting
for transactions in which an enterprise receives employee services in exchange
for (a) equity instruments of the enterprise or (b) liabilities that are based
on the fair value of the enterprise's equity instruments or that may be settled
by the issuance of such equity instruments. SFAS 123R supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
("APB No. 25") and requires companies to recognize compensation cost in an
amount equal to the fair value of share-based payments, such as stock options
granted to employees. On January 1, 2006, we adopted SFAS 123R using the
modified prospective method.
With the adoption of SFAS 123R, the compensation cost for performance stock is
recorded based on the market value on the original date of grant, and not based
on the price of our common stock at the end of each reporting period as formerly
was required under APB No. 25. Compensation cost for stock appreciation rights
payable in cash ("cash-settled SARS") is recognized based on the fair value of
the award at the end of each period through the date of vesting, also a change
from APB No. 25. Compensation cost for stock appreciation rights payable in
shares ("stock-settled SARS") and stock options is recognized over the vesting
period based on the estimated fair value on the date of the grant. SFAS 123R
also requires that we estimate a forfeiture rate for all share-based awards. We
monitor share option exercise and employee termination patterns to estimate
forfeiture rates within the valuation model. The estimated fair values are based
on assumptions, including estimated lives of the instruments, historical and
implied volatility, dividend yield, and risk-free interest rates. These
estimates also consider the probability that the options and stock-settled SARS
will be exercised prior to the end of their contractual lives and the
probability of termination or retirement of the holder. These assumptions are
based on reasonable facts but are subject to change based on a variety of
external factors.
-34-
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 environmental remediation reflects our assumptions about
remediation requirements at the contaminated site, the nature and cost of the
remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties at multi-party sites, and the number and
financial viability of other potentially responsible parties.
Included in other contingent liabilities are workers' compensation, product
liability and toxic tort claims. The amount accrued for other contingent
liabilities reflects our assumptions about the incidence, severity, indemnity
costs and dismissal rates for existing and future claims.
Our asbestos related contingent liabilities and related insurance receivables
are based on a study. The study estimated our gross asbestos liabilities using a
frequency/severity approach. With this approach, the cost of future claim
filings due to asbestos-related diseases are estimated as the product of the
future number of claims filed and the average value of those claims on a nominal
as opposed to discounted basis. Future claim frequency has been estimated using
our claims history and the Stallard/Manton Epidemiological Decay Model, a widely
used industry study. The Decay model assumes that future levels of claims
activity will gradually decrease from current levels by applying model-specific
decay factors that project this claim activity to wind down over the next 35 to
40 years. Our current levels are estimated based on our risk profile and our
historical claim experience. The estimated cost per claim is based on our
historical paid claims adjusted for inflation. Although these estimates and
assumptions are based on reasonable facts, they are subject to change based on
the actual outcome and a variety of external factors. A sustained 1% change in
the annual number of future asbestos claims filed against us will increase or
decrease the liability and related receivable by $0.5 and $0.3, respectively. A
sustained 1% change in the average value of asbestos claims paid will increase
or decrease the liability and related receivable by $0.5 and $0.3, respectively.
Accruals for environmental remediation and other contingent liabilities can
change substantially if our assumptions are not realized or due to actions by
governmental agencies or private parties. We cannot estimate any additional
amount of loss or range of loss in excess of the recorded amounts. Moreover,
environmental and other contingent liabilities are paid over an extended period,
and the timing of such payments cannot be predicted with any certainty. Accruals
for environmental and other contingent liabilities are recorded as other
noncurrent liabilities with any amounts expected to be paid out in the next
twelve months classified as accrued expenses.
Probable insurance recoveries for past and probable future indemnity costs are
recorded at management's best estimate of the ultimate expected receipts without
discounting to reflect the time value of money and are recorded as other assets.
A number of factors impact the estimates of insurance reimbursements. These
factors include the financial viability of the insurance companies, the method
in which losses will be allocated to the various insurance policies, how legal
and defense costs will be covered by the insurance policies, the interpretation
of the effect on coverage of various policy terms and limits and their
interrelationships, and historical recovery rates over the past ten years.
Defense and processing costs are expensed as incurred. Probable insurance
recoveries for defense and processing costs are recognized when the related
costs are incurred and are recorded as other assets.
Retirement Plans
We sponsor defined benefit pension and other postretirement benefit plans. The
postretirement plans provide medical and life insurance benefits to retirees who
meet minimum age and service requirements. Our most significant pension plans
are in the U.S., and constituted over 68% of our consolidated pension assets and
66% of projected benefit obligations as of December 31, 2007. The calculation of
our pension expense and pension liability associated with our defined benefit
pension plans requires the use of a number of assumptions. Changes in these
assumptions can result in different pension expense and liability amounts, and
actual experience can differ from the assumptions. We believe that the most
critical assumptions are the discount rate and the expected rate of return on
plan assets.
At the end of each year, we determine the discount rate to be used for pension
liabilities. In estimating this rate, we look to rates of return on high
quality, long-term corporate bonds that receive one of the two highest ratings
given by a recognized ratings agency. We discounted our U.S. future pension
liabilities using a rate of 6.2% at December 31, 2007. The discount rate used to
determine the value of liabilities has a significant effect on expense. A 1%
increase to the discount rate for our U.S. pension plans will decrease our 2008
expected annual expense by $6.0 and decrease our liability by $70.4. A 1%
decrease to the discount rate for our U.S. pension plans will increase our 2008
expected annual expense by $7.5 and increase our liability by $80.6. A 1%
increase to the discount rate for our U.S. post retirement medical plan will
increase our 2008 expected annual expense by $0.4 and decrease our liability by
$17.9. A 1% decrease to the discount rate for our U.S. post retirement medical
plan will decrease our 2008 expected annual expense by $0.7 and increase our
liability by $19.6.
-35-
The expected rate of return on our U.S. plan assets, which was 8.0% for 2007,
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. A 1%
change to the expected rate of return on plan assets of our U.S. pension plans
will increase or decrease our 2008 expected annual expense by $4.9. The U.S.
pension plan's investment mix at December 31, 2007 approximated 50% equities and
50% fixed income securities. Any differences between actual experience and
assumed experience are deferred as an unrecognized actuarial gain or loss. The
unrecognized net actuarial gain or loss is amortized into pension expense in
accordance with SFAS No. 87, "Employers' Accounting for Pensions."
Impairment of Goodwill
We have defined our segments as our SFAS No. 142, "Goodwill and Other Intangible
Assets" reporting units. Our four business segments are Cytec Performance
Chemicals, Cytec Surface Specialties, Cytec Engineered Materials and Building
Block Chemicals. Cytec Performance Chemicals serves large, global industrial
markets. Cytec Surface Specialties serves the large, global coatings market.
Cytec Engineered Materials serves principally aerospace markets. Building Block
Chemicals sells commodity chemical intermediates to industrial users. The
segments above reflect how we run our company, manage the assets and the
customer perspective.
We test goodwill for impairment on an annual basis. Goodwill of a reporting unit
will be tested for impairment between annual tests if events occur or
circumstances change that would likely reduce the fair value of the reporting
unit below its carrying value. We use a two-step process to test goodwill for
impairment. We initially use a market multiple approach (1A) to estimate a range
of fair values by reporting unit, and then use a discounted cash flow approach
(1B) if the market multiple approach indicates that a potential impairment might
exist to refine and reaffirm the results of the first test. The market multiple
approach provides a straightforward, cost effective and relatively simple method
to readily determine if an impairment might exist by utilizing EBITDA (Earnings
Before Interest, Taxes, Depreciation, and Amortization) information by reporting
unit multiplied by average current industry valuation factors or multiples to
easily determine an estimated range of fair value. Due to the cyclical nature of
our reporting units, we utilize a three year EBITDA average of historical and
forecasted EBITDA for the reportable segment times the range of EBITDA multiple
factors. The three year period is comprised of the prior year, current year and
one year projected amounts. The market multiple range utilizes an average lower
and upper multiple limit based on recent industry acquisition average EBITDA
multiples paid by financial and strategic purchasers. We obtain this information
from a third party investment bank. If the reporting unit's estimated fair value
using the low end of the range is close to or below the reporting unit's
carrying value, in our judgment, we refine the calculation using cash flows to
calculate a point estimate of the reporting unit's fair value, as opposed to a
range. If the discounted cash flow approach yields a fair value estimate less
than the reporting unit's carrying value, we would proceed to step two of the
impairment test, as defined by SFAS No. 142. 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.
In 2007, our Surface Specialties reporting unit had a fair value that did not
materially exceed its carrying value, hence, we have estimated its discounted
cash flows to complete the first step in the SFAS No. 142 test. As the majority
of this segment's operations and related carrying value (including its
intangibles and goodwill) came from our 2005 significant acquisition, we did not
expect that its fair value would materially exceed its carrying value for some
time until we successfully expand the business.
For the market multiple approach, we used an EBITDA range of between 8.2X and
10.5X. At the upper limit multiple of 10.5X EBITDA, the estimated fair value
exceeded the carrying value but it was below using the 8.2X multiple. The
Surface Specialties EBITDA of $185 was a three year average of the 2006 actual,
the 2007 full year estimate, and the 2008 budgeted EBITDA amounts. The market
multiple approach (Step 1A) resulted in a fair value range of $1,521 to $1,947.
Since the low end of the range of the estimated fair value using the multiples
was below the carrying value, we reaffirmed the estimate of the fair value using
a discounted cash flow approach in accordance with our aforementioned policy
which resulted in a value of $1,937. The discounted cash flow approach fair
value exceeded the carrying value by $242, or 14%, indicating that there was no
impairment of Surface Specialties goodwill. The discounted cash flow approach
used our 2007 weighted average cost of capital ("WACC") rate of 8.5% as the
discount rate and an estimated net cash flow for a ten-year period from 2008 to
2017. Our WACC calculation is the standard calculation and includes factors such
as the risk-free rate of return, cost of debt and expected equity premiums. A
terminal value of six times 2017 EBITDA was assumed. The terminal value EBITDA
multiple approximates a long-term growth rate of 3% which we believe is
reasonable for this business. These evaluations involve amounts that are based
on management's best estimates and judgments.
-36-
The discounted cash flows were based on a ten year projection, covering 2008
through 2017. The 2008 to 2011 projections were based on forecasts prepared by
Surface Specialties management. The 2012 to 2017 amounts were based on
forecasted average revenue growth factor of 4%. Operating profit margins improve
from approximately 7% in 2008 to approximately 11% by 2017. The average revenue
growth for the ten year period is 5.3%. The projections included average annual
capital expenditures of $60 and net working capital increases corresponding to
the revenue growth assumed. We assumed an average tax rate of 30% for the
discounted cash flow approach which we believe is a realistic approximation of
our future annual effective tax rate.
The following table summarizes the approximate impact that a change in certain
critical assumptions would have on the estimated fair value of our Cytec Surface
Specialties segment. The approximate impact of the change in each critical
assumption assumes all other assumptions and factors remain constant.
-------------------------------------------------------------------------
Approximate
Impact On
Critical Factors Change Fair Value
-------------------------------------------------------------------------
Weighted Average Cost of Capital 0.50% $73
-------------------------------------------------------------------------
Terminal Value Multiple 1X 158
-------------------------------------------------------------------------
Annual Capital Expenditures $10 46
-------------------------------------------------------------------------
Annual Sales Volume Growth Rate 0.25% 102
-------------------------------------------------------------------------
Operating Profit Margin 1% 158
-------------------------------------------------------------------------
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 or asset group 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 or asset group to the future undiscounted net cash
flows expected to be generated by the asset or asset group. 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.
-37-
We establish accruals for tax contingencies when, notwithstanding the reasonable
belief that our tax return positions are fully supported, we believe that
certain filing positions are likely to be challenged and moreover, that such
filing positions may not be fully sustained. Prior to the issuance of FIN 48,
all uncertain income tax positions were accounted for under FASB Statement 5:
Accounting for Contingencies ("SFAS 5"). We adopted FIN 48 in January 2007,
which provides that recognition of a tax benefit from an uncertain tax position
will only be recognized if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities based on the technical
merits of the position. We continually evaluate our uncertain tax positions and
will adjust such amounts in light of changing facts and circumstances all within
accordance of the provisions of FIN 48 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 accruals for gross
uncertain tax positions are presented in the balance sheet within income taxes
payable for current items and other noncurrent liabilities for long-term items.
Acquisitions
We account for acquired businesses using the purchase method of accounting which
requires that the assets acquired and liabilities assumed be recorded at the
date of acquisition at their respective fair values. Our consolidated financial
statements and results of operations reflect an acquired business after the
completion of the acquisition. The cost to acquire a business, including
transaction costs, is allocated to the underlying net assets of the acquired
business in proportion to their respective fair values. Any excess of the
purchase price over the estimated fair values of the net assets acquired is
recorded as goodwill. Amounts allocated to acquired in-process research and
development are expensed at the date of acquisition.
The judgments made in determining the estimated fair value assigned to each
class of assets acquired and liabilities assumed, as well as asset lives, can
materially impact our results of operations. Accordingly, for significant items,
we typically obtain assistance from third party valuation specialists.
Determining the useful life of an intangible asset also requires judgment as
different types of intangible assets will have different useful lives and
certain assets may even be considered to have indefinite useful lives.
All of these judgments and estimates can materially impact our results of
operations.
Derivative Financial Instruments and Certain Hedging Activities
We use derivative instruments in accordance with our established policies to
manage exposure to fluctuations in currency rates, interest rates and natural
gas prices in North America. 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.
Foreign Currency Risk: We use currency forward contracts and cross currency
swaps to manage our exposure to fluctuations in currency rates on third party
and intercompany transactions denominated in currencies other than the
functional currency of the legal entity. We hedge such exposures with currency
forward contracts denominated in the same currency and with similar terms as the
underlying exposure, and therefore, the instruments are effective at generating
offsetting changes in the fair value or cash flows of the hedged item or
transaction. All derivative contracts used to manage foreign currency risk are
measured at fair value and reported as assets or liabilities on the balance
sheet. Changes in fair value are reported in earnings or deferred, depending on
the nature and effectiveness of the hedging relationship. Ineffectiveness, if
any, in a hedging relationship is recognized immediately into earnings. If the
hedging relationship is not highly effective in generating offsetting cash flows
or changes in fair value, we would recognize the change in the fair value of the
currency forward contract in other income (expense), net. We did not terminate
any designated hedging relationships in 2007, 2006 or 2005. There was no
ineffectiveness in 2007, 2006 or 2005.
The earnings impact of currency forward contracts that are used to economically
hedge foreign currency assets or liabilities is recognized in other income
(expense), net during the term of the contracts.
We use cross currency swaps to hedge certain future cash flows from Euro
receipts on certain Euro denominated intercompany loans receivable we have with
certain subsidiaries against changes in the U.S. dollar to Euro exchange rates.
The swaps fix the U.S. dollar equivalent cash flows of these Euro denominated
intercompany loans and eliminate foreign exchange variability since the notional
amounts of the swaps equal that of the loans, and all cash flow dates and
interest rates coincide between the swaps and the loans, therefore no
ineffectiveness is expected. These swaps have been designated as cash flow
hedges. The cross currency swaps are recorded at fair value as either assets or
liabilities. Each period we record the change in the swaps fair value to
accumulated other comprehensive income. We reclassify an amount out of
accumulated other comprehensive income to the income statement to offset the
foreign currency gain or loss on the remeasurement to U.S. dollar of the Euro
loans. We also accrue for the periodic net swap payments each period in the
consolidated income statement. We monitor the counterparty credit risk and the
continued probability of the hedged cash flows as to amount and timing.
-38-
Another portion of our intercompany Euro denominated loans payable of one of our
U.S. subsidiaries is designated as a hedge of our net investment in our
Belgium-based subsidiary, Cytec Surface Specialties SA/NV. The portion of the
remeasurement of the intercompany loan to the U.S. dollar that relates to the
amount designated as a hedge of our net investment is recorded as a translation
adjustment.
Commodity Price Risk: We use natural gas swaps to hedge a portion of our utility
requirements at certain of our North American manufacturing 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 the
effective portion of the hedged item included in accumulated other comprehensive
income/(loss) 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. If the derivative is no longer
highly effective in achieving offsetting cash flows, subsequent changes in fair
value are recorded in other income (expense), net. Any ineffectiveness is
recognized in other income (expense), net in the current period. If the hedging
relationship is terminated we continue to defer the related gain or loss in
accumulated other comprehensive income and include it as a component of the cost
of the underlying hedged item. If the forecasted transaction is no longer likely
to occur we recognize the related gain or loss in other income (expense), net in
that period. We did not terminate any hedges during 2007, 2006 and 2005. All
hedged transactions that were forecasted to occur in 2007, 2006 and 2005 occured
as forecasted. Ineffectiveness during these years was insignificant. The fair
values of all of these instruments are based on quotes from third party
financial institutions.
