<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, 1999
-------------
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: 42,800,367 shares of Common
Stock, par value $.01 per share, were outstanding at June 30, 1999.
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
INDEX
Page
Part I - Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Part II - Other Information 22
Item 1. Legal Proceedings 22
Item 4 Submission of Matters to a Vote of
Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Exhibit Index 26
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Consolidated Financial Statements
---------------------------------
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $359.1 $365.8 $714.4 $734.0
Manufacturing cost of sales 246.9 250.6 496.9 509.0
Selling and technical services 37.3 39.0 74.5 77.2
Research and process development 9.6 11.4 19.8 22.3
Administrative and general 13.2 12.4 24.6 24.7
Amortization of acquisition intangibles 2.6 2.1 5.3 4.3
------ ------ ----- -----
Earnings from operations 49.5 50.3 93.3 96.5
Other income, net 0.6 3.5 2.9 6.4
Equity in earnings (losses) of associated companies (0.2) 6.1 4.0 11.2
Interest expense, net 6.8 5.1 13.6 9.8
------ ------ ----- -----
Earnings before income taxes 43.1 54.8 86.6 104.3
Income tax provision 15.1 20.3 30.3 38.6
------ ------ ----- ----
Net earnings $28.0 $34.5 $56.3 $65.7
====== ====== ===== =====
Earnings per common share
Basic $0.65 $0.76 $1.31 $1.45
Diluted $0.63 $0.73 $1.26 $1.38
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<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 1999 1998
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 27.7 $ 1.7
Accounts receivable, less allowance for doubtful
accounts of $9.2 in 1999 and 1998 246.8 241.3
Inventories 133.8 140.5
Deferred income taxes 69.1 72.9
Other current assets 23.6 21.2
------ ------
Total current assets 501.0 477.6
Equity in net assets of and advances to associated
companies 145.4 147.4
Plants, equipment and facilities, at cost 1,361.5 1,363.0
Less: accumulated depreciation (706.6) (695.5)
-------- --------
Net plant investment 654.9 667.5
Acquisition intangibles,
net of accumulated amortization 342.3 349.5
Deferred income taxes 62.0 62.6
Other assets 24.2 26.0
-------- --------
Total assets $1,729.8 $1,730.6
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ - $10.3
Accounts payable 98.5 99.9
Accrued expenses 224.4 243.9
Income taxes payable 56.7 40.3
-------- --------
Total current liabilities 379.6 394.4
Long-term debt 416.5 419.5
Other noncurrent liabilities 466.0 485.7
Stockholders' Equity
Preferred stock, 20,000,000 shares authorized;
issued and outstanding 4,000
shares, Series C Cumulative,
$.01 par value at liquidation value of $25 share 0.1 0.1
Common stock, $.01 par value per share, 150,000,000
shares authorized; issued 48,132,640 in 1999 and
48,142,961 in 1998 0.5 0.5
Additional paid-in capital 161.5 162.4
Retained earnings 512.4 456.2
Unearned compensation (3.1) (1.7)
Accumulated translation adjustments (14.6) (5.1)
Treasury stock, at cost, 5,332,273 shares in 1999 and
4,952,881 shares in 1998 (189.1) (181.4)
-------- --------
Total stockholders' equity 467.7 431.0
-------- --------
Total liabilities and stockholders' equity $1,729.8 $ 1,730.6
======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of dollars)
Six Months Ended
June 30,
1999 1998
---- ----
Cash flows provided by (used for) operating activities
Net earnings $56.3 $65.7
Noncash items included in earnings:
Equity in undistributed earnings of associated companies 0.8 (8.1)
Depreciation 40.5 38.4
Amortization 6.1 5.8
Deferred income taxes 3.8 (2.4)
Gain on sale of assets (2.9) -
Other 0.4 (0.8)
Changes in operating assets and liabilities:
Accounts receivable (13.5) (27.7)
Inventories 4.4 (2.7)
Accounts payable 1.4 (11.4)
Accrued expenses (9.7) 4.0
Income taxes payable 16.3 35.4
Other assets (3.8) (14.0)
Other liabilities (14.6) (11.9)
------ -----
Net cash flows provided by operating activities 85.5 70.3
------ -----
Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (37.6) (49.7)
Proceeds from sale of assets 8.0 -
Acquisition of business (4.0) (9.0)
Change in other investments - 4.1
