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CYT > SEC Filings for CYT > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for CYTEC INDUSTRIES INC/DE/

Form 10-Q for CYTEC INDUSTRIES INC/DE/


8-Nov-2012

Quarterly Report


Item 2. 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. Currency amounts are in millions, except per share amounts. Percentages are approximate.

GENERAL

Overview

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 and industrial materials, mining and plastics. Our strategy is to develop a robust, sustainable portfolio of businesses that provide sales and earnings growth, minimum operating margins of 10%, and a better return on assets by investing in and expanding our growth platforms while selectively monetizing or exiting non-strategic or under-performing businesses.

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. We 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, which is 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.

Selling price changes and 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. Higher global demand levels and, occasionally, lack of adequate forecasting by customers, result in a lack of adequate capacity to meet the demand. In addition, occasional operating difficulties at suppliers have limited availability of certain of our raw materials.

Acquisition of Umeco plc

On July 20, 2012, we completed the acquisition of all of the outstanding shares of Umeco plc ('Umeco'), an international provider of composite and process materials, in an all-cash transaction at a cost of approximately $423.8. Our consolidated financial results included in this MD&A include the results of the Umeco segment since July 20, 2012, the closing date of the acquisition of Umeco. Additionally, we have incurred costs of approximately $7.2 related to the acquisition, which are reflected in our consolidated financial results for the nine months ended September 30, 2012. See Note 4, "Acquisitions", for further details.

With respect to our acquisition of Umeco, we filed a Current Report on Form 8-K on July 25, 2012, announcing the transaction. At that time, we expected to provide the financial statements and pro forma financial information required by items 9.01(a) and 9.01(b), respectively, on Form 8-K no later than 71 days from that date pursuant to Item 2.01 of Form 8-K. Upon analyzing the data after the acquisition, we determined that this transaction did not meet the threshold under the tests of significance and, as such, an amended Form 8-K was not required.

Discontinued operations

Coating Resins

In the second quarter of 2012, we committed to a plan to sell the assets and liabilities of our former Coating Resins segment. In conjunction with the plan, on May 11, 2012, we announced our agreement to sell our pressure sensitive adhesives ("PSA") product line of the Coating Resins segment to Henkel AG & Co. ("Henkel") for approximately $105.0, including working capital of approximately $15.0. As of June 30, 2012, we had met all the criteria for discontinued operations, and as a result, the results of operations of the former Coating Resins segment, including PSA, are now reported as discontinued operations. The total assets and liabilities that are held for sale as of September 30, 2012 are approximately $1,498.3 and $461.8, respectively, and exclude those related to the PSA product line, which were sold in July 2012, as noted below. The results of operations of the former Coating Resins segment are reported as discontinued operations, and are therefore excluded from both continuing operations and segment results for all periods presented. The results of the PSA product line are included in discontinued operations up through its sale on July 31, 2012. All previously reported financial information has been revised to conform to the current presentation.

On July 31, 2012, we completed the sale of the PSA product line to Henkel under the terms noted above, subject to post-closing working capital adjustments. In August, we received cash consideration of $112.8 from the sale. For both the three and nine months ended September 30, 2012, we recorded an after-tax gain on the sale of $8.3, which is included in Net (loss) gain on sale of discontinued operations, net of tax in the consolidated statements of income.

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On October 9, 2012, we entered into a definitive agreement to divest our remaining Coating Resins business to Advent International, a global private equity firm for $1,032.0 plus assumed liabilities of $118.0 bringing the total value to $1,150.0. The sale is expected to close in the first quarter of 2013, following the satisfaction of regulatory requirements and other customary closing conditions. As a result, we recorded an after-tax charge of $23.8 in the third quarter of 2012 to adjust our carrying value of the disposal group to its fair value less cost to sell, based on the terms of the definitive agreement. The charge is included in Net (loss) gain on sale of discontinued operations, net of tax in the consolidated statements of income.

Building Block Chemicals

On February 28, 2011, we completed the sale of substantially all of the assets and certain liabilities of our former Building Block Chemicals segment (the "Business") to Cornerstone Chemical Company, an affiliate of HIG Capital, LLC
(the "Purchaser"), pursuant to an Asset Purchase Agreement ("the Agreement")
dated January 28, 2011, between the Company and the Purchaser. The total consideration received from the sale was $175.7, including cash consideration of $160.7 that we received at closing and a promissory note for $15.0. A cash payment of $6.6 was made to the Purchaser in July 2011 as final settlement of the agreed upon working capital transferred, resulting in net realized consideration of $169.1. Accordingly, the Business was treated as discontinued operations and discussion of that former segment is no longer included in the discussions that follow.