-39-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
December 31,
2007 2006
------------------
Assets
Current assets
Cash and cash equivalents $ 76.8 $ 23.6
Trade accounts receivable, less allowance for doubtful accounts of
$4.5 and $5.1 in 2007 and 2006, respectively 584.4 510.3
Other accounts receivable 72.1 81.5
Inventories 520.0 474.6
Deferred income taxes 7.1 9.2
Other current assets 15.7 15.4
Assets held for sale - 38.8
------------------
Total current assets 1,276.1 1,153.4
------------------
Investment in associated companies 23.8 23.3
Plants, equipment and facilities, at cost 2,022.6 1,895.5
Less: accumulated depreciation (972.6) (897.0)
------------------
Net plant investment 1,050.0 998.5
Acquisition intangibles, net of accumulated amortization of $139.3 and $92.1
in 2007 and 2006, respectively 484.5 486.1
Goodwill 1,104.8 1,042.5
Deferred income taxes 0.4 33.2
Other assets 122.1 93.5
------------------
Total assets $4,061.7 $3,830.5
------------------
Liabilities
Current liabilities
Accounts payable $ 316.5 $ 298.8
Short-term borrowings 42.0 41.8
Current maturities of long-term debt 101.4 1.4
Accrued expenses 204.4 203.8
Income taxes payable 7.4 39.3
Deferred income taxes 15.2 2.0
Liabilities held for sale - 16.3
------------------
Total current liabilities 686.9 603.4
Long-term debt 705.3 900.4
Pension and other postretirement benefit liabilities 271.4 371.1
Other noncurrent liabilities 349.2 273.6
Deferred income taxes 119.0 105.3
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 438.0 429.0
Retained earnings 1,356.6 1,169.1
Accumulated other comprehensive gain/(loss) 173.4 (5.7)
Treasury stock, at cost, 596,911 shares in 2007 and 510,006 shares in 2006 (38.6) (16.2)
------------------
Total stockholders' equity 1,929.9 1,576.7
------------------
Total liabilities and stockholders' equity $4,061.7 $3,830.5
------------------
See accompanying Notes to Consolidated Financial Statements
-40-
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
Years ended December 31,
2007 2006 2005
---------------------------
Net sales $3,503.8 $3,329.5 $2,925.7
Manufacturing cost of sales 2,752.9 2,669.6 2,312.1
Selling and technical services 212.8 215.4 213.6
Research and process development 75.7 73.9 68.5
Administrative and general 113.2 102.9 102.1
Amortization of acquisition intangibles 38.7 37.8 30.3
Write-off of acquired in-process research and development - - 37.0
Gain on sale of assets held for sale 13.6 75.5 -
---------------------------
Earnings from operations 324.1 305.4 162.1
Other income (expense), net (0.4) 12.7 (44.9)
Equity in earnings of associated companies 1.4 3.2 7.9
Interest expense, net 41.9 55.5 80.0
---------------------------
Earnings from continuing operations before income tax provision and cumulative effect of
accounting change 283.2 265.8 45.1
Income tax provision (benefit) 76.7 69.4 (13.8)
---------------------------
Earnings from continuing operations before cumulative effect of accounting change 206.5 196.4 58.9
Cumulative effect of accounting change, net of taxes - (1.2) -
---------------------------
Earnings from continuing operations 206.5 195.2 58.9
Earnings from discontinued operations, net of taxes - - 1.2
---------------------------
Net earnings available to common stockholders $ 206.5 $195.2 $ 60.1
---------------------------
Basic net earnings per common share:
Earnings from continuing operations before cumulative effect of accounting change $ 4.29 $4.13 $ 1.30
Cumulative effect of accounting change, net of taxes - (0.02) -
Earnings from discontinued operations, net of taxes - - 0.03
---------------------------
Net earnings available to common stockholders $ 4.29 $4.11 $ 1.33
---------------------------
Diluted net earnings per common share:
Earnings from continuing operations before cumulative effect of accounting change $ 4.20 $4.03 $ 1.28
Cumulative effect of accounting change, net of taxes - (0.02) -
Earnings from discontinued operations, net of taxes - - 0.02
---------------------------
Net earnings available to common stockholders $ 4.20 $4.01 $ 1.30
---------------------------
Dividends per common share $ 0.40 $0.40 $ 0.40
---------------------------
See accompanying Notes to Consolidated Financial Statements
-41-
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions, except per share amounts)
Years ended December 31, 2007 2006 2005
--------------------------
Cash flows provided by (used in) operating activities
Net earnings $ 206.5 $ 195.2 $ 60.1
Earnings from discontinued operations, net of taxes - - 1.2
--------------------------
Earnings from continuing operations 206.5 195.2 58.9
Non cash items included in earnings from continuing operations:
Depreciation 100.9 111.2 110.8
Amortization 44.7 41.6 36.5
Share-based compensation 12.9 13.4 2.5
Deferred income taxes 27.2 15.9 (24.3)
Write-off of acquired in-process research and development - - 37.0
Amortization of write-up to fair value of finished goods purchased in acquisition - - 20.8
Gains on sales of assets - - (1.3)
Gain on sale of assets held for sale (13.6) (75.5) -
Asset impairment charges 1.4 29.3 -
Cumulative effect of accounting change - 1.9 -
Other 1.9 (0.8) (2.4)
Changes in operating assets and liabilities (excluding effect of acquisitions and
divestitures):
Trade accounts receivable (38.8) (33.6) (12.9)
Other receivables 10.1 (7.9) 31.7
Inventories (21.7) (54.3) 9.5
Other assets 3.9 18.6 22.1
Accounts payable 2.8 15.0 2.8
Accrued expenses (2.2) (9.8) (21.6)
Income taxes payable (14.7) (6.4) (42.6)
Other liabilities (51.5) (52.8) -
--------------------------
Net cash provided by operating activities of continuing operations 269.8 201.0 227.5
Net cash provided by operating activities of discontinued operations - - 4.9
--------------------------
Net cash provided by operating activities 269.8 201.0 232.4
--------------------------
Cash flows provided by (used in) investing activities:
Acquisition of businesses, net of cash received - - (1,459.1)
Additions to plants, equipment and facilities (114.8) (102.5) (105.3)
Net proceeds received on sale of assets 38.7 206.6 105.5
Proceeds received on sale of discontinued business - - 74.3
--------------------------
Net cash (used in) provided by investing activities (76.1) 104.1 (1,384.6)
--------------------------
Cash flows provided by (used in) financing activities
Proceeds from long-term debt 222.0 241.2 1,438.4
Payments on long-term debt (319.8) (632.8) (571.9)
Change in short-term borrowings (1.2) 0.2 45.9
Cash dividends (19.1) (18.8) (17.8)
Proceeds from the exercise of stock options 39.3 45.0 17.7
Purchase of treasury stock (77.3) - -
Deferred financing cost - - (5.9)
Excess tax benefits from share-based payments arrangements 11.7 10.7 -
Other 0.4 0.1 (0.6)
--------------------------
Net cash (used in) provided by financing activities (144.0) (354.4) 905.8
--------------------------
Effect of currency rate changes on cash and cash equivalents 3.5 4.3 (8.8)
--------------------------
Increase (decrease) in cash and cash equivalents 53.2 (45.0) (255.2)
Cash and cash equivalents, beginning of year 23.6 68.6 323.8
--------------------------
Cash and cash equivalents, end of year $ 76.8 $ 23.6 $ 68.6
--------------------------
See accompanying Notes to Consolidated Financial Statements
-42-
CYTEC INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in millions)
Unrealized
net
Additional (losses)
Years ended December Additional Unearned Minimum gains on Accumulated
31, 2007, 2006 and Common Paid-in Retained Compen- Pension Pension cash flow Translation Treasury
2005 Stock Capital Earnings sation Liabilities Liability hedges Adjustments Stock Total
--------------------------------------------------------------------------------------------------------------------------
Adjusted Balance at
January 1, 2005 (see
Notes 2 and 17) $ 0.5 $ 293.3 $ 943.3 $ (3.1) $ - $ (108.5) $ (0.5)$ 73.3 $(261.0) $ 937.3
--------------------------------------------------------------------------------------------------------------------------
Net earnings as
adjusted - - 60.1 - - - - - - $ 60.1
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 $ 8.8
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 $ 406.1 $ 985.5 $ (2.5) $ - $ (115.6) $ 0.4 $ 28.2 $ (58.2) $1,244.4
Cumulative effect of
adjustment resulting
from the adoption of
SAB 108 , net of tax - - 7.5 - - - - - - 7.5
--------------------------------------------------------------------------------------------------------------------------
Adjusted Balance at
January 1, 2006 $ 0.5 $ 406.1 $ 993.0 $ (2.5) $ - $ (115.6) $ 0.4 $ 28.2 $ (58.2) $1,251.9
--------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
-43-
CYTEC INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(Dollars in millions)
------------------------------------------------------------------------------------------------------------------------
Adjusted Balance at January 1, 2006 $0.5 $406.1 $ 993.0 $(2.5) $ - $(115.6)$ 0.4 $ 28.2 $(58.2)$1,251.9
Net earnings as adjusted - - 195.2 - - - - - - 195.2
Other comprehensive income:
Minimum pension
liability adjustment,
net of taxes of $11.5 - - - - - 18.7 - - - 18.7
Unrealized net gains on
derivative instruments - - - - - - 7.4 - - 7.4
Translation adjustments - - - - - - - 60.6 - 60.6
---------
Comprehensive income $ 281.9
Adjustment resulting from adoption
of SFAS 123R , net of tax - (3.1) - 2.5 - - - - - (0.6)
Dividends:
Common stock outstanding - - (18.8) - - - - - - (18.8)
Deferred and unvested
common stock - - (0.3) - - - - - - (0.3)
Share-based compensation - 13.4 - - - - - - (1.5) 11.9
Exercise of stock options - 1.9 - - - - - - 43.5 45.4
Excess tax benefit on stock options - 10.7 - - - - - - - 10.7
Adjustment resulting from adoption of SFAS
158, net of tax - - - - (102.3) 96.9 - - - (5.4)
------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006 $0.5 $429.0 $1,169.1 $ - $ (102.3) $ - $ 7.8 $ 88.8 $(16.2)$1,576.7
------------------------------------------------------------------------------------------------------------------------
Cumulative effect of adjustment
resulting from the adoption
of FIN 48 - - 0.3 - - - - - - 0.3
------------------------------------------------------------------------------------------------------------------------
Adjusted Balance at
January 1, 2007 $0.5 $429.0 $1,169.4 $ - $( 102.3) $ - $ 7.8 $ 88.8 $(16.2)$1,577.0
------------------------------------------------------------------------------------------------------------------------
Net earnings - - 206.5 - - - - - - 206.5
Other comprehensive income:
Pension liability adjustment, net of
tax - - - - 52.5 - - - - 52.5
Unrealized net gains on
derivative instruments - - - - - - 31.9 - - 31.9
Translation adjustments - - - - - - - 94.7 - 94.7
---------
Comprehensive income $ 385.6
Dividends:
Common stock outstanding - - (19.1) - - - - - - (19.1)
Deferred and unvested
common stock - - (0.2) - - - - - - (0.2)
Purchase of treasury stock - - - - - - - - (77.3) (77.3)
Share-based compensation - 12.2 - - - - - - 0.7 12.9
Exercise of stock options - (14.9) - - - - - - 54.2 39.3
Excess tax benefit on stock options - 11.7 - - - - - - - 11.7
------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007 $0.5 $438.0 $1,356.6 $ - $ (49.8) $ - $39.7 $183.5 $(38.6)$1,929.9
------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
-44-
CYTEC INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Currencies in millions, except per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Business and Consolidation Policy: We are a global specialty
chemicals and materials company focused on developing, manufacturing and selling
value-added products. Our products serve a diverse range of end markets
including aerospace, adhesives, automotive and industrial coatings, chemical
intermediates, inks, mining and plastics. We use our technology and application
development expertise to create chemical and material solutions that are
formulated to perform specific and important functions in the finished products
of our customers. We operate on a global basis with 36% of our 2007 revenues in
North America, 44% in Europe, 14% in Asia-Pacific and 6% in Latin America. We
have manufacturing and research facilities located in 18 countries. The
consolidated financial statements include the accounts of Cytec Industries Inc.
and our subsidiaries on a consolidated basis. Intercompany transactions and
balances have been eliminated. The equity method of accounting is used for
investments in associated companies that we do not control, but for which we
have the ability to exercise significant influence on operating and financial
policy.
B. Inventories: Inventories are stated at the lower of cost or market. We
determine cost using the first-in, first-out method.
C. Currency Translation: Operations in our international subsidiaries are
recorded in local currencies which are also the functional currencies for
financial reporting purposes. The results of operations for our international
subsidiaries are translated from local currencies into U.S. dollars using the
average currency rate during each period which approximates the results that
would be obtained using actual currency rates on the dates of individual
transactions. Assets and liabilities are translated using currency rates at the
end of the period with translation adjustments recorded in accumulated
translation adjustments and recognized as a component of accumulated other
comprehensive income. Gains and losses on foreign currency transactions are
recorded as incurred in other income (expense), net.
D. Depreciation: Depreciation is provided on either the straight-line or the
straight-line composite method. Assets acquired in conjunction with the Surface
Specialties business ("Surface Specialties") of UCB SA ("UCB") and assets
outside the United States and Canada are depreciated on a straight-line basis
over the estimated useful lives of the assets. When these assets are retired or
disposed of, the net book value of assets are removed from the consolidated
balance sheet and the net gain or loss is included in the determination of
earnings from operations. Depreciation for the remainder of our assets in the
United States and Canada is provided primarily on a straight-line composite
method over the estimated useful lives of various classes of assets, with rates
periodically reviewed and adjusted if necessary. When such depreciable assets
are sold or otherwise retired from service, unless a major change in the
composition of an asset class has occurred, 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 or asset group 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 assets. 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 income. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less the costs to sell. Intangible assets are amortized on
a straight-line basis over their respective estimated useful lives. Long-lived
assets with indefinite useful lives are tested for impairment annually and more
often if circumstances warrant by comparing their carrying values to their fair
values.
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 implied fair value of goodwill is less than its
carrying value.
-45-
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 initially use a market
multiple approach (1A) to estimate a range of fair values by reporting unit, and
then use a discounted cash flow approach (1B) if the market multiple approach
indicates that a potential impairment might exist to refine and reaffirm the
results of the first test. 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 reporting unit's estimated fair value at the low end
of the range is close to, in our judgment, or below the reporting unit's
carrying value, we refine the calculation using discounted cash flows to
calculate a point estimate of the reporting unit's fair value, as opposed to a
range. If the discounted cash flow approach yields a fair value estimate less
than the reporting unit's carrying value, we would proceed to step two of the
impairment test, as defined by Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The
second step of the goodwill impairment test is used to measure the amount of the
impairment loss. In the second step, the implied fair value of the reporting
unit's goodwill is determined by allocating the reporting unit's fair value to
all of its assets and liabilities other than goodwill in a manner similar to a
purchase price allocation. The resulting implied fair value of the goodwill that
results from the application of this second step is then compared to the
carrying amount of the goodwill and an impairment charge would be recorded for
the difference.
G. Cash and Cash Equivalents: Securities with maturities of three months or less
when purchased are considered to be cash equivalents.
H. Financial Instruments: Financial instruments are recorded at cost which
approximates fair value for cash and cash equivalents, receivables, certain
other assets, accounts payable, and certain other liabilities. Fair values are
determined through a combination of management estimates and information
obtained from third parties using the latest available market data. Long-term
debt is carried at amortized cost.
I. Derivative Instruments and Hedging Activities: We use derivative instruments
in accordance with our established policies to manage exposure to fluctuations
in currency rates, interest rates and natural gas prices in North America. 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.
Foreign Currency Risk: We use currency forward contracts and cross currency
swaps to manage our exposure to fluctuations in currency rates on third party
and intercompany transactions denominated in currencies other than the
functional currency of the legal entity. We hedge such exposures with currency
forward contracts denominated in the same currency and with similar terms as the
underlying exposure, and therefore, the instruments are effective at generating
offsetting changes in the fair value or cash flows of the hedged item or
transaction. All derivative contracts used to manage foreign currency risk are
measured at fair value and reported as assets or liabilities on the balance
sheet. Changes in fair value are reported in earnings or deferred, depending on
the nature and effectiveness of the hedging relationship. Ineffectiveness, if
any, in a hedging relationship is recognized immediately into earnings. If the
hedging relationship is not highly effective in generating offsetting cash flows
or changes in fair value, we recognize the change in the fair value of the
currency forward contract in other income (expense), net. We did not terminate
any designated hedging relationships in 2007, 2006 or 2005. There was no
ineffectiveness on these derivative instruments in 2007, 2006 or 2005.
The earnings impact of currency forward contracts that are used to hedge foreign
currency assets or liabilities is recognized in other income (expense), net
during the term of the contracts.
We use cross currency swaps to hedge certain future cash flows from Euro
receipts on certain Euro denominated intercompany loans receivable we have with
certain subsidiaries against changes in the U.S. dollar to Euro exchange rates.
The swaps fix the U.S. dollar equivalent cash flows of these Euro denominated
intercompany loans and eliminate foreign exchange variability since the notional
amounts of the swaps equal that of the loans, and all cash flow dates and
interest rates coincide between the swaps and the loans, therefore no
ineffectiveness is expected. These swaps have been designated as cash flow
hedges. The cross currency swaps are recorded at fair value as either assets or
liabilities. Each period we record the change in the swaps fair value to
accumulated other comprehensive income. We reclassify an amount out of
accumulated other comprehensive income to the income statement to offset the
foreign currency gain or loss on the remeasurement to U.S. dollar of the Euro
loans. We also accrue for the periodic net swap payments each period in the
income statement. We monitor the counterparty credit risk and the continued
probability of the hedged cash flows as to amount and timing.
A portion of the intercompany Euro denominated loans payable of one of our U.S.
subsidiaries is designated as a hedge of our net investment in our Belgium-based
subsidiary, Cytec Surface Specialties SA/NV. The portion of the remeasurement of
the intercompany loan to the U.S. dollar that relates to the amount designated
as a hedge of our net investment is recorded as a translation adjustment.
Commodity Price Risk: We use natural gas swaps to hedge a portion of our utility
requirements at certain of our North American manufacturing 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 the
effective portion of the hedged item included in accumulated other comprehensive
income/(loss) 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. If the derivative is no longer
highly effective in achieving offsetting cash flows, subsequent changes in fair
value are recorded in other income (expense), net. Any ineffectiveness is
recognized in other income (expense), net in the current period. If the hedging
relationship is terminated, we continue to defer the related gains or loss in
accumulated other comprehensive income and include it as a component of the cost
of the underlying hedged item. If the forecasted transaction is no longer likely
to occur, we recognize the related gain or loss in other income (expense), net
in that period. We did not terminate any hedges during 2007, 2006 and 2005. All
hedged transactions that were forecasted to occur in 2007, 2006 and 2005 occured
as forecasted. Ineffectiveness during these years was insignificant. The fair
values of all of these instruments are based on quotes from third party
financial institutions.
-46-
J. Environmental and Other Contingent Liabilities: Accruals for environmental
remediation, maintenance and operating costs directly related to remediation,
and other contingent liabilities are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated.
It is our practice to conduct an analysis of our self-insured and insured
contingent liabilities annually and whenever circumstances change significantly.
Included in these liabilities are workers' compensation, product liability and
toxic tort claims.
Accruals for environmental liabilities and other contingent liabilities are
recorded as other liabilities with amounts expected to be paid out in the next
twelve months classified as accrued expenses at undiscounted amounts.
Probable insurance recoveries for past and future indemnity costs are recorded
in other receivables, to the extent collection is reasonably assured within the
next twelve months, and longer term receivables are included in other assets at
our best estimate of the ultimate expected receipts at undiscounted amounts.
Defense and processing costs are expensed as incurred. Probable insurance
recoveries for defense and processing costs are recognized only as actual costs
are incurred.
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.
K. 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 income of our international subsidiaries
and associated companies is anticipated then income taxes are provided for such
earnings.
On January 1, 2007, we adopted the Financial Accounting Standards Board ("FASB")
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109, Accounting for Income Taxes" ("FIN
48"). FIN 48 addresses the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, we recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon settlement with the
tax authorities. FIN 48 also provides guidance on derecognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures.
-47-
L. Postretirement Benefits: Costs are recognized as employees render the
services necessary to earn the related benefits. In September 2006, the FASB
issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Benefits, an amendment of SFAS 87, 88, 106 and 132(R)"
("SFAS 158"). SFAS 158 requires an employer that sponsors postretirement plans
to recognize an asset or liability for the overfunded or underfunded status of
plans. Additionally, employers are required to record all unrecognized prior
service costs and credits, unrecognized actuarial gains and losses and any
unrecognized transition obligations or assets in accumulated other comprehensive
income. Such amounts are reclassified into earnings as components of net
periodic benefit cost/income pursuant to the recognition and amortization
provisions of the current applicable accounting literature. Finally, SFAS 158
requires an employer to measure plan assets and benefit obligations as of the
date of the employer's statement of financial position, as opposed to at an
earlier measurement date as allowed previously. Currently, we use a measurement
date of November 30 for the majority of our non-U.S. defined benefit pension
plans. The provisions of SFAS 158 requiring that the measurement date be the
same as the date of the statement of financial position are effective for fiscal
years ending after December 15, 2008 and will require us to change our
measurement date for certain non-U.S. defined benefit pension plans to December
31 from November 30. SFAS 158 allows employers to choose one of two transition
methods to adopt the measurement date requirement. We plan to adopt the
measurement date requirement in 2008 using the 13-months approach. Under this
approach, we will record an additional one month of net periodic benefit cost
covering the period between the previous measurement date of November 30, 2007
and December 31, 2007 as an adjustment to equity. SFAS 158 does not alter the
basic approach to measuring plan assets, benefit obligations, or net periodic
benefit cost. Except for the measurement date requirement, we adopted SFAS 158
in the fourth quarter of 2006. The adoption of SFAS 158 had no effect on our
consolidated statements of income and cash flows for the year ended December 31,
2006. SFAS 158 also did not have an effect on our consolidated balance sheet as
of December 31, 2005 or any other prior period financial statements presented
herein. See Note 15 for further discussion of the effect of adopting SFAS 158.
M. 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.
N. Stock-Based Compensation: In December, 2004, the FASB issued SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R addresses the
accounting for transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments. SFAS 123R supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB No. 25") and requires companies to recognize compensation cost
in an amount equal to the fair value of share-based payments, such as stock
options granted to employees.
On January 1, 2006, we adopted SFAS 123R using the modified prospective method.
Under this method, we record compensation cost for the unvested portion of
previously granted awards that remain outstanding as of January 1, 2006. Results
for prior periods have not been restated. We previously accounted for our
share-based compensation under the recognition and measurement principle of APB
No. 25 and related interpretations. Prior to the SFAS 123R adoption, no
share-based compensation cost was reflected in net income for stock options, as
all stock options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant. Also, prior to the SFAS 123R
adoption, compensation cost for restricted ("non-vested") stock was recorded
based on the market value on the date of grant, and compensation cost for
performance stock was recorded based on the market price of our common stock at
the end of each period through the date of vesting. Compensation cost for
non-vested and performance stocks was charged to unearned compensation in
Stockholders' Equity and amortized to expense over the requisite vesting
periods. Stock appreciation rights payable in cash ("cash-settled SARS") were
accounted for as liabilities under APB No. 25. Compensation cost for
cash-settled SARS was recognized over the vesting period and through the life of
the award based on changes in the market price of our common stock over the
market price at the grant date.