------ -----
Net cash flows used for investing activities (33.6) (54.6)
------ -----
Cash flows provided by (used for) financing activities
Proceeds from the exercise of stock options and warrants 0.8 2.6
Purchase of treasury stock (13.0) (29.8)
Change in short-term borrowings (10.3) -
Change in long-term debt (3.0) 35.4
Debt issuance costs - (6.9)
Proceeds received on sale of put options 0.6 1.0
------ -----
Net cash flows (used for) provided by financing activities (24.9) 2.3
------ -----
Effect of exchange rate changes on cash and cash equivalents (1.0) -
------ -----
Increase in cash and cash equivalents 26.0 18.0
Cash and cash equivalents, beginning of period 1.7 6.4
------ -----
Cash and cash equivalents, end of period $27.7 $24.4
====== =====
See accompanying Notes to Consolidated Financial Statements.
5
<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 1998 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, 1999 and for the three and six months ended June 30,
1999 and 1998. Such adjustments are of a normal, recurring nature. The
consolidated statements of income for the three and six months ended June 30,
1999 are not necessarily indicative of the results to be expected for the full
year.
(2) Acquisitions and Dispositions
------------------------------
On January 25, 1999, the Company acquired assets of the Nottingham Company's
industrial minerals product line for $4.0. The acquisition was recorded under
the purchase method of accounting and resulted in an excess of the purchase
price over the assets acquired of $3.5 which is included in Acquisition
Intangibles in the Consolidated Balance Sheet and will be amortized on a
straight-line basis over a period of up to 40 years. The acquired business was
integrated into the Company's existing Water and Industrial Process Chemicals
segment.
On January 21, 1999, the Company sold substantially all of the assets of its
engineered molding compounds business excluding land, buildings and one product
line to Rogers Corporation of Manchester, Connecticut for $4.3.
During 1998 the Company acquired assets of the OrePrep minerals processing
product line, Dyno Industrier's global amino coating resins business, which
consisted primarily of Dyno's 50% interest in the former Dyno-Cytec joint
venture, and The American Materials and Technologies Corporation. All three
acquisitions have been accounted for under the purchase method of accounting and
consolidated results of operations have been included from the date of
acquisition. In addition, on November 23, 1998, the Company completed the sale
of its bulk molding compounds business. For a more detailed description of the
1998 acquisitions and dispositions, refer to Note 2 of the consolidated
financial statements, which is incorporated by reference herein and contained in
the Company's 1998 Annual Report on Form 10-K.
(3) Restructuring of Operations
----------------------------
Cash payments related to the $38.4 of pre-tax restructuring charges incurred
during 1997 were $7.7 for the six months ended June 30, 1999 and $12.9 and $8.4
for the years ended December 31, 1998 and 1997, respectively. At June 30, 1999,
the remaining liability to be paid was $10.0, essentially all of which is for
employee related costs.
6
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
The payouts and personnel reductions related to the restructuring plan are
expected to be substantially completed by the end of 1999 with the exception of
certain long-term payouts for employee severance.
(4) Earnings Per Share (EPS)
------------------------
Basic earnings per common share excludes dilution and was computed by dividing
net earnings by the weighted-average number of common shares outstanding, which
includes shares outstanding (less performance and restricted shares for which
vesting criteria have not been met) plus deferred stock awards under the 1993
Stock Award and Incentive Plan, weighted for the period outstanding. Diluted
earnings per common share was computed by dividing net earnings by the sum of
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 and any
proceeds thereof had been used to repurchase common stock.