Segment realignment

We regularly review our segment reporting and classifications and may periodically change our reportable segments to align with operational changes. Our latest strategic review of our operations resulted in business segment changes that became effective January 1, 2012. In the first quarter of 2012, we announced that we had retained an advisor to help us explore the potential separation of our Coating Resins segment, along with the PSA product line and certain methyl acrylamide ("NMA") product groups. In light of this potential separation, we realigned our segment reporting (internal and external) and management structure accordingly. PSA and NMA, which previously were included in our Engineered Materials and Additive Technologies segments, respectively, became a part of the Coating Resins segment. Concurrently, to align the segments with our revised management structure and operating model, we moved the formulated resins business out of the Engineered Materials segment into the Additive Technologies segment. We believe our new strategy, which realigned our reportable segments, will enable us to develop a more sustainable portfolio in the future that will drive earnings growth and a better return on our assets.

As discussed in Note 5, the former Coating Resins and Building Block Chemicals segments are reported as discontinued operations for all periods presented. As discussed in Note 4, the acquired Umeco business is reported as a separate segment and includes results of operations since we acquired it on July 20, 2012. As a result, we now have four reportable business segments: Engineered Materials, Umeco, In-Process Separation and Additive Technologies. The Engineered Materials segment principally includes advanced composites, carbon fiber, and structural film adhesives. The Umeco segment includes composite and process materials, primarily for the aerospace and defense, wind energy, automotive, recreation and other industrial segments. The In-Process Separation segment includes mining chemicals and phosphines. The Additive Technologies segment includes polymer additives, specialty additives and formulated resins.

Quarter Ended September 30, 2012, Compared With Quarter Ended September 30, 2011

Consolidated Results

Net sales for the third quarter of 2012 were $455.4 compared with $363.4 for the third quarter of 2011. Overall, net sales increased 25% in 2012, of which 18% was attributable to sales from the newly acquired Umeco segment since July 20, 2012. Volume increases in the existing three segments improved sales by 5% and price increases increased sales by 3%. The changes in exchange rates negatively impacted net sales by 1%. Engineered Materials net sales increased by 12%, primarily due to increased volumes. In-Process Separation sales increased 9%, due mostly to higher selling prices and increased volumes. Additive Technologies net sales decreased 11%, due mostly to lower volumes and the impact of exchange rates.

For a detailed discussion on revenues refer to the Segment Results section below.

Manufacturing cost of sales was $320.8, or 70.5%, of net sales in the third quarter of 2012, compared with $256.0, or 70.5%, of net sales in the third quarter of 2011. Total manufacturing costs increased by $64.8, due mostly to costs of sales of $55.1 related to the Umeco segment, which includes $4.5 for the expense of inventory that was written up to fair value at the acquisition. The increase was also due to higher period costs of $13.8, mostly due to supporting the increased manufacturing levels resulting from the growth of the Engineered Materials and In-Process Separation segments. We also had $4.2 of higher costs from higher sales volumes in the Engineered Materials and In-Process Separation segments, freight charges increased by $1.0, and restructuring costs increased $0.6 year over year. These higher costs of sales were partially offset by the favorable impact of foreign exchange rate changes of $5.1, favorable fixed cost absorption of $4.5, and lower raw material costs of $0.4.

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Selling and technical services expenses were $36.5 in the third quarter of 2012 versus $29.3 in the third quarter of 2011. Research and process development expenses were $13.4 versus $10.9 in the prior year. Administrative and general expenses were $37.9 versus $20.6 in the prior year. Overall operating expenses increased $27.0, from $60.8 in 2011 to $87.8 in the third quarter of 2012, primarily due to $10.8 of operating charges related to personnel and other operating expenses we incurred for the new Umeco segment. They also increased $5.0 for increased personnel to support our growth businesses, higher costs of $4.3 for professional fees and other costs we incurred in our effort to acquire Umeco, $4.1 of higher incentive compensation costs, higher restructuring charges of $3.8 mostly to realign the supporting structure of our Umeco segment to take advantage of synergies from the acquisition, and $0.7 of accelerated depreciation related to the sale-leaseback of our Stamford research laboratory treated as a financing transaction. These increases were partially offset by a favorable impact from changes in exchange rates of $2.0.

