<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
-----
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/______/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ______ to ______
Commission file number 1-12372
-------
CYTEC INDUSTRIES INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3268660
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
----------------------------------------
(Address of principal executive offices)
973-357-3100
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 44,783,219 shares of Common
Stock, par value $.01 per share, were outstanding at June 30, 1998.
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Income 3
Consolidated Statements of Comprehensive Income 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Part II - Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
Exhibit Index 26
</TABLE>
2
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. - Consolidated Financial Statements
---------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $365.8 $315.5 $734.0 $622.0
Manufacturing cost of sales 250.6 219.2 509.0 454.1
Selling and technical services 39.0 34.8 77.2 69.4
Research and process development 11.4 10.7 22.3 21.0
Administrative and general 12.4 10.8 24.7 21.8
Amortization of acquisition intangibles 2.1 0.2 4.3 0.4
------ ------ ------ ------
Earnings from operations 50.3 39.8 96.5 55.3
Other income (expense), net 3.5 1.5 6.4 26.1
Equity in earnings of associated companies 6.1 4.0 11.2 8.5
Interest income (expense), net (5.1) 0.3 (9.8) 0.1
------ ------ ------ ------
Earnings before income taxes 54.8 45.6 104.3 90.0
Income tax provision 20.3 17.8 38.6 35.3
------ ------ ------ ------
Net earnings $ 34.5 $ 27.8 $ 65.7 $ 54.7
====== ====== ====== ======
Earnings per common share
Basic $ 0.76 $ 0.61 $ 1.45 $ 1.20
Diluted $ 0.73 $ 0.59 $ 1.38 $ 1.15
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
------------ --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $34.5 $27.8 $65.7 $54.7
Other comprehensive income:
Foreign currency translation adjustments (1.8) (2.1) (2.1) (8.3)
----- ----- ----- -----
Comprehensive income $32.7 $25.7 $63.6 $46.4
===== ===== ===== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Millions of dollars, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
--------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 24.4 $ 6.4
Accounts receivable, less allowance for doubtful accounts
of $9.8 and $10.0 in 1998 and 1997, respectively 254.7 226.9
Inventories 135.4 131.9
Deferred income taxes 73.8 70.7
Other current assets 28.5 16.9
Total current assets ----------- --------
516.8 452.8
Equity in net assets of and advances to associated companies 149.1 141.1
Plants, equipment and facilities, at cost 1,292.8 1,278.0
Less: accumulated depreciation (658.6) (648.3)
----------- --------
Net plant investment 634.2 629.7
Acquisition intangibles,
net of accumulated amortization 298.0 295.6
Deferred income taxes 81.9 82.2
Other assets 23.1 12.7
----------- --------
Total assets $1,703.1 $1,614.1
=========== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable 104.7 $ 116.3
Accrued expenses 243.3 239.0
Income taxes payable 50.6 19.7
----------- --------
Total current liabilities 398.6 375.0
Long-term debt 359.4 324.0
Other noncurrent liabilities 515.6 527.7
Stockholders' equity
Preferred stock, 20,000,000 shares authorized, issued and
outstanding 4,000 shares, Series C, $.01 par value, at
liquidation value of $25 per share 0.1 0.1
Common stock, $.01 par value per share, 150,000,000 shares
authorized, issued 48,143,605 in 1998 and 48,181,264 in 1997 0.5 0.5
Additional paid-in capital 197.8 203.9
Retained earnings 397.1 331.5
Unearned compensation (2.9) (3.5)
Accumulated translation adjustments (9.0) (6.9)
Treasury stock at cost, 3,360,386 shares in 1998 and 3,044,589
shares in 1997 (154.1) (138.2)
----------- --------
Total stockholders' equity 429.5 387.4
----------- --------
Total liabilities and stockholders' equity $1,703.1 $1,614.1
=========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
Six Months Ended
------------------
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
Cash flows provided by (used for) operating activities
Net earnings $ 65.7 $ 54.7
Non-cash items included in net earnings:
Equity in undistributed net earnings of associated companies (8.1) (2.2)
Depreciation 38.4 36.9
Amortization 5.8 1.5
Deferred income taxes (2.4) 5.5
Gain on sale of business - (22.3)
Other (0.8) -
Changes in operating assets and liabilities
Accounts receivable (27.7) (31.0)
Inventories (2.7) 2.0
Accounts payable (11.4) (13.4)
Accrued expenses 4.0 9.3
Income taxes payable 35.4 31.7
Other assets (14.0) (4.2)
Other liabilities (11.9) (31.7)
------ -------
Net cash flows provided by operating activities 70.3 36.8
------ -------
Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (49.7) (34.7)
Proceeds received on sale of assets - 94.8
Acquisition of business (9.0) -
Change in other assets 4.1 7.0
------ -------
Net cash flows (used for) provided by investing activities (54.6) 67.1
------ -------
Cash flows provided by (used for) financing activities
Proceeds from the exercise of stock options 2.6 3.8
Purchase of treasury stock (29.8) (41.8)
Change in long-term debt 35.4 (63.0)
Debt issuance cost (6.9) -
Proceeds received on sale of put options 1.0 0.5
------ -------
Net cash flows provided by (used for) financing activities 2.3 (100.5)
------ -------
Effect of exchange rate changes on cash and cash equivalents - (1.1)
------ -------
Increase in cash and cash equivalents 18.0 2.3
Cash and cash equivalents, beginning of period 6.4 20.4
------ -------
Cash and cash equivalents, end of period $ 24.4 $ 22.7
====== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(1) Basis of Presentation
---------------------
The unaudited consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The statements should be read in
conjunction with the consolidated financial statements and notes to the
consolidated financial statements contained in the Company's 1997 Annual Report
on Form 10-K.
In the opinion of management, the consolidated financial statements included
herein reflect all adjustments necessary for a fair statement of the information
presented as of June 30, 1998 and for the three and six month periods ended June
30, 1998 and 1997. Such adjustments are of a normal, recurring nature. The
consolidated statements of income for the three and six month periods ended June
30, 1998 are not necessarily indicative of the results to be expected for the
full year.
Certain reclassifications have been made to the consolidated statements of
income for the three and six month periods ended June 30, 1997 to conform to the
1998 presentation.
(2) Acquisitions
------------
On September 30, 1997, the Company acquired substantially all of the assets and
liabilities of Fiberite, Inc. ("Fiberite"), a leading worldwide supplier of
advanced composite materials for aerospace, industrial and recreational
applications, for $344.0 in cash (the "Fiberite Acquisition"). The assets and
liabilities were acquired from Stamford FHI Acquisition Corp., which acquired
the right to purchase Fiberite on April 20, 1997 from its previous owners. The
assets acquired include all of the businesses of Fiberite, except for their
satellite materials business. The Fiberite Acquisition was accounted for under
the purchase method of accounting.