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
months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended June 30,
| 1999 | 1998
| ---- | ----
| 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 EP | |
- --------- | |
Net earnings | $28.0 42,971,313 $0.65 | $34.5 45,442,875 $0.76
| |
Effect of dilutive securities | |
- ----------------------------- | |
Options | - 1,665,072 - | - 1,960,922 -
Performance/Restricted stock | - 78,036 - | - 102,826 -
Warrants | - 5,426 - | - - -
Put options | - - - | - 50,749 -
Diluted EPS | |
- ----------- | |
Net earnings divided by the | |
weighted average shares plus | |
assumed conversions | $28.0 44,719,847 $0.63 | $34.5 47,557,372 $0.73
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
| 1999 | 1998
| ---- | ----
| 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 | $56.3 43,074,257 $1.31 | $ 65.7 45,450,386 $ 1.45
| |
Effect of dilutive securities | |
- ----------------------------- | |
Options | - 1,547,716 - | - 1,936,560 -
Performance/Restricted stock | - 74,202 - | - 72,493 -
Warrants | - 6,560 - | - - -
Put options | - - - | - 25,374 -
Diluted EPS | |
- ----------- | |
Net earnings divided by the | |
weighted average shares plus | |
assumed conversions | $56.3 44,702,735 $1.26 | $ 65.7 47,484,813 $ 1.38
</TABLE>
7
<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 ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for hedging activities and derivative
instruments, including certain derivative instruments embedded in other
contracts. As originally issued, SFAS 133 would have been effective for the
Company beginning January 1, 2000. However, in July 1999 the FASB issued SFAS
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133,"which delays the effective date of
SFAS 133 by one year. SFAS 133 will now become effective for the Company
beginning January 1, 2001. The Company is reviewing the potential impact, if
any, of SFAS 133 on its consolidated results of operations and financial
position.
(6) Inventories
-----------
The components of inventories at June 30, 1999 and December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Finished goods $ 78.6 $ 87.6
Work in process 17.9 16.0
Raw materials & supplies 75.8 75.4
------- -------
172.3 179.0
Less reduction in LIFO cost (38.5) (38.5)
------- -------
$ 133.8 $ 140.5
======= =======
</TABLE>
(7) Equity in Earnings (Losses) of Associated Companies
---------------------------------------------------
Summarized financial information for the Company's equity in earnings (losses)
of associated companies for the three and six months ended June 30, 1999 and
1998 was as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $128.1 $152.5 $259.2 $306.8
Gross profit 24.6 39.4 57.5 82.5
Net income (loss) (1.0) 11.1 7.8 26.6
------ ------ ------ ------
The Company's equity in earnings
(losses) of associated companies $(0.2) $6.1 $4.0 $11.2
====== ====== ====== ======
</TABLE>
The above associated companies' information for 1998 includes the results of the
former Dyno-Cytec joint venture, which the Company acquired on July 31, 1998.
8
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(8) Long-Term Debt
--------------
At June 30, 1999 and December 31, 1998, the Company's long-term debt consisted
of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Credit Facility $97.0 $100.0
364-Day Facility - -
Public Debt 319.5 319.5
------ ------
$416.5 $419.5
====== ======
</TABLE>
On May 14, 1999, the Company entered into an interest rate swap agreement
wherein the counterparty agreed to pay Cytec a fixed interest rate of 6.2375%
and Cytec agreed to pay the counterparty a floating interest rate equal to the
six-month London Interbank Offered Rate ("LIBOR") on a notional amount of $25.0.
The swap agreement matures in March, 2008 and effectively converts $25.0 of the
Company's 6.75% fixed rate borrowings due on March 15, 2008 to a floating rate.
The fair value of the swap agreement is not recognized in the financial
statements. Interest rate differentials paid or received under this agreement
are recorded as adjustments to interest expense.
(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.
9
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
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.
In accordance with the above policies, as of June 30, 1999 and December 31,
1998, the aggregate environmental related accruals were $130.6 and $136.1,
respectively, of which $25.0 was included in accrued expenses as of both dates,
with the remainder included in other noncurrent liabilities. Environmental
remediation spending for the six months ended June 30, 1999 and 1998 was $7.5
and $10.8, respectively. All accruals have been recorded without giving effect
to any possible future insurance proceeds.