Amortization of acquisition intangibles was $3.4 and $0.8 in the third quarter of 2012 and 2011, respectively. The increase is due to the amortization of intangible assets acquired from the Umeco acquisition in the third quarter.

Other (expense) income, net was an expense of $0.3 in the third quarter of 2012 compared to income of $1.3 in the third quarter of 2011. The third quarter of 2012 includes a $1.1 expense for a foreign exchange loss on an acquired Umeco intercompany loan that was settled during the quarter.

Interest expense, net was $7.0 in the third quarter of 2012 compared with $8.6 in the prior year. The decrease of $1.6 is primarily due to higher capitalized interest of $2.5 due to the restart of the carbon fiber expansion project in 2012, which was offset by lower interest income of $0.5 and higher interest expense of $0.4, mostly related to the partial drawdown of the Revolving Credit Facility in the third quarter of 2012.

The effective tax rate for continuing operations for the three months ended September 30, 2012 was a tax provision of 13.9% ($5.0) compared to 34.0% ($13.1) for the three months ended September 30, 2011. For the three months ended September 30, 2012, the rate was favorably impacted by a tax benefit of $8.5 attributable to the reversal of certain tax reserves due to the completed U.S. tax audits for the years ended 2004 through 2008.

Net earnings from continuing operations for the third quarter of 2012 was $31.0 ($0.66 per diluted share), an increase of $5.6 from $25.4 ($0.52 per diluted share) reported for the same period in 2011. Included in the third quarter of 2012 were charges of $4.3 ($0.09 per diluted share) related to costs incurred for the acquisition of Umeco, after-tax restructuring charges of $3.3 ($0.07 per diluted share) primarily related to plans to realign the supporting structure of our Umeco segment as we take advantage of synergies from the acquisition, after-tax charges of $3.1 ($0.7 per diluted share) related to the third quarter expense of Umeco inventory that was written up to fair value as of the acquisition date, foreign exchange losses of $0.7 after-tax ($0.01 per diluted share) for the settlement of an intercompany loan we acquired in the Umeco transaction, and accelerated depreciation of $0.4 after tax ($0.01 per diluted share) for the sale-leaseback of our Stamford facility treated as a financing transaction. Also included in the third quarter of 2012 is a tax benefit of $8.5 ($0.18 per diluted share) attributable to the reversal of certain tax reserves due the completed U.S. tax audits for the years ended 2004 through 2008. Included in the third quarter of 2011 was $0.1 of after-tax restructuring costs. For the three months ending September 30, 2012 and 2011, net earnings from continuing operations included pre-tax costs previously allocated to the operations of our discontinued Coating Resins segment of $15.7 and $15.5, respectively.

Earnings from discontinued operations, net of tax, were $22.8 in the third quarter of 2012 compared with $23.1 in 2011. The earnings from discontinued operations, net of tax for 2012 reflect the following after-tax amounts: the earnings from operations of our former Coatings segment of $38.3, the realized gain of $8.3 on the sale of our PSA product line in the third quarter, which is part of the former Coatings segment, and a charge of $23.8 to adjust to the carrying value of the assets held for sale at September 30, 2012 to their fair value less costs to sell. This charge was based on new information received about the carrying value as determined by our agreement to sell remaining Coatings segment that we entered into in October 2012. In the third quarter of 2012, discontinued operations of our former Coatings segment included the following after-tax items: costs of $3.0 related to the sale of Coating Resins and restructuring charges of $0.4. For the third quarter of 2011, discontinued operations, net of tax included after-tax net restructuring charges of $5.9.

Net earnings for the third quarter of 2012 were $53.3 ($1.13 per diluted share), an increase of $5.4 from the net earnings of $47.9 ($0.98 per diluted share) in the same period in 2011.

Segment Results

Year-to-year comparisons and analyses of changes in net sales by segment and region during the quarter are set forth below.