With the adoption of SFAS 123R, unearned compensation cost of $2.5, net of
taxes, for non-vested and performance stocks was credited to additional paid-in
capital on January 1, 2006. The compensation cost for performance stock is
recorded based on the market value on the original date of grant, and not based
on the price of our common stock at the end of each reporting period as formerly
was required under APB No. 25. Compensation cost for cash-settled SARS is
recognized based on the fair value of the award at the end of each period
through the date of vesting, also a change from APB No. 25. Compensation cost
for non-vested stock is still based on the market value on the date of grant
under SFAS 123R. SFAS 123R requires that we estimate a forfeiture rate for all
share-based awards. We monitor share option exercise and employee termination
patterns to estimate forfeiture rates within the valuation model. Prior to the
SFAS 123R adoption, forfeitures were recorded as they occurred.
O. Newly Issued Accounting Pronouncements: In December 2007, the FASB issued
SFAS No. 141R, "Business Combinations" ("SFAS 141R"), which establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in an acquiree, and the recognition and measurement
of goodwill acquired in a business combination or a gain from a bargain
purchase. SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160"),
which establishes accounting and reporting standards that require the
noncontrolling interest to be identified, labeled, and presented in the
consolidated statement of financial position within equity, but separate from
the parent's equity. SFAS 160 will also require that the amount of consolidated
net income attributable to the parent and to the noncontrolling interest be
identified and presented on the face of the consolidated statement of income.
SFAS 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. We are still in the process of
reviewing the impact of adopting this statement. However, we do not expect the
adoption of SFAS 160 to have a material impact on our consolidated financial
statements.
-48-
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits companies to choose to measure
certain financial assets and liabilities at fair value (the "fair value
option"). If the fair value option is elected, any upfront costs and fees
related to the item must be recognized in income and cannot be deferred, e.g.,
debt issue costs. The fair value election is irrevocable and may generally be
made on an instrument-by-instrument basis, even if a company has similar
instruments that it elects not to fair value. At the adoption date, unrealized
gains and losses on existing items for which fair value has been elected are
reported as a cumulative adjustment to beginning retained earnings. SFAS 159 is
effective January 1, 2008 for us. We do not expect the adoption of SFAS 159 to
have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and requires additional
disclosures about fair value measurements. SFAS 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments) and is intended to
increase the consistency of those measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years
for financial assets and liabilities, as well as for any other assets and
liabilities that are carried at fair value on a recurring basis in financial
statements. The FASB has issued a one-year deferral of SFAS 157's fair value
measurement requirements for non-financial assets and liabilities that are not
required or permitted to be measured at fair value on a recurring basis.
Although SFAS 157 will require additional disclosures about fair value
measurements, we do not expect the adoption of SFAS 157 to have a material
impact on our consolidated financial statements.
P. Use of Estimates: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions. These estimates or assumptions affect the reported
amounts and disclosures. For example, estimates are used when accounting for
allowance for doubtful accounts, inventory valuations, useful lives of tangible
and intangible assets, recoverability of goodwill, accrued expenses,
environmental and other contingent liabilities, pension and other postretirement
benefits, income tax valuation allowances and assumptions utilized in
determining share-based compensation. Actual results could differ from these
estimates. Accounting estimates require the use of judgment regarding uncertain
future events and their related effects and, accordingly, may change as
additional information is obtained.
2. DEFERRED PLANNED MAINTENANCE COSTS
In September 2006, the FASB issued Staff Position No. AUG AIR-1, "Accounting for
Planned Major Maintenance Activities" ("FSP"). This FSP prohibits accruing as a
liability the future costs of periodic major overhauls and maintenance of plant
and equipment under the "accrue-in-advance" methodology, as the costs for future
planned major maintenance activities do not meet the definition of a liability.
We adopted the FSP as of January 1, 2007 and retroactively applied the
accounting required by the FSP to our prior consolidated financial statements
accordingly. Prior to adoption, we utilized the accrue-in-advance method for
incremental costs to be incurred for the planned major maintenance activities in
our Building Block Chemicals segment. We adopted the deferral method to account
for maintenance expenses incurred for scheduled maintenance activities, which
are amortized evenly until the next scheduled activity. The impact to our
consolidated results of operations was a $0.3 and $1.0 increase in net earnings
for the years ended December 31, 2006 and 2005, respectively. As a result of
these changes, basic and diluted earnings per share for the year ended 2005
increased $0.02 and $0.03 per share, respectively, and 2006 earnings per share
remained unchanged. The impact to our consolidated financial position was an
increase in retained earnings of $5.3 as of January 1, 2005, as a result of an
increase in other assets for $5.2 for the addition of prior unamortized deferred
charges and a decrease in accrued expenses of $3.4, as well as adjustments of
deferred taxes for these respective items. There was no impact to our 2006 and
2005 net cash provided by operating activities in our consolidated statements of
cash flows.
3. ACQUISITION AND RELATED EVENTS
On February 28, 2005, we acquired the Surface Specialties business ("Surface
Specialties") of UCB SA ("UCB") for cash and stock valued at $1,799.7, of which
$1,508.9 ((euro)1,138.5 at 1.325 U.S. dollar per Euro) was paid in cash and the
balance was paid in 5,772,857 shares of Cytec common stock ($290.8 at $50.37 per
Cytec share). During September 2005, we received $25.4 from UCB representing a
reduction of the purchase price for finalization of working capital amounts as
of the acquisition date. After considering the final working capital adjustment
and transaction costs incurred of $15.3, the acquisition was valued at $1,789.6.
The acquisition complemented our existing product lines by significantly
increasing our product offering to the coatings and additives industries
including the general industrial, automotive, architectural, plastic, graphic
arts and wood sectors.
In accordance with the purchase agreement, contingent consideration up to a
maximum of (euro)50.0 was to be determined in January 2006 based upon 2005
year-end results, of which (euro)20.0 ($26.5 at 1.325 U.S. dollar per Euro) was
prepaid at closing. In view of the parties' expectation that the contingent
consideration would not be payable, we were refunded the payment during
September 2005 provided that a final year-end determination of the actual
contingent payment due, if any, would still be made. Subsequently, we determined
that no amounts were due under this agreement.
-49-
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 provided, subject to various exceptions, that UCB
must reduce its stake over five years by specified amounts and which prohibited
UCB from purchasing additional shares of our common stock or causing, advocating
or participating in a change of control in the ownership of Cytec. UCB sold all
of its Cytec shares in early 2007 and the Stockholder's Agreement was
terminated.
Pursuant to regulatory approvals, we were required to divest the Surface
Specialties amino resins ("SSAR") product line. On August 31, 2005, we sold SSAR
to affiliates of INEOS Group Limited ("INEOS") for cash consideration of
(euro)64.0 ($78.2 at 1.22 U.S. dollar per Euro). In the fourth quarter of 2005,
we paid $1.6 to INEOS representing a reduction of the selling price for final
working capital adjustments as of the acquisition date. After considering the
final working capital adjustment, the sale was valued at $76.6 ($72.8 net of
disposition related expenses of $3.8). From acquisition through the date of
sale, SSAR was classified as a discontinued operation. Revenues of SSAR were
$74.3 for the six months ended August 31, 2005 (acquisition through date of
sale). The net proceeds realized from the divestiture of SSAR were used to
reduce acquisition related debt.
In late 2004, we entered into $642.9 of forward-starting interest rate swaps to
hedge the benchmark interest rate and credit spread on certain debt anticipated
to be issued in 2005 in connection with the acquisition. Due to a subsequent
reduction in borrowing requirements, we liquidated $25.0 of these swaps in March
2005 at a cost of $0.4 and $60.4 of these swaps in June 2005 at a cost of $3.7.
In September 2005, we settled the remaining outstanding swaps at the same time
that we priced our public debt offering. The termination payment of $27.4 was
paid in October 2005. The swaps were marked to market and recorded in income
until their termination. The net pre-tax impact of the mark to market value on
these swaps was a loss of $25.0 in 2005 and $6.5 in 2004, which was recorded in
other income (expense), net.
We had also previously entered into currency forward contracts that related to
approximately 87% of the Euro exposure of (euro)1,190.0 for the cash component
of the Surface Specialties acquisition. The forward contracts, which matured on
February 28, 2005, were marked to market and recorded in income until their
maturity. The impact on income for the three months ended March 31, 2005 of the
marked to market adjustment on these forward contracts was a net pre-tax expense
of $19.2 and was recorded in other income (expense), net. In 2004, we recorded a
gain of $33.3 on currency forward transactions entered into in connection with
the acquisition.
The following table summarizes the estimated fair value of the assets acquired
and the liabilities assumed in the acquisition. We completed the purchase price
allocation in the first quarter of 2006.
-------------------------------------------------------------------------------------------
Cash $ 34.6
Current deferred tax assets 28.3
Other current assets 533.1
Assets of discontinued operations held for sale 91.8
Property, plant and equipment 447.9
Goodwill 725.7
Acquired intangible assets 490.4
Acquired in-process research and development 37.0
Other assets 31.7
-------------------------------------------------------------------------------------------
Total assets acquired $2,420.5
-------------------------------------------------------------------------------------------
Current liabilities $ 285.3
Liabilities of discontinued operations held for sale 26.5
Long-term deferred tax liabilities 181.9
Long-term debt 9.9
Other long-term liabilities 127.3
-------------------------------------------------------------------------------------------
Total liabilities assumed $ 630.9
-------------------------------------------------------------------------------------------
Net assets acquired $1,789.6
-------------------------------------------------------------------------------------------
The $725.7 of goodwill is not tax deductible, and $38.0 was allocated to our
Cytec Performance Chemicals segment and $687.7 was allocated to our Cytec
Surface Specialties segment. The acquired intangibles consist of
customer-related ($382.6), marketing-related ($96.5) and technology-related
intangibles ($11.3), and were amortized on a straight-line basis over periods of
15 years. Included in marketing-related intangibles was $45.7 relating to trade
names in the Radcure product line which were originally classified as having
indefinite useful lives. As a result of annual review of non-amortizable
intangible assets in the second quarter of 2006, management decided to cease
utilization of two minor trade names in the Radcure portfolio. As of December
31, 2007, these two trade names have been fully amortized. In addition,
management revised its estimate of the useful life of the remaining Radcure
trade name portfolio from indefinite to an estimated life of 40 years.
-50-
Immediately following the acquisition, $37.0 of acquired in-process research and
development costs were written off.
The acquisition has been accounted for under the purchase method of accounting
and the results of operations of Surface Specialties have been included in the
consolidated financial statements from the date of acquisition.
Following are the unaudited pro forma combined results of operations for the
year ended December 31, 2005 as if Cytec and Surface Specialties had been
combined and the sale of SSAR had been completed as of January 1, 2005.
Additionally, the write-off of in-process research and development costs and the
cost of sales effects of the inventory valuation adjustments were excluded from
the 2005 amounts as they were considered non-recurring charges. The pro forma
results do not include any anticipated cost savings or other effects of the
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.
------------------------------------------------------------------------------------
Year Ended
December 31,
(unaudited) 2005
------------------------------------------------------------------------------------
Revenues $3,150.6
------------------------------------------------------------------- ----------------
Earnings from continuing operations $ 110.8
------------------------------------------------------------------- ----------------
Earnings from continuing operations per common share:
------------------------------------------------------------------------------------
Basic $ 2.40
------------------------------------------------------------------------------------
Diluted $ 2.34
------------------------------------------------------------------------------------
4. DIVESTITURES
In October 2006, we completed the first of three phases of the sale of our water
treatment chemicals and acrylamide product lines to Kemira Group ("Kemira").
This first phase included the product lines themselves, the related intellectual
property, the majority of the manufacturing sites and essentially all of the
sales, marketing, manufacturing, research and development and technical services
personnel. The manufacturing sites in the first phase included Mobile, Alabama,
Longview, Washington, Bradford, UK, and the acrylamide manufacturing plant at
our Fortier, Louisiana facility which will be operated by our personnel under a
long-term manufacturing agreement. The sale of our Botlek manufacturing site in
the Netherlands was completed and transferred to Kemira in January 2007 as part
of the phase two closing. We will continue to supply acrylonitrile to the Kemira
acrylamide plants at Fortier and Botlek under long-term supply agreements. In
addition, under various long-term manufacturing agreements, we will manufacture
certain water treatment products for Kemira at several of our sites and Kemira
will manufacture for us certain mining chemicals at the Mobile, Alabama and
Longview, Washington sites and various other products at the Botlek site. These
contracts were all deemed to be at estimated fair value. Sales of certain assets
at subsidiaries in Asia/Pacific and Latin America were settled in the third and
fourth quarters of 2007 and the transfer of our subsidiary in Venezuela was
completed in the fourth quarter of 2007 as the last phase of the transaction.
The timing of the flow of funds was as follows: approximately $208.0 ($206.6 net
of associated transaction costs) was received in October 2006 for the first
closing, and approximately $21.2 was received for the second closing in January
2007. We also received approximately $5.9 in February 2007 for a working capital
adjustment from the first phase closing per the terms of the contract. During
the third quarter of 2007, we received approximately $3.1 from completed
transfers of the assets at various subsidiaries in Asia/Pacific and Latin
America, and approximately $8.5 was received in the fourth quarter of 2007 in
settlement of the final working capital transfers in Asia/Pacific and Latin
America and for the sale of our subsidiary in Venezuela, bringing total proceeds
to $246.7 ($245.3 net of associated transaction costs). We recorded a pre-tax
gain of $75.5 ($59.6 after-tax) related to the first phase closing in the fourth
quarter of 2006, and a pre-tax gain of $13.6 ($13.3 after-tax) in 2007 from
other closings and other activities. The 2007 gain consists of a pre-tax gain of
$15.7 ($15.3 after-tax) recorded in the first quarter related to the phase two
sale of the Botlek site, which includes pre-tax $13.8 gain resulting from the
recognition of accumulated translation adjustments, and a pre-tax loss of $2.1
($2.0 after-tax) recorded in the fourth quarter. The fourth quarter 2007 loss
included a loss on the transfer of the Venezuela subsidiary, an accrual to
increase recorded environmental liabilities related to sites previously
transferred to Kemira based on additional information generated by recent site
evaluations, and a favorable adjustment, based on final actuarial reports, to a
pension settlement loss accrued in the first quarter of 2007 related to the sale
of the Botlek site.
-51-
At the time of the sale of the manufacturing facilities included in this
transaction, Kemira agreed to assume certain environmental liabilities related
to those sites and we agreed to compensate Kemira for the estimated costs of
required remedial actions identified in a subsequent site evaluation or to
undertake such actions on behalf of Kemira. We are in negotiations with Kemira
over the required remedial actions and their estimated costs at one remaining
site. It is possible that the final valuation agreed for this site will exceed
the current recorded liability, and that could impact the final proceeds and
require an adjustment to our net earnings in 2008. In the event that an agreed
valuation cannot be reached, we will be responsible for conducting any required
remediation on Kemira's behalf at our own expense.
On June 1, 2005, we sold our 50% ownership in CYRO Industries ("CYRO") to our
joint venture partner Degussa Specialty Polymers, an affiliate of Degussa AG,
for cash consideration of $95.0 plus $5.4 for working capital adjustments. The
proceeds of this transaction essentially recovered the carrying value of our
investment in CYRO. As discussed in Note 3, SSAR was divested on August 31,
2005. Net proceeds of the sales were used to reduce debt incurred to fund the
Surface Specialties acquisition.
5. RESTRUCTURING OF OPERATIONS
In accordance with our accounting policy, restructuring costs are included in
our corporate unallocated operating results for segment reporting purposes
consistent with management's view of its businesses.
In 2007, we recorded total net restructuring charges of $6.2 ($5.0 after-tax),
which were charged to expense as follows: manufacturing cost of sales $5.7, and
administrative and general of $0.5.
Details of 2007 restructuring initiatives are as follows:
We decided to cease manufacturing of several mature products at our Willow
Island, West Virginia plant. The discontinued products were part of the polymer
additives business in our Cytec Performance Chemicals segment. As a result, we
recorded a restructuring charge of $2.6 to 2007 manufacturing cost of sales
primarily related to severance and other benefits for 63 employees who are
expected to be retained through May 2008. This charge also included the
write-off of excess raw materials and spare parts. An additional restructuring
charge of $2.9 to manufacturing cost of sales is expected to occur in the first
half of 2008. This relates to the remainder of the severance and other benefits
which will be accrued as they are earned as well as decontamination expenses
which will be expensed as incurred. The remaining reserve relating to this
restructuring initiative is expected to be paid in 2009.
We also announced the restructuring of our liquid coating resins plant in
Wallingford, Connecticut in order to exit a mature product line and consolidate
and automate certain operations at the site. Liquid coating resins are part of
the Cytec Surface Specialties segment. We recorded a restructuring charge of
$1.4 to 2007 manufacturing cost of sales relating to severance and other
benefits for 31 employees. An additional restructuring charge of $0.4 is
expected to be recorded in 2008, primarily related to the remainder of the
severance and other benefits which will be accrued as they are earned. The
economic benefit of this restructuring is derived from the combination of
ceasing operations of one manufacturing line and supplying the volume on a
consolidated operating basis. Asset retirements on both these projects will be
recorded when production ceases, and will be charged to the composite
depreciation reserve in accordance with our accounting policy. The remaining
reserve relating to this restructuring initiative is expected to be paid in
2009.
We also incurred additional net restructuring charges of $2.2 in 2007 relating
to restructuring initiatives announced in 2006 and 2005. These charges were
comprised of $2.5 related to the Dijon restructuring and a net credit of $0.3
related to lower costs than anticipated for prior restructuring initiatives. In
addition, a non-cash charge of $0.3 was recognized and cash payments of $11.5
were incurred for the 2006 restructuring initiatives.
In 2006, we recorded total restructuring charges of $51.1 ($42.3 after-tax) in
connection with several restructuring initiatives, including related asset
impairments of $29.3 ($24.6 after-tax). In the aggregate these costs were
charged to expense as follows: manufacturing cost of sales $45.2, selling and
technical services $2.0, administrative and general $1.5, research and process
development $1.0, and amortization of acquisition intangibles $1.4.
Details of 2006 restructuring initiatives are as follows:
-52-
Based on forecasted cash flow information, we determined that our manufacturing
facility in Dijon, France and related intangible assets were impaired. This
facility manufactured solventborne alkyd and solventborne acrylic based resins
for our Cytec Surface Specialties segment, which are used in the coating
industry for sale in the European market. These mature products were in a
declining market with supplier overcapacity with severe price erosion and were
generating losses. We recorded an impairment charge of $15.5 to write-down the
carrying value of the manufacturing facility and related intangible assets down
to zero as we did not believe the assets were saleable and the outlook for
recovery of products it manufactured was not positive. Also in 2006, after the
appropriate consultations with the Works Council, we decided to close the
facility and commence shutdown activities. At that time, we recorded a
restructuring charge of $8.4, based on estimated severance costs for eliminating
60 positions at our Dijon, France manufacturing site. In addition, we recorded a
net restructuring charge of $1.5 primarily for the severance costs for
eliminating 8 positions at our Indian Orchard, Massachusetts site, and 16
positions at our leased facilities in New Castle, Delaware, which operations
have relocated to our new manufacturing facility in Kalamazoo, Michigan. The
restructuring was charged as follows: manufacturing cost of sales $7.8, selling
and technical services $0.6, research and process development $0.5, and
administrative and general $1.0. No payments were made in 2006. In 2007, the
Dijon restructuring reserve was reduced by $7.7 for cash payments primarily
related to severance and the balance is expected to be paid by the beginning of
2009. In addition, a non-cash charge of $0.3 for asset impairment at the Indian
Orchard facility was charged against the reserve and all cash payments for
severance of the 8 positions in Indian Orchard and 16 positions in New Castle
were made in 2007 for a total of $1.3 and the reserve is now depleted.
