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CYT > SEC Filings for CYT > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for CYTEC INDUSTRIES INC/DE/


3-May-2013

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 materials and chemicals 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. 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. Our latest strategic review of our operations resulted in business segment changes that became effective in the first quarter of 2013, as discussed below. Segment realignment
We regularly review our segment reporting and classifications and may periodically change our reportable segments to align with operational changes. In the first quarter of 2013, we began reporting separately the aerospace and industrial materials businesses out of the former Engineered Materials and former Umeco segments into two new segments, Aerospace Materials and Industrial Materials. They are managed and reported separately as the markets and distribution channels are distinct. While their manufacturing assets and processes are similar, their supply chains are dissimilar. This follows our strategy of focusing on the aerospace and industrial markets separately and reflects how we operate the businesses. We also believe this is more clear and understandable to investors. The segment information presented herein reflects this change in our business segments.
As discussed in Note 4, the former Coating Resins segment is reported as discontinued operations for all periods presented. As discussed in Note 3, the acquired Umeco business is reported in part in the Aerospace Materials segment, but mostly in the Industrial Materials segment, and includes results of operations since we acquired it on July 20, 2012. As a result, we now have four reportable business segments: Aerospace Materials, Industrial Materials, In Process Separation and Additive Technologies. The Aerospace Materials segment principally includes advanced composites, carbon fiber, and structural film adhesives. The Industrial Materials segment includes composite and process materials, primarily for the high-end automotive, wind energy, 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.
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. 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 availability of certain of our raw materials.
Acquisitions
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 business since July 20, 2012, the closing date of the acquisition of Umeco. Approximately 84% of Umeco sales are included in our Industrial Materials segment and 16% in our Aerospace Materials segment in the first quarter of 2013. See Note 3, "Acquisitions," for further details. Star Orechem International Private Limited On March 30, 2012, we acquired the manufacturing assets of Star Orechem International Private Limited (SOIL), in Nagpur, Central India, in a cash transaction. The results of operations of the acquired business have been included in our In Process Separation segment since April 1, 2012. See Note 3, "Acquisitions," for further details.

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Discontinued operations
Coating Resins
In the second quarter of 2012, we committed to a plan to sell the assets and liabilities of our Coating Resins business. On July 31, 2012, we completed the sale of the 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.