Engineered Materials



                                                                   Total                      % Change Due to
                                          2012        2011        % Change        Price        Volume/Mix        Currency
North America                            $ 138.6     $ 133.5              4 %          3 %               1 %             0 %
Latin America (1)                            1.0         0.8             -            -                 -               -
Asia/Pacific                                14.4        10.2             41 %          3 %              38 %             0 %
Europe/Middle East/Africa                   70.1        54.8             28 %          5 %              23 %             0 %

Total                                    $ 224.1     $ 199.3             12 %          3 %               9 %             0 %

(1) Due to the low level of sales in this geographic region, percentage comparisons are not meaningful.

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Net sales increased 12% primarily due to a 9% increase in selling volumes. The higher selling volumes in the third quarter of 2012 were primarily attributable to the continued ramp up of new large commercial transport programs and increased build rates of existing large commercial transport models. In addition, we also experienced higher sales volumes as a result of build rate increases in the civil rotorcraft and certain segments within the business jet market. Selling prices increased 3% and changes in exchange rates did not significantly impact net sales.

Earnings from operations were $40.5 or 18% of sales in 2012, compared with $30.0, or 15% of sales in 2011. The $10.5 increase in earnings was generated by increased marginal income due to higher selling volumes of $11.0, increased selling prices of $6.7, the favorable impact of foreign exchange rate changes of $2.8, increased fixed cost absorption of $1.4 due to increased production volume, and $0.9 of lower costs primarily driven by raw materials. These positive impacts to earnings were partially offset by higher manufacturing and freight costs of $10.0 mostly due to increased spending to meet increased production demands, and $2.3 of higher operating expenses, which include continued investments in technology in support of new growth programs, wage inflation and increased benefit costs.

Umeco (from July 20, 2012 through September 30, 2012)



                                                                   Total                    % Change Due to (1)
                                           2012      2011      % Change (1)       Price         Volume/Mix       Currency
North America                             $ 22.6     $ 0.0                -           -                  -              -
Latin America                                4.9       0.0                -           -                  -              -
Asia/Pacific                                 3.1       0.0                -           -                  -              -
Europe/Middle East/Africa                   36.2       0.0                -           -                  -              -

Total                                     $ 66.8     $ 0.0                -           -                  -              -

(1) Sales prior to July 20, 2012 were not attributable to Cytec. Therefore, percentage comparisons are not meaningful.

Net sales for the quarter represent net sales by Umeco for the period from July 20, 2012 through September 30, 2012.

The losses from operations were $1.7 or (3%) of sales in 2012. As a result of purchase accounting for the acquisition of Umeco, we wrote up our inventory to fair value by $4.5 and subsequently charged the write up to cost of sales as the inventory was sold in the third quarter.

In-Process Separation



                                                                  Total                      % Change Due to
                                           2012       2011       % Change        Price        Volume/Mix        Currency
North America                             $ 26.2     $ 21.9             20 %          7 %              13 %             0 %
Latin America                               28.2       26.8              5 %          3 %               2 %             0 %
Asia/Pacific                                23.2       22.5              3 %          1 %               2 %             0 %
Europe/Middle East/Africa                   20.5       18.5             11 %         10 %               2 %            -1 %

Total                                     $ 98.1     $ 89.7              9 %          5 %               4 %             0 %

Net sales were up 9%, primarily due to higher selling prices of 5% and higher volumes of 4%. The volume increase reflects strong demand for mining products in the copper market, new mine fills of $3.4 and for phosphine gases and derivative products. Selling prices increased across most product lines.

Earnings from operations were $24.4 or 25% of sales in 2012, compared with $17.3, or 19% of sales in 2011. The $7.1 increase in earnings is principally due to increased marginal income from higher selling volumes of $4.6, price increases of $4.5, net favorable fixed cost absorption of $2.1 on higher production levels, and a favorable impact from changes in exchange rates of $1.1. This increase in earnings was partially offset by higher freight, warehousing and manufacturing costs of $2.5 due to the higher volumes, increased operating costs of $2.4 to support our accelerated growth strategy, and higher raw material costs of $0.3.