On June 24, 1998, the Company acquired the Oreprep minerals processing business
from Baker Petrolite Corporation. Oreprep supplies mineral processing reagents
and services to the mining industry. The acquisition, accounted for under the
purchase method of accounting, will be integrated into the Company's existing
Mining Chemicals product line.
(3) Restructuring of Operations
---------------------------
Cash payments of $ 2.6 and $6.8 were made during the three and six months ended
June 30, 1998, respectively, related to the restructuring charges of $38.4 (pre-
tax) incurred during 1997. The reserve related to these restructurings at June
30, 1998 was $23.2. There have been no changes in the estimated completion date
of the payouts related to the restructuring plan.
7
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(4) Earnings Per Share
------------------
Basic earnings per common share excludes dilution and was computed by dividing
net earnings by the weighted-average number of common shares outstanding for the
period. Diluted earnings per common share was computed by dividing net earnings
by the weighted-average number of common shares outstanding for the period
adjusted (i.e., increased) for all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued.
The following represents the reconciliation of the numerators and denominators
of the basic and diluted EPS computations for net earnings for the three and six
month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended June 30
--------------------------
1998 1997
---- ----
Weighted Avg Per Weighted Avg. Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------- ------------ ------ ---------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
- ---------
Net earnings $ 34.5 45,442,875 $0.76 $ 27.8 45,423,344 $0.61
Effect of dilutive securities
- -----------------------------
Options - 1,960,922 - - 1,926,730 -
Performance/Restricted stock - 102,826 - - 99,090 -
Put Warrants 50,749 8,528
Diluted EPS
- -----------
Net earnings plus
assumed conversions $ 34.5 47,557,372 $0.73 $ 27.8 47,457,692 $0.59
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1998 1997
---- ----
Weighted Avg Per Weighted Avg. Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------- ------------ ------ ---------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
- ---------
Net earnings $ 65.7 45,450,386 $1.45 $54.7 45,518,974 $1.20
Effect of dilutive securities
- -----------------------------
Options - 1,936,560 - - 2,009,149 -
Performance/Restricted stock - 72,493 - - 93,790 -
Put Warrants 25,374 4,264
Diluted EPS
- -----------
Net earnings plus
assumed conversions $ 65.7 47,484,813 $1.38 $54.7 47,626,177 $1.15
</TABLE>
8
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(5) Recently Issued Statements Of Financial Accounting Standards
------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement, which becomes effective for
the Company beginning January 1, 2000, establishes accounting and operating
standards for hedging activities and derivative instruments, including certain
derivative instruments embedded in other contracts. The Company is reviewing the
potential impact, if any, of SFAS 133 on its financial statements.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which became effective for the
Company for the annual period beginning January 1, 1998. SFAS No.132 requires
additional information about the changes in the benefit obligation and fair
value of plan assets during the period, while standardizing the disclosure
requirements for pensions and other postretirement benefits. The Company will
include such disclosures in its Annual Report on Form 10-K for the year ended
December 31, 1998.
In June 1997, the Financial Accounting Standards Board released Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"). Both statements became effective for the Company beginning January 1,
1998. These statements require disclosure of certain components of changes in
equity and certain information about operating segments and geographic areas of
operation. The Company adopted SFAS 130 in the first quarter of 1998 (See
"Consolidated Statement of Comprehensive Income"). The Company has also adopted
SFAS 131 which does not require interim period reporting in the year of
adoption. The Company is completing its evaluation of the disclosure
requirements of SFAS 131 and will begin such disclosures in its Form 10-K filing
for the year ended December 31, 1998. Implementation of these statements will
not have any effect on the results of operations or financial position of the
Company.
(6) Inventories
-----------
Components of inventories at June 30, 1998 and December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- -------------
<S> <C> <C>
Finished goods 89.6 $ 77.5
Work in process 20.8 19.0
Raw materials & supplies 73.6 78.4
------ ------
184.0 174.9
Less reduction in LIFO cost (48.6) (43.0)
------ ------
$135.4 $131.9
====== ======
</TABLE>
9
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(7) Equity in Earnings of Associated Companies
------------------------------------------
Summarized financial information for the Company's equity in earnings of
associated companies is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
------------ ----------
Ended Ended
----- -----
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $152.5 $160.9 $306.8 $302.8
Gross profit 39.4 40.5 82.5 76.6
Net income 11.1 10.5 26.6 21.7
The Company's equity in earnings
of associated companies $ 6.1 $ 4.0 $ 11.2 $ 8.5
====== ====== ====== ======
</TABLE>
(8) Long-Term Debt
--------------
At June 30, 1998 and December 31, 1997, the Company's long-term debt consisted
of the following:
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
1998 1997
---- ----
<S> <C> <C>
Credit Facility - $123.0
Fiberite Acquisition Facility $ 40.0 200.0
Public Debt 319.4 -
Other - 1.0
------ ------
$359.4 $324.0
====== ======
</TABLE>
On May 11, 1998, the Company sold $120.0 principal amount of 6.846% MandatOry
Par Put Remarketed Securities(SM)* ("MOPPRS"(SM)*) due May 11, 2025 in a public
offering. The MOPPRS(SM) are senior unsecured obligations subject to mandatory
tender on May 11, 2005 (the "Remarketing Date") and were offered under the
Company's remaining available shelf registrations. The Company received an
aggregate of approximately $123.8 in proceeds from the sale before deducting
expenses associated with the sale. $104.0 of the net proceeds were used (i) to
repay approximately $84.0 of indebtedness outstanding under the Credit Facility,
(ii) to repay approximately $20.0 of indebtedness outstanding under the Fiberite
Acquisition Facility, and the remainder was used for general corporate purposes.
Except in limited circumstances, the MOPPRS(SM) will be subject to mandatory
tender to Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Remarketing
Dealer at 100% of the principal amount thereof, for remarketing on the
Remarketing Date. The interest rate on the MOPPRS(SM) from the Remarketing Date
to maturity will be equal to 5.951% plus an applicable spread. If the
Remarketing Dealer for any reason does
10
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
not purchase all tendered MOPPRS (SM) on the Remarketing Date or elects not to
remarket the MOPPRS (SM), the Company will be required to repurchase the MOPPRS
(SM) from the beneficial owners thereof on the Remarketing Date at 100% of the
principal amount thereof, plus accrued interest, if any.
In conjunction with the sale of the MOPPRS (SM), the Company made payments
aggregating $4.9 in the second quarter of 1998 to settle its Rate Lock
Agreements on $100.0 of 30-year debt. These payments will be amortized over the
life of the MOPPRS (SM) as an increase in interest expense of such securities.
(See also footnote 11.)
* Service Mark of Merrill Lynch & Co., Inc.
