Press Releases
Cytec Announces Second Quarter Results
Full Year 2006 Outlook Updated
July 20, 2006
West Paterson, New Jersey, Cytec Industries Inc. (NYSE:CYT)
announced today net earnings for the second quarter of 2006 of
$48.4 million or $1.00 per diluted share on net sales of $853
million. Included in the quarter is a pre-tax net restructuring
charge of $21.9 million (after-tax $15.4 million or $0.32 per
diluted share), a pre-tax charge of $1.0 million (after-tax $0.8
million or $0.01 per diluted share) for integration expenses
related to the Surface Specialties acquisition, a pre-tax gain
relating to the receipt of $15.6 million (after-tax $12.4
million or $0.26 per diluted share) in a legal dispute and an
income tax benefit of $3.5 million ($0.07 per diluted share)
related to the completion of prior years tax audits. Excluding
these items, net earnings were $48.7 million or $1.00 per
diluted share.
Net earnings for the second quarter of 2005 was $11.9 million or
$0.25 per diluted share on net sales of $813 million. Included
in the quarter was a purchase accounting related charge of $10.3
million pre-tax (after-tax $7.5 million, or $0.16 per diluted
share) related to the 2005 acquisition of the Surface
Specialties business, a pre-tax charge of $28.0 million
(after-tax $17.7 million or $0.37 per diluted share) for
interest rate derivative transactions associated with the
Surface Specialties acquisition, a pre-tax charge of $2.4
million (after-tax $1.8 million or $0.04 per diluted share) for
an anticipated settlement of a certain litigation matter, a
pre-tax charge of $22.0 million (after-tax $14.0 million or
$0.30 per diluted share) pertaining to the optional redemption
of our Mandatory Par Put Remarketed Securities (MOPPRS) prior to
their maturity and an income tax benefit of $9.6 million, or
$0.20 per diluted share, reflecting the partial resolution of a
tax audit in Norway with respect to prior year tax returns.
Excluding these special items, net earnings were $43.3 million
or $0.92 per diluted share.
David Lilley, Chairman, President and Chief Executive Officer
said, “Our second quarter results continued the positive
momentum from the first quarter. The benefits of our previous
initiatives are now being realized in our financial results and
in spite of the headwinds of higher raw material costs,
primarily related to propylene and its derivatives, our
operating margin improved to almost 10%.
Cytec Performance Chemicals Sales increased 1% to $230
million; Operating Earnings increased to $18.3 million
Mr. Lilley continued, “In Cytec Performance Chemicals, selling
volumes decreased 1%, selling prices increased 2% and exchange
rate changes were flat. Strong sales volume in mining chemicals
and pressure sensitive adhesives were more than offset by lower
volumes in specialty additives and in water treatment chemicals,
primarily into the paper sector.
“Operating earnings increased to $18.3 million primarily due to
the benefits of restructuring and a better product mix partially
offset by higher raw material costs and expense of $0.9 million
for stock options and stock appreciation rights settled in stock
related to the application of “Financial Accounting Standard No.
123R, “Share Based Payment” (SFAS 123R). Included in 2005, and
related to the Surface Specialties acquisition, is a charge of
$1.3 million for the excess of the fair value of the finished
goods inventory of the acquired business over normal
manufacturing cost.
Cytec Surface Specialties Sales increased 5% to $391 million;
Operating Earnings increased to $29.5 million
“In Cytec Surface Specialties, selling volumes increased 7%,
selling prices decreased 2% and exchange rate changes were flat.
The increase in selling volumes was strong in all regions except
North America. Selling prices were down in radcure and powder
coating resins.
“Operating earnings increased to $29.5 million primarily due to
increased selling volumes, improved product mix, favorable raw
material costs principally in the radcure product line and the
benefits of restructuring partially offset by lower selling
prices and expense of $0.8 million for stock options and stock
appreciation rights settled in stock related to the application
of SFAS 123R. Included in 2005 and related to the Surface
Specialties acquisition, is a charge of $9.0 million for the
excess of the fair value of the finished goods inventory of the
acquired business over normal manufacturing cost.