We recorded a restructuring charge of $22.5 of which $13.8 related to the
impairment of fixed assets in Botlek related to our polymer additives product
line in our Cytec Performance Chemicals segment and the remainder related to the
elimination of 38 positions. This initiative includes the cessation of
manufacturing of two light stabilizer products in Botlek. Manufacture of one of
these products has been consolidated at our facility in West Virginia and the
other product has been exited. The restructuring costs included estimated cash
severance, reduction of prepaid pensions and retirement of fixed assets and were
charged as follows: manufacturing cost of sales $22.1, and selling expense $0.4.
In 2007, this restructuring reserve was reduced by $1.6 for cash payments
primarily related to severance and the balance of the reserve is expected to be
paid in 2008.
We also recorded restructuring charges of $3.2 related to the elimination of 35
positions associated with our Cytec Specialty Chemicals segments as we continue
our efforts to take advantage of synergies from the 2005 acquisition, and to
mitigate continuing costs related to the 2006 divestiture of our water treatment
and acrylamide product lines. The restructuring costs, which were primarily
severance related, were charged to expense as follows: manufacturing cost of
sales $1.3, selling and technical services $0.9, research and process
development $0.5 and administrative and general $0.5. In 2007, cash payments
primarily related to severance of $0.9 were made and the remaining reserve is
expected to be paid by 2009.
In 2005, we recorded aggregate restructuring charges of $16.8, principally
related to our formation of Cytec Specialty Chemicals whereby we combined our
specialty chemicals product lines into one organization. As a result of 2005
restructuring initiatives, a total of 136 positions were eliminated. Of the 136
positions, 22 were related to our Cytec Engineered Materials segment and 114
were related to our Specialty Chemicals segments. In 2007, all payments relating
to severance for the Cytec Engineered Materials segment were completed. The
remaining 2005 restructuring reserve balance relates to severance for the Cytec
Specialty Chemicals segment and will be paid through 2009.
A summary of the restructuring charges is outlined in the table below:
2005 2006 2007
Restructuring Restructuring Restructuring
Initiatives Initiatives Initiatives Total
------------------------------------------------------------------------------------------------------------------------
2005 charges $ 16.8 $ - $ - $ 16.8
------------------------------------------------------------------------------------------------------------------------
Cash payments (6.3) - - (6.3)
------------------------------------------------------------------------------------------------------------------------
Balance
December 31, 2005 $ 10.5 $ - $ - $ 10.5
------------------------------------------------------------------------------------------------------------------------
2006 charges (2.5)(1) 51.1 - 48.6
------------------------------------------------------------------------------------------------------------------------
Non-cash items - (30.7)(2) - (30.7)
------------------------------------------------------------------------------------------------------------------------
Cash payments (7.0) (7.3) - (14.3)
------------------------------------------------------------------------------------------------------------------------
Currency translation adjustments 0.4 0.4 - 0.8
------------------------------------------------------------------------------------------------------------------------
Balance
December 31, 2006 $ 1.4 $ 13.5 $ - $ 14.9
------------------------------------------------------------------------------------------------------------------------
2007 charges (0.2)(1) 2.4 4.0 6.2
------------------------------------------------------------------------------------------------------------------------
Non-cash items - (0.3)(3) - (0.3)
------------------------------------------------------------------------------------------------------------------------
Cash payments (1.0) (11.5) (0.6) (13.1)
------------------------------------------------------------------------------------------------------------------------
Currency translation adjustments 0.1 0.7 - 0.8
------------------------------------------------------------------------------------------------------------------------
Balance
December 31, 2007 $ 0.3 $ 4.8 $ 3.4 $ 8.5
------------------------------------------------------------------------------------------------------------------------
-53-
(1) Represents a reduction in estimated severance and other costs.
(2) Includes $29.3 write-off of fixed assets and intangibles, $0.7 reduction of
pension related prior service costs, and $0.7 write-off of spare parts
inventory.
(3) Represents asset impairment charge at the Indian Orchard facility.
6. SHARE-BASED COMPENSATION
As described in Note 1, we adopted SFAS 123R on January 1, 2006 and as a result,
we recorded additional charges related to stock options and stock appreciation
rights that are settled with common shares ("stock-settled SARS") of $10.4 for
the year ended December 31, 2006. The effect on net earnings, cash provided by
operating activities, and cash provided by financing activities were $6.7,
($10.7), and $10.7, respectively, for the year ended December 31, 2006. The
effect on basic and diluted earnings per share was a reduction of $0.14 per
share for the year ended December 31, 2006. The adoption of SFAS 123R was
recorded as of January 1, 2006 and resulted in a non-cash charge for the
cumulative effect of a change in accounting principle of $2.5 ($1.6 after-tax)
for cash-settled SARS (as a result of the new requirement to record expense at
fair value) and a non-cash credit of $0.6 ($0.4 after-tax) for non-vested and
performance stocks (forfeitures estimated now, as well as grant date only market
value of the shares under award), for a net after-tax charge of $1.2. The effect
on basic and diluted earnings per share for the cumulative effect charge was
$0.02 per share.
The following table illustrates the effect on the net earnings and earnings per
share if we had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", to all share-based employee
compensation for the year ended December 31, 2005. Option forfeitures were
accounted for as they occurred and no amounts of compensation expense have been
capitalized into inventory or other assets, but instead were considered period
expenses in the pro forma amounts below:
--------------------------------------------------------------------------
Year Ended
December 31,
2005
--------------------------------------------------------------------------
Net earnings as reported $ 59.1
Add:
Share-based compensation expense
included in reported net earnings, net of
related tax effects 1.6
Deduct:
Total share-based compensation expense
determined under fair value based method for all
awards, net of related tax effects 7.3
--------------------------------------------------------------------------
Pro forma net earnings $ 53.4
--------------------------------------------------------------------------
Net earnings per share:
Basic, as reported $ 1.31
Basic, pro forma $ 1.18
Diluted, as reported $ 1.27
Diluted, pro forma $ 1.15
--------------------------------------------------------------------------
For stock options granted before January 1, 2005, the fair value of each stock
option grant was estimated on the date of grant using the Black-Scholes option
pricing model. For stock options and stock-settled SARS granted after January 1,
2005, the fair value of each award is estimated on the date of grant using a
binomial-lattice option valuation model. Stock-settled SARS are economically
valued the same as stock options. The binomial-lattice model considers
characteristics of fair value option pricing that are not available under the
Black-Scholes model. Similar to the Black-Scholes model, the binomial-lattice
model takes into account variables such as volatility, dividend yield, and
risk-free interest rate. However, in addition, the binomial-lattice model
considers the contractual term of the option, the probability that the option
will be exercised prior to the end of its contractual life, and the probability
of termination or retirement of the option holder in computing the value of the
option. For these reasons, we believe that the binomial-lattice model provides a
fair value that is more representative of actual experience and future expected
experience than the value calculated in previous years using Black-Scholes. The
weighted average assumptions for the years ended December 31, 2007, 2006 and
2005 are noted in the following table:
--------------------------------------------------------------------------------------------------
2007 2006 2005
--------------------------------------------------------------------------------------------------
Expected life (years) 6.2 5.7 5.8
Expected volatility 27.2% 37.6% 38.5%
Expected dividend yield 0.69% 0.81% 0.84%
Range of risk-free interest rate 4.8% - 5.2% 4.4% - 4.7% 2.1% - 4.2%
Weighted-average fair value per option $19.50 $19.02 $17.78
--------------------------------------------------------------------------------------------------
-54-
The expected life of options granted is derived from the output of the option
valuation model and represents the period of time that options granted are
expected to be outstanding. Expected volatilities are based on the combination
of implied market volatility and our historical volatility. The decrease in our
expected volatility from 2006 represents a change in methodology used to
calculate the expected volatility. Prior to 2007, our expected volatility was
based on a weighted average of the implied volatility and the mean reversion
volatility (represents the annualized volatility of the stock prices over our
entire stock history) of our stock with weighting of 10% and 90%, respectively.
In 2007, we changed the methodology to a weighted average of our implied
volatility and our most recent 6.2 years of volatility (which represents the
most recent expected life of the options/stock-SARS) with weighting of 50% each.
We feel that the revised methodology is more representative of the market's
expectation of our volatility, based on recent trends and the mature industries
in which we participate. The risk-free rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant. SFAS 123R specifies that initial accruals be based on the
estimated number of instruments for which the requisite service is expected to
be rendered. Therefore, we are required to incorporate the probability of
pre-vesting forfeiture in determining the number of expected vested options. The
forfeiture rate is based on the historical forfeiture experience and prospective
actuarial analysis.
Stock Award and Incentive Plan:
The 1993 Stock Award and Incentive Plan (the "1993 Plan") provides for grants of
a variety of awards, such as stock options (including incentive stock options
and nonqualified stock options), non-vested stock (including performance stock),
stock appreciation rights (including those settled with common shares) and
deferred stock awards and dividend equivalents. At December 31, 2007, there are
approximately 4,400,000 shares reserved for issuance under the 1993 Plan.
We have utilized the stock option component of the 1993 Plan to provide for the
granting of nonqualified stock options and stock-settled SARS with an exercise
price at 100% of the market price on the date of the grant. Options and
stock-settled SARS are generally exercisable in installments of one-third per
year commencing one year after the date of grant and annually thereafter, with
contract lives of generally 10 years from the date of grant.
A summary of stock options and stock-settled SARS activity for the year ended
December 31, 2007 is presented below.
-------------------------------------------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining Aggregate
Options and Stock-Settled SARS Number of Exercise Price Contractual Intrinsic
Activity: Units Per Unit Life (Years) Value
-------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2006 4,342,420 $35.01
Granted 586,006 58.22
Exercised (1,177,361) 34.49
Forfeited (150,133) 49.40
-------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2007 3,600,932 $38.35 5.4 $83.6
-------------------------------------------------------------------------------------------------------
Exercisable at December 31, 2007 2,552,270 $32.04 4.2 $75.4
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted
Average
Nonvested Options and Stock-Settled Number of Grant Date Fair
SARS: Units Value Per Unit
-------------------------------------------------------------------------
Nonvested at December 31, 2006 1,090,966 $18.25
Granted 586,006 19.50
Vested (514,591) 17.72
Forfeited (113,719) 19.13
-------------------------------------------------------------------------
Nonvested at December 31, 2007 1,048,662 $19.09
-------------------------------------------------------------------------
-55-
During the year ended December 31, 2007, we granted 586,006 stock-settled SARS
and stock options. We did not grant any stock-settled SARS before 2006.
Stock-settled SARS are deemed to be equity-based awards under SFAS 123R. The
weighted-average grant-date fair value of stock options and the stock-settled
SARS granted during the years ended December 31, 2007, 2006, and 2005 was
$19.50, $19.02, and $17.78 per share, respectively. The total intrinsic value of
stock options exercised during the years ended December 31, 2007, 2006, and 2005
was $33.9, $29.4, and $15.5, respectively. Treasury shares have been utilized
and reissued upon stock option exercises. The total fair value of stock options
vested during the years ended December 31, 2007, 2006, and 2005 was
approximately $9.1, $9.2, and $9.1, respectively .
As of December 31, 2007, there was approximately $8.2 of total unrecognized
compensation cost related to stock options and stock-settled SARS. That cost is
expected to be recognized over a weighted-average period of 1.5 years as the
majority of our awards vest over three years. Compensation cost related to stock
options and stock-settled SARS capitalized in inventory as of December 31, 2007
and 2006 was approximately $0.3 and $0.4, respectively.
Prior to the adoption of SFAS 123R, we presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the
Statement of Cash Flows. SFAS 123R requires that the cash flows resulting from
tax benefits in excess of the compensation cost recognized for those options
(excess tax benefits) be classified as financing cash flows. Total tax benefits
realized from stock options and stock-settled SARS exercised was $12.3, $10.8
and $5.4, for the years ended December 31, 2007, 2006 and 2005, respectively.
Cash received from stock options exercised was $39.3, $45.0, and $17.7 for the
years ended December 31, 2007, 2006, and 2005, respectively. As mentioned
previously, our 1993 Plan also provides for the granting of cash-settled SARS,
which were granted during 2004 and 2005. Cash-settled SARS are
liability-classified awards under the provisions of SFAS 123R. Intrinsic value
and cash used to settle cash-settled SARS was $0.9, $0.4 and $0.1 for the years
ended December 31, 2007, 2006, and 2005, respectively. Cash-settled SARS are
exercisable in installments of one-third per year commencing one year after the
date of grant and annually thereafter, with contractual lives of ten years from
the date of grant. The total amount of before-tax expense recognized for
cash-settled SARS was $1.0, $3.6 (including cumulative effect of SFAS 123R), and
$0.1 for the years ended December 31, 2007, 2006 and 2005, respectively. The
liability related to our cash-settled SARS was $4.3 at December 31, 2007 and
2006.
As provided under the 1993 Plan, we have also issued non-vested stock and
performance stock. Non-vested stock is subject to certain restrictions on
ownership and transferability that lapse upon vesting. Performance stock payouts
are based on the attainment of certain financial performance objectives and may
vary depending on the degree to which the performance objectives are met.
Performance stock awarded in 2005 relate to the 2007 performance period. During
2007, we granted 11,180 shares of non-vested stock to ten non-employee
directors, which generally vest on the third anniversary of the date of grant.
The weighted average fair value of the non-vested stock on the date of grant was
$57.61 per share which was equal to the closing market price of our stock on the
date of the grant. We did not grant any performance stock in 2007 and 2006. The
total amount of share-based compensation expense recognized for non-vested and
performance stock was $1.0, $1.1, and $2.7 for the years ended December 31,
2007, 2006 and 2005, respectively.
In the event of a "change of control" (as defined in the 1993 Plan and
interpreted in accordance with the American Jobs Creation Act of 2004), (i) any
award under the 1993 Plan carrying a right to exercise that was not previously
exercisable and vested will become fully exercisable and vested, (ii) the
restrictions, deferral limitations, payment conditions and forfeiture applicable
to any other award granted under the 1993 Plan will lapse and such awards will
be deemed fully vested and (iii) any performance conditions imposed with respect
to awards shall be deemed to be fully achieved.
In November 2005, the FASB issued FASB Staff Position 123(R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-based Payment
Awards" (" FSP 123R- 3"). FSP 123R-3 provides an elective alternative transition
method of calculating the additional paid-in capital pool ("APIC Pool") of
excess tax benefits available to absorb tax deficiencies recognized subsequent
to the adoption of SFAS 123R to the method otherwise required by paragraph 81 of
SFAS 123R. After evaluating the alternative methods, we elected the alternative
transition method described in FSP 123R-3 and used this method to estimate our
APIC Pool upon adoption of SFAS 123R. Upon adoption of SFAS 123R on January 1,
2006, we calculated our APIC Pool to be $41.4. Exercises of stock options and
stock-SARS since adoption have increased the APIC Pool to $63.7 at December 31,
2007.
7. EARNINGS PER SHARE (EPS)
Basic earnings per common share excludes dilution and is computed by dividing
net earnings by the weighted-average number of common shares outstanding (which
includes shares outstanding, less performance and non-vested shares for which
vesting criteria have not been met) plus deferred stock awards, weighted for the
period outstanding. Diluted earnings per common share is computed by dividing
net earnings by the sum of the weighted-average number of common shares
outstanding for the period adjusted (i.e., increased) for all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued and any proceeds of the issuance had been used to repurchase
common stock at the average market price during the period. The proceeds are
assumed to be the sum of the amount to be paid to the Company upon exercise of
options, the amount of compensation cost attributed to future services and not
yet recognized, and the amount of income taxes that would be credited to or
deducted from capital upon exercise.
-56-
The following shows the reconciliation of weighted-average shares:
--------------------------------------------------------------------------------------------------------------------
December 31, 2007 2006 2005
--------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 48,149,792 47,453,263 45,241,738
Effect of dilutive shares:
Options and stock-settled SARS 1,048,636 1,118,462 1,044,924
Performance/Non-vested shares 26,503 58,080 95,487
--------------------------------------------------------------------------------------------------------------------
Adjusted average shares outstanding 49,224,931 48,629,805 46,382,149
--------------------------------------------------------------------------------------------------------------------
Outstanding stock options to purchase 35,068 shares, 10,500 shares and 912,200
shares of common stock at December 31, 2007, 2006 and 2005, respectively, were
excluded from the above calculation because their inclusion would have had an
anti-dilutive effect on earnings per share. In addition, 504,022 and 609,260 of
outstanding stock-settled SARS at December 31, 2007 and 2006, respectively, were
excluded from the above calculation due to their anti-dilutive effect on
earnings per share.
8. DERIVATIVE FINANCIAL INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES
Derivative Financial Instruments
We use cross currency swaps to hedge the changes in the cash flows of certain
Euro denominated intercompany loan receivables (Euro loans) held by U.S.
entities. The loan amounts are Euro 207.9 and Euro 207.9 due October 1, 2010 and
October 1, 2015, respectively. Because the Euro loans are denominated in Euros,
we have foreign exchange exposure upon remeasurement to the U.S. dollar ("USD").
We hedged this foreign exchange exposure by entering into cross-currency swaps
with notional amounts of Euro 207.9 ($250.0) that settle on October 1, 2010 and
October 1, 2015, respectively. At the initial principal exchange, we paid $500.0
and received Euro 415.8 from counterparties. At the final exchanges we will pay
Euro 207.9 and receive $250.0 on October 1, 2010 and October 1, 2015. The swaps
have fixed interest rates on both legs. On the five year swaps, we pay 3.78%
interest per annum on the Euro notional amount and we receive 5.5% interest per
annum on the USD notional amount. On the ten year swaps, we pay 4.52% interest
per annum on the Euro notional amount and we receive 6.0% interest per annum on
the USD notional amount. The interest payment dates (April 1 and October 1) and
Euro rates coincide with the Euro loans.
The swaps fix the U.S. dollar equivalent cash flows of the Euro loans and
eliminate foreign exchange variability since the notional amounts of the swaps
equal that of the loans, and all cash flow dates and interest rates coincide
between the swaps and the loans, therefore no ineffectiveness is expected. These
swaps have been designated as cash flow hedges. Each period we record the change
in the swaps fair value to accumulated other comprehensive income. We reclassify
an amount out of accumulated other comprehensive income to the income statement
equal to the foreign currency gain or loss on the remeasurement to USD of the
Euro loans which offsets the foreign currency gain or loss. We also accrue for
the periodic net swap payments each period in the income statement. We monitor
the counterparty credit risk and the continued probability of the hedged cash
flows as to amount and timing.
The fair value of the five year swaps were ($39.8) and ($16.9) at December 31,
2007 and 2006, respectively. The fair value of the ten year swaps were ($31.4)
and ($16.4) at December 31, 2007 and 2006, respectively. As long as the Euro
loans remain outstanding, we will reclassify amounts out of accumulated other
comprehensive income to the income statement to offset the amount of foreign
exchange gain or loss on the remeasurement of the Euro loans recorded each
period. The amount of such reclass will depend on changes in the USD/Euro
exchange rate occurring during the period. There were no amounts reclassified
out of accumulated other comprehensive income during 2007, 2006 or 2005 relating
to discontinuance of this hedging relationship.
