Press Releases
Cytec Announces Third
Quarter Results
Full Year 2006 Outlook Updated
October 19, 2006
West Paterson, New Jersey, Cytec Industries Inc. (NYSE:CYT)
announced today net earnings for the third quarter of 2006 of
$25.0 million or $0.51 per diluted share on net sales of $863
million. Included in the quarter is a pre-tax asset impairment
charge of $15.4 million (after-tax $14.8 million or $0.30 per
diluted share) relating to an unprofitable manufacturing site in
Europe, a net pre-tax charge of $2.2 million ($1.6 million
after-tax or $0.03 per diluted share) related to the completion
of a detailed update of our asbestos contingent liability, a
restructuring charge of pre-tax $1.1 million (after-tax $0.8
million or $0.02 per diluted share) for employee severance costs
and a charge of pre-tax $0.2 million for integration expenses
related to the Surface Specialties acquisition. Excluding these
special items, net earnings were $42.4 million or $0.87 per
diluted share.
Net earnings for the third quarter of 2005 were $35.4 million,
or $0.75 per diluted share, on net sales of $761 million.
Included in the quarter was a gain of pre-tax $3.7 million
(after-tax $2.4 million or $0.05 per diluted share) for interest
rate derivative transactions associated with the Surface
Specialties acquisition and a restructuring charge of pre-tax
$1.1 million (after-tax $0.8 million or $0.02 per diluted share)
related to employee severance. Excluding these special items,
net earnings were $33.8 million or $0.72 per diluted share.
David Lilley, Chairman, President and Chief Executive Officer
said, “We had a very strong sales growth performance in the
third quarter as our specialty businesses sales volume grew over
7% over the prior year period. However, we saw continued
escalation in raw material costs coupled with significant
tightness in raw material supplies which led to challenges in
availability and significant cost increases cutting into our
operating margins. We are raising prices but the lag effect in
implementing selling price increases did not allow us to offset
the cost increases in this quarter.”
Cytec Performance Chemicals Sales increased 10% to $233
million; Operating Earnings increased to $20.8 million
Mr. Lilley continued, “In Cytec Performance Chemicals, selling
volumes increased 8%, selling prices were up slightly and the
impact of exchange rate changes increased sales 2%. Sales
volumes were up in most product lines with the increase across
all regions particularly in Europe and Asia-Pacific. Mining
Chemicals again had strong growth particularly to the copper
industry.
“Operating earnings of $20.8 million were up compared to the
$16.5 million in the third quarter of 2005. This is primarily
due to the benefits of the higher selling volumes and previous
restructuring activities partially offset by significantly
higher raw material costs of approximately $9 million and $0.9
million related to the application of “Financial Accounting
Standard No. 123R, “Share Based Payment” (SFAS 123R).”
Cytec Surface Specialties Sales increased 8% to $384 million;
Operating Earnings decreased to $18.8 million
“In Cytec Surface Specialties, selling volumes increased 5%,
selling prices were flat and the impact of exchange rate changes
increased sales 3%. The increase in selling volumes was strong
in the Europe and Asia/Pacific regions while selling volumes in
North America decreased reflecting weak demand.
“Operating earnings of $18.8 million were down compared to the
$20.3 million in the third quarter of 2005. The benefits of
increased selling volumes and previous restructuring activities
were more than offset by significantly higher raw material costs
of approximately $6 million and a less favorable product mix.
Also impacting the quarter was expense of $0.9 million related
to the application of SFAS 123R.”
Cytec Engineered Materials Sales increased 11% to $151
million; Operating Earnings decreased slightly to $26.7 million
“Cytec Engineered Materials selling volumes increased 10%,
selling prices increased 1% and the impact of exchange rate
changes on sales was essentially flat. The selling volume
increase was primarily due to higher build rates for large
commercial aircraft and military rotorcraft partially offset by
the expected ramp down in volume for a European high-end
automotive program.
“Operating earnings of $26.7 million were down compared to the
$27.6 million in the third quarter of 2005. The favorable impact
of the higher selling volumes was offset by increased raw
material costs of approximately $2 million, higher manufacturing
period costs as a result of the increased production volumes,
lower production rates in one of our carbon fiber plants due to
trial runs of new product, some plant inefficiencies as well as
planned higher technical service and research expenses. Also
included in operating earnings was expense of $0.6 million
related to the application of SFAS 123R.”