Cytec Engineered Materials Sales increased 8% to $152
million; Operating Earnings increased to $28.3 million
“Cytec Engineered Materials selling volumes increased 5%,
selling prices increased 3% and exchange rate changes were
essentially flat. The selling volume increase was primarily due
to higher build rates for large commercial aircraft partially
offset by the expected ramp down in volume to a European
high-end automotive program.
“Operating earnings improved 12% to $28.3 million, primarily due
to higher selling volumes and selling prices. Included in
operating earnings is expense of $0.6 million for stock options
and stock appreciation rights settled in stock related to the
application of SFAS 123R.
Building Block Chemicals Sales increased 10% to $81 million;
Operating Earnings decreased to $6.2 million
“Building Block Chemicals selling volumes increased 1%, selling
prices increased 9% and exchange rate changes were flat. Due to
tighter supply/demand conditions for acrylonitrile, selling
prices increased.
“Operating earnings decreased to $6.2 million. Selling price
increases almost offset the increase in raw material costs. Our
plant operations ran well, however, similar to last quarter, our
melamine manufacturing joint venture partner did not take any
production during the quarter. The resulting operational
inefficiencies associated with the melamine plant being down for
about half the quarter reduced earnings by slightly over $1
million. Also included is expense of $0.3 million for stock
options and stock appreciation rights settled in stock related
to the application of SFAS 123R.”
Earnings in Associated Companies
Earnings in Associated Companies decreased from the prior year
period as a result of the May 2005 sale of our 50% interest in
CYRO Industries to our former partner, Degussa.
Corporate and Unallocated
James P. Cronin, Executive Vice President and Chief Financial
Officer commented, “During the quarter, we recorded a net
restructuring charge of $21.9 million, which was primarily
recorded in cost of sales. Of the net restructuring charge,
$22.6 million relates to permanently shutting down manufacturing
operations for two older technology polymer additive light
stabilizer products produced at our manufacturing facility in
Botlek, the Netherlands which included a full review of the
support and commercial infrastructure at the site. Included in
the $22.6 million charge is a non-cash $13.8 million write-off
of polymer additive assets at our Botlek site with the majority
of the remaining amount being mostly severance related. One of
the products, CYASORB® UV-5411 light stabilizer, will be
consolidated at our Willow Island, West Virginia facility.
Production of the other product, CYASORB® UV-1084 light
stabilizer, is expected to cease by the end of the third quarter
and we will exit this product line. The remainder of the net
restructuring charge is a reduction of $0.7 million of a
previous restructuring accrual primarily as a result of
incurring less cost than originally estimated.
“Included in administrative expense are integration costs of
$1.0 million related to the Surface Specialties acquisition.
These integration costs which began in the second quarter, the
majority of which are duplicative in nature, are being incurred
primarily as a result of the elimination of transition service
agreements that were in place with the former owner regarding
the information technology hardware infrastructure.
“In addition, we realized a gain of $15.6 million during the
quarter which is included in other income (expense), net
relating to a legal dispute with a European firm that was in
arbitration proceedings since 2000. After proceeding through a
number of appeals the defendant was ordered to pay us damages
and we collected essentially all of the cash in the second
quarter. Although a final appeal is pending, we believe the
appeal is without merit.
“Included in administrative expense in the second quarter of
2005 was a pre-tax charge for $2.4 million ($1.8 million
after-tax) related to an increase in accrual for a certain
litigation matter.
“Included in other income (expense), net in the second quarter
of 2005 was a pre-tax loss of $28.0 million ($17.7 million
after-tax or $0.38 per diluted share) pertaining to interest
rate derivative transactions related to the acquisition of the
Surface Specialties business.”
Interest Expense
Mr. Cronin commented, “Interest expense was reduced from the
prior year quarter due to the overall lower debt level as we
continue to make good progress in reducing debt incurred for the
Surface Specialties acquisition in the first quarter of 2005.