-57-
At December 31, 2007 and 2006, the currency and net contractual amounts of
forward contracts outstanding translated into U.S. dollar equivalent amounts
were as follows:
December 31, 2007 Buy
------------------------------------------------------------------------------------------------------------------------
Sell U.S. Dollar Euro Pound Sterling Australian Dollar Canadian Dollar Others
------------------------------------------------------------------------------------------------------------------------
U.S. Dollar $ - $ 11.1 $ 13.7$ 15.0 $ 31.7 $ 6.4
------------------------------------------------------------------------------------------------------------------------
Pound Sterling $ - $ 5.4 - - - -
------------------------------------------------------------------------------------------------------------------------
Japanese Yen $ 7.6 $ - - - - -
------------------------------------------------------------------------------------------------------------------------
Malaysian Ringgit $ - $ 4.9 - - - -
------------------------------------------------------------------------------------------------------------------------
Norwegian Krone $ 7.2 $ - - - - -
------------------------------------------------------------------------------------------------------------------------
Taiwan Dollar $ 7.4 $ - - - - -
------------------------------------------------------------------------------------------------------------------------
Others $ 3.6 $ 4.1 - - - -
------------------------------------------------------------------------------------------------------------------------
December 31, 2006 Buy
------------------------------------------------------------------------------------------------------------------------
Sell U.S. Dollar Euro Pound Sterling Australian Dollar Canadian Dollar
------------------------------------------------------------------------------------------------------------------------
U.S. Dollar $ - $ 91.3 $ 8.5 $ 14.5 $ 12.0
------------------------------------------------------------------------------------------------------------------------
Euro $ - $ - $ 6.8 - -
------------------------------------------------------------------------------------------------------------------------
Japanese Yen $ 3.4 $ - - - -
------------------------------------------------------------------------------------------------------------------------
Brazilian Real $ 4.7 $ - - - -
------------------------------------------------------------------------------------------------------------------------
Taiwan Dollar $ 6.0 $ - - - -
------------------------------------------------------------------------------------------------------------------------
Others $ - $ 3.0 - - -
------------------------------------------------------------------------------------------------------------------------
The fair value of currency contracts, based on exchange rates at December 31,
2007 and 2006 was approximately $1.3 and ($1.3), respectively.
Commodity Hedging Activities
At December 31, 2007 and 2006, we had outstanding natural gas swaps with a fair
value of ($0.7) and ($4.3), net of taxes, respectively.
9. INVENTORIES
Inventories consisted of the following:
December 31, 2007 2006
------------------------------------------------------------------------------------------------
Finished goods $362.1 $333.4
Work in progress 35.4 26.4
Raw materials and supplies 122.5 114.8
------------------------------------------------------------------------------------------------
Total inventories $520.0 $474.6
------------------------------------------------------------------------------------------------
10. PLANTS, EQUIPMENT AND FACILITIES
December 31, 2007 2006
-------------------------------------------------------------------------
Land and land improvements $ 96.0 $ 88.9
Buildings 318.7 288.8
Machinery and equipment 1,537.8 1,451.8
Construction in progress 70.1 66.0
-------------------------------------------------------------------------
Plants, equipment and facilities, at cost $ 2,022.6 $1,895.5
-------------------------------------------------------------------------
-58-
The average composite depreciation rates utilized in the U.S. and Canada,
expressed as a percentage of the average depreciable property in service, were
4.6% in 2007, 4.9% in 2006 and 5.2% in 2005. Gross cost of the assets
depreciated under the composite method in the U.S. and Canada totaled $1,214.6
and $1,152.5 as of December 31, 2007 and 2006, respectively. Depreciation is
calculated using the straight line depreciation method for assets at the
remainder of our locations with the estimated useful lives of these assets
ranging from 4 to 40 years.
11. GOODWILL AND OTHER ACQUISITION INTANGIBLES
Following are the changes in goodwill by segment.
-------------------------------------------------------------------------------------------------------------------------
Cytec Cytec Cytec
Performance Surface Engineered
Chemicals Specialties Materials Corporate Total
-------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2005 $ 65.0 $ 29.3 $247.4 $ 0.7 $ 342.4
2005 acquisition 38.0 690.3 - - 728.3
Purchase adjustment (1) - - (6.3) - (6.3)
Currency exchange (1.5) (50.9) 0.2 - (52.2)
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ 101.5 $ 668.7 $241.3 $ 0.7 $ 1,012.2
2006 divestiture (15.2) - - - (15.2)
Purchase adjustment (2) - (3.3) - - (3.3)
Currency exchange 1.9 47.0 (0.1) - 48.8
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2006 $ 88.2 $712.4 $241.2 $ 0.7 $ 1,042.5
Currency exchange 5.1 57.3 (0.1) - 62.3
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2007 $ 93.3 $769.7 $241.1 $ 0.7 $ 1,104.8
-------------------------------------------------------------------------------------------------------------------------
(1) Includes a reduction of $6.3 as a result of the favorable resolution of a
tax contingency related to a prior acquisition.
(2) Includes a reduction of $1.2 from final purchase price allocation
adjustments and a $1.4 reduction related to the reversal of a domestic and
international valuation allowance, for a total of $2.6, which represents
the closing purchase price allocation adjustment for the 2005 Surface
Specialties acquisition made early in 2006, and a $0.7 reduction related to
pre-acquisition tax attributes associated with the same acquisition
recorded later in 2006.
Other acquisition intangibles consisted of the following major classes:
--------------------------------------------------------------------------------------------------------------
Weighted
Average
Useful Life Accumulated
(years) Gross Carrying Value Amortization Net Carrying Value
--------------------------------------------------------------------------------------------------------------
December 31, 2007 2007 2006 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------
Technology-based 15.1 $57.2 $53.9 $(25.1) $(19.1) $32.1 $34.8
Marketing-related < 2.0 2.1 1.9 (2.1) (1.2) - 0.7
Marketing-related 15.8 65.7 62.3 (17.7) (15.0) 48.0 47.3
Marketing-related 40.0 48.9 43.6 (1.8) (0.5) 47.1 43.1
Customer-related 15.0 449.9 416.5 (92.6) (56.3) 357.3 360.2
-------------------------------------------------------------------
Total $623.8 $578.2 $(139.3) $(92.1) $484.5 $486.1
--------------------------------------------------------------------------------------------------------------
Amortization of acquisition intangibles for the year ended December 31, 2007 and
2006 was $38.7 and $37.8, respectively. Amortization expense for the year ended
December 31, 2006 includes $1.4 related to the impairment of certain
marketing-related assets as a result of closing our manufacturing facility in
France (see Note 5). Assuming no change in the gross carrying amount of
acquisition intangibles and the 2007 average currency exchange rates remain
constant, the estimated future amortization expense for the years 2008 and 2009
is $38.7, for the years 2010 through 2012 is $37.9 per year.
At December 31, 2005, $41.8 of marketing-related intangibles related to trade
names in the Radcure product line purchased in the Surface Specialties
acquisition were classified as having indefinite lives. Management performed its
annual review of non-amortizable intangible assets in the second quarter of 2006
following completion of the 2006 strategic planning process. As a result, the
strategic plan included decisions to cease utilization of two minor trade names
in the Radcure portfolio, one in September 2006 and the other by the end of
2007. As of December 31, 2007, these two trade names have been fully amortized.
In addition, management revised its estimate of the useful life of the remaining
Radcure trade name portfolio from indefinite to an estimated life of 40 years.
These trade names have been classified accordingly in the table above and
amortization began effective July 1, 2006.
-59-
12. DEBT
Long-term debt, including the current portion, consisted of the following:
-----------------------------------------------------------------------------------------------------------------------
December 31,
------------
2007 2006
---------------------------------------------------------
Carrying Carrying
Face Value Face Value
---------------------------------------------------------
Five-Year Term Loan Due February 15, 2010 $ - $ - $ 52.6 $ 52.6
Five-Year Revolving Credit Line Due June 7, 2012 - - 42.0 42.0
6.75% Notes Due March 15, 2008 100.0 99.9 100.0 99.3
5.5% Notes Due October 1, 2010 250.0 249.8 250.0 249.7
4.6% Notes Due July 1, 2013 200.0 201.2 200.0 201.5
6.0% Notes Due October 1, 2015 250.0 249.5 250.0 249.4
Other 6.3 6.3 7.3 7.3
---------------------------------------------------------
$ 806.3 $ 806.7 $ 901.9 $ 901.8
Less: Current maturities (101.5) (101.4) (1.4) (1.4)
---------------------------------------------------------
Long-term Debt $ 704.8 $ 705.3 $ 900.5 $ 900.4
-----------------------------------------------------------------------------------------------------------------------
The fair value of our long-term debt, including the current portion, based on
dealer quoted values, was $803.2 at December 31, 2007, and $887.4 at December
31, 2006.
All of the outstanding notes are unsecured and may be redeemed in whole or in
part, at our option at any time subject to a prepayment adjustment.
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 five-year term loan facility, a $700.0 364-day credit
facility, and a $350.0 five-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
was based on our credit rating and was subject to change (1.0% at December 31,
2006). The $725.0 facility required 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.
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
"five-year notes" and the "ten-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 was then
terminated. The Notes pay interest on each April 1 and October 1, commencing on
April 1, 2006 through their respective due dates.
During the first quarter of 2007, we repaid the $52.6 outstanding balance at
December 2006 under the five-year term loan and terminated this facility. In
June 2007, we amended and restated our revolving credit agreement to increase
the facility from $350.0 to $400.0 and extended the maturity date to June 2012.
There were no borrowings against the $400.0 unsecured five-year revolving credit
facility at December 31, 2007. This facility contains covenants that are
customary for such facilities.
The weighted average interest rate on all of our debt was 5.1% for 2007 and 4.9%
for 2006. The weighted-average interest rate on short-term borrowing outstanding
as of December 31, 2007 and 2006 was 4.6% and 4.7%, respectively.
At December 31, 2007 and 2006, we had approximately $104.6 and $91.1,
respectively, of non-U.S. credit facilities. There were outstanding borrowings
of $46.3 and $47.4 under these facilities at December 31, 2007 and 2006,
respectively.
Cash payments during the years ended December 31, 2007, 2006 and 2005, included
interest of $44.5, $56.1 and $75.3, respectively. Included in interest expense,
net, for the years ended December 31, 2007, 2006 and 2005, is interest income of
$2.1, $1.6 and $3.7, respectively.
Maturities of long-term debt for the next five years are as follows:
-60-
----------------------------------------------------------------------------------------------------------------
Payments Due by year
--------------------------------------------------------------------------------------
2008 2009 2010 2011 2012 Thereafter Total
----------- ---------- ---------- ------------ ----------- ------------- -------------
Long-term debt $ 101.5 $1.5 $251.4 $ - $ - $ 451.9 $ 806.3
----------------------------------------------------------------------------------------------------------------
13. ENVIRONMENTAL, 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, 2007 and 2006, the aggregate environmental related accruals
were $109.7 and $102.7, respectively, of which $7.4 are included in accrued
expenses with the remainder included in other noncurrent liabilities for both
years. Environmental remediation spending, for the years ended December 31,
2007, 2006 and 2005, was $5.0, $4.8 and $6.6, respectively.
As discussed in note 4, we divested our water treatment and acrylamide product
lines to Kemira in 2006 and 2007, including certain manufacturing facilities. At
the time of the sale of these facilities Kemira agreed to assume certain related
environmental liabilities, and we agreed to compensate Kemira for the estimated
costs of required remediation identified in subsequent site evaluations or to
undertake such actions on behalf of Kemira. In 2007, we increased our reserves
for certain of these sites based on additional information generated by such
site evaluations. We also increased our reserves for certain other sites based
on new information or changes in remedial plans. In total we increased our
environmental reserves by $6.2 in 2007.
In 2005, we increased our reserves by $4.4 as a result of our agreement in
principle to settle claims by a third party for the costs of environmental
remediation at a manufacturing site operated by the former American Cyanamid
Company ("Cyanamid") prior to 1944. In connection with our spin-off from
Cyanamid in 1993, we agreed to indemnify Cyanamid for claims of this nature.
Under the terms of the settlement, the third party released all claims and
indemnified us against third-party environmental remediation claims arising from
the alleged contamination at the site. Although we believed that we had
meritorious defenses to this claim, we agreed to the settlement to avoid
incurring additional legal fees and any risk of an adverse outcome in any
related litigation.
These accruals can change substantially due to such factors as additional
information on the nature or extent of contamination, methods of remediation
required, changes in the apportionment of costs among responsible parties and
other actions by governmental agencies or private parties or if we are named in
a new matter and determine that an accrual needs to be provided or if we
determine that we are not liable and no longer require an accrual.
Asset Retirement Obligations
We record asset retirement obligations in accordance with SFAS No.143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"). Under SFAS 143, the
fair value of a liability for an asset retirement obligation is recognized in
the period in which the liability is incurred and becomes determinable with an
offsetting increase in the carrying amount of the related long-lived asset. The
recognition of an asset retirement obligation at fair value requires that
management make numerous estimates, assumptions and judgments regarding such
factors as the estimated probabilities, amounts and timing of settlements, the
credit-adjusted risk-free rate to be used, inflation rates, market risk-premium,
and changes in environmental, regulatory, and legal environments. In periods
subsequent to initial measurement of the liability, we must recognize
period-to-period changes in the liability resulting from the passage of time and
revisions such as the timing or the amount of the original estimate of
undiscounted cash flows. Over time, the liability is accreted to its future
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, we either settle the obligation
for its recorded amount or incur a gain or loss.
-61-
A summary of the changes in the asset retirement obligation for the years ended
December 31, 2007 and 2006 is presented below:
--------------------------------------------------------------------------------
Asset retirement obligation as of December 31, 2005 $40.1
Liabilities incurred 0.4
Liabilities settled (0.5)
Accretion expense 2.9
Revisions in estimated cash flows (1.0)
Currency exchange 1.5
--------------------------------------------------------------------------------
Asset retirement obligation as of December 31, 2006 $43.4
Liabilities incurred -
Liabilities settled (1.4)
Accretion expense 2.9
Revisions in estimated cash flows (0.3)
Currency exchange 1.1
--------------------------------------------------------------------------------
Asset retirement obligation as of December 31, 2007 $45.7
--------------------------------------------------------------------------------
Our long-lived assets subject to asset retirement obligations are primarily
related to asbestos abatement and Resource Conservation and Recovery Act
("RCRA") closures at certain manufacturing facilities and office buildings. As
of December 31, 2007, 45 of our manufacturing sites have been identified with
regulatory closure obligations. Assets subject to asset retirement obligations
are primarily manufacturing facilities, related equipment, and storage tanks. We
are also obligated to return certain lands to its original condition upon
vacating.
There are no sites with a regulatory closure obligation for which a liability
has not been estimated and recorded.
At December 31, 2007, there were no assets legally restricted for purpose of
settling asset retirement obligations. The asset retirement obligation liability
has been recorded as other noncurrent liabilities in the accompanying
consolidated balance sheets.
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, 2007 and 2006, the aggregate self-insured and insured
contingent liability was $70.1 and $72.7, respectively, and the related
insurance recovery receivable was $37.6 and $40.9, respectively. The asbestos
liability included in the above amounts at December 31, 2007 and 2006 was $53.9
and $54.6, respectively, and the related insurance receivable was $35.6 and
$38.1, respectively. We anticipate receiving a net tax benefit for payment of
those claims for which full insurance recovery is not realized.
Asbestos
We, like many other industrial companies, have been named as one of hundreds of
defendants in a number of lawsuits filed in the U.S. by persons alleging bodily
injury from asbestos. The claimants allege exposure to asbestos at facilities
that we own or formerly owned or from products that we formerly manufactured for
specialized applications. Most of these cases involve numerous defendants,
sometimes as many as several hundred. Historically, most of the closed asbestos
claims against us have been dismissed without any indemnity payment by us;
however, we have no information that this pattern will continue.
The following table presents information about asbestos claims activity:
-62-
Year Ended Year Ended
December 31, December 31,
2007 2006
------------------- --------------------
Number of claimants at beginning of period 8,600 22,200
Number of claimants associated with claims closed during
period (700) (15,800)
Number of claimants associated with claims opened during
period 300 2,200
------------------- --------------------
Number of claimants at end of period 8,200 8,600
------------------------------------------------------------------------------------------------------------------
Numbers in the foregoing table are rounded to the nearest hundred and are based
on information as received by us which may lag actual court filing dates by
several months or more. Claims are recorded as closed when a claimant is
dismissed or severed from a case. Claims are opened whenever a new claim is
brought, including from a claimant previously dismissed or severed from another
case. The significant decline in the number of claimants during 2006 primarily
reflects disposition of a large number of unwarranted filings in Mississippi
made immediately prior to the institution of tort reform legislation in that
state effective January 1, 2003.
During the third quarter of 2006, we completed a study of our asbestos related
contingent liabilities and related insurance receivables. We previously
completed a similar study in 2003. These studies are based on, 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, dismissal rates by claim and estimated future claims. In
conjunction with the 2006 asbestos study, we also conducted a detailed update of
our previous insurance position and estimated insurance recoveries. We expect to
recover close to 54% of our future indemnity costs and certain defense and
processing costs already incurred for asbestos claims. We anticipate updating
the study approximately every three years or earlier if circumstances warrant.
We have completed coverage in place and commutation agreements with several of
our insurance carriers and are in the process of negotiating similar agreements
with other insurance carriers.
As a result of the findings from the 2006 study, we recorded an increase of $9.0
in September 2006 to our self insured and insured contingent liabilities for
pending and anticipated probable future claims and recorded a higher receivable
for probable insurance recoveries for past, pending and future claims of $6.8.
The reserve increase is attributable to higher settlement values which more than
offset a decrease in number of claimants. The increase in the receivable is a
result of the higher gross liability plus an increase in overall projected
insurance recovery rates.
Most of our insurance is with carriers with investment grade ratings and only
those with such ratings or other solvent carriers were included in the
estimation of the recovery of indemnity and incurred defense costs.
It should be noted that the ultimate liability and related insurance recovery
for all pending and anticipated future claims cannot be determined with
certainty due to the difficulty of forecasting the numerous variables that can
affect the amount of the liability and insurance recovery. These variables
include but are not limited to: (i) significant changes in the number of future
claims; (ii) significant changes in the average cost of resolving claims; (iii)
changes in the nature of claims received; (iv) changes in the laws applicable to
these claims; and (v) financial viability of co-defendants and insurers.
Lead Pigment
We are among several defendants in approximately 25 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. We have
not recorded a loss contingency for these cases. The number of lead cases in
which we are a defendant declined by approximately 15 during 2007 as some cases
were terminated and in others we were dismissed as a defendant.
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. We settled this case for an immaterial amount. Seven other courts have
previously rejected the applicability of this and similar doctrines to white
lead pigment. Although we are a defendant in approximately 20 similar cases in
Wisconsin as of December 31, 2007 and additional actions may be filed in
Wisconsin, we intend to vigorously defend ourselves if such case(s) are filed
based on what we believe to be our non-existent or diminutive market share. In
October 2007, the Wisconsin Court of Appeals affirmed the trial court's
dismissal of the plaintiff's strict liability and negligent design defect causes
of action for white lead carbonate in the case styled Ruben Godoy et al v. E.I
DuPont de Nemours et al., one of the approximately 20 Wisconsin lead cases. The
decision in this case reinforces our belief that our liability, if any, in these
cases will not be material, either individually or in the aggregate, and no loss
contingency has been recorded.
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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 to date 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 are in the process of negotiating additional agreements
with other insurance carriers.
Other
We commenced binding arbitration proceedings against SNF SA ("SNF") in 2000 to
resolve a commercial dispute relating to SNF's failure to purchase agreed
amounts of acrylamide under a long-term agreement. In July 2004, the arbitrators
awarded us damages and interest aggregating approximately (euro)11.0 plus
interest on the award at a rate of 7% per annum from July 28, 2004 until paid.
After further proceedings in France, we collected (euro)12.2 ($15.7) related to
the arbitration award including interest in the second quarter of 2006 and
recognized the gain in other income in the 2006 consolidated statement of
income. Subsequent to the arbitration award, SNF filed a complaint alleging
criminal violation of French and European Community antitrust laws relating to
the contract, which was the subject of the arbitration proceedings, which
complaint was dismissed in December 2006. SNF has also filed a final appeal of
the court order which allowed us to enforce the award and a separate complaint
in France seeking compensation from Cytec for (euro)54.0 in damages it allegedly
suffered as a result of our attachment on various SNF receivables and bank
accounts to secure enforcement of the arbitration award. We believe that the
appeal and complaint are without merit. SNF also appealed the arbitration award
in Belgium where the Brussels Court of First Instance invalidated the award in
March 2007. We have appealed that decision to the Belgium Court of Appeals,
which will review the matter on a de novo basis. The Belgium decision should not
affect the enforceability of the award in France.
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.
Accounting for Uncertainty in Income Taxes
During the first quarter of 2007, we adopted FIN 48. Under FIN 48, we recognize
the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than fifty percent likelihood of being
realized upon effective settlement. See Note 14 of the Consolidated Financial
Statements for additional details on the impact of adoption of FIN 48.