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. We completed the sale on April 3, 2013, for a total value of $1,133.0, including assumed liabilities of approximately $118.0. The final price paid is subject to final working capital and other customary adjustments. The results of operations of the former Coating Resins segment, including PSA, have been reported as discontinued operations, and are therefore excluded from both continuing operations and segment results for all periods presented. All previously reported financial information has been revised to conform to the current presentation. The total assets and liabilities that are included as held-for-sale in our consolidated balance sheets as of March 31, 2013 are approximately $1,520.6 and $441.1, respectively.
We recorded an after-tax charge of $4.3 in the first quarter of 2013 to adjust our carrying value of the disposal group to its fair value less cost to sell, based on the terms of the agreement. The charge is included in Net loss on sale of discontinued operations, net of tax in the consolidated statements of income. Quarter Ended March 31, 2013, Compared With Quarter Ended March 31, 2012 Consolidated Results
Net sales for the first quarter of 2013 were $477.4 compared with $378.1 for the first quarter of 2012. Overall, net sales increased 26% in 2013, of which 23% was attributable to sales from the Umeco businesses, acquired in July 2012. Price increases improved sales by 2%, while overall selling volume changes increased sales by 1% and the impact of exchange rates on sales were essentially flat. Aerospace Materials net sales increased by 14%, of which 7% was due to new sales from the acquisition of Umeco and increased volumes of 4%. Net sales for Industrial Materials segment increased significantly, entirely due to new acquisition-related sales. Additive Technologies sales increased 1% due to increased volumes. In Process Separation net sales decreased 3%, as lower volumes were only partially offset by higher prices.
For a detailed discussion on revenues refer to the Segment Results section below.
Manufacturing cost of sales was $337.0, or 70.6% of net sales, in the first quarter of 2013, compared with $252.9, or 66.9% of net sales, in the first quarter of 2012. Total manufacturing costs increased by $84.1, due mostly to costs of sales of $68.5 incurred in the first quarter of 2013 related to the Umeco business, which we acquired on July 20, 2012. The increase was also due to unfavorable fixed cost absorption of $8.6 to control inventory levels, higher raw material costs of $2.7, higher period costs of $2.7, mostly due to a fixed asset write off related to a certain technology development program that will no longer proceed and increased manufacturing personnel levels resulting from the anticipated growth of the Aerospace Materials for the remainder of 2013, and $2.2 of higher costs from higher sales volumes, primarily in the Aerospace Materials segment. These higher costs of sales were partially offset by the favorable impact of foreign exchange rate changes of $0.8.
Selling and technical service expenses were $39.5 in the first quarter of 2013 versus $33.1 in the first quarter of 2012. Research and process development expenses were $13.4 versus $12.9 in the prior year. Administrative and general expenses were $31.2 versus $26.6 in the prior year. Overall operating expenses increased $11.5, from $72.6 in 2012 to $84.1 in the first quarter of 2013, primarily due to $15.9 of expenses that we incurred in 2013 from the acquisition of Umeco, which are largely headcount related. Increases in operating expenses also included $0.6 for increased personnel to support our growth businesses, higher restructuring charges of $0.5 reflecting net adjustments in 2013 related to prior period initiatives, and $0.4 of bad debt in 2013 related to a customer for In Process Separation. These increases were partially offset by $4.1 of lower stranded costs previously allocated to our former Coating Resins business, $0.7 of accelerated depreciation in the first quarter of 2012 related to the sale-leaseback of our Stamford research laboratory treated as a financing transaction, and lower costs of $0.9 for professional fees and other costs in business development efforts.
Amortization of acquisition intangibles was $3.7 and $0.8 in the first quarter of 2013 and 2012, respectively. The increase is due to the amortization of intangible assets acquired as part of the Umeco acquisition in the third quarter of 2012.
Other (expense) income, net was an expense of $0.7 in the first quarter of 2013 compared to income of $0.9 in the first quarter of 2012. The change was primarily due to an increase of $0.8 in foreign exchange losses in 2013 compared to 2012.
Loss on early extinguishment of debt consists of a loss of $39.4 including transaction costs, incurred on the redemption of $135.2 principal amount of our 4.6% notes due July 1, 2013, which we called for redemption in February 2013, for a purchase

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price of $136.8 plus accrued interest of $1.5; the repurchase of $107.8 principal amount of our 6.0% notes due October 1, 2015 for a purchase price of $121.1 plus accrued interest of $3.1; and the repurchase of $85.1 principal amount of our 8.95% notes due July 1, 2017 for a purchase price of $108.3 plus accrued interest of $1.8. The repurchase of the 6.0% and 8.95% notes were completed under an offer to repurchase the notes that ended in March 2013. Interest expense, net was $6.8 in the first quarter of 2013 compared with $8.7 in the prior year. The decrease of $1.9 is primarily due to higher capitalized interest of $3.2 due to the restart of the carbon fiber expansion project in 2012, which was offset by higher interest expense of $0.7, mostly related to the new debt issued in the first quarter of 2013 and the outstanding portion of the Revolving Credit Facility in the first quarter of 2013, and by lower interest income of $0.6.
The effective tax rate for continuing operations for the three months ended March 31, 2013 was a tax benefit of 41.9% $(2.4) compared to a tax provision of 31.2% ($13.8) for the three months ended March 31, 2012. The effective tax rate for the three months ended March 31, 2013 was favorably impacted by a tax benefit of $2.7 attributable to the U.S. reinstatement of 2012 business tax incentives during the first quarter of 2013, and a $14.7 benefit related to the loss on early extinguishment of debt. The rate was unfavorably impacted by a tax expense of $1.0 related to a revision of our previously accrued estimated income tax liability on the unrepatriated earnings of certain foreign subsidiaries as a result of the sale of our Coating Resins business.
Net earnings from continuing operations for the first quarter of 2013 was $8.0 ($0.17 per diluted share), a decrease of $22.2 from $30.2 ($0.65 per diluted share) reported for the same period in 2012. Included in the first quarter of 2013 were charges of $0.5 ($0.01 per diluted share) for adjustments to previous restructuring initiatives and costs to divest the Umeco distribution business. For the three months ended March 31, 2012, it includes net after-tax credits of $0.1 for previous restructuring initiatives, and accelerated depreciation of $0.4 after-tax for the sale-leaseback of our Stamford facility treated as a financing transaction. Net earnings from continuing operations also included costs previously allocated to the operations of our discontinued Coating Resins segment of $12.2 for the three months ended March 31, 2013, and $17.2 for the three months ended March 31, 2012.
Earnings from discontinued operations, net of tax, were $25.9 in the first quarter of 2013 compared with $23.4 in 2012. For 2013, earnings from discontinued operations, net of tax consisted of earnings from operations of our former Coating Resins segment of $30.2, and a charge of $4.3 to adjust to the carrying value of the assets held for sale at March 31, 2013 to their fair value less costs to sell, based on the terms of sale to Advent that closed in April 2013. Included in 2013 earnings from the operations of the former Coating Resins business were costs of $4.0 related to the sale of Coating Resins and restructuring credits of $0.2 to adjust previous initiatives. In the first quarter of 2012, earnings from discontinued operations, net of tax consisted entirely of earnings from operations of our former Coating Resins segment, which included the PSA product line that we sold in the second quarter 2012. Included in 2012 were the following after-tax items: costs of $3.9 related to the sale of Coating Resins and restructuring charges of $2.6.
Net earnings for the first quarter of 2013 were $33.5 ($0.73 per diluted share), a decrease of $19.6 from the net earnings of $53.1 ($1.14 per diluted share) in the same period in 2012.
Segment Results
Year-to-year comparisons and analysis of changes in net sales by segment and region during the quarter are set forth below.