(9) Contingent Liabilities
----------------------
The Company is subject to substantial costs arising out of environmental laws
and regulations, which include obligations to remove or limit the effects on the
environment of the disposal or release of certain wastes or substances at
various sites. Liability for investigative, removal and remedial costs under
certain federal and state laws is retroactive, strict and joint and several. The
Company is currently a party to, or otherwise involved in, legal proceedings
directed at the cleanup of approximately 60 Superfund sites. Since the laws
pertaining to these sites provide for joint and several liability, a
governmental plaintiff could seek to recover all remediation costs at a waste
disposal site from any of the potentially responsible parties ("PRPs") for such
site, including the Company, despite the involvement of other PRPs. In some
cases, the Company is one of several hundred identified PRPs, while in others it
is the only one or one of only a few. Generally, where there are a number of
financially solvent PRPs, liability has been apportioned, or the Company
believes, based on its experience with such matters, that liability will be
apportioned based on the type and amount of waste disposed by each PRP at such
disposal site and the number of financially solvent PRPs. The Company is also
conducting remediation at, or is otherwise responsible for, a number of non-
Superfund sites. Proceedings involving environmental matters, such as alleged
discharge of chemicals or waste material into the air, water or soil, are
pending against the Company in various states. In many cases, future
environmental-related expenditures cannot be quantified with a reasonable degree
of accuracy. In addition, from time to time in the ordinary course of its
business, the Company is informed of, and receives inquiries with respect to,
new sites which may contain environmental contamination for which the Company
may be responsible.
It is the Company's policy to accrue and charge against earnings, environmental
cleanup costs when it is probable that a liability has been incurred and an
amount is reasonably estimable. As assessments and cleanups proceed, these
accruals are reviewed periodically and adjusted, if necessary, as additional
information becomes available. These accruals can change substantially due to
such factors as additional information on the nature or extent of contamination,
methods of remediation required, and other actions by governmental agencies or
private parties. Cash expenditures often lag behind the period in which an
accrual is recorded by a number of years.
11
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
In accordance with the above policies, as of June 30, 1998 and December 31,
1997, the aggregate environmental related accruals were $151.9 and $161.6,
respectively, of which $25.0 was included in accrued expenses in 1998 and 1997,
with the remainder included in other noncurrent liabilities. Environmental
remediation spending for the six months ended June 30, 1998 and 1997 was $10.8
and $12.9, respectively. All accruals have been recorded without giving effect
to any possible future insurance proceeds. Various environmental matters are
currently being litigated and potential insurance recoveries are unknown at this
time but are considered unlikely.
While it is not feasible to predict the outcome of all pending environmental
suits and claims, it is reasonably possible that there will be a necessity for
future provisions for environmental costs which, in management's opinion, will
not have a material effect on the financial position of the Company, but could
be material to the results of operations of the Company in any one accounting
period. The Company cannot estimate any additional amount of loss or range of
loss in excess of the recorded amounts. Moreover, environmental liabilities are
paid over an extended period and the timing of such payments cannot be predicted
with any confidence.
The Company is also a party to various other claims and routine litigation
arising in the normal course of its business. Based on the advice of counsel,
management believes that the resolution of such claims and litigation will not
have a material adverse effect on the financial position of the Company, but
could be material to the results of operations of the Company in any one
accounting period.
(10) Other Financial Information
---------------------------
Taxes paid for the six months ended June 30, 1998 and 1997 were approximately
$15.9 and $16.4, respectively. Interest paid for the six months ended June 30,
1998 and 1997 was approximately $7.1 and $1.3, respectively.
The Company's ratio of earnings to fixed charges for the three and six months
ended June 30, 1998 was 7.0 and 7.2 respectively. For purposes of computing the
ratio of earnings to fixed charges (a) earnings consist of earnings before
income taxes which include the Company's share of pre-tax equity in earnings of
associated companies, plus fixed charges less capitalized interest and (b) fixed
charges consist of interest on long-term debt, plus the portion of rentals
representative of an interest factor plus the Company's share of such charges of
associated companies.
In April 1997, the Company began a stock repurchase program for approximately
10% of the outstanding shares, or 4.5 million shares. Through June 30, 1998,
the Company had repurchased 1,555,950 shares at a cost of $66.0 under this
program. Depending on the level, price and timing of repurchases, borrowings may
be required.
During the first half of 1998, in connection with the Company's stock repurchase
program, the Company sold put options to an institutional investor in a series
of private placements exempt from registration under Section 4(2) of the
Securities Act of 1933. The put options entitled the holder to sell 400,000
shares of the Company's common stock to the Company on certain dates at
specified prices, subject to the Company's right, in lieu of purchasing such
shares, to pay the holder of the put the excess of the strike price over the
then market price of the shares in
12
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
either cash or additional shares of the Company's common stock. The Company
received premiums of approximately $1.0 on the sale of such options. During the
second quarter 200,000 put options written in February 1998 expired unexercised.
At June 30, 1998, 200,000 options were outstanding with strike prices of $54.49
and $55.99 per share.
The Company purchased the 200,000 shares subject to the options at their strike
prices for an aggregate of $11.0 in July.
(11) Subsequent Events and Other Information
---------------------------------------
On July 9, 1998 the Company entered into an agreement and plan of merger with
The American Materials & Technologies Corporation "(AMT)" (the "Merger
Agreement"). Under the Merger Agreement a newly formed subsidiary of the Company
will merge with and into AMT and all outstanding shares of common stock of AMT
will be converted into the equivalent of $6.00 per share in the Company's stock
valued at approximately $31 million. The Company intends to repay AMT's
outstanding debt of approximately $5.0 after the transaction is completed.
Subject to the receipt of the necessary regulatory approvals and the approval of
a majority of the outstanding common stock of AMT, the closing is expected to
occur in the fourth quarter of 1998.
AMT manufactures and markets advanced composite materials for customers in the
aerospace, defense, transportation, sporting goods, communication, and other
industries; with products ranging from graphite golf club shafts, fabrics,
graphite parts, fiberglass, quartz and other fibers requiring proprietary resin
formulations. AMT has signed a letter of intent to sell the graphite golf shaft
portion of its business. The Company anticipates integrating AMT's remaining
operations into its existing aerospace materials product line.
On July 31, 1998, the Company completed the purchase from Dyno Industrier ASA of
Oslo, Norway of Dyno's 50% interest in Dyno-Cytec, a European joint venture, and
Dyno's global amino coatings resin business for approximately $56 million.
Payment of the purchase price was funded under the Company's Credit Facility.
Dyno-Cytec produces and sells cross-linking resins for coating applications
primarily in Europe from a single manufacturing plant in Lillestrom, Norway. The
Company anticipates integrating the acquisition into its existing coating and
resin products product line.
On June 29, 1998 the Company announced that it is considering the possible
divestiture and other strategic options for its molding thermoset compounds
product line. No assurances can be given as to the results of and assessment of
these strategic options.
On completion of its review of strategic alternatives for its subsidiary Conap,
Inc., which was announced in the first quarter, the Company decided to retain
ownership of Conap.