Building Block Chemicals Sales increased 60% to $96 million;
Operating Earnings increased to $9.9 million
“Building Block Chemicals selling volumes increased 35%, selling
prices increased 24% and the impact of exchange rate changes
increased sales 1%. The increase in selling volumes is primarily
related to the impact of plant shutdowns in 2005 due to the U.S.
gulf coast hurricanes. The higher selling prices primarily
reflect tighter supply/demand conditions for acrylonitrile and
pass through of propylene cost increases.
“Operating earnings increased to $9.9 million compared to a loss
of $4.3 million in the third quarter of 2005. The increase was
mostly due to the higher selling volumes, improved selling
prices and increased plant production levels partially offset by
significantly higher raw material costs of approximately $10
million and some difficulties in our plant operations. We also
benefited in the quarter by approximately $2.7 million relating
to a payment from our former melamine joint venture partner for
early termination of the manufacturing joint venture for monies
we expected to receive from our former partner in the fourth
quarter of this year. Also included is expense of $0.3 million
related to the application of SFAS 123R.”
Corporate and Unallocated
James P. Cronin, Executive Vice President and Chief Financial
Officer commented, “Included in the quarter is a pre-tax asset
impairment charge of $15.4 million related to our Cytec Surface
Specialties manufacturing site in France which produces
solvent-borne alkyds and solvent-borne acrylics primarily for
the European market. Only minor tax benefits were available on
the impairment charge as a result of the existence of net
operating losses in France which are not likely to be realized.
These mature products are in a declining market with supplier
overcapacity and severe price erosion and are generating losses.
The outlook for recovery of these products is not positive and,
as a result, we reduced the carrying value of the fixed assets
and certain intangibles relating to this site to zero. A
preliminary restructuring project for this site has been
developed and a final decision is expected after consultation
with our Works Council before year end.
“We also recorded a restructuring charge of $1.1 million, which
was primarily recorded in cost of sales and selling and
technical services. This relates to headcount reductions
principally in Specialty Chemicals. Also included in
administrative expense are integration costs of $0.2 million
related to the Surface Specialties acquisition.
“As is our practice, we retained an outside actuarial consultant
and completed a detailed update of our asbestos related
contingent liabilities and related insurance receivables. While
claims against us have dropped significantly since our last
detailed review in 2003, our average settlement values have
increased which, when forecasted forward to estimate the
ultimate liability, necessitated an increase in our reserve of
approximately $9.0 million. Partially offsetting the increase
was a corresponding increase in our receivable for insurance
recoveries of approximately $6.7 million reflecting an overall
improved insurance position as well as reflecting the applicable
insurance receivables on the increase in the reserve. Therefore,
included in results for the quarter is a net pre-tax charge to
earnings of $2.2 million ($1.6 million after tax or $0.03 per
diluted share). As of September 30, 2006 our total asbestos
related contingent liabilities and related insurance receivables
were $54.6 million and $29.5 million, respectively. As a
reminder, we forecast our liabilities through the year 2049 on
an undiscounted basis and 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
but these amounts represent our best estimate.
“Included in the third quarter of 2005 in administrative and
general expense was a pre-tax charge of $1.1 million for
employee related severance costs. Also, included in other income
(expense), net in the third quarter of 2005 was a pre-tax gain
of $3.7 million pertaining to interest rate derivative
transactions related to the acquisition of the Surface
Specialties business.”
Interest Expense
Mr. Cronin commented, “Interest expense decreased primarily 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.”
Income Tax Expense
Mr. Cronin added, “We have reviewed our underlying annual
effective tax rate taking into account the effect of the
divestiture of the water treatment and acrylamide product lines.
A good portion of the earnings from these product lines were
realized in a low tax jurisdiction. With the sale of these
product lines we lose this tax benefit going forward and as a
result our annual underlying rate increased slightly to 27.5%
from 27%. Our tax provision for the third quarter of 2006 was
$15.3 million, or 38.0%, on the earnings before income taxes.
Impacting the rate for the quarter was the limited tax benefit
available on the French asset impairment charge and the impact
of raising the full year underlying effective tax rate to 27.5%.
Our underlying effective tax rate for the third quarter of 2005
was 26%.”
Cash Flow
Mr. Cronin commented further, “We are again pleased with our
cash flow generation in the quarter. Cash flow provided by
operations was $66 million for the quarter which is net of an
additional pension payment of $15 million to our U.S. plans.