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Additive Technologies



                                                                  Total                     % Change Due to
                                           2012       2011       % Change        Price        Volume/Mix       Currency
North America                             $ 29.5     $ 32.2             -9 %          3 %             -12 %            0 %
Latin America                                5.3        5.5             -3 %         11 %              -4 %          -10 %
Asia/Pacific                                16.8       16.8              0 %         -3 %               3 %            0 %
Europe/Middle East/Africa                   14.8       19.9            -26 %         -1 %             -16 %           -9 %

Total                                     $ 66.4     $ 74.4            -11 %          1 %              -9 %           -3 %

Net sales decreased 11% primarily due to lower volumes of 9% and the impact of changes in exchange rates which reduced sales by 3%. Higher sales prices increased sales by 1%. Selling volumes decreased across all product lines, due mostly to weak demand from the industrial markets in Europe and North America.

Earnings from operations were $9.6 or 14% of sales in 2012, compared with $12.8 or 17% of sales in 2011. The $3.2 decrease in earnings is due primarily from decreased marginal income due to lower selling volumes of $3.9, higher period of costs of $0.8 from higher manufacturing and benefit costs, increased commercial and administration expenses of $0.4 due to wage inflation and increased benefit costs, and higher raw material costs of $0.2. These were partially offset by lower freight costs on lower volumes, increased fixed cost absorption of $1.1 and sales price increases of $1.0. The overall foreign exchange impact for the quarter was minimal as unfavorable sales exchange was offset by favorable impacts on raw materials and other costs.

Nine Months Ended September 30, 2012, Compared With Nine Months Ended September 30, 2011

Consolidated Results

Net sales for the first nine months of 2012 were $1,237.4 compared with $1,046.4 for the first nine months of 2011. Overall, net sales increased 18%, which was primarily due to volume increases of 8% attributable to continued growth in our Engineered Materials and In-Process Separation segments. Net sales also increased 6% due to sales recorded from the newly acquired Umeco segment, which includes revenues since we acquired it on July 20, 2012, and price increases of 5%. Changes in exchange rates negatively impacted net sales by 1%. Engineered Materials net sales increased by 17%, due to increased volumes of 13% and price increases of 4%. In-Process Separation sales increased 16%, due to increased volumes of 9% and higher selling prices of 7%. Additive Technologies net sales decreased 5% due to lower volumes and the impact of exchange rate changes, which were partially offset by price increases.

For a detailed discussion on revenues refer to the Segment Results section below.

Manufacturing cost of sales was $847.3, or 68.5%, of net sales in the first nine months of 2012, compared with $739.4, or 70.7%, of net sales in the first nine months of 2011. Total manufacturing costs increased by $107.9 due mostly to the addition of costs of sales related to Umeco of $55.1, which includes $4.5 for the expense of inventory that had been written up to fair value at the acquisition date. Also, we incurred $39.3 of higher period costs, $28.9 of higher variable costs from increased volumes in the Engineered Materials and In-Process Separation segments, higher raw materials costs of $4.3, and higher freight of $2.6. Restructuring charges were higher by $2.3 in the first nine months of 2012, primarily related to mitigation of continuing costs following the future separation of Coating Resins and plans to realign the supporting structure of our Umeco segment as we take advantage of synergies from the acquisition. These increases in manufacturing costs of sales were partially offset by the impact of foreign exchange rate changes, which decreased costs by $12.9, and favorable fixed cost absorption of $11.7.

Selling and technical services expenses were $105.0 in the first nine months of 2012 versus $93.8 in the first nine months of 2011. Research and process development expenses were $39.5 versus $32.9 in the prior year. Administrative and general expenses were $100.8 versus $72.0 in the prior year. Overall operating expenses increased $46.6, from $198.6 in 2011 to $245.2 in the first nine months of 2012, primarily due to higher restructuring costs of $13.0 in 2012 related to our effort to mitigate continuing costs following the future separation of Coating Resins and plans to realign the supporting structure of our Umeco segment as we take advantage of synergies from the acquisition, as well as operating expenses for the new Umeco segment of $10.9. We also experienced higher costs of approximately $18.1 to support increased demand in our Engineered Materials and In-Process Separation businesses, $7.2 of costs related to the acquisition of Umeco prior to the acquisition date, and $2.0 for accelerated depreciation related to the sale-leaseback of our Stamford research labs treated as a financing transaction. These increases were offset by a favorable impact from changes in exchange rates of $4.6.

Amortization of acquisition intangibles was $5.1 and $2.4 in the first nine months of 2012 and 2011, respectively. The increase is due to the amortization of intangible assets acquired from the Umeco acquisition completed on July 20, 2012.

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