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CYT > SEC Filings for CYT > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for CYTEC INDUSTRIES INC/DE/

Form 10-Q for CYTEC INDUSTRIES INC/DE/


31-Oct-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 5, the former Coating Resins segment was sold on April 3, 2013, and is reported as discontinued operations for all periods presented. As discussed in Note 4, 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 structural composite materials (high performance automotive, motorsports, recreation, tooling and other structural materials markets) and process materials (aerospace, wind energy, and other process materials markets). 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.
Changes in selling volumes, selling prices, and raw material costs year on year are an important factor in profitability, especially in years of high volatility. Discussion of the year to year impact of these factors is provided in our segment discussion. In addition, higher global demand levels and, occasionally, operating difficulties at suppliers, have limited the availability of certain of our raw materials.
Change in method of accounting for pension and OPEB costs As previously reported, we have elected to change our method of accounting for actuarial gains and losses for our pension and other postretirement benefit ("OPEB") plans to a more preferable method permitted under GAAP. The new method recognizes actuarial gains and losses in our operating results in the year in which the gains and losses occur rather than amortizing them over future periods. Under the new method of accounting, these gains and losses are now measured annually at December 31 and recorded as a mark-to-market ("MTM") adjustment during the fourth quarter of each year. Any interim remeasurements triggered by a curtailment, settlement, or significant plan changes are recognized as an MTM adjustment in the quarter in which such remeasurement event occurs. The new method has been retrospectively applied to financial results of all periods presented. For additional information, see Note 3, "Accounting Methodology Change for Pension and Other Postretirement Benefit Plans" to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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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 the closing date of the acquisition. 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 4, "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 4, "Acquisitions," for further details.
Discontinued operations
Coating Resins
On April 3, 2013, we completed the sale of our remaining Coating Resins business to Advent International, a global private equity firm, for a total value of $1,133.0, including assumed liabilities of approximately $118.0. As a result, in the second quarter of 2013, we recorded an after-tax loss on the sale of $15.5, in addition to the charge of $4.3 that we recorded 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. For the three months ended September 30, 2013, we recorded after-tax losses of approximately $0.6, which primarily relate to certain tax liabilities related to taxable periods (or portions thereof) ending on or before April 3, 2013. The after-tax losses and the adjustment to carrying value are included in Loss on sale of discontinued operations, net of tax in the consolidated statements of income. The final price paid is subject to final working capital and other customary adjustments. Previously, on July 31, 2012, we completed the sale of the pressure sensitive adhesives ("PSA") product line of the former Coating Resins segment to Henkel AG & Co. for approximately $105.0, including working capital of approximately $15.0.

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.
Sale of Distribution business
On July 12, 2013, we sold the distribution business of our Industrial Materials segment, which we acquired as part of the Umeco acquisition in July 2012, to Cathay Investments for $8.6, subject to final working capital and other customary adjustments. As a result, in the second quarter of 2013, we recorded an after-tax charge of $12.5 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 loss on sale of discontinued operations, net of tax in the consolidated statements of income.
The results of operations of the former distribution business remain in continuing operations for all periods presented, as the result of operations for the business and assets and liabilities sold were not material to disclose as discontinued operations or assets held for sale.
Quarter Ended September 30, 2013, Compared With Quarter Ended September 30, 2012 Consolidated Results
Net sales for the third quarter of 2013 increased 2% to $463.9, compared with $455.4 for the third quarter of 2012. Lower selling volumes of 1% were more than offset by a 2% increase attributable to the acquisition of the Umeco businesses, acquired in late-July 2012, and price increases that improved sales by 1%. Aerospace and Industrial Materials both had higher sales compared to the third quarter of 2012. Aerospace Materials net sales increased by 7%, of which 3% was due to higher selling prices, 2% was due to new sales from the acquisition of Umeco and 2% was due to increased volumes. Net sales for Industrial Materials segment increased 1%. Sales for In Process Separation and Additive Technologies were lower versus the same period of 2012. In Process Separation sales decreased 7% due to lower volumes of 5% and lower net selling prices of 2%. Additive Technologies net sales decreased 1% due to lower selling prices, while volumes were consistent with 2012.
For a detailed discussion on revenues refer to the Segment Results section below.
Manufacturing cost of sales was $313.3, or 67.5% of net sales, in the third quarter of 2013, compared with $316.8, or 69.6% of net sales, in the third quarter of 2012. Total manufacturing costs decreased by $3.5, consisting of $2.7 of lower stranded costs in