“In the second quarter of 2005, we redeemed our $120 million
MOPPRS debt at the optional redemption price of approximately
$141 million which included $21 million for the value of
redeeming the securities prior to their final maturity. In
addition, we recognized a charge of $1 million from amounts
related to the unamortized put premium and rate lock agreements
for these securities. Accordingly, 2005 interest expense
includes a total pre-tax charge of $22.0 million related to this
transaction.”
Income Tax Expense
Mr. Cronin added, “Our tax provision for the second quarter of
2006 was $10.9 million, or 18.4%, on the earnings before income
taxes. Favorably impacting the rate for the quarter is a
reduction in income tax expense of $3.5 million related to the
completion of prior years U.S. tax audits. Also favorably
impacting the tax rate was the tax benefit from the
restructuring charge which was recorded at 29.6% and the gain on
the favorable resolution of the previously mentioned legal
dispute which was effectively recorded at a tax provision of
20%. Excluding these items, our underlying effective tax rate
for the quarter was 27%.
“For the second quarter of 2005 our effective tax rate for
continuing operations was favorably impacted by a reduction in
income tax expense of $9.6 million related to a partial
resolution of a tax audit in Norway with respect to prior years
tax returns. Also favorably impacting the rate were the losses
incurred in the U.S. on the interest rate derivatives and the
MOPPRS redemption. The tax benefit on these losses is recorded
at 36.5%. Excluding these items, our underlying effective tax
rate for the quarter was 27%.”
Cash Flow
Mr. Cronin commented further, “Cash flow provided by operations
was $74 million for the quarter. Trade accounts receivable
dollars were up $37 million, in line with the increase in sales.
Inventory dollars increased $18 million and days outstanding are
71, up about 3 days from year end. Capital spending for the
quarter was $25 million and our full year estimate of $110
million is unchanged. We continue to pay down debt in advance of
scheduled payment dates and during the quarter we paid down $59
million of our debt.”
Sale of Water Treatment Chemicals and Acrylamide Product
Lines
Mr. Lilley commented further, “On July 17, 2006 we announced
that we had reached a definitive agreement to sell our water
treatment chemicals and acrylamide product lines with estimated
2006 sales of approximately $300 million, to Kemira Group, for
approximately $240 million cash. The closing of the sale is
expected in two phases. The first phase, which includes the
entire product lines excluding Cytec’s manufacturing site in the
Netherlands, is expected to close by the end of September, 2006.
The second phase for the Netherlands site is expected to close
in early 2007. Between the closing of phase one and phase two,
Cytec will contract manufacture and sell water treatment
chemicals and acrylamide at the Botlek site solely to Kemira.
The timing of the flow of funds is $220 million upon the first
closing with the balance payable upon the second closing. Both
closings are subject to regulatory approval and certain other
conditions.
“When completed, this transaction will streamline Cytec, further
improve our balance sheet and let us increase our focus on our
growth businesses. The net effect of this transaction, excluding
any anticipated gains on the actual closings, and giving effect
to the use of net after-tax proceeds to pay down debt is
expected to be about $0.04 dilutive to earnings per diluted
share in 2006 assuming the first closing occurs on September 30,
2006.”
2006 Outlook
Mr. Lilley commented further, “Our second quarter results have
continued our momentum from the first quarter. We expect our
aerospace markets to continue to grow in the second half of 2006
as the build rates for large commercial aircraft, business jets,
military aircraft and commercial rotorcraft continue to increase
and our customers utilize more advanced composites. For our
Specialty Chemical segments we now expect a slight decline in
demand in North America. For Europe, demand has improved but
typically the second half is lower than the first half. We
continue to expect Asia-Pacific and Latin America to have good
growth in 2006. Our expectation is for crude oil costs to stay
high for the rest of 2006 which for us affects the cost of
propylene and its derivatives which then impacts Cytec’s
Specialty Chemicals and Building Block Chemicals businesses.”
Mr. Lilley continued with some additional comments, “The
following discussion includes the impact of the proposed sale of
the water treatment chemicals and acrylamide product lines
assuming a September 30, 2006 phase one closing.
