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CYT > SEC Filings for CYT > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for CYTEC INDUSTRIES INC/DE/

Form 10-K for CYTEC INDUSTRIES INC/DE/


21-Feb-2014

Annual Report


Item 7.
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. It is assumed that the reader is familiar with the description of our business and risk factors contained in Part I of this report. Currency amounts are in millions, except per share amounts. Percentages are approximate.

GENERAL

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.
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 consistent with management's view of the business. North America consists of the United States ("U.S.") 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.
Increasing selling volumes, geographic expansion, and new product introductions are important factors of our profitability. Selling price changes and raw material cost changes year on year are also important factors of our profitability especially in years of high volatility. See our Segment Results for discussion of the year to year impact of these important factors. 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 U.S. generally accepted accounting principles ("GAAP"). The new method recognizes actuarial gains and losses, resulting from changes in actuarial assumptions and the differences between actual and expected returns on plan assets, 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 15, "Change in Pension Accounting," of Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. Segment realignment
We regularly review our segment reporting and classifications and may periodically change our reportable segments to align with strategic and operational changes.
As discussed below, the former Coating Resins and Building Block Chemicals segments are reported as discontinued operations for all periods presented, and the acquired Umeco business is reported partly in our Aerospace Materials segment, but mostly in our Industrial Materials segment, and includes results of operations since we acquired it on July 20, 2012.
In the first quarter of 2013, we began reporting separately the aerospace and industrial materials businesses from the former Engineered Materials and former Umeco segments into two new segments, Aerospace Materials and Industrial Materials. They are managed and reported separately to properly align our resources, assets, and strategy with target end-markets. Manufacturing assets and processes are similar although supply chains are dissimilar. We believe this is a more appropriate way to reflect how we manage the business going forward, and follows our strategy of focusing on aerospace and industrial markets separately. We believe this is more transparent and understandable to investors. The segment information presented herein reflects this change in our business segments.
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. To fund the transaction, we used approximately $170.0 from the draw-down of our existing $400.0 revolving credit facility (the "Revolving

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Credit Facility") with the balance funded by cash on hand. The acquisition is intended to strengthen our position as a leading manufacturer of composite materials, while offering significant opportunities for growth and value creation, particularly in industrial composites and process materials. The acquired Umeco business is being reported partly in the Aerospace Materials segment, but mostly in the Industrial Materials segment. See Note 2 of Notes to Consolidated Financial Statements 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 acquisition is expected to increase our global capacity for our metal extraction product ("MEP") line of our In Process Separation segment by approximately 15%, and provides the ability to further expand production at the site. We are in the process of completing and upgrading the capabilities of the acquired plant to meet appropriate safety and operating standards. Our expectation is that this work will be completed and we will begin production of our mining chemical products in mid-2014. The results of operations of the acquired business have been included in our In Process Separation segment since April 1, 2012. The acquisition was funded from our cash on hand and has been accounted for as an acquisition of a business. See Note 2 of Notes to Consolidated Financial Statements for further details. Discontinued Operations
Coating Resins
On April 3, 2013, we completed the divestiture of our remaining Coating Resins business to Advent International ("Advent"), a global private equity firm, for $1,015.0 plus assumed liabilities of $118.0, bringing the total value to $1,133.0. As a result, we recorded a cumulative after-tax loss on the sale of $16.9 in 2013. These cumulative after-tax losses are included in Net (loss) gain on sale of discontinued operations, net of tax in the consolidated statement of income for 2013. The final price paid and loss on sale 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. We recorded an after-tax gain on the sale of PSA of $8.6 in 2012, which is included in Net (loss) gain on sale of discontinued operations, net of tax in the consolidated statement of income. We also recorded cumulative after-tax charges of $24.7 in 2012 to adjust our carrying value of the Coatings disposal group to its fair value less cost to sell, based on the terms of the definitive agreement with Advent at that time. The charge is included in Net (loss) gain on sale of discontinued operations, net of tax in the consolidated statement of income for 2012.
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.
Sale of Industrial Materials distribution product line On July 12, 2013, we sold the Industrial Materials distribution product line, which we acquired from Umeco in July 2012, to Cathay Investments for $8.6, subject to final working capital and other customary adjustments. In 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 Net (loss) gain on sale of discontinued operations, net of tax in the consolidated statements of income. The results of operations of the former Industrial Materials distribution product line prior to its divestiture remain in continuing operations for all periods presented, as the results of operations for the business and assets and liabilities sold were not material to disclose as discontinued operations or assets held for sale. Associated company and minority interests As part of our investment in the former Coating Resins, we owned a 50% interest in SK Cytec Co., Ltd. and a majority share of two consolidated entities. Each of these entities was divested with the sale of Coating Resins in 2013. They were immaterial to the results of our operations, and are included in the results of our discontinued operations.
Building Block Chemicals
On February 28, 2011, we completed the sale of substantially all of the assets and certain liabilities of our Building Block Chemicals business (the "Business") to Cornerstone Chemical Company, an affiliate of HIG Capital, LLC (the "Purchaser"), pursuant to an Asset Purchase 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, which was subsequently paid in February 2013. 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 excluded from both continuing operations and segment

