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CYT > SEC Filings for CYT > Form 10-Q on 21-Jul-2014All Recent SEC Filings

Show all filings for CYTEC INDUSTRIES INC/DE/

Form 10-Q for CYTEC INDUSTRIES INC/DE/


21-Jul-2014

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.
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.
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. Segments
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 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 regularly review our segment reporting and classifications and may periodically change our reportable segments to align with operational changes.
As discussed below, the former Coating Resins segment was sold on April 3, 2013, and is reported as discontinued operations for all periods presented. Discontinued operations
Coating Resins
On April 3, 2013, we completed the sale of our remaining Coating Resins ("Coatings") business to Advent International ("Advent"), a global private equity firm, for a total value of $1,133.0, including assumed liabilities of approximately $118.0, resulting in a cumulative after-tax loss on sale of $16.9 in 2013. In the second quarter of 2013, we recorded an after-tax loss on the sale of $15.5, in addition to 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. After-tax earnings from operations of the discontinued business for the six months ended June 30, 2013 were $31.6.
In connection with the sale of the business to Advent, we agreed to retain certain liabilities, including liabilities for U.S. pension and other postretirement benefits and certain tax liabilities related to taxable periods (or portions thereof) ending on or before April 3, 2013. During the three months ended June 30, 2014, we recorded after-tax benefits of $0.5 and after-tax charges of $1.3 during the six months ended June 30, 2014, related to certain of these tax liabilities. In the first quarter of 2014, we recorded after-tax charges of approximately $1.8 for purchase price and working capital adjustments related to the divestiture. Additionally, in the second quarter of 2014, we recorded a tax benefit of $10.6 based on our best estimate of the purchase price allocation attributable to the Coatings business sold in various taxing jurisdictions.
The after-tax losses and the adjustment to carrying value are included in Net gain (loss) on sale of discontinued operations, net of tax in the consolidated statements of income. The results of operations and gain (loss) on sale of the former Coating Resins segment 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.