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2013 following the divestiture of Coating Resins, $1.3 of lower costs and freight due to lower sales volumes, favorable fixed cost absorption of $2.1, lower raw material costs of $1.3, and lower restructuring costs of $0.6. These lower costs of sales were partially offset by higher costs of sales of $3.5 incurred in the third quarter of 2013 related to the Umeco business, which we acquired on July 20, 2012, and higher net period costs of $1.0 driven mostly by higher Aerospace demand.
Selling and technical service expenses were $35.3 in the third quarter of 2013 versus $35.6 in the third quarter of 2012. Research and process development expenses were $12.5 versus $13.0 in the prior year. Administrative and general expenses were $32.3 versus $37.2 in the prior year. Overall operating expenses decreased $5.7, from $85.8 in the third quarter of 2012 to $80.1 in the third quarter of 2013, primarily due to $5.9 of lower stranded costs previously allocated to our former Coating Resins business, $4.3 of lower costs associated with the acquisition of Umeco in 2012, a $2.1 reduction in restructuring charges in 2013 due to initiatives we took in the second quarter of 2012 in preparation for the sale of Coating Resins, and $0.7 of accelerated depreciation in the third quarter of 2012 related to the sale-leaseback of our Stamford research laboratory treated as a financing transaction during 2012. The reduction in operating expenses was partly offset by expenses of $4.3 for costs, including consulting fees, associated with the development and implementation of a single, global ERP system, and $2.5 of expenses that we incurred in 2013 from the operations of Umeco, which are largely headcount related, higher costs of $0.7 related to the sale of the distribution business.
Amortization of acquisition intangibles was $3.6 and $3.4 in the third quarter of 2013 and 2012, respectively. The slight increase is due to the amortization of intangible assets acquired as part of the Umeco acquisition in the third quarter of 2012.
Asset impairment charges were $2.7 in the third quarter of 2013, which is primarily for the write-off of plant assets at our manufacturing facility in Beelitz, Germany, under the restructuring initiatives within Industrial Materials to reduce costs associated with the acquired Umeco business. Other expense, net was $0.3 in the third quarter of 2013, equal to the third quarter of 2012.
Interest expense, net was $3.4 in the third quarter of 2013 compared with $7.0 in the prior year. The decrease of $3.6 is primarily due to higher capitalized interest of $2.4 driven by the restart of the carbon fiber expansion project in 2012 and the phosphine plant expansion, lower net interest expense of $1.8, mostly from the redemption of higher interest debt in the first quarter of 2013 with new debt issued at a lower rate, which was offset by lower interest income of $0.6.
The effective tax rate for continuing operations for the three months ended September 30, 2013 was a tax provision of 26.6%, or $16.1, compared to a tax provision of 17.4%, or $7.3, for the three months ended September 30, 2012. The effective tax rate for the three months ended September 30, 2013 was favorably impacted by a tax benefit of $3.7 primarily related to a change in tax rate with respect to the deferred tax assets and liabilities associated with an international jurisdiction and a net benefit related to the resolution of an international tax audit.
Net earnings from continuing operations for the third quarter of 2013 was $44.4 ($1.20 per diluted share), an increase of $9.7 from $34.7 ($0.74 per diluted share) reported for the same period in 2012. Included in the third quarter of 2013 was an after-tax charge of $3.9 ($0.11 per diluted share), which includes severance costs plus the Beelitz, Germany asset impairment charge noted above, related to cost reduction initiatives in our Industrial Materials segment to address the current market conditions and better position ourselves for profitable growth, $0.7 ($0.02 per diluted share) of costs to divest the Umeco distribution business, and a $0.2 income tax expense ($0.01 per diluted share) 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. 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. For the three months ended September 30, 2012, net earnings from continuing operations included pre-tax costs previously allocated to the operations of our discontinued Coating Resins segment of $15.7.
(Loss) earnings from discontinued operations, net of tax, were losses of $0.6 in the third quarter of 2013 compared with net earnings of $24.2 in 2012. For 2013, losses from discontinued operations, net of tax consisted of additional expenses for certain tax liabilities related to taxable periods (or portions thereof) ending on or before April 3, 2013. For the third quarter of 2012, discontinued operations consisted of the results of our former Coating Resins segment. 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 $39.2, the realized gain of $8.3 on the sale of our PSA product line in the third quarter, which is part of the former