Commitments
Rental expense under property and equipment leases was $17.5 in 2007, $15.6 in
2006 and $14.3 in 2005. 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, 2007, are:
-------------------------------------------------------------------
Operating Leases
-------------------------------------------------------------------
2008 $ 15.1
2009 10.8
2010 7.9
2011 5.4
2012 4.2
Thereafter 21.9
--------------------
Total minimum lease payments $ 65.3
-------------------------------------------------------------------
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We frequently enter into long-term contracts with customers with terms that vary
depending on specific industry practices. The business of Cytec Industries and
its consolidated subsidiaries as a whole, 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 25% of our production capacity of
acrylonitrile per year under a long-term distributorship agreement that is
scheduled to expire on January 1, 2010. The price under this distributorship
agreement is market-based less certain costs and commissions.
We are obligated to sell, and a tenant at our Fortier facility is obligated to
buy, substantially all of our nominal production capacity of hydrocyanic acid
under an agreement with an initial term expiring May 30, 2013. Price is
determined by a formula based on the raw materials used to manufacture
hydrocyanic acid and to a lesser extent on the quoted market price of such
tenant's product based on hydrocyanic acid and is adjusted periodically.
We are obligated to sell sulfuric acid, and also to regenerate used sulfuric
acid, and a tenant at our Fortier facility is obligated to buy such product and
services, under an agreement with an initial term expiring May 30, 2013. The
price for regenerated sulfuric acid is cost based and the price for sulfuric
acid is set between the price for regenerated acid and a market price for
sulfuric acid and both prices are adjusted periodically. 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. Pricing is based on a toll agreement, which is fixed for a target volume
and includes an adjustment based on volume following predefined volume
thresholds.
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 2015. The agreement specifies price which is
fixed annually.
We are obligated to supply acrylonitrile to the Kemira acrylamide plants at
Fortier and Botlek under a long-term supply agreement. In addition, under
various long-term manufacturing agreements, we are committed to manufacture for
and sell to Kemira certain water treatment products at several of our sites and
we are committed to purchase certain mining chemicals manufactured at Kemira's
Mobile, Alabama and Longview, Washington sites and various other products at the
Botlek site which Kemira will manufacture and sell to us. The acrylonitrile
price to Kemira is determined by a formula based on the primary raw material.
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, 2007, obligations under such agreements totaled $41.9.
We had $39.7 of outstanding letters of credit, surety bonds and bank guarantees
at December 31, 2007 that are issued on our behalf in the ordinary course of
business to support certain of our performance obligations and commitments. The
instruments are typically renewed on an annual basis.
14. INCOME TAXES
The income tax provision (benefit) is based on earnings (losses) from continuing
operations before income taxes and in 2006, before the cumulative effect of
accounting change as follows:
----------------------------------------------------------------------------------------------------
2007 2006 2005
----------------------------------------------------------------------------------------------------
U.S. $ 119.1 $ 96.5 $ (20.7)
Non-U.S. 164.1 169.3 65.8
----------------------------------------------------------------------------------------------------
Total $ 283.2 $265.8 $45.1
----------------------------------------------------------------------------------------------------
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The components of the income tax provision (benefit) are as follows:
----------------------------------------------------------------------------------------------------
2007 2006 2005
----------------------------------------------------------------------------------------------------
Current:
U.S. Federal $ 19.8 $ 17.8 $ (8.6)
Non-U.S. 29.0 43.1 27.3
Other, principally state 0.7 2.1 1.5
----------------------------------------------------------------------------------------------------
Total $ 49.5 $ 63.0 $ 20.2
----------------------------------------------------------------------------------------------------
Deferred:
U.S. Federal $ 18.0 $ 10.3 $ (7.7)
Non-U.S. 6.9 (6.2) (23.5)
Other, principally state 2.3 2.3 (2.8)
----------------------------------------------------------------------------------------------------
Total $ 27.2 $ 6.4 $ (34.0)
----------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $ 76.7 $ 69.4 $ (13.8)
----------------------------------------------------------------------------------------------------
U.S. and non-U.S. earnings of consolidated companies, before income taxes,
include all earnings derived from operations in the respective U.S. and non-U.S.
geographic areas; whereas provisions (benefits) for income taxes include all
income taxes payable to (receivable from) U.S. Federal, non-U.S. and other
governments as applicable, regardless of the sites in which the taxable income
(loss) is generated.
Income taxes paid in 2007, 2006 and 2005 were $59.7, $67.5 and $64.4,
respectively, and include non-U.S. taxes of $45.8, $56.9 and $59.8 in 2007, 2006
and 2005, respectively. Income taxes related to pre-acquisition tax period of
the Surface Specialties entities paid in 2007, 2006 and 2005 were $0.0, $9.4 and
$18.0, respectively, for which $0.1, $7.6, and $17.8 in 2007, 2006, and 2005,
respectively, has been reimbursed to us thus far from UCB pursuant to the Stock
and Asset Purchase Agreement.
The temporary differences that give rise to a significant portion of deferred
tax assets and liabilities were as follows:
--------------------------------------------------------------------------------
December 31, 2007 2006
--------------------------------------------------------------------------------
Deferred tax assets:
--------------------------------------------------------------------------------
Allowance for bad debts $ 2.8 $ 3.4
Self insurance accruals 25.6 26.8
Operating accruals 4.6 6.9
Environmental accruals 20.5 21.2
Pension and postretirement benefit liabilities 94.8 136.7
Employee benefit accruals 27.3 23.5
Tax credit carry forwards 15.8 18.2
Net operating losses 48.4 54.8
Other 37.1 24.0
--------------------------------------------------------------------------------
Gross deferred tax assets 276.9 315.5
Valuation allowance (33.5) (27.8)
--------------------------------------------------------------------------------
Total net deferred tax assets 243.4 287.7
--------------------------------------------------------------------------------
Deferred tax liabilities:
Inventory (9.4) (8.9)
Plants, equipment and facilities (179.1) (171.7)
Insurance receivables (13.4) (13.7)
Intangibles (167.3) (157.5)
Other (0.9) (0.8)
--------------------------------------------------------------------------------
Gross deferred tax liabilities (370.1) (352.6)
--------------------------------------------------------------------------------
Net deferred tax assets / (liabilities) $ (126.7) $ (64.9)
--------------------------------------------------------------------------------
No provision has been made for U.S. or additional non-U.S. taxes on the
undistributed earnings of international subsidiaries totaling $723.5 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.
-66-
As of December 31, 2007, all U.S. research and development tax credits have been
utilized resulting in no carryforward to future tax periods. We have U.S.
foreign tax credit carryforwards of $6.5 available as of December 31, 2007 to
offset future U.S. tax liabilities. Such U.S. foreign tax credits will expire at
various dates starting in 2011 through 2017. We also have $3.8 of state tax
credits of which $2.6 will be carried forward indefinitely with the balance to
expire at various dates starting in 2008. Additionally, we have $0.1 of foreign
jurisdiction tax credits related to our operations in Korea, which will expire
in 2009 and 2011.
At December 31, 2007, we have U.S. federal income tax net operating loss
carryforwards of $6.6 relating to our 1998 acquisition of The American Materials
& Technologies Corporation available to offset future taxable income.
Utilization of those loss carryforwards is limited under certain provisions of
the Internal Revenue Code. The carryforwards begin to expire at various dates
starting in 2011 through 2018. In addition, we have foreign net operating losses
totaling $32.7, primarily related to our operations in Europe and Canada. These
net operating losses are available to offset future taxable income in the
respective foreign countries. Of the total carryforwards, approximately $8.1
expire at various dates starting in 2008 through 2016, while $24.6 can be
utilized over an indefinite period.
Our long-term earnings trend makes it more likely than not that we will generate
sufficient taxable income on a consolidated basis to realize our net deferred
tax assets with the exception of certain state net operating losses and state
tax credits, and various foreign deferred tax assets. Accordingly, we have
recorded a valuation allowance of $33.5 and $27.8 as of December 31, 2007 and
2006. For 2007, the $5.7 valuation allowance activity primarily consisted of an
increase to the valuation allowance for foreign net operating losses and other
foreign deferred tax assets ($5.4), and various state deferred tax assets
($0.3). As of December 31, 2007, $16.3 of the valuation allowance is
attributable to U.S. state tax attributes and $17.2 primarily relates to foreign
net operating losses. As of December 31, 2007, approximately $3.8 of the total
valuation allowance of $33.5 represents the portion for which subsequently
recognized tax benefits would be applied to reduce goodwill. For 2006, the $4.6
valuation allowance activity primarily consisted of a $4.4 decrease for acquired
Surface Specialties deferred tax assets, offset by an increase to the valuation
allowance for foreign net operating losses and other foreign deferred tax assets
($8.6), and various state deferred tax assets ($0.4). As of December 31, 2006,
$15.9 of the valuation allowance is attributable to U.S. state tax attributes
and $11.9 primarily relates to foreign net operating losses.
In 2005, we received a final notice from the Norwegian Assessment Board
disclosing a transfer pricing adjustment for a Norwegian subsidiary with respect
to a 1999 restructuring of certain European operations. As this matter
developed, we previously accrued for the potential unfavorable outcome of this
dispute for the full amount of the tax liability, including interest thereon.
The tax liability attributable to this assessment, excluding interest and
possible penalties, was approximately 84.0 Norwegian krone ($15.5).
During 2006 and 2007, we unsuccessfully contested this assessment before various
Norwegian tribunals, and ultimately appealed the case to the Norwegian Supreme
Court. In January 2008, the Norwegian Supreme Court denied our request to hear
the case effectively upholding the aforementioned initial assessment. After
giving effect for tax deposits and other payments previously remitted with
respect to this issue, we have a remaining tax liability of Norwegian krone 21.2
($3.9) of which approximately 7.0 Norwegian krone ($1.3) relates to pre-2005
taxable periods with the balance to be paid in subsequently filed tax returns
without interest.
In June 2006, the FASB issued FIN 48. FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon settlement with the tax authorities. FIN 48 also provides guidance
on derecognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures.
We adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, we recognized a $0.3 decrease in the liability for
unrecognized tax benefits. This decrease in liability resulted in an increase to
the January 1, 2007 retained earnings balance in the amount of $0.3. In
addition, as of January 1, 2007, we reclassified $19.3 of unrecognized tax
benefits from current taxes payable to non-current taxes payable, which is
included in other non-current liabilities on the consolidated balance sheet.
The amount of unrecognized tax benefits at January 1, 2007 was $25.6 (gross) of
which $18.9 would impact our effective tax rate, if recognized. As of December
31, 2007, the amount of unrecognized tax benefits is $42.4 (gross) of which
$23.9 would impact our effective tax rate, if recognized.
-67-
We recognize interest and penalties related to unrecognized tax benefits in
income tax expense in the consolidated statements of income. We had recorded a
liability for the payment of interest and penalties (gross), of approximately
$2.4 as of January 1, 2007, increasing by current year activity of $3.9, thus
resulting in a liability for the payment of interest and penalties of $6.3 as of
December 31, 2007.
Set forth below is the tabular roll-forward of our 2007 unrecognized tax
benefits from uncertain tax positions:
Balance as of January 1, 2007 $25.6
Increases:
Increases related to current periods $8.1
Gross increases related to prior periods 5.4
Foreign exchange 3.3
----
Balance as of December 31, 2007 $42.4
=====
Our most significant known uncertain tax positions which are reasonably possible
to change over the next twelve months relate to a U.S. state tax appeal
regarding certain filing positions taken with respect to a U.S. subsidiary, and
a German audit of an acquired subsidiary for a pre-acquisition period.
Additionally, as a result of the Norway decision described above, our
unrecognized tax benefits will be reduced by approximately $3.9 as a settlement
in the first quarter of 2008.
In 2006, the state of Maryland assessed a tax deficiency against a U.S.
subsidiary asserting nexus with the state. We have filed a judicial notice to
proceed to trial with the Maryland Tax Court (the "Court") in opposition to this
assessment. It is expected that the Court will hear the case and render a
decision within the next twelve months. This event may trigger a possible
reduction with respect to this unrecognized tax position in the range of zero to
$1.0, subject to our discretion to pursue further appellate venues.
An international subsidiary acquired as part of the Surface Specialties
acquisition is currently subject to a German audit for the tax periods
1999-2003. It is likely that the tax authorities will issue an assessment based
on an expected settlement within the next twelve months, primarily regarding the
disallowance of a goodwill write-off and other similar write-offs with respect
to certain businesses, and the transfer pricing adjustment for such
pre-acquisition periods. This event may trigger a possible change with respect
to this unrecognized tax position in the range of zero to $4.6, the amount of
which will be reimbursed to us from UCB pursuant to the Stock and Asset Purchase
Agreement.
The Internal Revenue Service (the "IRS") has completed and closed its audits of
our tax returns through 2003. In May 2006, we received notice that the Internal
Revenue Service approved the final settlement with respect to a federal income
tax audit for the 2002 and 2003 calendar years. Such approval resulted in a
minor tax refund, which was recorded in the second quarter of 2006. We also
recorded a reduction in tax expense of approximately $3.5 during the second
quarter of 2006 to reflect the final resolution of this audit. During the second
quarter of 2007, the IRS commenced the audit of our tax returns for the years
2004 and 2005. We believe that adequate provisions for all outstanding issues
have been made for all open years.
State income tax returns are generally subject to examination for a period of
3-5 years after filing of the respective return. The state impact of any federal
changes remains subject to examination by various states for a period of up to
one year after formal notification to the states. We have various state income
tax returns in the process of examination and administrative appeals.
International jurisdictions have statutes of limitations generally ranging from
3-5 years after filing of the respective return. Years still open to examination
by tax authorities in major jurisdictions include Austria (2005 onward), Belgium
(2005 onward), Germany (2005 onward), Netherlands (2003 onward), Canada (2002
onward), UK (2005 onward), Italy (2005 onward), China (2003 onward), and Norway
(1999 onward). We are currently under examination in several of these
jurisdictions.
A reconciliation of our effective tax rate to the U.S. federal income tax rate
is as follows:
-------------------------------------------------------------------------------------------------
2007 2006 2005
-------------------------------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
Research and development credit (0.7) (0.7) (5.0)
Income subject to other than
the federal income tax rate (7.0) (10.1) (20.3)
Change in tax rates (2.0) (0.5) (1.1)
State taxes, net of federal benefits 0.7 0.6 (3.6)
Valuation allowance 1.2 3.6 5.4
Acquired in-process research
and development write-off - - 28.7
Extraterritorial income exclusion - (0.9) (7.5)
Favorable resolution of prior
year audits - (1.3) (62.7)
Other (credits) charges, net (0.1) 0.4 0.5
--------------------------------------------------------------------------------------------------
Effective tax rate 27.1% 26.1% (30.6)%
--------------------------------------------------------------------------------------------------
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The 2007 effective tax rate was unfavorably impacted by a shift in our earnings
to higher tax jurisdictions, changes in U.S. tax laws regarding export
incentives, and a French restructuring charge for which no tax benefit was given
due to the unlikely utilization of related net operating losses. The rate was
favorably affected by the relatively low tax expense of $0.3 with respect to a
$13.6 gain recorded on the water and acrylamide business divestiture, U.S.
manufacturing incentives and a net tax benefit of $6.3 to primarily adjust our
deferred taxes for recently enacted tax legislation that lowered the corporate
income tax rate in a number of jurisdictions beginning in 2008. Excluding these
items and accrued interest and penalties on unrecognized tax benefits, the
underlying estimated annual tax rate for the year ended December 31, 2007 was
29.3%, with a normalized rate of approximately 30.3% including such interest and
penalties.
The 2006 effective tax rate was positively impacted by an arbitration award in
settlement of a commercial dispute, a portion of which was recorded in a lower
tax entity resulting in an effective rate of 20.0%, the gain on the divestiture
of the water treatment and acrylamide product lines recorded at a 21.0% rate,
and a reduction in tax expense of $3.5 as a result of the completion of prior
years U.S. tax audits. The rate was also favorably impacted by the change in
statutory tax rates with respect to deferred tax assets and liabilities recorded
in certain countries. These results were partially offset by a reduction of
earnings of divested product lines in lower tax jurisdictions, the zero tax
benefit on a French restructuring charge due to insufficient earnings to realize
its net deferred tax asset, a tax benefit from a restructuring charge recorded
at 29.6% and a $1.7 tax charge associated with a capital reduction with respect
to a foreign subsidiary.
In 2006 a tax benefit of $0.7 was allocated to the cumulative effect of
accounting change.
Tax benefits on stock option exercises were $12.3, $10.8 and $5.4 for 2007, 2006
and 2005, respectively.
15. EMPLOYEE BENEFIT PLANS
We have defined benefit and defined contribution pension plans that cover
employees in a number of countries. Almost all of the plans provide defined
benefits based on years of service and career average salary. We also sponsor
postretirement and post employment benefit plans in certain countries. The
postretirement plans provide medical and life insurance benefits to retirees who
meet minimum age and service requirements, and in the case of non-bargaining
employees, who commenced employment prior to April 1, 2007. 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 $2.6, $4.2, and $3.9, respectively,
for the years ended December 31, 2007, 2006, and 2005.
In March 2007, we announced a change to our U.S. salaried pension plans from
defined benefit plans to defined contribution plans effective December 31, 2007.
A related plan curtailment was recorded which resulted in a decrease in our
pension liabilities of $12.2, with a corresponding increase in accumulated other
comprehensive income ("AOCI") of $7.5 and an adjustment to deferred taxes of
$4.7. The curtailment had an immaterial effect on our 2007 consolidated
statement of income. We considered these plan changes to be significant events
as contemplated by SFAS 158 and accordingly, the liabilities and assets for the
affected plans have been remeasured as of March 31, 2007. The remeasurement
resulted in a further decrease to pension liabilities of approximately $6.1,
with a corresponding increase of $3.7 in AOCI, and an adjustment to deferred
taxes for $2.4. The remeasurement was driven by a change in the discount rate
assumption for the affected plans (from 5.85% at December 31, 2006 to 6.00% at
March 31, 2007), and slightly better than expected returns on plan assets for
the three months ended March 31, 2007. Finally, in September 2007, using updated
demographic data, our actuaries revised the estimated funded status of our U.S.
pension plans as of January 1, 2007. As a result, we recorded an increase of
$6.8 to our U.S. pension liabilities, with a corresponding decrease of $4.1 in
AOCI and an adjustment to deferred taxes for $2.7, to reflect the funded status
at January 1, 2007 as determined by the actuarial valuation.
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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
----------------------- --------------------
2007 2006 2005 2007 2006 2005
----------------------- --------------------
Net periodic costs:
Service cost $ 19.5 $ 25.0 $ 21.4 $ 1.2 $ 1.3 $ 1.3
Interest cost 47.2 44.9 41.3 11.8 13.8 13.7
Expected return on plan assets (48.8) (43.6) (42.1) (4.1) (4.7) (4.7)
Net amortization and deferral 14.0 18.7 15.8 (10.4) (9.9) (10.6)
Curtailment/Settlement 0.3 9.5 (2.7) - - -
----------------------- --------------------
Net periodic expense (credit) $ 32.2 $ 54.5 $ 33.7 $ (1.5)$ 0.5 $ (0.3)
----------------------- --------------------
Weighted-average assumptions used to
determine net periodic costs, during the year
Discount rate 5.5% 5.1% 5.4% 5.7% 5.6% 5.8%
Expected return on plan assets 7.6% 7.5% 7.7% 6.5% 6.5% 6.5%
Rate of compensation increase 3%-10% 3%-10% 3%-10% - - -
Weighted-average assumptions used to
determine benefit obigations, end of the year
Discount rate 5.9% 5.4% 5.3% 6.2% 5.9% 5.6%
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 55-70% stocks and 30-45% bonds, including cash equivalents ("fixed
income securities"). Since the long-term average annualized return is
approximately 9%-11% for stocks and 5%-7% for fixed income securities, the
expected long-term weighted average return was estimated to be 8.25% and 8.5%
for the U.S. pension plans in 2007 and 2006, respectively. This return is based
on an assumed allocation of U.S. pension assets of 69% stocks and 31% in fixed
income securities for 2007 and 70% stocks and 30% fixed income securities for
2006. Expected long-term investment returns for U.S. investments were 9.5% for
stocks and 5.5% for fixed income securities in 2007 and 9.5% for stocks and 6.0%
for fixed income securities in 2006. For U.S. and non-U.S. postretirement plans,
assets are only held in the U.S. The expected rate of return on postretirement
assets was 6.5% in 2007 and 2006, based on an assumed asset allocation of 52% in
stocks and 48% fixed income securities in 2007 and 55% stocks and 45% fixed
income securities in 2006.