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 that, in management's opinion, will
not have a material adverse effect on the consolidated financial position of the
Company, but could be material to the consolidated 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) Comprehensive Income
--------------------
The components of comprehensive income, which represents the change in equity
from non-owner sources, for the three and six months ended June 30, 1999 and
1998, were as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $28.0 $34.5 $56.3 $65.7
Other comprehensive loss:
Foreign currency translation adjustments (1.5) (1.8) (9.5) (2.1)
----- ----- ----- -----
Comprehensive income $26.5 $32.7 $46.8 $63.6
===== ===== ===== =====
</TABLE>
10
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(11) Other Financial Information
---------------------------
Taxes paid for the six months ended June 30, 1999 and 1998 were approximately
$14.8 and $15.9, respectively. Interest paid for the six months ended June 30,
1999 and 1998 was approximately $14.2 and $7.1, respectively.
On January 25, 1999, the Company announced a program to spend up to $100.0 to
repurchase shares of its outstanding common stock. Through June 30, 1999, the
Company had repurchased 518,545 shares at a cost of $13.0 under this program.
The Company expects the timing of its share repurchase program to be balanced
with the related financing requirements of its long term growth strategies,
including research and development, global expansion and in particular,
opportunities for strategic acquisitions arising from consolidation in the
specialty chemicals industry.
During January 1999, in connection with the Company's stock repurchase program,
the Company sold put options to two institutional investors in a series of
private placements exempt from registration under Section 4(2) of the Securities
Act of 1933. The put options entitled the holders to sell an aggregate of
300,000 shares of the Company's common stock to the Company at exercise prices
ranging from $21.68 to $21.99. During July 1999, the 300,000 put options expired
unexercised. The Company received premiums of approximately $0.6 on the sale of
such options.
(12) Segment Information
-------------------
Summarized segment information for the Company's four segments for the three and
six months ended June 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---- ---- ----- ----
<S> <C> <C> <C> <C>
Net sales
- ---------
Water and Industrial Process Chemicals $ 94.3 $ 88.3 $ 181.9 $ 170.6
Performance Products 112.4 100.7 219.3 197.7
Specialty Materials 114.6 128.5 234.7 260.4
Building Block Chemicals
Sales to external customers 37.7 48.3 78.4 105.1
Intersegment sales 8.9 10.1 18.9 19.9
-------- ------- ------- -------
Net sales from segments 367.9 375.9 733.2 753.7
Other revenues 0.1 0.0 0.1 0.2
Elimination of intersegment revenue (8.9) (10.1) (18.9) (19.9)
-------- ------- ------- -------
Total consolidated net sales $ 359.1 $ 365.8 $ 714.4 $ 734.0
======== ======= ======= =======
<CAPTION>
% of % of % of % of
Earnings from operations Sales Sales Sales Sales
- ------------------------ ----- ----- ----- -----
Water and Industrial Process Chemicals $12.3 13% $ 9.3 11% $21.8 12% $15.9 9%
Performance Products 14.6 13% 11.9 12% 27.0 12% 23.0 12%
Specialty Materials 22.8 20% 21.1 16% 44.3 19% 42.4 16%
Building Block Chemicals 2.5 5% 11.2 19% 5.1 5% 20.2 16%
----- --- ---- ---- ----
Earnings from segments 52.2 14% 53.5 14% 98.2 13% 101.5 13%
Corporate and Unallocated (2.7) (3.2) (4.9) (5.0)
----- ----- ----- -----
Total consolidated earnings from operations $49.5 14% $50.3 14% $93.3 13% $96.5 13%
===== ===== ===== =====
</TABLE>
11
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(13) Subsequent Events
-----------------
On August 4, 1999, the Company announced that it had signed a definitive
agreement for the acquisition of Inspec Mining Chemicals S.A. ("IMC"), a
manufacturer of specialty mining chemicals, from Laporte plc for approximately
$25.0 in cash. IMC has two manufacturing operations in Chile, as well as an R&D
center located in Santiago, Chile. The acquisition is subject to normal closing
conditions.