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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.
Net earnings for the third quarter of 2013 were $43.8 ($1.19 per diluted share), a decrease of $14.6 from the net earnings of $58.4 ($1.24 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 (1)             % Change Due to
                            2013       2012      % Change    Price     Volume/Mix    Currency
North America             $ 149.7    $ 139.0         8 %       2 %         6  %         - %
Latin America (1)             1.7        0.9         -         -           -            -
Asia/Pacific                 16.0       14.0        14 %       5 %         9  %         - %
Europe/Middle East/Africa    68.5       66.9         2 %       5 %        (3 )%         - %
Total                     $ 235.9    $ 220.8         7 %       3 %         4  %         - %

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

Net sales increased 7% primarily due to a 4% increase in selling volumes, of which 2% is acquisition-related, and 2% was for existing business. The higher selling volumes for existing business in the third quarter of 2013 were primarily attributable to the continued ramp up of the 787 program and increased build rates for single aisle aircraft. Partially offsetting this growth was lower rotorcraft sales. Selling prices increased 3% and changes in exchange rates did not significantly impact net sales.
Earnings from operations were $40.7, or 17% of sales in 2013, compared with $40.4, or 18% of sales in 2012. The $0.3 increase in earnings consists of increased selling prices of $7.5, improved marginal income due to higher selling volumes of $1.8 including earnings from the Umeco acquisition, and favorable fixed cost absorption of $1.5. These favorable impacts in earnings were partially offset by $3.2 of higher period costs, including freight and warehousing, due to higher spending to meet increased volume demands, $2.7 of stranded costs associated with the sale of the coatings resins business earlier this year, higher operating expenses of $2.1 due to increased investment in research and technical services, $1.5 related to the planned carbon fiber maintenance turn-around and expenses related to our ongoing capital projects, a $0.8 unfavorable impact of foreign exchange rate changes, and higher material costs of $0.2.

Industrial Materials
                                              Total (1)             % Change Due to
                           2013      2012      % Change    Price      Volume/Mix    Currency
North America             $ 22.9    $ 22.2         3 %       1 %           2 %         - %
Latin America (1)            1.7       5.0         - %       - %           - %         - %
Asia/Pacific (1)             2.9       3.5         - %       - %           - %         - %
Europe/Middle East/Africa   43.4      39.4        10 %       - %          10 %         - %
Total                     $ 70.9    $ 70.1         1 %       1 %           - %         - %

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

Overall, net sales increased 1% compared to the third quarter of 2012 primarily due to selling price increases. Higher sales related to the acquisition of Umeco of $15.5, which closed in late July 2012, were offset by lower sales volumes of existing products in the high performance automotive and tooling sectors, and also in reduced sales of our process materials to the wind energy market. Sales for the third quarter of 2012 included $9.0 related to the distribution product line, which we divested on July 12, 2013. Changes in exchange rates did not significantly impact net sales.
Earnings from operations were $5.1, or 7% of net sales in 2013, compared with $1.6, or 2% of net sales in 2012. The $3.5 increase in earnings was driven by earnings from operations of $4.4 from the acquired Umeco industrial business, reduced

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manufacturing and operating expenses of $1.8 due to prior year restructuring initiatives, favorable fixed cost absorption of $0.8, lower raw material costs of $0.6, selling price increases of $0.4, and a favorable impact of $0.1 from changes in exchange rates. These were largely offset by lower marginal income of $3.7 due to the lower aforementioned sales volumes and $0.9 million of stranded cost increases related to the coating resins sale. In the third quarter of 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 that quarter. In Process Separation

                                                Total              % Change Due to
                           2013      2012      % Change    Price    Volume/Mix    Currency
North America             $ 20.8    $ 26.2      (21 )%       -  %      (21 )%        -  %
Latin America               30.8      28.2        9  %       -  %        9  %        -  %
Asia/Pacific                20.2      23.2      (13 )%      (4 )%       (6 )%       (3 )%
Europe/Middle East/Africa   19.4      20.5       (5 )%      (4 )%       (1 )%        -  %
Total                     $ 91.2    $ 98.1       (7 )%      (2 )%       (5 )%        -  %