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results for all periods presented. In 2011, we recorded an after-tax gain of $36.5 on the sale of the business which is included in Net (loss) gain on sale of discontinued operations, net of tax on the consolidated statement of income for 2011.
RESULTS OF OPERATIONS

The following table sets forth the percentage of net sales of certain items in our consolidated statements of income:

Years ended December 31,                 2013       2012      2011
Net sales                               100.0 %   100.0  %   100.0 %
Manufacturing cost of sales              66.3      70.4       72.6
Gross profit                             33.7      29.6       27.4
Selling and technical services            7.6       9.0        9.4
Research and process development          2.5       3.2        3.4
Administrative and general                6.5       8.2        7.1
Amortization of acquisition intangibles   0.8       0.5        0.2
Net (loss) gain on sale of assets           -      (1.0 )      0.2
Asset impairment charge                   0.3         -          -
Earnings from operations                 16.0       7.7        7.6
Earnings from continuing operations       8.9       4.4        4.1

NET SALES BY SEGMENT AND GEOGRAPHIC AREA


                                                                                     Europe/
                                                                     Asia/        Middle East/
Net Sales                  North America       Latin America        Pacific          Africa           Total
                    2013
Aerospace Materials      $         609.4     $           5.5     $      66.9     $       279.0     $    960.8
Industrial Materials                95.4                12.2            11.9             196.8          316.3
In Process Separation               96.1               117.6            96.3              72.7          382.7
Additive Technologies              121.6                23.9            69.1              60.6          275.2
Total                    $         922.5     $         159.2     $     244.2     $       609.1     $  1,935.0
                    2012
Aerospace Materials      $         545.3     $           4.4     $      58.6     $       268.8     $    877.1
Industrial Materials                63.3                 6.8             6.5              99.8          176.4
In Process Separation              103.5               113.0            85.6              82.1          384.2
Additive Technologies              118.7                22.1            67.6              62.0          270.4
Total                    $         830.8     $         146.3     $     218.3     $       512.7     $  1,708.1
                    2011
Aerospace Materials      $         469.4     $           3.3     $      41.2     $       208.7     $    722.6
Industrial Materials                45.1                 0.5             1.1              19.9           66.6
In Process Separation               97.6               105.6            80.3              56.0          339.5
Additive Technologies              121.1                24.2            66.2              75.7          287.2
Total                    $         733.2     $         133.6     $     188.8     $       360.3     $  1,415.9

Net sales in the U.S. were $865.2, $795.0 and $686.2, or 45%, 47%, and 48% of total net sales, for 2013, 2012 and 2011, respectively. International net sales were $1,069.8, $913.1 and $729.7, or 55%, 53%, and 52% of total net sales, for 2013, 2012 and 2011, respectively.
We 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

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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.
For more information on our segments, refer to Note 19 of Notes to Consolidated Financial Statements and further discussions under "Segment Results" below.