Aerospace Materials
                                                  Total              % Change Due to
                            2013       2012     % Change    Price      Volume/Mix    Currency
North America             $ 148.0    $ 131.6         12 %     2 %          10 %         - %
Latin America (1)             1.3        0.7          -       -             -           -
Asia/Pacific                 15.1       14.1          7 %     4 %           3 %         - %
Europe/Middle East/Africa    71.6       60.9         18 %     4 %          14 %         - %
Total                     $ 236.0    $ 207.3         14 %     3 %          11 %         - %

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

Net sales increased 14% primarily due to an 11% increase in selling volumes, of which 7% are acquisition-related sales increase, and 4% were for existing business. The higher selling volumes for existing business in the first quarter of 2013 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 driven by higher build rates

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of business jets as well as new business jet programs. Selling prices increased 3% and changes in exchange rates did not significantly impact net sales. Earnings from operations were $41.5, or 18% of sales in 2013, compared with $43.3, or 21% of sales in 2012. The $1.8 decrease in earnings included unfavorable fixed cost absorption of $5.9 related to inventory builds in 2012, $4.4 of higher raw material costs and higher waste driven by increased production, higher manufacturing period costs of $3.7, including a fixed asset write off of $1.4 related to a certain technology development program that will no longer proceed and increased personnel spending to meet increased production demands, higher operating expenses of $0.7 and higher freight costs of $0.8 due to increased sales volumes. These unfavorable impacts in earnings were partially offset by earnings of $1.8 related to Umeco acquisition-related sales volumes, increased selling prices of $5.7, improved marginal income due to higher selling volumes of $5.4, and the favorable impact of foreign exchange rate changes of $0.8.

Industrial Materials
                                                          Total                      % Change Due to
                               2013        2012       % Change (1)        Price        Volume/Mix        Currency
North America                $  23.2     $   7.3            - %              3 %            - %              - %
Latin America                    3.6         0.1            - %              - %            - %              - %
Asia/Pacific                     3.1         0.2            - %              - %            - %              - %
Europe/Middle East/Africa       54.1         3.9            - %              - %            - %              - %
Total                        $  84.0     $  11.5            - %              2 %            - %              - %

(1) The Umeco acquisition occurred on July 20, 2012. Due to the low level of existing prior year sales in all geographic regions, the majority of the difference is due to the acquisition and percentage comparisons are not meaningful.