Trade accounts receivable dollars were up $2 million, in line
with the increase in sales and days outstanding are 57 which is
flat with the days outstanding at the end of the second quarter.
Inventory dollars increased $17 million and days on hand are 71
which also is flat with the days on hand at the end of the
second quarter. Capital spending for the quarter was $21 million
and we are reducing our full year estimate to $100 million from
$110 million. We continue to pay down debt in advance of
scheduled payment dates and during the quarter we paid down $65
million of our debt.
“Our cash flow from operations for the nine months ended
September 30, 2006 is $161 million and year to date we have paid
down $177 million of our debt.”
Sale of Water Treatment Chemicals and Acrylamide Product
Lines
Mr. Lilley continued, “As previously announced, earlier this
month we completed the first of three phases of the sale of our
water treatment chemicals and acrylamide product lines with
estimated 2006 sales of approximately $300 million, to Kemira
Group. This first phase includes the entire product lines
excluding Cytec’s manufacturing site in the Netherlands, which
is expected to close in early 2007 and certain assets at various
subsidiaries in Asia-Pacific and Latin America which are
expected to close in the next six months. The timing of the flow
of funds is approximately $208 million received for phase one,
an estimated $20 million upon the Botlek closing and an
estimated $12 million upon completion of the transfer of assets
at the various subsidiaries for an estimated total of $240
million. The remaining closings are subject to certain other
conditions and the amounts could change due to final working
capital transferred.
“The net effect of this transaction, excluding any anticipated
gains on the 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.”
2006 Outlook
Mr. Lilley commented further, “We faced some very strong
headwinds in the third quarter from significantly higher raw
material costs and we forecast this to continue into the fourth
quarter of this year. Despite decreasing crude oil and natural
gas prices we are experiencing tightness in various raw material
areas and consequential cost increases, and this situation
extends across methanol derivatives, epoxy, acrylate esters and
other raw material categories. We are actively raising our
specialty chemicals selling prices to cover the increased costs
and are making progress. However our selling price increases
typically lag our raw material cost increases. Additionally, we
continue to experience larger freight cost increases and our
employee benefit costs are rising faster than anticipated. Also
as previously discussed, the sale of the water treatment and
acrylamide product lines is approximately $0.04 dilutive in the
fourth quarter.
“Concerning the demand side we expect our aerospace markets to
continue to grow in the fourth quarter of 2006 in anticipation
of increasing build rates for large commercial aircraft,
business jets, and military rotorcraft. For our Specialty
Chemicals segments we expect demand in North America and Europe
to decline versus the third quarter as we typically see a
seasonal slowdown. We expect demand in Asia-Pacific and Latin
America to continue their good growth for the rest of 2006.”
Mr. Lilley continued with some additional comments, “In Cytec
Performance Chemicals, our full year guidance for a sales range
of $840 million to $865 million and for an operating earnings
range of $65 million to $68 million remains unchanged.
“In Cytec Surface Specialties, our full year guidance for a
sales range of $1.48 billion to $1.52 billion is unchanged. We
expect that raw material costs will increase further in the
fourth quarter and despite pricing actions, which lag supplier
actions, we do not expect to fully cover these increases, and
therefore we feel it prudent to change our operating earnings
forecast to a range of $95 million to $100 million down from $97
million to $107 million.
“In Cytec Engineered Materials, the aircraft manufacturers
continue in their development of new platforms for the future
including new applications for advanced composites and we
anticipate increased aircraft production. We have a strong order
book although we continue to expect some delays into 2007. Our
full year guidance for sales remains unchanged at $590 million
to $610 million. However, we do not expect to be able to fully
make up the reduction in earnings we experienced due to the
various cost inefficiencies in the plants and the impact of the
investment in new product trials in our carbon fiber plants in
the third quarter and we are changing our forecast for operating
earnings to be in a range of $108 million to $113 million down
from our previous guidance of $110 to $115 million.
“Building Block Chemicals acrylonitrile margins improved in the
quarter and we expect to hold them in the next quarter. Our
melamine plant is running at low rates as we continue to market
our additional melamine capacity and this will negatively impact
our cost absorption in the fourth quarter. Taking into account
the above, our full year guidance for sales increased to a range
of $330 million to $350 million from a range of $310 to $330
million and operating earnings now looks to be higher than our
previous estimate of $15 million by approximately $2 million.