12
<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 1999 versus Second Quarter of 1998
- ----------------------------------------------------
Net sales for the second quarter of 1999 were $359.1 as compared to $365.8 in
the second quarter of 1998. The decrease is principally due to $10.6 lower sales
in the Building Block Chemicals segment and $13.9 lower sales in the Specialty
Materials segment. This decrease was partially offset by sales increases in the
Water and Industrial Process Chemicals and Performance Products segments of $6.0
and $11.7, respectively.
Sales outside of the United States for the second quarter of 1999 were 43.2% of
total sales as compared to 36.8% in the second quarter of 1998. International
sales increased across all regions. Sales in the Europe/Mideast/Africa region
were $84.6, up 13.6% from the prior year period. More than 85 percent of the
sales increase was from amino resins sales generated as a result of the
acquisition of Dyno Industrier's global amino coatings resins business (the
"Dyno Business"), which consisted primarily of Dyno's 50% interest in the former
Dyno-Cytec joint venture. The Company's sales in the Asia/Pacific region were
$37.3, up 17.3% from the prior year period due mainly to an increase of selling
volumes in the Water and Industrial Process Chemicals, Performance Products, and
Building Block Chemicals segments. Sales in Latin America were $18.0, up 15.4%
due to higher mining sales in Chile, partially offset by lower resins sales in
Brazil.
Segment Results
Water and Industrial Process Chemicals sales increased 6.8% to $94.3 and
earnings from operations increased 32.3% to $12.3. The sales increase was
primarily in mining chemicals, while the other product lines were essentially
flat. Overall, selling volumes were up 9.5%, with the acquisitions of the
OrePrep and Nottingham industrial mineral product lines accounting for
approximately one-third of the improved volume. The increase in selling volumes
was partially offset by lower selling prices, which were down about 2.1%, and
the adverse effect of exchange rate changes, which reduced sales another 0.5%.
The improved earnings from operations were primarily the result of the stronger
performance in mining chemicals' and lower raw material costs.
Performance Products sales increased 11.6% to $112.4 and earnings from
operations increased 22.7% to $14.6. The sales increase was due mainly to the
acquisition of the Dyno Business in July of last year, which added about $8.8 to
sales for the quarter, and higher selling volumes in the polymer additives
product line. Overall, selling volumes were up 16.6%, while selling prices and
exchange rate changes negatively impacted sales 4.7% and 0.3%, respectively.
Approximately one-half of the 16.6% increase in selling volumes resulted from
the acquisition of the Dyno Business. The improved earnings from operations were
attributable to the higher sales volume and lower manufacturing costs.
Specialty Materials sales were $114.6, down 10.8% from the previous year.
Earnings from operations however, improved 8.1% to $22.8 largely the result of
synergies achieved through acquisitions, as well as cost savings initiatives
started late last year, the benefits of which are now beginning to be realized.
13
<PAGE>
Approximately $12.5 of the sales decrease was due to lower sales in divested and
discontinued product lines, $8.9 of which is the result of the divestiture of
the molding compounds product lines. The acquisition of The American Materials
and Technologies Corporation ("AMT") in the fourth quarter of last year added
about $7.5 to sales for the quarter. Excluding the effect of acquisitions and
divestitures, selling volumes were down 5.2%, largely the result of expected
reductions in demand by the U.S. commercial aerospace industry. The commercial
aerospace industry is expected to continue to trend downward, but this is
expected to be offset somewhat by new product introductions, applications and
qualifications. Selling prices decreased 1.4%, but the decrease was offset by
lower raw material costs.