“In Cytec Performance Chemicals, our full year guidance for a
sales range of $900 to $925 million revises to a range of $840
to $865 million and for an operating earnings range of $65 to
$70 million revises to a range of $63 to $68 million after
adjusting for the sale of the water treatment chemicals product
line. We continue to expect strong demand in our mining
chemicals and more moderate demand in most others. The polymer
additive product line continues to see severe price competition
in our mature products but our commercial organization continues
its focus of increasing sales of our proprietary differentiated
products. We announced a restructuring of our polymer additives
manufacturing at our site in the Netherlands and the impact from
these actions will have a positive impact in 2007.
“In Cytec Surface Specialties, our full year guidance for a
sales range of $1.48 to $1.52 billion is unchanged. Our
operating earnings range of $95 to $105 million improves to a
range of $97 to $107 million. The improvement in demand from
Europe is mostly offset by weakness in North America. We expect
to continue to see good progress in the Asia-Pacific and Latin
American regions and also from new global product introductions.
Our forecast is for raw material costs to increase in the second
half of the year and we will attempt to compensate with selling
price increases. We continue to find many opportunities to
improve our operations both in the short and medium term.
“In Cytec Engineered Materials, we continue to respond to
aircraft manufacturers as they develop new platforms for the
future plus new applications for advanced composites and
anticipate increased aircraft production. We have a strong order
book for the second half of the year although we now expect some
delays into 2007. Taking into account the above, we are changing
our full year guidance for sales to $590 to $610 million from
our previous guidance of $600 to $620 million and for operating
earnings to $110 to $115 million from our previous guidance of
$115 to $120 million.
“As expected, Building Block Chemicals saw some improvement in
the second quarter. We continue to watch the impact of oil price
volatility on propylene costs and acrylonitrile margin spreads.
Our operating team is focused on what they can control,
particularly manufacturing efficiency and costs. Taking into
account the above and anticipating the sale of the acrylamide
product line and the resulting sales from the acrylonitrile
supply contract, our full year guidance for sales is in a range
of $310 to $330 million and operating earnings now looks to be
about $15 million versus a previous range of $12 to $15 million.
“We forecast no change in our guidance for Corporate and
Unallocated and other income/(expense). Our forecast for
interest expense, net will be reduced to a range of $51 to $53
million from a range of $54 to $56 million as we pay down debt
with proceeds from the divestiture. We see some improvement in
our forecast for equity earnings to about $3 million and our
forecast for our underlying annual effective tax rate for
ongoing operations will change slightly to 27.3% from 27% as
some of the earnings of the divested product lines were recorded
in a lower tax rate entity.
“Overall, we had a solid first half in 2006 but we remain
cautious on the demand side and are concerned about high oil
costs and raw material volatility. Taking this into account plus
all the above, including the impact of the pending sale of the
water treatment chemicals and acrylamide product lines, our
revised forecast for full year diluted earnings per share is a
range of $3.41 to $3.66 versus our prior range of $3.45 to $3.70
per diluted share.
Excluded from the full year guidance are the following special
items – (a) approximately $3 million pre-tax for integration
expenses related to the Surface Specialties acquisition, (b) the
$15.6 million pre-tax gain related to a legal dispute, (c) net
restructuring charges of $22.3 million pre-tax recorded in the
first and second quarters of 2006, (d) the reduction in income
tax expense of $3.5 million relating to the completion of prior
years tax audits and (e) the cumulative effect of accounting
change after-tax charge of $1.2 million related to the adoption
of SFAS 123R. Also excluded are any additional restructurings or
divestiture gain as a result of the pending sale of the water
treatment chemicals and acrylamide product lines.”
In closing Mr. Lilley commented, “We have recently announced a
number of key strategic and operational initiatives to improve
Cytec, and we continue to focus on all issues under our control.
The Cytec team is committed to delivering the highest
performance for all our stakeholders.”
Six Month Results
Net earnings for the six months ended June 30, 2006 were $86.4
million or $1.79 per diluted share on sales of $1,673 million.