YEAR ENDED DECEMBER 31, 2013, COMPARED WITH YEAR ENDED DECEMBER 31, 2012

Consolidated Results
Net sales for 2013 were $1,935.0, compared with $1,708.1 for 2012. Overall, net sales increased 13%, of which 10% was attributable to the acquisition of the Umeco businesses, acquired in July 2012, 1% was due to net volume increases in the existing businesses, and 2% related to selling price increases. Aerospace Materials net sales increased by 10%, of which 4% was 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 Additive Technologies increased 2% due to higher volumes, while net sales for In Process Separation were flat with the prior year. For a detailed discussion on sales, refer to "Segment Results" section below.
Manufacturing cost of sales was $1,283.1, or 66.3% of sales, for 2013 compared with $1,202.9, or 70.4% of sales, for 2012. The increase in manufacturing cost of sales of $80.2 compared to 2012 is due mostly to incremental costs of sales of $131.4 incurred in 2013 related to the Umeco business, which we acquired on July 20, 2012. The increase was also due to unfavorable fixed cost absorption of $12.1 due to efforts to control inventory levels, and $6.3 of higher expenses related to our ongoing capital projects. Increased sales volumes resulted in $4.4 of higher costs and higher freight of $4.2. Additionally, raw material costs were higher by $2.0 and we had a $1.8 unfavorable impact from changes in exchange rates. The increases were partly offset primarily by favorable pension and OPEB MTM adjustments of $59.0 compared to 2012. Additionally, stranded costs were lower by $10.8 in 2013 following the sale of Coating Resins, net period costs decreased by $8.5, net of a fixed asset write off of $1.4 related to a certain technology development program that will no longer proceed, and restructuring charges were lower by $3.7 compared to 2012, due to the initiatives we took in 2012 related to mitigation of continuing costs following the future separation of Coating Resins and plans to realign the supporting structure of our Industrial Materials and Aerospace Materials segments to take advantage of synergies from the Umeco acquisition.
Overall operating expenses (which include Selling and technical services, Research and process development, and Administrative and general expenses) decreased by $25.2 primarily due to favorable pension and OPEB MTM adjustments of $23.8 compared to 2012, $23.7 of lower stranded costs previously allocated to our former Coating Resins business, and lower restructuring charges of $13.4 due to initiatives we took in 2012 to mitigate continuing costs following the separation of Coating Resins and to realign the supporting structure of our Industrial Materials and Aerospace Materials segments to take advantage of synergies from the Umeco acquisition. We also incurred $8.4 of lower costs associated with the acquisition of Umeco in 2012, $2.5 of accelerated depreciation in 2012 related to the sale-leaseback of our Stamford research laboratory treated as a financing transaction, and had a favorable impact of changes in foreign exchange of $1.1. These decreases were partially offset by $31.6 of incremental expenses that we incurred in 2013 from the acquisition of Umeco, which are largely headcount related. Increases in operating expenses also included $10.4 for costs, including consulting fees, associated with the development and implementation of a single, global ERP system begun in 2013, higher costs of approximately $3.8 to support increased commercial activity and investment in technical services and research and development in our Aerospace Materials and In Process Separation businesses, higher costs of $1.2 related to the sale of the Industrial Materials distribution product line, and $0.7 for bad debt write offs.
Amortization of acquisition intangibles was $14.6 for 2013 versus $9.0 for 2012. The increase is due to the amortization of intangible assets acquired from the Umeco acquisition completed on July 20, 2012.
Net (loss) gain on sale of assets of $(16.7) in 2012 consists of the loss from the sale of our research facility in Stamford, CT. We sold the facility in September 2011, and lease back a portion of the facility. However, we were precluded from recognizing the sale at the time of the original transaction due to our continuing environmental obligation at the site, and we recorded the transaction as a financing transaction at the time. Upon satisfactory completion of our obligation in the fourth quarter of 2012, we recognized the loss for the remaining excess carrying value.
Asset impairment charges were $5.8 in 2013, which includes a charge of $3.0 for the write down of certain manufacturing assets acquired in our Nagpur, India facility. It also includes the write-off of $2.8 of plant assets at our manufacturing facility in Beelitz, Germany, which was shut down under the restructuring initiatives within Industrial Materials to reduce costs associated with the acquired Umeco business.