Overall, net sales increased primarily due to $75.9 of net sales in 2013 from the Umeco business acquired in July 2012. For existing product lines, our selling volumes decreased by $3.4, or 31%, due to weak demand from the high performance automotive and motor sports markets and tooling applications. Selling prices increases resulted in higher sales of 2%. Changes in exchange rates did not significantly impact net sales.
Earnings from operations were $2.6, or 3% of net sales in 2013, compared with $1.7, or 15% of net sales in 2012. The $0.9 increase in earnings was driven by earnings from operations of $1.9 from the Umeco industrial business, favorable fixed cost absorption of $1.0, reduced operating expenses of $0.4 from prior year restructuring initiatives, and selling price increases of $0.2. These were largely offset by lower marginal income of $2.2 due to lower sales volumes for existing product lines, higher raw material costs of $0.3, and an unfavorable impact of changes in exchange rates of $0.1.

In Process Separation
                                                Total               % Change Due to
                           2013      2012      % Change     Price    Volume/Mix    Currency
North America             $ 27.4    $ 25.3        8  %       2  %         6  %        - %
Latin America               24.6      30.8      (20 )%      (1 )%       (19 )%        - %
Asia/Pacific                23.2      21.0       10  %      (1 )%        11  %        - %
Europe/Middle East/Africa   13.6      14.5       (6 )%       3  %        (9 )%        - %
Total                     $ 88.8    $ 91.6       (3 )%       1  %        (4 )%        - %

Net sales were down 3%, primarily due to lower sales volumes of 4%, offset by higher selling prices of 1%. The volume decrease reflects weaker demand compared to 2012 for alumina products. Selling prices increased sales, primarily in the phosphine and alumina product lines.
Earnings from operations were $16.7 or 19% of sales in 2013, compared with $22.9, or 25% of sales in 2012. The $6.2 decrease in earnings is principally due to decreased marginal income from lower selling volumes of $3.6, higher manufacturing costs of $1.4 due to the higher plant operating costs, net unfavorable fixed cost absorption of $1.1, higher net commercial and other operating expenses of $1.0 to support future growth, and $0.4 for a customer's bad debt. This decrease in earnings was partially offset by lower freight and warehousing costs of $0.6 from lower sales volumes, price increases of $0.5, primarily in phosphines and alumina, and lower net overall raw material costs of $0.3.

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Additive Technologies
                                                Total              % Change Due to
                           2013      2012      % Change    Price    Volume/Mix    Currency
North America             $ 32.4    $ 31.8        2  %       2  %       -  %         -  %
Latin America                5.1       5.4       (6 )%       1  %      (7 )%         -  %
Asia/Pacific                15.5      15.9       (3 )%      (5 )%       4  %        (2 )%
Europe/Middle East/Africa   15.6      14.6        7  %      (2 )%       9  %         -  %
Total                     $ 68.6    $ 67.7        1  %       -  %       1  %         -  %