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Other divestitures
Sale of the Industrial Materials distribution product line On July 12, 2013, we sold the Industrial Materials distribution product line, which we acquired as part of the Umeco acquisition, to Cathay Investments for $8.6, subject to final working capital and other customary adjustments. 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 Net gain (loss) on sale of discontinued operations, net of tax in the consolidated statements of income for the three and six months ended June 30, 2013.
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.
As part of our acquisition accounting for Umeco in 2012, we established reserves related to income tax and value added tax liabilities of an entity that had been divested by Umeco in 2011, for periods that were under audit prior to it its divestiture. We continued to accrue interest through the end of 2013. In the first quarter of 2014, we agreed to a settlement for audit periods through March 31, 2009, which resulted in a benefit of approximately $3.6. The benefit is included in Net gain (loss) on sale of discontinued operations, net of tax in the consolidated statement of income for the six months ended June 30, 2014. Quarter Ended June 30, 2014, Compared With Quarter Ended June 30, 2013 Consolidated Results
Net sales for the three months ended June 30, 2014 were $527.1, up 3% compared with $513.8 for the three months ended June 30, 2013. Overall selling volumes for our continuing businesses were up 3%, while price increases improved sales by 1%. These increases were partially offset by the impact of the divestiture of the former Industrial Materials distribution product line in July 2013, which caused second quarter of 2014 net sales to be lower by 2%. The impact of changes in exchange rates on sales was not significant. Aerospace Materials net sales increased by 5%, of which 3% was from higher selling volumes and 2% was due to price increases. Net sales for Industrial Materials segment increased 2%. A 14% decrease caused by the divestiture of the former distribution product line was almost completely offset by 13% increase due to higher sales volume for remaining products. Higher prices increased sales by 1%, and the favorable impact from the changes in exchange rates increased sales by 2%. Net sales for Additive Technologies increased 3% due to higher volumes, while In Process Separation net sales decreased 2% due to lower sales volumes.
For a detailed discussion on revenues refer to the Segment Results section below.
Manufacturing cost of sales was $347.1, or 65.9% of net sales, in the second quarter of 2014, compared with $326.6, or 63.6% of net sales, in the second quarter of 2013. Total manufacturing costs increased by $20.5, due mostly to $5.4 of higher raw material costs, primarily in Aerospace Materials, increased materials costs of $6.7 related to higher sales volume, higher period costs of $6.6 related to inflationary factors, higher spending to meet increased volume demands, and other increased costs, and $2.6 for the unfavorable impact of changes to exchange rates. These increases were partly offset by reduced costs of $10.6 from the divestiture of the Industrial Materials distribution product line in July 2013. Also included in cost of sales in the second quarter of 2013 was a benefit of $8.0 from mark-to-market ("MTM") adjustments from the remeasurement of two of our U.S. pension and other postemployment benefit ("OPEB") plans triggered by the curtailment of the plans resulting from the Coatings business divestiture on April 3, 2013.
Overall operating expenses (which include Selling and technical services, Research and process development, and Administrative and general expenses) increased by $3.8 in the second quarter of 2014 compared to the second quarter of 2013. The increase was primarily due to the expiration of transition service agreements related to the Coatings sale resulting in $1.9 of higher administrative and general expenses, $1.2 from increased investment in research, $1.2 higher expenses related to incentive compensation and benefits, $0.7 of higher costs associated with the continuing development and implementation of a single, global ERP system that began in 2013, and a $0.6 unfavorable impact from changes in foreign exchange. These cost increases were partly offset by $1.5 of lower operating expenses from the divestiture of the Industrial Materials distribution product line in July 2013, and lower restructuring costs of $0.4. Amortization of acquisition intangibles was $3.7 and $3.8 in the second quarter of 2014 and 2013, respectively.
Asset impairment charges of $2.9 in the second quarter of 2013 were primarily for the write-off 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, net was $0.0 in the second quarter of 2014, compared to $7.7 in the second quarter of 2013. 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 $1.6 of foreign exchange losses.
Interest expense, net was $3.0 in the second quarter of 2014 compared with $4.8 in the prior year. The decrease of $1.8 is primarily due to higher capitalized interest of $1.9 driven mostly by the carbon fiber expansion project and the phosphine plant expansion, offset by lower interest income of $0.2.
The effective tax rate for continuing operations for the three months ended June 30, 2014 was a tax provision of 30.9%, or $28.0, compared to a tax provision of 29.6%, or $26.4, for the three months ended June 30, 2013. The effective tax rate for the three months ended June 30, 2014 was consistent with our underlying annualized effective rate of 31% given the absence of any significant non-recurring transactional events.
Earnings from continuing operations for the second quarter of 2014 were $62.5 ($1.70 per diluted share), a decrease of $0.1 from $62.6 ($1.51 per diluted share) reported for the same period in 2013. Included in the second quarter of 2014 were after-tax charges of $0.2 ($0.01 per diluted share) related to adjustments to previous restructuring initiatives. Included in the second quarter of 2013 was an after-tax benefit of $5.2 ($0.13 per diluted share) for an MTM adjustment from the remeasurement of two of our U.S. plans triggered by the curtailment of the plans resulting from the Coatings business divestiture on April 3, 2013. Also included in 2013 are after-tax charges of $3.2 ($0.08 per diluted share) related to the dissolution of our Process Materials Joint Venture in China, $2.0 ($0.05 per diluted share) for the write down of certain manufacturing assets in our Nagpur, India facility, $1.6 ($0.04 per diluted share) of environmental charges related to inactive sites, mainly in Canada, for revised remediation plans, and $0.4 ($0.01 per diluted share) of adjustments related to the stranded cost reduction initiatives and costs to divest the Umeco distribution business. Also included is a $2.0 million income tax benefit ($0.05 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.
Earnings from discontinued operations, net of tax, were $11.1 in the second quarter of 2014 compared with net losses of $28.0 in 2013. For 2014, Earnings
(loss) from discontinued operations, net of tax consists of after-tax benefits of $0.5 related to adjustments of certain tax liabilities of the Coatings business that we retained related to taxable periods (or portions thereof) ending on or before April 3, 2013. Additionally, it includes a tax benefit of $10.6 based on our best estimate of the purchase price allocation attributable to the Coatings business sold in various taxing jurisdictions. For 2013, it consisted of the loss on the sale of our former Coating Resins segment of $15.5, and a charge of $12.5 to adjust the carrying value of the distribution product line, based on the terms of the sale agreement with Cathay Investments completed on July 12, 2013. Net earnings for the second quarter of 2014 were $73.6 ($2.00 per diluted share), an increase of $39.0 from the net earnings of $34.6 ($0.83 per diluted share) in the same period in 2013. 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
                                                                      % Change Due to
                                                 Total %
                            2014       2013       Change     Price     Volume/Mix    Currency
North America             $ 163.6    $ 161.5         1 %       2 %        (1 )%         - %
Latin America (1)             2.5        1.1         -         -           -            -
Asia/Pacific                 17.8       16.1        11 %       3 %         8  %         - %
Europe/Middle East/Africa    78.5       71.2        10 %       2 %         8  %         - %
Total                     $ 262.4    $ 249.9         5 %       2 %         3  %         - %

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

Net sales increased 5% primarily due to a 3% increase in selling volumes. The higher selling volumes in the second quarter of 2014 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, mostly for replacement blades. Selling prices increased 2% and changes in exchange rates did not significantly impact net sales.