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.
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. For our two largest non-U.S. pension plans, the assumed
weighted average rate of return was 6.1% in 2007. The 2007 return is based on
assumed weighted average rates of return of 7.3% for stocks and 5.2% for fixed
income securities and an assumed weighted average asset allocation of 44% stocks
and 56% fixed income securities.
-70-
Pension Plans Postretirement Plans
--------------------- ---------------------
2007 2006 2005 2007 2006 2005
--------------------- ---------------------
Change in benefit obligation:
Benefit obligation at January 1 $876.0 $830.5 $646.2 $242.7 $258.1 $248.6
Addition of plans 0.8 2.8 - - - -
Service cost 19.5 25.0 21.4 1.2 1.3 1.3
Interest cost 47.2 44.9 41.3 11.8 13.8 13.7
Amendments - 1.5 2.4 - - -
Acquisitions - - 137.4 - - -
Translation difference 28.7 29.1 (29.0) 0.7 0.1 -
Actuarial (gain)/losses (37.3) (4.6) 42.2 (29.5) (8.2) 14.9
Employee contributions 0.6 1.7 1.4 3.6 3.8 4.0
Company contributions (1) 0.6 (1.7) - - - -
Benefits paid (38.2) (33.6) (31.8) (25.2) (26.2) (24.4)
Curtailments/Settlements (2) (39.9) (19.6) (1.0) - - -
--------------------- ---------------------
Benefit obligation at December 31 $858.0 $876.0 $830.5 $205.3 $242.7 $258.1
--------------------- ---------------------
Accumulated benefit obligation at December 31 $809.2 $814.6 $769.7 $ - $ - $ -
Change in plan assets:
Fair value of plan assets at January 1 $663.5 $554.7 $485.3 $ 69.3 $ 70.2 $ 71.6
Actual return on plan assets 43.5 62.9 39.1 3.7 8.2 3.0
Company contributions 59.7 72.1 14.4 15.7 15.3 15.9
Employee contributions 0.6 1.7 1.4 3.6 3.8 4.0
Acquisitions - - 65.8 - - -
Translation difference 20.9 19.8 (20.0) - - -
Curtailments/Settlements (2) (24.7) (11.6) - - - -
Others - (2.5) - - - -
Benefits paid $(38.2)$(33.6)$(31.3) $(27.7)$(28.2)$(24.3)
--------------------- ---------------------
Fair value of plan assets at December 31 $725.3 $663.5 $554.7 $ 64.6 $ 69.3 $ 70.2
--------------------- ---------------------
(1) Represents net post-measurement date contribution.
(2) Represents various curtailments and settlements, including the impacts of a
change in certain U.S. plans from defined benefit plans to defined
contribution plans and the transfer of accrued pension rights and plan
assets in Netherlands related to the divestiture of the water treatment and
acrylamide product lines.
-71-
As required by SFAS 158, the following information is presented as of December
31, 2007 and 2006:
Pension Plans Postretirement Plans
------------------- ---------------------
2007 2006 2007 2006
------------------- ---------------------
Funded status, end of year:
Fair value of plan assets $ 725.3 $ 663.5 $ 64.6 $ 69.3
Benefit obligations (858.0) (876.0) (205.3) (242.7)
------------------- ---------------------
Funded status $ (132.7)$ (212.5) $ (140.7)$ (173.4)
------------------- ---------------------
Amounts recognized in the statement of
financial position consist of:
Noncurrent asset $ 19.2 $ 3.2 $ - $ -
Current liability (4.6) (4.9) (16.6) (13.5)
Noncurrent liabiltiy (147.3) (210.8) (124.1) (159.9)
------------------- ---------------------
Total amount recognized $ (132.7)$ (212.5) $ (140.7)$ (173.4)
------------------- ---------------------
Amounts recognized in accumulated other
comprehensive income consist of:
Net actuarial (gain)/loss $ 128.7 $ 190.6 $ (4.4)$ 24.9
Prior service (credit)/cost 2.3 2.4 (42.8) (53.4)
Transition obligation 0.1 0.2 - -
------------------- ---------------------
Total $ 131.1 $ 193.2 $ (47.2)$ (28.5)
------------------- ---------------------
Change in accumulated other
comprehensive income (AOCI):
AOCI, beginning of year $ 193.2 $ (28.5)
Current year actuarial (gain)/loss (47.7) (29.2)
Current year prior service cost (credit)/cost (0.2) -
Amortization:
Amortization of actuarial gain/(loss) (13.7) (0.1)
Amortization of prior service cost credit/(cost) (0.3) 10.6
Translation difference (0.2) -
---------- -----------
AOCI, end of year $ 131.1 $ (47.2)
---------- -----------
Estimated amortization to be recognized in
accumulated other comprehensive income
in 2008 consist of:
Net actuarial loss $ 9.8 $ 0.1
Prior service cost/(credit) 0.3 (10.6)
---------- -----------
Total $ 10.1 $ (10.5)
---------- -----------
-72-
As required by SFAS 87, the following information is presented for December 31,
2005 (this disclosure is no longer applicable under SFAS 158 and therefore, 2006
and 2007 information is not presented):
Pension Plans Postretirement Plans
--------------------------- ----------------------
Funded status: $ (275.8) $ (187.9)
Unrecognized actuarial losses 241.3 37.3
Unrecognized prior service cost 0.7 (63.9)
Other contributions 0.7 -
Unrecognized net transition obligation 4.0 -
--------------------------- ----------------------
Net amount recognized $ (29.1) $ (214.5)
--------------------------- ----------------------
Amounts recognized in the
consolidated balance sheets
consists of:
Prepaid benefit cost $ 15.7 $ -
Accrued benefit cost (239.7) (214.5)
Intangible asset 5.4 -
Accumulated other comprehensive
income, exclusive of deferred taxes 189.5 -
--------------------------- ----------------------
Net amount recognized $ (29.1) $ (214.5)
--------------------------- ----------------------
The accrued postretirement benefit cost recognized in the consolidated balance
sheets at December 31, 2007 and 2006 includes $21.2 and $18.4 in accrued
expenses, respectively, with the balance reported in pension and other
postretirement benefit liabilities.
Under SFAS 158, we recorded a non-cash after-tax adjustment of ($52.5) to AOCI
in 2007. Under SFAS 87, we recorded a non-cash after-tax minimum pension
liability adjustment of ($18.7) and $7.1 to AOCI in 2006 and 2005, respectively.
At the adoption of SFAS 158 in the fourth quarter of 2006, we adjusted our
pension liability to the funded position with a corresponding non-cash after-tax
charge of $5.4 to AOCI. The adjustment to AOCI did not trigger additional
funding.
The assumed rate of future increases in the per capita cost of healthcare
benefits (healthcare cost trend rate) is 8.0% in 2007, decreasing to ultimate
trend of 5.0% in 2010. The healthcare cost trend rate has a significant effect
on the reported amounts of APBO and related expense. A 1.0% change in assumed
health care cost trend rates would have the following effect:
2007 2006
--------------------------- ---------------------------------
1% Increase 1% Decrease 1% Increase 1% Decrease
--------------------------- ---------------------------------
Approximate effect on the total of service
and interest cost components of other
postretirement benefit cost $ 1.2 ($1.1) $ 1.4 ($1.3)
Approximate effect on accumulated
postretirement benefit obligation $ 18.7 ($16.7) $ 21.0 ($18.9)
--------------------------- ---------------------------------
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, 2007 2006 2007 2006 2007 2006
------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation ($569.9)($575.8) ($93.9)($210.4) ($663.8)($786.2)
Accumulated benefit obligation (559.5) (551.4) (84.7) (188.6) (644.2) (740.0)
Fair value of plan assets 497.1 445.7 42.2 135.3 539.3 581.0
------------------------------------------------------------------------------------------------------------------------
-73-
The asset allocation for our U.S. and non-U.S. pension plans and
postretirement plans at the end of 2007 and 2006, and the target allocation for
2008, 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 2008 2007 2006 Asset Category 2008 2007 2006
---------------------------------------- ----------------------- ----------------------------- ---------------------
Equity Securities 60% 50% 70% Equity Securities 55% 49% 55%
Fixed Income 40% 50% 30% Fixed Income 45% 51% 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 2008 2007 2006
-------------------------------------------------------------- ------------------------------
Equity Securities 40% 40% 37%
Fixed Income 46% 44% 52%
Cash and other 14% 16% 11%
-------------------------------------------------------------- ------------------------------
Total 100% 100% 100%
---------------------------------------------------------------------------------------------
The total fair value of U.S. pension and postretirement plan assets was $561.7
and $515.0 at December 31, 2007 and 2006, respectively. We use a combination of
active and passive stock and bond managers to invest the assets of pension and
postretirement plans. The managers are selected based on an analysis of, among
other things, their historical investment results, frequency of management
turnover, cost structure, and assets under management. Assets are periodically
reallocated among the investment managers to maintain the appropriate asset mix
and occasionally transferred to new or existing managers in the event that a
manager is terminated.
The following table reflects expected cash flows for the U.S. pension and
postretirement benefit plans:
Expected Employer Contributions Pension Plans Postretirement Plans
---------------------------------------- ---------------------- ----------------------------------------------------------
2008 $21.5 $16.5
The following table reflects total benefits expected to be paid from the plans
and/or our assets:
Postretirement Plans
----------------------------------------------------------
Prior to Medicare Part D Anticipated Medicare Part
Expected Benefit Payments Pension Plans Subsidy D Subsidy
---------------------------------------- ---------------------- -------------------------- ----------------------------
2008 $27.5 $21.6 $3.4
2009 28.7 21.8 3.4
2010 30.1 21.6 3.4
2011 31.7 21.3 3.4
2012 33.5 20.6 3.3
2013-2017 193.9 95.6 15.3
--------------------------------------------------------------------------------------------------------------------------------
The following table reflects the expected cash flows for the non-U.S. plans:
Expected Employer Contributions Pension Plans Postretirement Plans
---------------------------------------- ---------------------- ------------------------
2008 $ 11.1 $ 0.1
---------------------------------------- ---------------------- ------------------------
-74-
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
---------------------------------------- ---------------------- ------------------------
2008 $ 10.6 $0.1
2009 11.6 0.1
2010 13.2 0.2
2011 12.1 0.2
2012 14.4 0.2
2013-2017 76.5 1.3
-------------------------------------------------------------------------------------------
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:
2007 2006 2005
----------------------------------------------------------------------
U.S.
Profit Growth Sharing (1) $ 8.2$ 7.6$ 4.1
Savings Plan 7.8 7.6 8.0
---------------
Total $16.0$15.2$12.1
---------------
Non-U.S.
Others $ 4.4$ 3.3$ 2.7
----------------------------------------------------------------------
(1) In conjunction with the freezing of certain of our U.S. pension plans, we
discontinued the U.S. profit growth sharing plan effective December 31,
2007. All U.S. salaried and nonbargaining unit employees participated in an
enhanced savings plan effective on the frozen date.
In addition to defined benefit pension and defined contribution retirement
plans, we sponsor post employment plans in a number of countries. Those plans,
in certain circumstances, provide salary continuation, disability related
benefits, severance pay and continuation of health care coverage during the
period after employment but before retirement.
Certain of our benefit plans provide for enhanced benefits in the event of a
"change of control" as defined in the plans.
16. OTHER
Following are our accrued expenses:
December 31, 2007 2006
-----------------------------------------------------------------------
Employee benefits $ 29.2 $ 23.3
Pension and other postretirement employee benefits 21.2 18.4
Salaries and wages 47.8 45.0
Taxes other than income taxes 6.6 6.1
Environmental 7.4 7.4
Interest 13.2 12.6
Restructuring costs 8.5 14.9
Customer rebates 13.4 17.6
All other 57.1 58.5
-----------------------------------------------------------------------
Total $204.4 $203.8
-----------------------------------------------------------------------
UCB was considered a related party during the year ended December 31, 2006 and
2005 since it then owned more than 10% of Cytec's outstanding common stock. UCB
announced in March 2007 that it had sold all of its Cytec shares and as a
result, UCB is no longer a related party. As of December 31, 2007 and 2006, $9.4
and $2.4, respectively, was owed from UCB, which is included in other accounts
receivable on the accompanying consolidated balance sheet. The balance
represents amounts to be received from UCB for certain pre-acquisition tax
liabilities which we have paid or will pay as a result of our acquisition of
Surface Specialties.
-75-
17. COMMON STOCK AND PREFERRED STOCK
We are authorized to issue 150 million shares of common stock with a par value
of $.01 per share, of which 47,535,729 shares were outstanding at December 31,
2007. A summary of changes in common stock issued and treasury stock is
presented below.
Common Stock Treasury Stock
--------------------- --------------------
Balance at December 31, 2004 48,132,640 8,297,863
Issuance related to acquisition of Surface Specialties - (5,772,857)
Issuance pursuant to stock option plan - (688,736)
Awards of performance stock and restricted stock - (53,345)
Forfeitures and deferrals of stock awards - 50,887
--------------------- --------------------
Balance at December 31, 2005 48,132,640 1,833,812
Issuance pursuant to stock option plan - (1,365,912)
Awards of restricted stock - (1,798)
Forfeitures and deferrals of stock awards - 43,904
--------------------- --------------------
Balance at December 31, 2006 48,132,640 510,006
Purchase of treasury stock - 1,252,800
Issuance pursuant to stock option and stock-SARS plan - (1,157,745)
Awards of restricted stock - (11,180)
Forfeitures and deferrals of stock awards - 3,030
--------------------- --------------------
Balance at December 31, 2007 48,132,640 596,911
-------------------------------------------------------------------------------------------------------------
Treasury stock, when reissued, is relieved at the moving 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 2007, 2006, and 2005, four
quarterly cash dividends of $0.10 per share were declared and paid totaling
$19.1, $18.8, and $17.8, respectively.
On January 30, 2008, the Board of Directors increased the regular dividend rate
by 25% and declared a quarterly cash dividend of $0.125 per common share,
payable on February 25, 2008 to stockholders of record as of February 11, 2008.
In February 2007, we announced the reinstatement of our stock buyback program
authorized in 2003. Approximately $69 remained authorized under the buyback
program as of that date. In December 2007, we completed that authorization and
announced a new authorization to repurchase up to an additional $100.0 of our
outstanding common stock. During 2007, we repurchased 1,252,800 shares of stock
at a cost of $77.3 that completed our previous stock repurchase authorization
and included $8.3 under the new authorization. The repurchases are made from
time to time on the open market or in private transactions and the shares
obtained under this authorization are anticipated to be utilized for stock
option/stock-SARS plans, benefit plans and other corporate purposes.
In addition to the restatement of our consolidated financial statements as a
result of the adoption of the new accounting pronouncement on planned
maintenance activities as described in Note 2, we also revised our accounting
used to record treasury stock reissuances for the exercise of stock options from
1993 to 2004 and for a 1998 business combination. Such amounts had previously
been reflected as decreases in additional paid-in capital, but should have been
reflected as decreases in retained earnings. The revision increased additional
paid-in capital at January 1, 2005 by $170.5, with a corresponding reduction in
retained earnings for the same amount. This revision of prior year financial
statements was considered immaterial and it had no impact on reported earnings.
18. OPERATIONS BY SEGMENT AND GEOGRAPHIC AREAS AND IDENTIFIABLE ASSETS
Cytec Performance Chemicals includes our mining chemicals, phosphine and
phosphorous specialties, polymer additives and specialty additives, urethanes,
polyurethanes and pressure sensitive adhesives product lines. Cytec Surface
Specialties includes low energy-cured (Radcure) resins, powder coating resins
and liquid coating resins which includes various product lines such as
waterborne resins and solvent based resins. Cytec Engineered Materials
principally includes advanced composites and film adhesives. Building Block
Chemicals principally includes acrylonitrile, hydrocyanic acid, sulfuric acid
and melamine.
The accounting policies of the reportable segments are the same as those
described in Note 1. All intersegment sales prices are cost based. We evaluate
the performance of our operating segments primarily based on earnings from
operations of the respective segment. As described in Note 5, restructuring
costs and impairment charges related to unprofitable sites are not charged to
our operating segments consistent with management's view of its businesses.
-76-
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
----------------------------------------------------------------------------------------------------------------------------
2007
Net sales to external customers $ 736.4 $ 1,640.4 $ 669.8 $ 457.2 $3,503.8
Intersegment net sales 5.7 - - 34.9 40.6
----------------------------------------------------------
Total net sales 742.1 1,640.4 669.8 492.1 3,544.4
Earnings from operations 71.1 99.7 132.3 23.8 326.9
Percentage of sales 9.6% 6.1% 19.8% 4.8% 9.2%
Total assets 716.5 2,330.8 607.8 203.5 3,858.6
Capital expenditures 20.1 48.4 25.3 19.0 112.8
Depreciation and amortization 25.2 78.0 13.6 24.9 141.7
----------------------------------------------------------------------------------------------------------------------------
2006
Net sales to external customers $ 865.1 $ 1,523.4 $ 601.8 $ 339.2 $3,329.5
Intersegment net sales 7.0 - - 77.1 84.1
----------------------------------------------------------
Total net sales 872.1 1,523.4 601.8 416.3 3,413.6
Earnings from operations 68.4 95.5 106.0 19.8 289.7
Percentage of sales 7.8% 6.3% 17.6% 4.8% 8.5%
Total assets 744.8 2,126.1 577.0 168.4 3,616.3
Capital expenditures 25.5 29.3 34.3 11.7 100.8
Depreciation and amortization 34.4 73.5 11.5 22.6 142.0
----------------------------------------------------------------------------------------------------------------------------
2005
Net sales to external customers $ 855.8 $ 1,244.1 $ 541.6 $ 284.2 $2,925.7
Intersegment net sales 5.6 - - 85.3 90.9
----------------------------------------------------------
Total net sales 861.4 1,244.1 541.6 369.5 3,016.6
Earnings from operations 56.6 22.0 103.0 7.3 188.9
Percentage of sales 6.6% 1.8% 19.0% 2.0% 6.3%
Total assets 864.6 1,970.5 532.2 196.7 3,564.0
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
----------------------------------------------------------------------------------------------------------------------------
The following table provides a reconciliation of selected segment information to
corresponding amounts contained in our consolidated financial statements:
2007 2006 2005
-----------------------------------------------------------------------------------
Net sales:
Net sales from segments $3,544.4 $3,413.6 $3,016.6
Elimination of intersegment revenue (40.6) (84.1) (90.9)
-----------------------------------------------------------------------------------
Total consolidated net sales $3,503.8 $3,329.5 $2,925.7
-----------------------------------------------------------------------------------
Earnings from operations:
Earnings from segments (1) $ 326.9 $ 289.7 $ 188.9
Corporate unallocated (2) (2.8) 15.7 (26.8)
-----------------------------------------------------------------------------------
Total consolidated earnings from operations $ 324.1 $ 305.4 $ 162.1
-----------------------------------------------------------------------------------
Total assets:
Assets from segments $3,858.6 $3,616.3 $3,564.0
Other assets (3) 203.1 214.2 297.5
-----------------------------------------------------------------------------------
Total consolidated assets $4,061.7 $3,830.5 $3,861.5
-----------------------------------------------------------------------------------
(1) Includes charges resulting from application of SFAS No. 123(R) of $11.6 and
$10.4 in 2007 and 2006, respectively. 2005 includes $37.0 write-off of
acquired in-process research and development costs and $20.8 excess fair
market value of the finished goods inventory of the acquired business over
normal manufacturing costs (see Note 3).