Included in the results for the six months ended June 30, 2006
were – (a) net restructuring charges of pre-tax $22.3 million
(after-tax $15.7 million or $0.33 per diluted share) recorded in
the first and second quarters of 2006, (b) a pre-tax $15.6
million (after-tax $12.4 million or $0.26 per diluted share)
gain related to resolution of a legal dispute, (c) a pre-tax
charge of $1.0 million (after-tax $0.8 million or $0.01 per
diluted share) for integration expenses related to the Surface
Specialties acquisition, (d) a reduction in income tax expense
of $3.5 million or $0.07 per diluted share relating to the
completion of prior years tax audits, and (e) the cumulative
effect of an accounting change after-tax charge of $1.2 million
or $0.02 per diluted share related to the adoption of SFAS 123R.
Excluding these items, net earnings were $88.2 million or $1.82
per diluted share.
Net earnings for the six months ended June 30, 2005 were $5.3
million or $0.12 per diluted share on sales of $1,377 million.
Included in the results for the six months ended June 30, 2005
were purchase accounting related charges of $20.8 million
pre-tax (after-tax $15.2 million, or $0.33 per diluted share),
related to acquired inventories from Surface Specialties being
recorded at fair value which exceeded normal manufacturing cost,
a charge of $37.0 million or $0.82 per diluted share related to
the write-off of in-process research and development costs of
Surface Specialties, a pre-tax charge of $47.9 million
(after-tax $30.4 million or $0.67 per diluted share) related to
currency and interest rate derivative transactions associated
with the Surface Specialties acquisition, a pre-tax charge of
$2.4 million (after-tax $1.8 million or $0.04 per diluted share)
related to an anticipated settlement of a certain litigation
matter, a pre-tax charge of $22.0 million (after-tax $14.0
million or $0.31 per diluted share) related to the optional
redemption of our MOPPRS prior to their maturity, an income tax
benefit of $25.7 million, or $0.57 per diluted share, reflecting
favorable partial resolution of tax audits with respect to prior
year tax returns, employee redundancy costs of $1.3 million
(after-tax net $0.9 million or $0.02 per diluted share), and a
$4.4 million settlement to resolve a dispute over an
environmental matter (after-tax net $3.2 million or $0.07 per
diluted share). Excluding these special items, net earnings were
$82.1 million or $1.81 on a diluted share basis.
Investor Conference Call to be Held on July 21, 2006 11:00
A.M. ET
Cytec will host their second quarter earnings release conference
call on July 21, 2006 at 11:00 a.m. ET. The conference call will
also be simultaneously webcast for all investors from Cytec’s
website www.cytec.com. Select the Investor Relations page to
access the live conference call.
A recording of the conference call may be accessed by telephone
from 2:00 p.m. ET on July 21, 2006 until August 11, 2006 at
11:00 p.m. ET by calling 888-203-1112 (U.S.) or 719-457-0820
(International) and entering access code 5345506. The conference
call recording will also be accessible on Cytec’s website for 3
weeks after the conference call.
Use of Non-GAAP Measures
Management believes that net earnings, basic and diluted
earnings per share before special items, which are non-GAAP
measurements, are meaningful to investors because they provide a
view of the Company with respect to ongoing operating results.
Special items represent significant charges or credits that are
important to an understanding of the Company’s overall operating
results in the period presented. Such non-GAAP measurements are
not recognized in accordance with generally accepted accounting
principles (GAAP) and should not be viewed as an alternative to
GAAP measures of performance. A reconciliation of GAAP
measurements to non-GAAP can be found at the end of this
release.
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained
herein, statements contained in this release may constitute
“forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Achieving the results
described in these statements involves a number of risks,
uncertainties and other factors that could cause actual results
to differ materially, as discussed in Cytec’s filings with the
Securities and Exchange Commission.
Corporate Profile
Cytec Industries Inc. is a global specialty chemicals and
materials company focused on developing, manufacturing and
selling value-added products with pro forma sales in 2005 of
approximately $3.2 billion. Our products serve a diverse range
of end markets including aerospace, adhesives, automotive and
industrial coatings, chemical intermediates, inks, mining,
plastics and water treatment. We use our technology and
application development expertise to create chemical and
material solutions that are formulated to perform specific and
important functions in the finished products of our customers.
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