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Earnings from operations were $52.7, or 20% of net sales in 2014, compared with $54.6, or 22% of net sales in 2013. The $1.9 decrease in earnings consists of $6.7 of higher material costs, of which $5.4 is due to raw material inflation, $0.7 is related to usage of external fiber to meet increased sales demand, and $0.6 for yield variances. Additionally, we incurred $5.0 of higher period costs in 2014 due to inflationary factors, higher spending to meet increased volume demands, and increased costs for repairs, maintenance, waste disposal, and higher freight. We also had a $1.4 unfavorable impact of foreign exchange rate changes, and incurred $1.0 of higher operating expenses primarily due to the expiration of transition service agreements related to the Coatings sale and increased investment in research services were partly offset by lower commercial spend. These unfavorable impacts in earnings were partially offset by increased selling prices of $5.9, improved marginal income due to higher selling volumes of $4.5, and favorable fixed cost absorption of $1.8.

Industrial Materials
                                                                       % Change Due to
                                                  Total %
                               2014      2013      Change     Price     Volume/Mix    Currency
North America                 $ 29.6    $ 23.9      24  %       2 %           22  %      - %
Latin America (1)                4.0       3.2       -  %       - %            -  %      - %
Asia/Pacific (1)                 2.8       3.0       -  %       - %            -  %      - %
Europe/Middle East/Africa (2)   50.1      54.9      (9 )%       1 %          (13 )%      3 %
Total                         $ 86.5    $ 85.0       2  %       1 %           (1 )%      2 %

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

(2) Includes year over year decrease in volumes of $12.2 or 22% due to July 2013 divestiture of former distribution product line.

Net sales increased 2% compared to the second quarter of 2013. The decline in selling volumes of 1% consisted of a 14% decrease ($12.2), all in Europe, due to the July 2013 divestiture of the former distribution product line. This was offset by 13% sales volume increase for remaining product lines. The increased selling volumes in the continuing product lines were primarily in the structural industrial product line, led by higher demand in the high performance auto and aerospace tooling markets. Additionally, net sales increased by 1% from selling price increases and 2% from the favorable impact of changes in exchange rates. Earnings from operations were $9.6, or 11% of net sales in 2014, compared with $5.0, or 6% of net sales in 2013. The $4.6 increase in earnings was driven by higher selling volumes of $4.5, higher selling prices of $1.0, lower raw material costs of $0.5, lower operating expenses of $0.3, and favorable fixed cost absorption of $0.2. These increases in earnings were partly offset by increased period costs and freight of approximately $1.2 due to increased volumes and inflationary factors for continuing product lines, and a $0.5 unfavorable impact of foreign exchange rate changes.

In Process Separation
                                                                     % Change Due to
                                                 Total %
                            2014       2013       Change     Price    Volume/Mix    Currency
North America             $  31.0    $  25.9       20  %       -  %       20  %        -  %
Latin America                28.3       29.4       (4 )%      (1 )%       (3 )%        -  %
Asia/Pacific                 21.9       30.1      (27 )%       1  %      (26 )%       (2 )%
Europe/Middle East/Africa    22.7       21.0        8  %       1  %        7  %        -  %
Total                     $ 103.9    $ 106.4       (2 )%       -  %       (2 )%        -  %

Net sales were down 2%, due to lower sales volumes of 2%. The volume decrease in 2014, is primarily from weaker demand in the alumina market and our metal extraction product line, partly offset by higher demand in our phosphine product line, especially in the electronics end market, and also in our mineral processing product line. Sales volumes in the Asia/Pacific region were down due to order patterns related to specific mining customers, a softening demand in the alumina market and lower production in Indonesian mines. Selling prices and changes in foreign exchange rates did not significantly impact net sales. Earnings from operations were $28.5, or 27% of net sales in 2014, compared with $28.4, or 27% of net sales in 2013. The $0.1 increase in earnings is principally due to $1.3 of lower raw material costs, a $1.0 favorable impact from changes in exchange rates, lower freight and warehousing of $0.6 due to lower sales, and $0.2 of selling price increases. These increases are mostly

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offset by the expiration of transition service agreements related to the Coatings sale resulting in higher operating expenses of $1.8, and higher manufacturing costs of $0.8 due to higher overall plant operating costs. The net lower sales volumes had a relatively minor $0.2 unfavorable impact on earnings due to the favorable mix effect of strong sales of higher margin phosphine products.
Additive Technologies