(2) 2007 includes a restructuring charge of $2.6 for the polymer additives
Willow Island restructuring, charges of $2.2 primarily related to the
restructuring of an unprofitable manufacturing site in Europe, a charge of
$1.4 for the Wallingford restructuring, and a gain of $13.6 for the second
and third phases of the sale of the water treatment and acrylamide product
lines. 2006 includes restructuring charges of $21.8 primarily related to
plant closures, impairment charges of $29.3 related to two unprofitable
manufacturing sites in Europe, charge of $2.6 related to a change in
employee benefit plans in the U.K., charge of $2.2 related to a contingent
liability study update, and a gain of $75.5 related to the first phase of
the sale of the water treatment and acrylamide product lines in 2006. 2005
includes $16.8 of restructuring charges.
(3) Includes cash and cash equivalents at December 31, 2007, 2006 and 2005 of
$76.8, $23.6 and $68.6, respectively.
-77-
Operations by Geographic Areas: Net sales to unaffiliated customers presented
below are based upon the sales destination, which is consistent with how we
manage our businesses. U.S. exports included in net sales are based upon the
sales destination and represent direct sales of U.S.-based entities to
unaffiliated customers outside of the United States. Identifiable assets are
those assets used in our operations in each geographic area. Unallocated assets
are primarily cash and cash equivalents, miscellaneous receivables, construction
in progress, deferred taxes and the fair values of derivatives.
2007 2006 2005
--------------------------------------------------------------------------------
Net Sales
United States $1,188.6 $1,162.2 $1,095.3
Other Americas 296.2 279.3 257.4
Asia / Pacific 498.5 460.1 401.7
Europe, Middle East and Africa 1,520.5 1,427.9 1,171.3
--------------------------------------------------------------------------------
Total $3,503.8 $3,329.5 $2,925.7
--------------------------------------------------------------------------------
U.S. exports included in net sales above
Other Americas $ 106.4 $ 93.4 $ 82.1
Asia / Pacific 102.4 84.9 88.7
Europe, Middle East and Africa 239.9 160.9 90.6
--------------------------------------------------------------------------------
Total $ 448.7 $ 339.2 $ 261.4
--------------------------------------------------------------------------------
Identifiable assets
United States $1,557.0 $1,516.2 $1,581.2
Other Americas 187.4 180.1 183.6
Asia / Pacific 271.9 242.3 223.3
Europe, Middle East and Africa 1,675.8 1,565.0 1,482.5
--------------------------------------------------------------------------------
Total $3,692.1 $3,503.6 $3,470.6
--------------------------------------------------------------------------------
Equity in net assets of and advances
to associated companies $ 23.8 $ 23.3 $ 20.3
Unallocated assets (1) 345.8 303.6 370.6
--------------------------------------------------------------------------------
Total assets $4,061.7 $3,830.5 $3,861.5
--------------------------------------------------------------------------------
(1) Includes cash and cash equivalents at December 31, 2007, 2006 and 2005 of
$76.8, $23.6 and $68.6, respectively.
19. Risks and Uncertainties
Our revenues are largely dependent on the continued operation of our various
manufacturing facilities. There are many risks involved in operating chemical
manufacturing plants, including the breakdown, failure or substandard
performance of equipment, operating errors, natural disasters, the need to
comply with directives of, and maintain all necessary permits from, government
agencies and potential terrorist attacks. Our operations can be adversely
affected by raw material shortages, labor force shortages or work stoppages and
events impeding or increasing the cost of transporting our raw materials and
finished products. The occurrence of material operational problems, including
but not limited to the above events, may have a material adverse effect on the
productivity and profitability of a particular manufacturing facility. With
respect to certain facilities, such events could have a material effect on our
company as a whole.
Our operations are also subject to various hazards incident to the production of
industrial chemicals. These include the use, handling, processing, storage and
transportation of certain hazardous materials. Under certain circumstances,
these hazards could cause personal injury and loss of life, severe damage to and
destruction of property and equipment, environmental damage and suspension of
operations. Claims arising from any future catastrophic occurrence at one of our
locations may result in Cytec being named as a defendant in lawsuits asserting
potentially large claims.
We perform ongoing credit evaluations of our customers' financial condition and
generally do not require collateral from our customers. We are exposed to credit
losses in the event of nonperformance by counterparties on derivative
instruments. The counterparties to these transactions are major financial
institutions, thus we consider the risk of default to be minimal. We typically
do not require collateral or other security to support potential credit risk.
-78-
International operations are subject to various risks which may or may not be
present in U.S. operations. These risks include political instability, the
possibility of expropriation, restrictions on royalties, dividends and
remittances, instabilities of currencies, requirements for governmental
approvals for new ventures and local participation in operations such as local
equity ownership and workers' councils. Currency fluctuations between the U.S.
dollar and the currencies in which we do business have caused and will continue
to cause foreign currency transaction gains and losses, which may be material.
While we do not currently believe that we are likely to suffer a material
adverse effect on our results of operations in connection with our existing
international operations, any of these events could have an adverse effect on
our international operations in the future by reducing the demand for our
products, affecting the prices at which we can sell our products or otherwise
having an adverse effect on our operating performance.
-79-
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, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2007, 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 2 to the consolidated financial statements, the Company
adopted the provisions of FASB Staff Position No. AUG AIR-1, "Accounting for
Planned Major Maintenance Activities" on January 1, 2007 through the retroactive
restatement of the prior periods financial statements. As discussed in Notes 1
and 14 to the consolidated financial statements, the Company also adopted the
provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109", effective January 1, 2007.
Further, as discussed in Notes 1 and 5 to the consolidated financial statements,
the Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123R, "Share-Based Payment", and the Securities and
Exchange Commission's Staff Accounting Bulletin 108, "Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year
Financial Statements", effective January 1, 2006. Finally, as discussed in Notes
1 and 15 to the consolidated financial statements, the Company adopted SFAS No.
158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R", at the end of
2006.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2007, 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, 2008 expressed an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ KPMG LLP
Short Hills, New Jersey
February 27, 2008
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The Board of Directors and Stockholders
Cytec Industries Inc.:
We have audited Cytec Industries Inc. and subsidiaries' (the Company) internal
control over financial reporting as of December 31, 2007, 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, included in Management's Report on Internal
Control Over Financial Reporting, appearing in Item 9A, Controls and Procedures.
Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included 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, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Cytec Industries Inc. and subsidiaries as of December 31, 2007 and 2006, 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, 2007, and our
report dated February 27, 2008 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Short Hills, New Jersey
February 27, 2008
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QUARTERLY DATA (UNAUDITED)
Note: 2006 financial data below has been restated to show the retroactive
application of Financial Accounting Standards Board Staff Position No. AUG
AIR-1, "Accounting for Planned Major Maintenance Activities" ("FSP AUG-AIR 1"),
which we adopted on January 1, 2007. For further details see Note 2 to the
Consolidated Financial Statements.
(Dollars in millions, except per share amounts) 1Q 2Q 3Q 4Q Year
--------------------------------------------------------------------------------------------------------------------
2007
Net sales $863.5 $864.0 $875.1 $901.2 $3,503.8
Gross profit (1) 164.7 201.1 191.3 193.8 750.9
Net earnings 51.7 54.8 52.4 47.6 206.5
Basic net earnings per share (2) $1.07 $1.14 $1.09 $0.99 $4.29
Diluted net earnings per share (2) $1.05 $1.11 $1.06 $0.97 $4.20
2006
Net sales $819.4 $853.1 $863.4 $793.6 $3,329.5
Gross profit (1) 173.7 165.1 165.1 156.0 659.9
Net earnings 38.1 48.5 25.1 83.5 195.2
Basic net earnings per share (2) $0.81 $1.02 $0.53 $1.74 $4.11
Diluted net earnings per share (2) $0.79 $1.00 $0.52 $1.70 $4.01
(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.
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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, 2007. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our current disclosure controls and procedures are effective.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) of the Exchange
Act. Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, an evaluation
of the effectiveness of our internal control over financial reporting was
carried out. Management's evaluation was based on the criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this evaluation,
management has concluded that our internal control over financial reporting was
effective as of December 31, 2007.
Changes in Internal Control
We continue the process of implementing our Cytec Specialty Chemicals global
enterprise-wide planning systems for the acquired business of Surface
Specialties. The world-wide implementation is expected to be completed in 2009
and includes changes that involve internal control over financial reporting.
Although we expect this implementation to proceed without any material adverse
effects, the possibility exists that the migration to our global enterprise-wide
planning systems could adversely affect our internal control, our disclosure
control and procedures or our results of operations in future periods. We are
reviewing each system and site as they are being implemented and the controls
affected by the implementation. Appropriate changes have been or will be made to
any affected internal control during the implementation. We will test all
significant modified controls resulting from the implementation to ensure they
are functioning effectively.
There were no changes in internal controls during the fourth quarter of 2007.
With the exception of the matters discussed above, there were no other changes
in internal control over financial reporting that occurred during the calendar
year 2007 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
Item 9B. OTHER INFORMATION
Not applicable.
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PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning our executive officers. Each
such person serves at the pleasure of our Board of Directors.
Name Age Positions
D. Lilley 61 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.
D. M. Drillock 50 Mr. Drillock was elected Vice President and Chief Financial Officer in May, 2007. He
previously served as Vice President, Controller and Investor Relations for more than
five years.
S. D. Fleming 49 Mr. Fleming has been President of Cytec Specialty Chemicals since October 2005. He was
elected as an officer in September 2004. He previously served as President of Cytec
Performance Specialties, Vice President, Phosphine and Mining Chemicals and other
executive positions in our specialty chemicals businesses for more than three years.
S. C. Speak 50 Mr. Speak was elected as an officer in September 2004. He has been President of Cytec
Engineered Materials for more than five years.
W. N. Avrin 52 Mr. Avrin is Vice President, Corporate and Business Development and has held this
position for more than five years.
J. E. Marosits 55 Mr. Marosits is Vice President, Human Resources and has held this position for more than
five years.
R. Smith 49 Mr. Smith is Vice President, General Counsel and Secretary, and has held this position
for more than five years.
T. P. Wozniak 54 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 2008 Annual Meeting of Common Stockholders, dated March 11,
2008.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
"Summary Compensation Table", the "Grants of Plan-Based Awards", the
"Outstanding Equity Awards at Fiscal Year-End", the "Option Exercises and Stock
Vested", the "Pension Benefits", the "Nonqualified Deferred Compensation", the
"Director Compensation Tables", the "Compensation Discussion and Analysis", the
"Potential Payments Upon Termination or Change-In-Control", and "Performance
Graph" section of our definitive Proxy Statement for our 2008 Annual Meeting of
Common Stockholders, dated March 11, 2008.
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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", "Equity Compensation Plan
Information", and the "Security Ownership of Certain Beneficial Owners" sections
of our definitive Proxy Statement for our 2008 Annual Meeting of Common
Stockholders, dated March 11, 2008.
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 2008 Annual Meeting of Common Stockholders, dated March 11,
2008.
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
2008 Annual Meeting of Common Stockholders, dated March 11, 2008.
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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, 2007 and 2006
Consolidated Statements of Income for the Years ended
December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years ended
December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
(a)(2) Cytec Industries Inc. and Subsidiaries Financial Statement
Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules, other than "Schedule II---Valuation and Qualifying
Accounts," are omitted because of the absence of the
conditions under which they are required or because the
information called for are included in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits
Exhibit No. Description
----------- -----------
3.1(a) Certificate of Incorporation (incorporated by reference to exhibit 3.1(a) to Cytec's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
3.1(b) Certificate of Amendment to Certificate of Incorporation dated May 13, 1997 (incorporated by
reference to exhibit 3.1(a) to Cytec's quarterly report on Form 10-Q for the quarter ended June
30, 1997).
3.1(c) Conformed copy of the Cytec's certificate of incorporation, as amended (incorporated by
reference to exhibit 3(c) to Cytec's registration statement on Form S-8, registration number
333-45577).
3.2 By-laws, as amended through January 22, 2002 (incorporated by reference to Exhibit 3.2 to Cytec's
annual report on Form 10-K for the year ended December 31, 2001).
4.1 Form of Common Stock Certificate (incorporated by reference to exhibit 4.1 to Cytec's
registration statement on Form 10).
4.2(a) Indenture, dated as of March 15, 1998 between the Cytec and PNC Bank, National Association as
Trustee (incorporated by reference to Exhibit 4.1 of Cytec's current report on Form 8-K, dated
March 18, 1998).
4.2(b) Supplemental Indenture, dated as of May 11, 1998 between the Cytec and PNC Bank National
Association, as Trustee (incorporated by reference to Exhibit 4.2 to Cytec's quarterly report on
Form 10-Q for the quarter ended March 31, 1998).
4.3 6.75% Global Note due March 15, 2008 (incorporated by reference to Exhibit 4.3 of Cytec's current
report on Form 8-K dated March 18, 1998).
4.5 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).
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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 Amended and Restated Five Year Credit Agreement dated as of June 7, 2007, among Cytec, the banks
named therein and Citigroup Global Markets, Inc., as lead arranger and book manager ("Credit
Agreement")(incorporated by reference to exhibit 10.1 to Cytec's current report on
form 8-K dated June 7, 2007).
10.2 Executive Compensation Plans and Arrangements (incorporated by reference to exhibit 10.12 to
Cytec's annual report on Form 10-K for the year ended December 31, 2003).
10.2(a) 1993 Stock Award and Incentive Plan, as amended through December 7, 2006 (incorporated by
reference to exhibit 10.2(a) to Cytec's annual report on Form 10-K of the year ended
Decmeber 31, 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 during 2004 and 2005
(incorporated by reference to exhibit 10.12 to Cytec's annual report on Form 10-K for the year
ended December 31, 2003).
10.2(d)(v) Form of common stock settled Stock Appreciation Rights ("SARs") Award letter used for grants to
officers from February 9, 2006 (incorporated by reference to Exhibit 10.2(d)(v) to Cytec's annual
report on Form 10-K for the year ended December 31, 2005).
10.2(d)(vi) Form of Performance Cash Award letter used for grants to officers from February 9, 2006.
(incorporated by reference to exhibit 10.2(d)(vi) to Cytec's annual report on Form 10-K for the
year ended December 31, 2006).
10.2(d)(vii) Form of Performance Stock Award Letter used for grants to officers from January 29, 2008.
10.2(e) Rule No. 2, as amended through January 27, 1997, under 1993 Stock Award and Incentive Plan
(incorporated by reference to exhibit 10.13(e) to Cytec's annual report on Form 10-K for the year
ended December 31, 1996).
10.2(f) Executive Income Continuity Plan, as amended through February 28, 2007 (incorporated by
reference to exhibit 10.2(f) to Cytec's annual report on Form 10-K for the year ended
December 31, 2006).
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10.2(g) Key Manager Income Continuity Plan, as amended through September 12, 2003 (incorporated by
reference to exhibit 10.12(g) to Cytec's quarterly report on Form 10-Q for the quarter ended
September 30, 2003).
10.2(h) Employee Income Continuity Plan, as amended through September 12, 2003 (incorporated by reference
to exhibit 10.12(h) to Cytec's quarterly report on Form 10-Q for the quarter ended September 30,
2003).
10.2(i) Cytec Excess Retirement Benefit Plan, as
amended through May 11, 2000 (incorporated by
reference to exhibit 10.12(j) to Cytec's
quarterly report on Form 10-Q for the quarter
ended June 30, 2000).
10.2(j) Cytec Supplemental Employees Retirement Plan, as amended through April 13, 2000 (incorporated by
reference to exhibit 10.12(k) to Cytec's quarterly report on Form 10-Q for the quarter ended June
30, 2000).
10.2(k) Cytec Executive Supplemental Employees Retirement Plan, as amended through February 28, 2007
(incorporated by reference to exhibit 10.2(k) to Cytec's annual report on Form 10-K for the year
ended December 31, 2006).
10.2(l) Cytec Compensation Tax Equalization Plan (incorporated by reference to exhibit 10(G) to Cytec's
quarterly report on Form 10-Q for the quarter ended September 30, 1994).
10.2(m) Cytec Supplemental Savings and Profit Sharing Plan, as amended and restated through July 22, 2003
(incorporated by reference to exhibit 4.4 to Cytec's Registration Statement on Form S-8,
registration number 333-107221).
10.2(n) Amended and Restated Trust Agreement effective as of December 15, 1994 between the Cytec and
Vanguard Fiduciary Trust Company, as successor trustee (incorporated by reference to exhibit
10.12(p) to Cytec's annual report on Form 10-K for the year ended December 31, 1999).
10.2(o) Deferred Compensation Plan as amended through December 9, 2002 (incorporated by reference
to exhibit 10.12(o) to Cytec's annual report on Form 10-K for the year ended December 31,
2002).
10.2(p) Rule No. 4 under 1993 Stock Award and Incentive Plan as amended (incorporated by reference to
Exhibit 10.2(p) to Cytec's annual report on Form 10-K for the year ended December 31, 2005).
10.2(q) Relocation Agreement for Shane Fleming dated December 11, 2005 (incorporated by reference
to Exhibit 10.3 to Cytec's annual report on Form 10-K for the year ended December 31,
2005).
10.2(s) Restricted Stock Award Agreement for William N. Avrin dated March 1, 2005 (incorporated by
reference to Exhibit 10.5 to Cytec's annual report on Form 10-K for the year ended December 31,
2005).
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
24(a-i) Powers of Attorney of C.A. Davis, A.G. Fernandes, L. L. Hoynes, Jr., B. C. Johnson, C.P. Lowe,
W. P. Powell, T.W. Rabaut, 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.
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31.2 Certification of David M. Drillock, 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 David M. Drillock, Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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, 2008 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, 2008 /s/ David Lilley
----------------
D. Lilley
Chairman, President and Chief Executive
Officer
DATE: February 28, 2008 /s/ David M. Drillock
------------------------------
D. M. Drillock, Vice President,
Chief Financial and Accounting Officer
*
-----------------------------------
C.A. Davis, Director
*
-----------------------------------
A.G. Fernandes, Director
*
-----------------------------------
L. L. Hoynes, Jr., Director *By: /S/ R. Smith
--------------------------
Attorney-in-Fact
*
-----------------------------------
C. P. Lowe, Director
*
-----------------------------------
B. C. Johnson, Director
*
-----------------------------------
W. P. Powell, Director
*
-----------------------------------
T.W. Rabaut, Director
-----------------------------------
J. R. Satrum, Director
*
-----------------------------------
R. P. Sharpe, Director
*
-----------------------------------
J. R. Stanley, Director
DATE: February 28, 2008
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2007, 2006 and 2005
(in millions)
Additions or
(deductions) Other
charged or additions
Balance (credited) or Balance
Description 12/31/2006 to expenses (deductions) 12/31/2007
----------- ---------- ----------- ------------ ----------
Reserves deducted from related assets:
Doubtful accounts receivable $ 5.1 $ 0.3 $ (0.9)(1) $ 4.5
Deferred tax asset valuation allowance $ 27.8 $ 5.9 $ (0.2) $ 33.5
Environmental accruals $ 102.7 $ 6.2 $ 0.8 (2) $ 109.7
(1) Principally bad debts written off.
(2) Environmental remediation spending of $5.0 offset by unfavorable currency exchange of $5.8.
Additions or
(deductions) Other
charged or additions
Balance (credited) or Balance
Description 12/31/2005 to expenses (deductions) 12/31/2006
----------- ---------- ----------- ------------ ----------
Reserves deducted from related assets:
Doubtful accounts receivable $ 7.8 $ (0.8) $ (1.9)(1) $ 5.1
Deferred tax asset valuation allowance $ 23.2 $ 9.6 $ (5.0)(2) $ 27.8
Environmental accruals $ 102.9 $ 0.5 $ (0.7)(3) $ 102.7
(1) Principally bad debts written off, less recoveries and a reduction of $1.7 due to adoption of SAB 108.
(2) Primarily attributable to adjustments of acquired Surface Specialties deferred taxes and related valuation allowance.
(3) Environmental remediation spending of $4.8 offset by unfavorable currency exchange of $4.1.
Additions or
(deductions) Other
charged or additions
Balance (credited) or Balance
Description 12/31/2004 to expenses (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.
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