Net sales were down 7%, primarily due to lower sales volumes of 5% and price decreases of 2%. The volume decrease is primarily from lower sales of phosphine gas as a result of a product quality issue that reduced sales by approximately $3.0 and lower phosphine gas demand in certain end markets, especially electronics. There was a decrease in sales in the alumina market, which was more than offset by increased demand for other mining products during the quarter. Selling prices decreased 2% and changes in foreign exchange did not significantly impact sales.
Earnings from operations were $20.4 or 22% of sales in 2013, compared with $25.4, or 26% of sales in 2012. The $5.0 decrease in earnings is principally due to decreased marginal income from lower selling volumes of $4.2, the impact of stranded costs of approximately $1.9 associated with the sale of the coating resins business earlier this year, price decreases of $1.6, higher net commercial and other operating expenses of $0.4 to support expected future growth. The decreases was partially offset by net favorable fixed cost absorption of $1.1, lower manufacturing costs and freight of $0.8, lower net overall raw material costs of $0.9, and the favorable impact from exchange rate changes of $0.4.

Additive Technologies
                                                Total              % Change Due to
                           2013      2012      % Change    Price    Volume/Mix    Currency
North America             $ 28.1    $ 29.5       (5 )%      (1 )%      (4 )%         -  %
Latin America                6.3       5.3       19  %      (4 )%      23  %         -  %
Asia/Pacific                17.2      16.8        2  %      (1 )%       5  %        (2 )%
Europe/Middle East/Africa   14.3      14.8       (3 )%      (1 )%      (7 )%         5  %
Total                     $ 65.9    $ 66.4       (1 )%      (1 )%       -  %         -  %

Net sales decreased 1% primarily due to lower selling prices. Selling volumes were flat compared to the third quarter of 2012. The specialty additives product line had lower sales due to planned rationalization of a low margin product, which was mostly offset by higher demand for polymer additive products in Europe and North America and higher sales of formulated resins products. Changes in exchange rates did not significantly affect net sales.
Earnings from operations were $9.0 or 14% of sales in 2013, compared with $10.3 or 16% of sales in 2012. The $1.3 decrease in earnings is due primarily from the impact of stranded costs of approximately $1.5 associated with the sale of the coating resins business earlier this year, unfavorable fixed cost absorption of $1.3, net sales price decreases of $0.8, an unfavorable impact of changes in exchange rates of $0.2. This was partially offset by an increased marginal income due to a favorable sales product mix of $1.1 and lower manufacturing costs of $0.9, and decreased commercial and administration expenses of $0.5. Nine Months Ended September 30, 2013, Compared With Nine Months Ended September 30, 2012
Consolidated Results
Net sales for the nine months ended September 30, 2013 were $1,455.1 compared with $1,237.4 for the nine months ended September 30, 2012. Overall, net sales increased 18% in 2013, of which 16% was attributable to the acquisition of the Umeco businesses, acquired in July 2012. Price increases improved sales by 2%, while overall selling volumes were consistent with 2012. The impact of exchange rates on sales was minimal. Aerospace Materials net sales increased by 12%, of which 6% was

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due to new sales from the acquisition of Umeco, higher volumes of 3%, and price increases of 3%. Net sales for Industrial Materials segment increased significantly, mostly due to new acquisition-related sales. Net sales for In Process Separation and Additive Technologies each decreased 1%, due to lower volumes.
For a detailed discussion on revenues refer to the Segment Results section below.
Manufacturing cost of sales was $978.6, or 67.3% of net sales, in the nine months ended September 30, 2013, compared with $850.6, or 68.7% of net sales, in the nine months ended September 30, 2012. Total manufacturing costs increased by $128.0, due mostly to incremental costs of sales of $142.4 incurred in the first nine months of 2013 related to the Umeco business, which we acquired on July 20, 2012. The increase was also due to higher period costs of $2.4, including a fixed asset write off of $1.4 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, unfavorable fixed cost absorption of $6.2 to control inventory levels, and $4.2 for higher freight and costs from increased sales volumes. The increases were partly offset by $15.6 favorable pension and OPEB MTM adjustments. Additionally, we had $7.9 of lower stranded costs in 2013 following the sale of Coating Resins, lower restructuring charges of $3.3 due to initiatives we took in the second quarter of 2012 in preparation for the sale of Coating Resins, and a $0.4 favorable impact from changes in exchange rates. Selling and technical service expenses were $110.7 in the nine months ended . . .

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