13
<PAGE>
(Millions of dollars, except share and per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
- ---------------------
Second Quarter of 1998 versus Second Quarter of 1997
- ----------------------------------------------------
Net sales for the second quarter of 1998 were $365.8 as compared to the $315.5
in the second quarter of 1997. The increase is attributable to sales generated
as a result of the Fiberite Acquisition on September 30, 1997.
Sales for the second quarter 1998 outside of the United States represented 37%
of total revenue compared to 42% last year. The decrease was due to the
inclusion of Fiberite sales that are mostly U.S. based and the effect of
exchange rate changes with the largest impact coming from Asia-Pacific.
International sales were also negatively impacted in Latin America in our Mining
Chemicals product line where low copper prices have caused customers to reduce
the use of the Company's products.
Asia-Pacific sales represent 9% of total consolidated sales. The Company's
sales in the region are down 20% from the prior year period with exchange
accounting for approximately half of the decrease. The impact across the
Company's product lines is mixed. Building Blocks and some specialty chemical
product lines were most affected, although overall, the negative short term
impact on sales and earnings of the slowdown and the unfavorable exchange rate
changes is not material. An extended economic slowdown in that region, however,
could inhibit Cytec's growth.
Specialty Chemicals sales decreased $3.7, or 2.0%. The negative impact of
foreign exchange rates was approximately 3% of sales with selling prices
essentially flat. Sales volume, before the effects of exchange, was up 1% led by
the Coating and Resin products and Phosphine Chemicals product lines. Downtime
in the paper industry and low metal prices in the mining industry, which caused
customers to reduce operations, resulted in lower sales in those product lines.
Specialty Materials sales increased $77.0, or 136.6%, due primarily to the
generation of sales as a result of the Fiberite Acquisition. Including proforma
Fiberite sales from the second quarter of 1997, sales were up $6.5 or 5.1%.
Building Block sales decreased $22.9, or 32.1%. Lower selling prices resulted in
an 8% sales decline and volume declined 24%. This was attributable to several
factors. Acrylonitrile selling prices and volume were significantly below the
prior year period. This is due primarily to reduced demand from Asia compounded
by additional capacity brought to the marketplace. The cost of propylene, the
major raw material in acrylonitrile, was down sharply, offsetting much of the
impact of lower selling prices. Selling prices were especially lower for
methanol. In addition the methanol plant operated for only 20 days in the
quarter. This was the result of a planned maintenance shutdown, energy
curtailments from the local utility in June and high natural gas costs which
when combined with low selling prices made the economics of running the plant
less favorable.
Manufacturing cost of sales decreased from 69.5% in 1997 to 68.5% in 1998. 1998
manufacturing costs benefitted from lower raw materials cost, continued plant
efficiencies, the results of restructuring and an improved product mix.
14
<PAGE>
(Millions of dollars, except share and per share amounts)
Selling and technical service spending increased $4.2; approximately 88% of this
was due to the impact of the Fiberite Acquisition. As a percent of sales,
selling and technical service decreased reflecting the lower selling and
technical service spending per sales dollar in the aerospace market.
Research and process development costs increased $0.7 almost all due to the
Fiberite Acquisition. Costs in the Specialty Chemical product lines were
essentially flat as an increase in Polymer Additives and Paper Chemicals efforts
was offset by decreased efforts in the other Specialty Chemical product lines.
Those decreases were the result of more focused research and development
efforts.
Administrative and general expenses increased $1.6 with a majority due to the
Fiberite Acquisition. Other increases were in international areas, partly
offset by lower domestic spending.
The amortization of acquisition intangibles expense increase reflects the
goodwill associated with the Fiberite Acquisition.
Other income (expense), net increased $2.0 reflecting gains from the sale of
investments in unaffiliated companies.
Equity in earnings of associated companies increased $2.1 due to improved
operations for Criterion Catalyst. CYRO earnings were lower as a result of
reduced sales reflecting slowdowns at specific customer accounts.
Interest income (expense), net increased as a result of the increase in long-
term debt, primainly resulting from the Fiberite Acquisition. Interest expense
for the period was $5.6 compared to $0.2 in the same period of last year.
The income tax provision was reduced to a rate of 37% from 39% in 1997. This
was primarily due to improved tax planning in the foreign and state tax area as
well as benefits from increased sales through the Company's foreign sales
corporation.
Net earnings increased to $34.5, up 24% from the $27.8 for the same period last
year. Diluted earnings per share increased to $0.73 from the prior year period
of $0.59, a 24% increase.
First Half of 1998 versus First Half of 1997
- --------------------------------------------
Net sales for the first half of 1998 were $734.0 as compared to the $622.0 in
the first half of 1997. The increase is attributable to sales generated as a
result of the Fiberite Acquisition. Included in the first half of 1997 are
sales totaling $11.9 from the divested Acrylic Fibers product line.
Sales for the first half of 1998 outside of the United States represented 37% of
total revenue compared to 41% last year. The decrease was due to the inclusion
of Fiberite sales that are mostly U.S. based and the effect of exchange rate
changes from all regions of the world, particularly Asia-Pacific. International
sales were also negatively impacted in Latin America in our Mining Chemicals
product line where low copper prices have caused customers to reduce the use of
the Company's products. Coating and Resin products sales volumes were down in
Asia-Pacific, principally Korea and Taiwan. Paper Chemical sales volumes were up
in Asia-Pacific primarily due to new accounts.
15
<PAGE>
(Millions of dollars, except share and per share amounts)
Asia-Pacific sales represented 9% of total consolidated sales in the period. The
Company's sales in the region are down 15% from the prior year period with
exchange accounting for approximately half of the decrease. A significant
portion of the remaining decrease is due to lower selling prices, principally
for acrylonitrile, partially offset by higher Specialty Chemical selling prices.
Specialty Chemicals sales decreased $8.3, or 2.3%. The negative impact of
foreign exchange rates was approximately 3% of sales with selling prices
essentially flat. Sales volume, before the effects of exchange, was up 1% led by
the Water Treatment, Coating and Resin products, Polymer Additives and Phosphine
Chemicals product lines. Weak paper recycling and downtime at the paper mills,
plus low metal prices in the mining industry which caused certain customers to
reduce operations, resulted in lower sales in those product lines. In view of
the rate of growth in sales volume in the first half, the Company does not
expect historical levels of Specialty Chemicals sales volume growth to be
achieved for the full year.
Specialty Materials sales increased $159.4, or 144%, due primarily to the
generation of sales as a result of the Fiberite Acquisition. Including proforma
Fiberite sales from the first half of 1997, sales were up $28.4 or 11.8% which
reflected improvement primarily in the commercial aircraft sector.