Building Block Chemicals sales to external customers were $37.7, a 21.9%
decrease. Earnings from operations were $2.5 compared to $11.2 in the second
quarter of 1998. For the quarter, acrylonitrile selling prices and demand
remained weak. However, export acrylonitrile pricing started to improve late in
the quarter and the production levels increased to nearly 95% capacity by the
end of the quarter mainly due to increased demand in the Far-East and to
replenish low inventory levels. In February, the methanol plant was idled as a
result of market conditions and low selling prices and it is expected to remain
down at least through August. Raw material costs, primarily propylene and
natural gas, were down from the year ago period offsetting some of the reduction
in selling prices. For the segment overall, selling prices were down 16.8% and
selling volumes declined 4.5%.
Manufacturing cost of sales was 68.8% of net sales in the second quarter of 1999
and was essentially flat when compared to 68.5% in 1998. Manufacturing costs in
1999 continued to benefit from plant efficiencies, the result of restructuring
initiatives undertaken in 1997, and improved product mix. Offsetting these
benefits were the adverse effects of price reductions in the Water and
Industrial Process Chemicals and Performance Product segments as well as price
and selling volume decreases in the Building Block Chemicals and Specialty
Materials segments.
Selling and technical service expenses decreased $1.7 reflecting the benefits of
business consolidations.
Research and process development expenses decreased $1.8 primarily reflecting
the Company's decentralization of research to business units and restructuring
initiatives at the Stamford, Connecticut research facility. In addition, patent
costs were lower as these costs tend to fluctuate quarter to quarter depending
on activity.
Administrative and general expenses increased $0.8. Higher costs associated with
certain litigation were primarily responsible for the increase.
Amortization of acquisition intangibles expense increased $0.5 due to the
additional intangibles resulting from the acquisition of the Dyno Business, AMT,
and the OrePrep and Nottingham industrial minerals product lines.
Equity in earnings of associated companies was down $6.3 primarily due to lower
sales and earnings by Criterion Catalyst. Increased production capacity and
difficult economic conditions in the refining industry affected operations at
Criterion Catalyst. The result has been much lower selling prices and an adverse
product mix for hydrotreating catalysts. The Company has begun the process of
reviewing all alternatives for this equity investment. CYRO Industries earnings
were also down, primarily as a result of lower selling
14
<PAGE>
prices. Equity earnings were also down $0.9 as a result of the purchase of the
remaining 50% ownership in and subsequent consolidation of the Dyno Business.
The Company expects second half equity earnings to be well below the prior year
period.
Interest expense, net was $6.8 and increased $1.7 in 1999 reflecting the
increase in long-term debt.
The income tax provision was reduced to a rate of 35% from 37% in 1998. This was
primarily due to improved tax planning in the foreign and state tax areas, as
well as benefits from the Company's foreign sales corporation.
Net earnings decreased to $28.0, down 18.8% from the $34.5 in the second quarter
of 1998. Diluted earnings per share decreased from $0.73 in 1998 to $0.63 in
1999, a decrease of 13.7%.
First Half of 1999 versus First Half of 1998
- --------------------------------------------
Net sales for the first half of 1999 were $714.4 as compared to $734.0 in the
first half of 1998. The decrease is principally due to $26.7 lower sales in the
Building Block Chemicals segment and $25.7 lower sales in the Specialty
Materials segment. This decrease was partially offset by sales increases in the
Water and Industrial Process Chemicals and Performance Products segments of
$11.3 and $21.6, respectively.
Sales outside of the United States for the first half of 1999 were 42.6% of
total sales as compared to 36.5% in the first half of 1998. International sales
increased across all regions. Sales in the Europe/Mideast/Africa region were
$166.9, up 12.5% from the first half of 1998. More than 90 percent of the sales
increase was from amino resins sales generated as a result of the Dyno Business
acquisition. The Company's sales in the Asia/Pacific region were $70.0, up 9.2%
from the first half of 1998 due mainly to an increase of selling volumes in the
Water and Industrial Process Chemicals and Performance Products segments.
Specialty Materials and Building Block Chemicals sales in the region were down
slightly from the previous year. Sales in Latin America were $35.2, up 19.7% due
to higher mining sales.