                                                                  % Change Due to
                                              Total %
                           2014      2013      Change     Price    Volume/Mix    Currency
North America             $ 30.0    $ 31.5      (5 )%       -  %      (5 )%         -  %
Latin America                6.6       6.3       5  %       -  %       5  %         -  %
Asia/Pacific                17.7      18.0      (2 )%      (2 )%       1  %        (1 )%
Europe/Middle East/Africa   20.0      16.7      20  %      (4 )%      19  %         5  %
Total                     $ 74.3    $ 72.5       3  %      (1 )%       3  %         1  %

Net sales increased 3% primarily due to higher selling volumes. Specialty additives products had strong growth in all regions except North America, which was party offset by product rationalization of low margin products of $0.6. Additionally, we had lower demand for polymer additives products across all regions except Europe due to an increase in sales to the agriculture film market. Selling prices and changes in exchange rates did not significantly affect net sales.
Earnings from operations were $10.4, or 14% of net sales in 2014, compared with $12.2, or 17% of net sales in 2013. The $1.8 decrease in earnings is due primarily from unfavorable fixed cost absorption of $2.1, net sales price decreases of $0.9, higher raw material costs of $0.5, and the expiration of transition service agreements related to the Coatings sale resulting in higher commercial and administration expenses of $0.3. This was partially offset by an increased marginal income due to a favorable sales product mix of $1.6 and lower manufacturing costs of $0.6 mostly from lower freight and warehousing costs. Six Month Ended June 30, 2014, Compared With Six Months Ended June 30, 2013 Consolidated Results
Net sales for the six months ended June 30, 2014 were $1,016.2, up 3% compared to net sales of $991.2 for the six months ended June 30, 2013. Overall selling volumes for our continuing businesses were up 3%, while price increases improved sales by 1%. These increases were partially offset by the impact of the divestiture of the former Industrial Materials distribution product line in July 2013, which caused first half of 2014 net sales to be lower by 2%. The impact of changes in exchange rates on sales was minimal. Aerospace Materials net sales increased by 4%, of which 2% was due to price increases and 2% was from higher selling volumes. Overall net sales for Industrial Materials segment was flat. A 14% decrease caused by the divestiture of the former distribution product line in July 2013 was offset by an 11% increase due to higher sales volume for remaining products. Higher prices increased sales by 1%, and the favorable impact from changes in exchange rates increased sales by 2%. Net sales for In Process Separation increased 2% due to sales volume increases, while Additive Technologies net sales were flat compared to 2013.
For a detailed discussion on revenues refer to the Segment Results section below.
Manufacturing cost of sales was $676.2, or 66.5% of net sales, in the six months ended June 30, 2014, compared with $665.3, or 67.1% of net sales, in the six months ended June 30, 2013. Total manufacturing costs increased by $10.9, due mostly to a $14.2 of higher raw material costs, primarily in Aerospace Materials. Additionally, there were higher materials costs and freight of $10.0 related to higher sales volumes, $12.1 due to inflationary factors and higher spending to meet increased volume demands, a $3.9 unfavorable impact from changes in exchange rates, and unfavorable fixed cost absorption of $1.6. Partly offsetting these cost increases were reduced costs of $20.5 from the divestiture of the Industrial Materials distribution product line in July 2013, $5.5 of lower stranded costs associated with the sale of the Coating Resins business in April 2013, and $4.5 year on year benefit from favorable pension and OPEB MTM adjustments.
Overall operating expenses (which include Selling and technical services, Research and process development, and Administrative and general expenses) increased by $1.4 in the six months ended June 30, 2014 versus the six months ended June 30, 2013. The increase was primarily due to $3.1 of higher costs associated with the continuing development and implementation of a single, global ERP system that began in 2013, and $2.2 of higher costs to support sales volume increases, net of year to date stranded costs savings associated with the sale of the Coating Resins business in April 2013. These costs were offset by $3.0 of lower operating expenses from the divestiture of the Industrial Materials distribution product line in July 2013, and lower restructuring costs of $1.0.

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Amortization of acquisition intangibles was $7.3 and $7.5 in the first six months of 2014 and 2013, respectively.
Asset impairment charges of $2.9 in the first six months of 2013 were primarily for the write-off 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.
Other expense, net was $0.5 in the first six months of 2014 compared to $8.5 in the first six months of 2013. In 2013, Other expense, net included 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.
Loss on early extinguishment of debt in 2013 consisted 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 $6.2 for the six months ended June 30, 2014 compared with $11.5 in the prior year. The decrease of $5.3 is primarily due to lower interest expense of $2.4, mostly from the redemption of higher interest debt in the first quarter of 2013 with new debt issued at a lower rate, and higher capitalized interest of $3.7 related to the ongoing major capital projects in . . .

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