Building Block sales decreased $27.3, or 20.6%. Lower selling prices and sales
volumes each accounted for approximately half of the decrease. This was
attributable to several factors. Acrylonitrile selling prices remained
significantly below the prior year period. Selling volumes were well below the
prior year period, all attributable to the second quarter. This was due
primarily to reduced demand, primarily from Asia, compounded by additional
capacity brought to the marketplace. The cost of propylene, the major raw
material in acrylonitrile, was down sharply, offsetting much of the impact of
lower selling prices. Selling prices were especially lower for methanol. In
addition, the methanol plant operated for only 20 days in the second quarter.
This was the result of a planned maintenance shutdown, energy curtailments from
the local utility in June and high natural gas costs which when combined with
low selling prices made the economics of running the plant less favorable.
Manufacturing cost of sales decreased to 69.3% in 1998 from 73.0% in 1997.
Included in 1997 manufacturing costs were restructuring charges of $18.6
relating primarily to manufacturing sites located in Botlek, the Netherlands and
Linden, New Jersey. Excluding this charge, manufacturing cost of sales in 1997
was 70.0%. Manufacturing costs in 1998 benefitted from lower raw materials
cost, continued plant efficiencies, the results of restructuring and an improved
product mix.
Selling and technical service spending increased $7.8, mainly due to the impact
of the Fiberite Acquisition. As a percent of sales, selling and technical
service decreased reflecting the lower selling and technical service spending
per sales dollar in the aerospace market.
Research and process development costs increased $1.3 with approximately half
due to the Fiberite Acquisition. Costs in Specialty Chemicals increased
principally in the Polymer Additive and Paper Chemicals product lines.
16
<PAGE>
(Millions of dollars, except share and per share amounts)
Administrative and general expenses increased $2.9 with approximately $2.1 due
to the Fiberite Acquisition. Other increases are in international subsidiaries
partially offset by lower domestic costs. As a percent of sales, administrative
expenses declined from 3.5% to 3.4%.
The amortization of acquisition intangibles expense increase reflects the
goodwill associated with the Fiberite acquisition.
Other income (expense), net of $6.4 in 1998 reflects gains from the sales of
investments in unaffiliated companies. The $26.1 in 1997 reflects a $22.3 gain
from the sales of divested product lines.
Equity in earnings of associated companies increased $2.7 primarily due to
stronger sales and improved operations for the Criterion Catalyst Company
partially offset by lower earnings from the CYRO joint venture.
Interest income (expense), net increased as a result of long-term debt
associated with the acquisition of Fiberite. Interest expense for the period
was $10.7 compared to $1.0 in the same period of last year.
The income tax provision was reduced to a rate of 37% from 39% in 1997. This
was primarily due to improved tax planning in the foreign and state tax area as
well as benefits from increased sales through the Company's foreign sales
corporation.
Net earnings increased to $65.7, up 20.1% from the $54.7 million for the same
period last year. Included in the 1997 net earnings is an after tax charge of
$11.3 relating to the restructuring charges mentioned earlier and an after tax
gain of $13.6 relating to the divestitures mentioned above. Diluted earnings
per share increased to $1.38 from the prior year period of $1.15, a 20%
increase.
17
<PAGE>
(Millions of dollars, except share and per share amounts)
Liquidity and Financial Condition
- ---------------------------------
At June 30, 1998, the Company's cash balance was $24.4, an increase of $18.0
from year-end 1997.
Net cash flows from operating activities totaled $70.3, compared to $36.8 in the
same period of 1997. The most significant factors affecting this increase were
the higher earnings in 1998 and the Company's decision to pre-fund $25.0 of its
postretirement medical benefits liability in 1997 through contributions to its
Voluntary Employee Benefit Association (VEBA) utilizing some of the proceeds
from the sale of the Acrylic Fibers product line, compared with $2.5 of such
prefunding payments in 1998.
Net cash flows used for investing activities totaled $54.6 compared to the $67.1
of net cash flows provided in the like period of 1997. Included in 1997 were
proceeds of $94.8 associated with the sale of the Acrylic Fibers product line
and $7.0 associated with the sale of other investments. Capital additions were
$15.0 higher than the same period last year due to three large construction
projects in the specialty product lines - the Benzotriazole light stabilizer
plant in Botlek, the Netherlands, the expansion of the surfactants plant in
Willow Island, West Virginia and the expansion of emulsion capacity in Mobile,
Alabama. For the full year 1998, the Company estimates capital spending in the
range of approximately $90.0 to $95.0.
The Company believes that based on internal cash generation it will be able to
fund operating cash requirements and planned capital expenditures through the
balance of 1998.
Net cash flows provided by financing activities totaled $2.3. This compares to
$100.5 of net cash flows used for financing activities for the same period in
1997. During the first half of 1998, 617,900 shares of treasury stock were
purchased at a cost of $29.8 as compared to the first half of 1997 when
1,084,450 shares were purchased at a cost of $41.8. In 1998, long-term debt
increased $35.4 which was partially offset by increased cash of $18.0. In 1997
the balance of proceeds from the sale of the Acrylic Fibers business were used
to pay down debt.
The Company sold an aggregate of $320.0 principal amount of senior debt
securities in public offerings in the first six months, consisting of (i) $100.0
principal amount of 6.50% Notes due March 15, 2003,(ii) $100.0 principal amount
of 6.75% Notes due March 15, 2008 and (iii) $120.0 principal amount of 6.846%
MOPPRS/SM/ due May 11, 2025. The securities were offered under the Company's
shelf registration statement which has now been fully utilized. The Company
received an aggregate of approximately $322.0 in proceeds from the sales before
deducting expenses associated with the sales. The proceeds were used to (1)
repay $160.0 of indebtedness under the Fiberite Acquisition Facility, (2) repay
$141.5 of indebtedness under the Credit Facility and (3) the remainder was used
for general corporate purposes.
In connection with the Fiberite Acquisition and in contemplation of the offering
of long-term debt securities, the Company entered into a series of rate lock
agreements (the "Rate Lock Agreements") with several banks commencing in
18
<PAGE>
(Millions of dollars, except share and per share amounts)
September 1997. Pursuant to the Rate Lock Agreements, the Company hedged
against the risk of an increase in treasury rates above the rates on the dates
it entered into the rate lock agreements on an aggregate of $300.0 in debt for
periods of up to 30 years. The Company made payments aggregating approximately
$11.2 to settle Rate Lock Agreements ($9.6 of which was paid during the first
half and the remainder in 1997), which payments will be amortized or recognized
over the life of the 6.50% Notes, 6.75% Notes and 6.846% MOPPRS/SM/ as an
increase in interest expense of such Notes.
During the first half of 1998, in connection with the Company's stock repurchase
program, the Company sold put options to an institutional investor in a series
of private placements exempt from registration under Section 4(2) of the
Securities Act of 1933. The put options entitled the holder to sell an
aggregate of 400,000 shares of the Company's common stock to the Company on
certain dates at specified prices, subject to the Company's right, in lieu of
purchasing such shares, to pay the holder of the put the excess of the strike
price over the then market price of the shares in either cash or additional
shares of the Company's common stock. The Company received premiums of
approximately $1.0 on the sale of such options. During the second quarter
200,000 put options, written in February 1998 expired unexercised. At June 30,
1998, 200,000 options were outstanding with strike prices of $54.49 and $55.99
per share. The Company purchased the 200,000 shares subject to the options at
their strike prices for an aggregate of $11.0 in July 1998.