Net sales increased 1% primarily due to higher volumes. Selling prices and changes in exchange rates did not significantly affect net sales. Selling volumes increased mostly due to higher demand for polymer additive products in Europe and North America, partly offset by lower demand for specialty additive products in Europe and North America.
Earnings from operations were $8.0 or 12% of sales in 2013, compared with $6.4 or 9% of sales in 2011. The $1.6 increase in earnings is due primarily from lower costs for raw materials of $1.7, especially in the specialty additives products, lower manufacturing costs of $1.2 due to lower plant maintenance costs in 2013, increased marginal income due to higher selling volumes of $0.9, decreased commercial and administration expenses of $0.7, and lower freight costs of $0.2. This was partially offset by unfavorable fixed cost absorption of $2.6, an unfavorable impact of changes in exchange rates of $0.3, and net sales price decreases of $0.2.
LIQUIDITY AND FINANCIAL CONDITION
At March 31, 2013, our cash balance was $120.5 compared with $179.3 at December 31, 2012. At March 31, 2013, approximately 91% of our cash was located outside of the U.S.
Net cash provided by continuing operations Net cash provided by operating activities of continuing operations was $28.3 in 2013 compared with cash used of $10.2 in 2012. Inventory increased $17.3. Inventory days on hand were at 82 days for the first quarter of 2013, which is up slightly compared to the 2012 fourth quarter of 81 days, primarily due to the timing of certain orders in our In Process Separation segment and a buildup of inventory in Aerospace Materials related to expected higher order levels for the remainder of 2013. Trade accounts receivable increased $12.7 due to higher sales with days outstanding of 51 days for the first quarter of 2013, which is up from the 2012 fourth quarter of 49 days. Accounts payable increased by $37.5, as first quarter of 2013 accounts payable days outstanding increased to 53 days, compared to 46 days for the fourth quarter 2012. Income taxes payable decreased $30.8 in the first quarter of 2013, primarily due to the fourth quarter 2012 corporate income tax payment related to the PSA sale. This payment of approximately $21.0, which was statutorily due on December 17, 2012, was deferred to February 1, 2013 as the Internal Revenue Service provided special tax relief for taxpayers in the federally-declared disaster areas struck by Hurricane Sandy. Accrued expenses decreased by $26.7, primarily due to payments related to 2012 incentive compensation. Other liabilities in 2013 increased by $3.3. We disclosed in our 2012 Annual Report on Form 10-K that we expected to contribute $57.4 and $10.2, respectively, to our pension and postretirement plans in 2013, which we expected to fund primarily with a portion of the proceeds from the sale of Coating Resins, which were received in April 2013. Through March 31, 2013, actual contributions to our pension and postretirement plans were $2.3 and $0.5, respectively.
Net cash used in investing activities of continuing operations was $54.4 in 2013 compared to $48.3 in 2012. Capital spending for the first three months of 2013 was $54.4 compared to $19.7 in 2012. Capital spending in 2013 is primarily attributable to continued investment for the strategic expansion of our growth businesses within the Aerospace Materials and In Process Separation segments, in addition to maintenance of business capital across the Company. In the second quarter of 2012, we restarted the carbon fiber expansion project that had been on hold since the first quarter of 2009, to support our growing demand for carbon fiber based composites. The construction part of the project is expected to be completed by the end of 2013, with aerospace qualified fiber production expected in 2016. We have also commenced production on a new prepreg manufacturing expansion project, with the construction phase expected to be competed in 2014 and commercial production expected to occur in 2015. In 2012, we also began expansion of our phosphine plant in Canada for our In-Process Separation segment, with construction expected to be completed in the first quarter of 2014. Our total capital spending for 2013 is expected to be up to approximately $300.0 for continuing operations.
Net cash provided by financing activities in 2013 was $31.6, compared to $13.2 in 2012. During the first three months of 2013, we received net proceeds of $117.8 from short and long term borrowings. This primarily consisted of net proceeds of $397.2 from the issuance of new 10 year, 3.5% debt in March 2013, which were used in part to pay $136.8 to redeem $135.2 face

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value of our 4.6% notes that we called for redemption in February 2013, $121.1 to repurchase $107.8 face value of our 6.0% notes due in October 2015, and $108.3 to repurchase $85.1 face value of our 8.95% notes due in July 2017. These repurchases were done under tender offers that commenced in February 2013. It also consisted of net borrowings of $78.0 from our Revolving Credit Facility, which was drawn down during the first quarter of 2013 for use in our expanded share repurchase program. We also received $8.8 of proceeds from stock option exercises, and had $2.1 of excess tax benefits related to share-based payments in the first quarter of 2013. These proceeds were offset primarily by our repurchase of $89.7 of treasury stock and payment of $7.4 of cash dividends during the first three months of 2013.
Share repurchases
In the first quarter of 2013, we repurchased 1,203,499 shares of our common stock at a total cost of $89.7. There were no repurchases in the first three months of 2012. Approximately $460.4 remained authorized under our stock buyback program as of March 31, 2013 from the $650.0 authorization announced on October 9, 2012. Pursuant to our stock buyback program, shares can be repurchased in open market transactions or privately negotiated transactions at our discretion. We expect to fund the remaining repurchase program with a portion of the cash proceeds from the sale of the Coating Resins business, which closed on April 3, 2013. The remaining repurchase program is expected to be completed by mid-2013. The repurchases will be made in compliance with, and at such times as permitted by, federal securities law and may be suspended or discontinued at any time. Dividends
On January 31, 2013, the Board of Directors declared a $0.125 per common share cash dividend, payable on February 25, 2013 to shareholders of record as of February 11, 2013. Cash dividends paid in the first quarter of 2013 and 2012 were $7.4 and $8.7, respectively. Dividends paid in the first three months of . . .

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