“We forecast no change in our guidance for Corporate and
Unallocated, other income/(expense) and equity earnings. Our
forecast for interest expense, net is forecast to be about $55
million from a range of $51 to $53 million primarily due to
higher rates on our floating debt than anticipated and higher
amortization of debt finance costs than anticipated. Our
forecast for our underlying annual effective tax rate for
ongoing operations remains at 27.5%.
“Overall, our demand drivers remain mostly on track and we are
continuing to react to the increasing raw material costs. Taking
all the above into account, we are revising our forecast for
full year diluted earnings per share to a range of $3.41 to
$3.51 versus our prior range of $3.41 to $3.66 per diluted
share.”
Excluded from the full year guidance are the following special
items – (a) asset impairment charge related to Cytec Surface
Specialties of pre-tax $15.4 million, (b) net restructuring
charges of pre-tax $23.4 million, (c) a pre-tax $15.7 million
gain related to resolution of a legal dispute, (d) a pre-tax
charge of $1.3 million for integration expenses related to the
Surface Specialties acquisition, (e) a pre tax charge of $2.2
million related to the asbestos contingent liability study, (f)
a reduction in income tax expense of $3.5 million relating to
the completion of prior years tax audits, and (g) the cumulative
effect of an accounting change after-tax charge of $1.2 million
related to the adoption of SFAS 123R, (h) any anticipated gain
associated with the phase one closing of the divestiture of the
water treatment chemicals and acrylamide product lines, (i) any
other matters of a similar nature that may arise in the fourth
quarter.”
In closing Mr. Lilley commented, “We participate in the right
markets with the right products as evidenced by our volume
growth and will remain vigilant in our attempts to recover the
increasing raw material costs through selling price increases.
Our people continue to find opportunities to further improve our
efficiency and productivity and we are not wavering in our
belief that by focusing on what we can control, we will deliver
improved results for all our stakeholders.”
Nine Month Results
Net earnings for the nine months ended September 30, 2006 were
$111.4 million or $2.30 per diluted share on sales of $2,536
million. Included in the results for the nine months ended
September 30, 2006 were – (a) asset impairment charge of pre-tax
$15.4 million (after-tax $14.8 million or $0.31 per diluted
share), (b) net restructuring charges of pre-tax $23.4 million
(after-tax $16.5 million or $0.34 per diluted share), (c) a
pre-tax $15.7 million (after-tax $12.5 million or $0.26 per
diluted share) gain related to resolution of a legal dispute,
(d) a pre-tax charge of $1.3 million (after-tax $0.9 million or
$0.02 per diluted share) for integration expenses related to the
Surface Specialties acquisition, (e) a pre tax charge of $2.2
million (after-tax $1.6 million or $0.03 per diluted share)
related to a contingent liability study/update, (f) 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 (g)
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 special items, net
earnings were $130.4 million or $2.69 per diluted share.
Net earnings for the nine months ended September 30, 2005 were
$40.7 million or $0.88 per diluted share on sales of $2,138
million. Included in the results for the nine months ended
September 30, 2005 were – (a)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, (b) a charge of $37.0 million or $0.80 per
diluted share related to the write-off of in-process research
and development costs of Surface Specialties, (c) a pre-tax
charge of $44.2 million (after-tax $28.1 million or $0.61 per
diluted share) related to currency and interest rate derivative
transactions associated with the Surface Specialties
acquisition, (d) 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, (e) a
pre-tax charge of $22.0 million (after-tax $14.0 million or
$0.30 per diluted share) related to the optional redemption of
our MOPPRS prior to their maturity, (f) an income tax benefit of
$25.8 million, or $0.56 per diluted share, reflecting favorable
partial resolution of tax audits with respect to prior year tax
returns, (g) employee restructuring costs of $2.4 million
(after-tax net $1.8 million or $0.04 per diluted share), and (h)
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
$116.1 million or $2.52 on a diluted share basis.
Investor Conference Call to be Held on October 20, 2006 11:00
A.M. ET
Cytec will host their third quarter earnings release conference
call on October 20, 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 October 20, 2006 until November 10, 2006 at
11:00 p.m. ET by calling 888-203-1112 (U.S.) or 719-457-0820
(International) and entering access code 9453856. 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. 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.
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