Under the Series C Cumulative Preferred Stock agreement with American Cyanamid
Company, a subsidiary of American Home Products Corporation, the Company must
maintain a debt to equity ratio of no more than 2-to-1, a minimum fixed charge
coverage ratio of not less than 3-to-1 for the average of the fixed charge
coverage ratios for the four consecutive fiscal quarters most recently ended,
and must not incur more than $150.0 of debt unless the Company's equity is in
excess of $200.0. If the Company has more than $200.0 in equity, then the
Company may incur additional debt as long as its ratio of debt to equity is not
more than 1.5-to-1. At June 30, 1998, the Company had $359.4 of debt and $429.4
in equity as defined in the Series C Stock covenants and had the ability to
incur up to an additional $284.7 in debt.
At June 30, 1998, the Company's Credit Facility provided for unsecured revolving
loans ("Revolving Loans") of up to $200.0. The revolving loans are available
for the general corporate purposes of the Company and its subsidiaries,
including, without limitation, for purposes of making acquisitions permitted
under the Credit Facility. There were no outstanding borrowings under the Credit
Facility at June 30, 1998. The Credit Facility, which is scheduled to mature on
July 28, 2002, contains covenants customary for such facilities. The Company was
in compliance with all material terms, covenants and conditions of the Credit
Facility at June 30, 1998. On July 31, 1998 the Company paid approximately $56.0
for Dyno Industrier's 50% interest in Dyno-Cytec and Dyno's global cross-linking
resins business, all of which was funded under the Credit Facility.
At June 30, 1998, there was $40.0 of outstanding borrowings under the Fiberite
Acquisition Facility. The 364 day facility which contains a two-year term-out
option will expire on September 22, 1998. The Company had an additional $160
available for borrowing at June 30, 1998 to finance only acquisitions approved
by the lenders. The Company currently expects to replace the Fiberite
Acquisition Facility with a new 364 day facility providing for the same amount
19
<PAGE>
(Millions of dollars, except share and per share amounts)
of borrowings and with the same two year term-out. No assurances can be given as
to the Company's efforts in this area.
Other
- -----
The Company is conducting a comprehensive review of its information technology
systems ("IT Systems") and its process control and other systems that include
micro-controllers ("Non-IT Systems") to identify the systems that could be
affected by the "Year 2000" Issue. In addition, the Company plans to review its
customers' and suppliers' status with regard to this issue and the potential
impact of non-compliance by such parties on the Company's operations.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
systems that have time sensitive features may recognize a date using "00" in the
last two places as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations, and in the case of Non-IT systems which
are non-compliant, could have a material adverse impact on the integrity and
safety of the Company's chemical manufacturing processes.
The Company has developed a phased program to address its Year 2000 issues. The
first phase consisted of identifying the Company's IT and Non-IT Systems and was
completed in the first quarter of 1998. The second phase consists of
determining whether those systems are Year 2000 compliant, primarily based on
certifications from the vendors of such systems, and developing cost estimates
to remediate non-compliant systems. The second phase is largely complete. The
Company's current estimate is that it will cost $4.0 to $7.0 to remediate non-
compliant systems. This estimate may change materially as the Company continues
to review and audit the result of its work in the first two phases on a plant by
plant basis, and as the Company commences to implement required remediation. The
third phase of the Company's program will consist of remediating non-compliant
systems that are critical to the Company's operations. The Company's goal is to
complete the third phase by the first quarter of 1999. The Company then plans
to test critical systems and to remediate non-critical systems by the end of the
second quarter of 1999.
The Company has not yet determined the business impact of any non-compliant
systems nor has it developed any contingency plans for addressing any problems
in completing implementation of all necessary remediation by the Year 2000. The
Company has also not yet addressed the Year 2000 status of its material
customers and suppliers. The Company intends to develop preliminary plans for
these areas in the next several months which may need to be refined as more
information becomes available in 1999.
Failure to complete any necessary remediation by the Year 2000 may have a
material adverse impact on the operations of the Company. Failure of third
parties, such as customers and suppliers, to remediate Year 2000 problems in
their IT and Non-IT Systems (something the Company is unable to predict, correct
or quantify) could also have a material adverse impact on the operations of the
Company.
Comments on Forward-Looking Statements
- --------------------------------------
A number of the statements made by the Company in this Management's Discussion
and Analysis, or in other documents, including but not limited to the Company's
Annual Report to Stockholders, its press releases and its periodic reports to
20
<PAGE>
(Millions of dollars, except share and per share amounts)
the Securities and Exchange Commission, may be regarded as "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995.
Forward-looking statements include, among others, statements concerning the
Company's outlook for 1998 and beyond, the accretiveness of acquisitions,
pricing trends and forces within the industry, the completion dates of, and
expenditures for, capital projects, expected sales growth, cost reduction
strategies and their results, the effect of the Asian economic slowdown, long-
term goals of the Company, possible further restructurings, plans and
expectations regarding the Fiberite Acquisition and other statements of
expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts.
All predictions as to future results contain a measure of uncertainty and,
accordingly, actual results could differ materially. Among the factors that
could cause a difference are: changes in the general economy; changes in demand
for the Company's products or in the costs and availability of its raw
materials; the actions of competitors; the success of our customers;
technological change; changes in employee relations, including possible strikes;
government regulations; litigation, including its inherent uncertainty;
difficulties in plant operations and materials transportation; environmental
matters; difficulties in completing remediation of Year 2000 issues by the
Company, its suppliers or its customers; and other unforeseen circumstances.
Specific new or enhanced uncertainties as a result of the Fiberite Acquisition
include the Company's ability to achieve, and the rate at which it achieves,
cost reductions and other planned synergies, the build rates in the commercial
and military aerospace industries, and the impact of competitive products and
pricing. A number of these factors are discussed in the Company's filings with
the Securities and Exchange Commission.
21
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
-----------------
In connection with the Spin-off, the Company assumed from Cyanamid substantially
all liabilities for legal proceedings relating to Cyanamid's chemicals
businesses, other than any legal proceedings related to remediation of
Cyanamid's Bound Brook Facility. In connection with the Fiberite Acquisition,
the Company assumed responsibility for certain liabilities relating to
Fiberite's business. As a result, although Cyanamid or Fiberite is the named
defendant in cases relating to events prior to the Spin-off or the Fiberite
Acquisition, respectively, the Company is the party in interest and is herein
described as the defendant.