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Other (expense) income, net was an expense of $7.4 for 2013 versus income of $1.5 for 2012. Included in 2013 is a charge of $3.2 related to the closing and dissolution of our Process Materials Joint Venture in China that operated under the Industrial Materials business and had been acquired as part of the Umeco acquisition, a charge of $2.2 for environmental charges related to inactive sites, mainly in Canada, for revised remediation plans, and foreign exchange losses of $2.7. Included in 2012 is a benefit of $3.2 related to an MTM curtailment gain, and an expense of $1.1 for a foreign exchange loss on an acquired Umeco intercompany loan that was settled during the third quarter. Net loss on early extinguishment of debt in 2013 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 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 $18.2 for 2013 compared with $30.1 for 2012. The $11.9 decrease is primarily due to higher capitalized interest of $10.3 in 2013 due to the restart of the carbon fiber expansion project in 2012, and lower interest expense of $4.2, 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 $2.6.
The effective income tax rate for continuing operations for 2013 was a tax provision of 29.6%, or $72.3, compared to 26.6%, or $27.5, for 2012. For 2013, the rate was favorably impacted by a tax benefit of $5.1 primarily related to a change in tax rate with respect to the deferred tax assets and liabilities associated with an international jurisdiction and U.S. state taxes and a net benefit related to the resolution of an international tax audit. In addition, the rate 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 tax benefit of $1.5 primarily 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. These tax benefits were offset by a tax expense of $0.7 primarily related to the establishment of a deferred tax valuation allowance and other discrete deferred tax adjustments related to international entities. The American Taxpayer Relief Act of 2012 (2012 Tax Relief Act), as signed into law on January 2, 2013 extended a host of expired and expiring tax incentives for businesses. These business tax incentives retroactively reinstated and extended through 2013, include, but are not limited to, the research and development credit as well as the favorable look-through treatment of payments between related controlled foreign corporations. Although this legislation reinstated these favorable tax laws retroactive to January 1, 2012, accounting rules require that the tax impact of such changes be reflected in the period the law is enacted.
Net earnings from continuing operations for 2013 was $171.7 ($4.27 per diluted share), an increase of $96.0 from $75.7 ($1.62 per diluted share) reported for the same period in 2012. Included in continuing operations for 2013 was an after-tax benefit of $16.4 ($0.41 per diluted share) for pension MTM adjustments, consisting of the fourth quarter 2013 MTM adjustment, the portion deferred in inventory from the fourth quarter 2012 MTM, and the second quarter 2013 MTM adjustment triggered by the curtailment of pension plans related to the divestiture of the former Coatings business on April 3, 2013, and a $1.5 net income tax benefit ($0.04 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. The revision is primarily due to changes in the tax attributes of certain foreign subsidiaries. Also included in 2013 were the following after-tax charges: $24.5 ($0.61 per diluted share) related to the loss on the debt redemption, $5.6 ($0.14 per diluted share) related to restructuring activities, including cost reduction initiatives in our Industrial Materials segment to address the current market conditions and better position ourselves for profitable growth, $3.2 ($0.08 per diluted share) related to the dissolution of our Process Materials Joint Venture in China, $3.0 ($0.07 per diluted share) for the write down of certain manufacturing assets in Nagpur, India, $1.7 ($0.04 per diluted share) of environmental charges related to inactive sites, mainly in Canada, for revised remediation plans, and charges of $1.1 ($0.03 per diluted share) for costs to divest the Umeco distribution product line. Included in continuing operations for 2012 were charges for net after-tax benefit plan MTM adjustments of $35.9 ($0.77 per diluted share), after-tax restructuring charges of $14.6 ($0.31 per diluted share) across corporate functions to mitigate continuing costs following the anticipated sale of Coating Resins and personnel reductions in the acquired Umeco business; an after-tax loss on the sale of assets at our Stamford facility of $10.5 ($0.23 per diluted share); after-tax charges of $8.2 ($0.18 per diluted share) related to costs incurred for the acquisition of Umeco; after-tax charges of $3.8 ($0.08 per diluted share) related to the step-up of Umeco inventory to fair value as of the acquisition date; accelerated depreciation of $1.5 after-tax ($0.03 per diluted share) for the sale-leaseback of our Stamford facility treated as a financing transaction prior to recognizing the sale, and an after-tax foreign exchange loss of $0.7 ($0.01 per diluted share) on the settlement of an acquired intercompany loan from the Umeco transaction. Also included in 2012 is a tax benefit of $11.6 ($0.25 per diluted share) attributable to the reversal of certain tax reserves due to the completion of U.S. tax audits for the years ended 2004 through 2008, and the

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expiration of the statute of limitations in certain international tax jurisdictions; an income tax provision of $7.5 ($0.16 per diluted share) related to the establishment of a liability for un-repatriated earnings of foreign subsidiaries, which we can no longer consider permanently reinvested in those entities, due to the anticipated sale of Coating Resins; and $3.1 of income tax expense ($0.07 per diluted share) related to the 2012 repatriation of earnings of certain foreign subsidiaries associated with the sale process of our Coating Resins segment. For 2013 and 2012, net earnings from continuing operations included pre-tax charges previously allocated to the operations of our discontinued Coating Resins segment of $12.2 and $66.5, respectively.

Earnings from discontinued operations, net of tax, were $2.2 for 2013 compared to $101.3 for the comparable period in 2012. For 2013, earnings from discontinued operations, net of tax consisted of earnings from operations of our former Coating Resins segment of $31.6 prior to its sale, the loss on the sale of our former Coating Resins segment of $16.9, and a charge of $12.5 to adjust the carrying value of the Industrial Materials distribution product line, based . . .

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