The Company is a defendant in twenty-four cases pending in state courts in
Jefferson, Harris, Harrison and Tarrant counties, Texas and in the U.S. District
Court for the Eastern District of Texas in which many plaintiffs seek damages
for injuries allegedly due to exposure to benzene, butadiene, asbestos or other
chemicals. Three of the cases involve several hundred plaintiffs, while the
remainder involve substantially fewer plaintiffs. All of these cases involve
multiple defendants. The Company is also one of multiple defendants in three
cases (originally brought in Texas by multiple plaintiffs who claimed they were
injured due to exposure to asbestos) which have been transferred by the Judicial
Panel for Multi-District Litigation to the United States District Court for the
Eastern District of Pennsylvania, for coordination of pretrial activities,
primarily discovery. The Company believes that its involvement in all but six
of these cases results from its former 50% ownership of Jefferson Chemical
Company, which the Company disposed of in 1975. It is not known at this time
how many plaintiffs eventually will assert claims against the Company.
The Company is a defendant in four suits pending in California Superior Court in
San Francisco County, which were filed by individuals or the personal
representatives of individuals allegedly injured as a result of exposure to
asbestos containing products. Another suit in which the Company is a defendant
has been removed to Federal Court and transferred by the Judicial Panel for
Multi-District Litigation to the United States District Court for the Eastern
District of Pennsylvania. These cases involve multiple defendants.
The Company is the defendant in a class action filed in Jefferson Parish Court,
Louisiana on behalf of persons residing in the city of Kenner, Louisiana
claiming damages allegedly caused by a sulfur dioxide emission from the
Company's Fortier facility in 1992. Prior to consolidation and certification of
the class, the original 29 cases had been remanded to state court following a
federal court ruling that the plaintiffs did not individually assert damages in
excess of the federal jurisdictional amount of $50,000. Trial of the claims of
32 randomly selected members of the class was completed in July. Post trial
memoranda will be submitted to the court during August 1998, after which the
court will render its decision.
The Company is also the defendant in two class actions filed in Jefferson Parish
Court, Louisiana, on behalf of persons who allegedly sustained injury as a
result of an explosion and fire at the Company's Fortier facility on February
21, 1996. The Company has conducted limited discovery in these cases and,
therefore, has little information on whether, or to what extent, most members of
the alleged class actually suffered any injury.
22
<PAGE>
The Company is one of several alleged processors of lead, lead pigments and/or
lead-based paints named as defendants in four cases pending in state and federal
courts in the states of New York and Ohio. The first suit, filed in New York
Supreme Court, New York County, by the City of New York, the New York Housing
Authority, and the New York City Health and Hospitals Corporation, seeks damages
for the cost of removing lead-based paints from New York City-owned buildings.
The second suit, filed in New York Supreme Court, Erie County, was brought on
behalf of two minor children, who seek damages for personal injuries allegedly
caused by ingestion of lead-based paints. The third suit is a class action
pending in the United States District Court for the Southern District of New
York in which two minor children have intervened and filed a complaint against
the Company and six other alleged processors of lead, lead pigments and/or lead-
based paints seeking injunctive relief, consisting of orders requiring the
defendants to contribute to court-administered funds to (i) pay for medical
monitoring of class members; (ii) provide abatement of lead-based paint hazards
in dwellings in the city of New York where class members reside; and (iii)
provide notification to class members. In all three cases, the Company is named
a defendant as the alleged successor to the MacGregor Lead Company, from which
the Company purchased certain assets in 1971. The fourth case is a class action
brought against the Company and ten other defendants in the Court of Common
Pleas in Cuyahoga County, Ohio on behalf of children with blood levels of lead
greater than 20 micrograms per deciliter. The plaintiffs seek compensatory and
punitive damages for injuries allegedly caused by exposure to lead-based paints.
The Company is one of several defendants in six suits filed in New Jersey State
Court in Middlesex County by, or on behalf of the estates of, individuals who
allegedly contracted cancer as a result of exposure to chemicals constituting,
or contained in products sold by the Company. Three of these cases involve
individuals who worked at the Allied Textile Printers Plant in Paterson, New
Jersey, and who allegedly contracted bladder cancer as a result of exposure to
benzidine dyes. A fourth case involving the Allied Textile site has been
brought in New Jersey Superior Court, Middlesex County, against the Company and
several other defendants on behalf of a class consisting of former employees of
Allied Textile. Plaintiffs in this action seek to compel defendants to
establish a medical monitoring program for the benefit of former employees of
Allied Textile who may have been exposed to benzidine containing dyes or other
carcinogenic chemicals in the course of their employment. Defendants are
alleged to have supplied such dyes and/or chemicals to Allied Textile.
Fiberite, Inc. and the Company were defendants in an antitrust action brought by
Culver City Composites in September 1997 against Fiberite, Inc. in the U.S.
District Court for the Central District of California. Following the Company's
agreement to acquire the stock of Culver City Composites' parent, American
Materials & Technologies Corporation, Culver City dismissed this action against
all defendants, with prejudice.
In August 1997, the EPA issued a Notice of Violation to the Company, its
contractor and subcontractors alleging certain violations of the asbestos air
regulations which apply to the demolition activities at the Company's Marietta,
Ohio plant. The alleged violations result from the alleged failure of the
contractor and its subcontractors to perform the demolition in accordance with
the terms of the agreement between the Company and the contractor.
See also the first four paragraphs of "Environmental Matters" under Item 1 of
the Company's 1997 Annual Report on Form 10-K, and Note 9 of the Notes to
Consolidated Financial Statements (unaudited) in Part I, item (1), which are
incorporated by reference herein.
23
<PAGE>
In addition to liabilities with respect to the specific cases described
previously, because the production of certain chemicals involves the use,
handling, processing, storage and transportation of hazardous materials, and
because certain of the Company's products constitute or contain hazardous
materials, the Company has been subject to claims of injury from direct exposure
to such materials and from indirect exposure when such materials are
incorporated into other companies' products. There can be no assurance that, as
a result of past or future operations, there will not be additional claims of
injury by employees or members of the public due to exposure, or alleged
exposure, to such materials.
Furthermore, the Company also has exposure to present and future claims with
respect to workplace exposure, workers' compensation and other matters, arising
from events both prior to and after the spin-off. There can be no assurance as
to the actual amount of these liabilities or the timing thereof.
Item 2. Changes in Securities
---------------------
(c) During the second quarter of 1998, in connection with the Company's stock
repurchase program, the Company sold put options to an institutional investor in
a series of private placements exempt from registration under Section 4(2) of
the Securities Act of 1933. The put options entitled the holder to sell an
aggregate of 200,000 shares of the Company's common stock to the Company on
certain dates at specified prices, subject to the Company's right, in lieu of
purchasing such shares, to pay the holder of the put option the excess of the
strike price over the then market price of the shares in either cash or
additional shares of the Company's common stock. The Company received premiums
of approximately $0.5 on the sale of such options. At June 30, 1998, 200,000
options were outstanding with strike prices of $54.49 and $55.99 per share. The
Company purchased the 200,000 shares subject to the options at their strike
prices for an aggregate of $11.0 in July 1998.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Company held its annual meeting of Common Stockholders on May 11,
1998. At this meeting, the stockholders voted on the election of
Directors.
(b) The only substantive matter voted on at the annual meeting was the
election of directors.
Messrs. D. Lilley and W. P. Powell were each elected Directors at the Annual
Meeting for a three-year term ending in 2001 by the following margins:
Name Votes For Votes Withheld
- ---- --------- --------------
D. Lilley 36,125,143 782,802
W. P. Powell 35,974,308 933,637
In addition, Mr. L. L. Hoynes, Jr. was re-elected to the Board by the unanimous
written consent of the sole holder of the Company's Series C Cumulative
Preferred Stock.
The terms of office as a Director of Messrs F. W. Armstrong, G. A. Burns, D. D.
Fry and J. R. Satrum continue after the meeting.
24
<PAGE>
Item 6.
- -------
Exhibits and Reports on Form 8-K
- --------------------------------
(a).
Exhibits
- --------
See Exhibit Index on page 26 for exhibits filed with this Quarterly Report on
Form 10-Q
(b).
Reports on Form 8-K
- -------------------
The Company filed two current reports on Form 8-K during the second
quarter of 1998:
Report dated April 16, 1998 citing press release announcing the Company's
earnings for the quarter ended March 31, 1998 and a restatement of the
Company's previously submitted financial data schedules for the periods
ending June 30, 1996 to September 30, 1997 due to the new accounting
standard regarding earnings per share (SFAS No. 128).
Report dated May 6, 1998 reporting the Company entering into an
Underwriting Agreement for the sale of $120 million of MandatOry Par Put
Remarketed Securities (SM) ("MOPPRS" (SM)) in a public offering.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYTEC INDUSTRIES INC.
By:/s/James P. Cronin
------------------------
James P. Cronin
Executive Vice President and Chief Financial Officer
August 11, 1998
25
<PAGE>
Exhibit Index
-------------
12 Computation of Ratio of Earnings to Fixed Charges for the three and six
months ended June 30, 1998 and 1997
27 Financial Data Schedule
99 Material incorporated by reference from Annual Report on Form 10-K
26
<PAGE>
Exhibit 12
Cytec Industries Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings before income taxes $54.5 $47.1 $106.7 $92.3
Add:
Interest on indebtedness net of
capitalized interest 6.7 0.7 13.1 2.4
Portion of rents representative
of the interest factor 1.7 1.3 3.4 2.7
----- ----- ------ -----
Earnings as adjusted 62.9 49.1 123.2 97.4
Fixed charges:
Interest on indebtedness 7.3 0.9 13.8 2.7
Portion of rents representative
of the interest factor 1.7 1.3 3.4 2.7
----- ----- ------ -----
Fixed charges $ 9.0 $ 2.2 $ 17.2 $ 5.4
----- ----- ------ -----
Ratio of earnings to fixed charges 7.0 22.3 7.2 18.0
----- ----- ------ -----
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 24,400
<SECURITIES> 0
<RECEIVABLES> 254,700
<ALLOWANCES> 9,800
<INVENTORY> 135,400
<CURRENT-ASSETS> 516,800
<PP&E> 1,292,800
<DEPRECIATION> (658,600)
<TOTAL-ASSETS> 1,703,100
<CURRENT-LIABILITIES> 398,600
<BONDS> 319,400
0
100
<COMMON> 500
<OTHER-SE> 428,900
<TOTAL-LIABILITY-AND-EQUITY> 1,703,100
<SALES> 734,000
<TOTAL-REVENUES> 734,000
<CGS> 509,000
<TOTAL-COSTS> 637,500
<OTHER-EXPENSES> (6,400)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,800<F1>
<INCOME-PRETAX> 104,300<F2>
<INCOME-TAX> 38,600
<INCOME-CONTINUING> 65,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,700
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.38
<FN>
<F1>THIS NUMBER REPRESENTS INTEREST EXPENSE, NET
<F2>THIS NUMBER INCLUDES EQUITY INTEREST IN NET INCOME OF ASSOCIATED COMPANIES OF
$11,200 FOR THE SIX MONTHS ENDED JUNE 30, 1998.
</FN>
</TABLE>
<PAGE>
Exhibit 99
Pursuant to Rule 12b-23 under the Securities and Exchange Act, the following
exhibit containing text from the Company's Annual Report on Form 10-K is filed
as to matters incorporated by reference in Part II, Item 1 ("Legal
Proceedings").
Environmental Matters
The Company is subject to various federal, state and foreign laws and
regulations which impose stringent requirements for the control and abatement of
air and water pollutants and contaminants and the manufacture, transportation,
storage, handling and disposal of hazardous substances, hazardous wastes,
pollutants and contaminants.
In particular, under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and various other federal and state laws, a current or
previous owner or operator of a facility may be liable for the removal or
remediation of hazardous materials at the facility. Such laws typically impose
liability without regard to whether the owner or operator knew of, or was
responsible for, the presence of such hazardous materials. In addition, pursuant
to the Resource Conservation and Recovery Act ("RCRA") and state laws governing
the generation, transportation, treatment, storage or disposal of solid and
hazardous wastes, owners and operators of facilities may be liable for removal
or remediation, or other corrective action at areas where hazardous materials
have been released at a facility. The costs of removal, remediation or
corrective action may be substantial, and the presence of hazardous materials in
the environment at any of the Company's facilities, or the failure to abate such
materials promptly or properly, may adversely affect the Company's abilities to
operate such facilities. CERCLA and analogous state laws also impose liability
for investigative, removal and remedial costs on persons who dispose of or
arrange for the disposal of hazardous substances at facilities owned or operated
by third parties. Liability for investigative, removal and remedial costs under
such laws is retroactive, strict, and joint and several.
The Clean Air Act and similar state laws govern the emission of pollutants into
the atmosphere. The Federal Water Pollution Control Act and similar state laws
govern the discharge of pollutants into the waters of the United States. RCRA
and similar state laws govern the generation, transportation, treatment,
storage, and disposal of solid and hazardous wastes. Finally, the Toxic
Substances Control Act regulates the manufacture, processing, and distribution
of chemical substances and mixtures, as well as the disposition of certain
hazardous substances. The costs of compliance with such laws and regulations
promulgated thereunder may be substantial, and regulatory standards under such
statutes tend to evolve towards more stringent requirements, which might, from
time to time, make it uneconomic or impossible to continue operating a facility.
Non-compliance with such requirements at any of the Company's facilities could
result in substantial civil penalties or the inability of the Company to operate
all or part of the facility.
In addition, certain state and federal laws govern the abatement, removal, and
disposal of asbestos-containing materials and the maintenance of underground
storage tanks equipment which contains or is contaminated by polychlorinated
biphenyls.