Segment Results
Water and Industrial Process Chemicals sales increased 6.6% to $181.9 and
earnings from operations increased 37.1% to $21.8. The sales increase was
primarily in mining chemicals, while the other product lines were essentially
flat. Overall, selling volumes were up 8.4%, with the acquisitions of the
OrePrep and Nottingham industrial mineral product lines accounting for
approximately one-third of the improved volume. The increase in selling volumes
was partially offset by lower selling prices, which were down about 1.8%. The
improved earnings from operations were primarily the result of the stronger
performance in mining chemicals'.
Performance Products sales increased 10.9% to $219.3 and earnings from
operations increased 17.4% to $27.0. The sales increase was due mainly to the
acquisition of the Dyno Business in July of last year, which added about $17.3
to sales for the first half of 1999, and higher sales volume in the specialty
resins and polymer additives product lines. Overall, selling volumes were up
16.3%, while selling prices and exchange rate changes negatively impacted sales
5.1% and 0.2%, respectively. Approximately one-half of the 16.3% increase in
selling volumes resulted from the acquisition of the Dyno Business. The
15
<PAGE>
improved earnings from operations were attributable to the higher sales volume
and lower manufacturing costs.
Specialty Materials sales were $234.7, down 9.9% from the previous year.
Earnings from operations, however, improved 4.5% to $44.3 largely the result of
synergies achieved through acquisitions, as well as cost savings initiatives
started late last year, the benefits of which are now beginning to be realized.
Approximately $18.8 of the sales decrease was due to the divestiture of the
molding compounds product lines and, another $3.2 due to discontinued product
lines. The acquisition of AMT in the fourth quarter of last year added about
$16.2 to sales for first half of 1999. Excluding the effect of acquisitions and
divestitures, selling volumes were down 6.0% and selling prices decreased 1.4%.
Building Block Chemicals sales to external customers were $78.4, a 25.4%
decrease. Earnings from operations were $5.1 compared to $20.2 for the first
half of 1998. For the first six months of 1999 acrylonitrile selling prices and
demand remained weak. However, export acrylonitrile pricing started to improve
late in the period and the production levels increased to nearly 95% capacity by
the end of the period mainly due to increased demand in the Far-East and to
replenish low inventory levels. In February, the methanol plant was idled as a
result of market conditions and low selling prices and it is expected to remain
down at least through August. Raw material costs, primarily propylene and
natural gas, were down from the year ago period offsetting some of the reduction
in selling prices. For the segment overall, selling prices were down 16.1% and
selling volumes declined 9.2%.
Manufacturing cost of sales was 69.6% of net sales in the first half of 1999 and
was essentially flat when compared to 69.3% in 1998. Manufacturing costs in 1999
continued to benefit from plant efficiencies, the result of restructuring
initiatives undertaken in 1997, and improved product mix. Offsetting these
benefits were the adverse effects of price reductions in the Water and
Industrial Process Chemicals and Performance Products segments as well as price
and selling volume declines in the Building Block Chemicals and Specialty
Materials segments.
Selling and technical service expenses decreased $2.7 reflecting the benefits of
business consolidations.
Research and process development expenses decreased $2.5 primarily reflecting
the Company's decentralization of research to business units and restructuring
initiatives at the Stamford, Connecticut research facility. Patent costs were up
for the first six months of 1999.
Administrative and general expenses were $24.6 for the first half of 1999 and
were essentially flat when compared to $24.7 in 1998.
Amortization of acquisition intangibles expense increased $1.0 due to the
additional intangibles resulting from the acquisition of the Dyno Business, AMT,
and the OrePrep and Nottingham industrial minerals product lines.
Other income, net was $2.9 for the first half of 1999 and included approximately
$3.8 of gains from divested product lines. Last year other income, net was $6.4
and included gains on the sale of investments in unaffiliated companies.
Equity in earnings of associated companies was down $7.2 primarily due to lower
earnings by Criterion Catalyst. Increased production capacity and difficult
economic conditions in the refining industry affected operations at Criterion
16
<PAGE>
Catalyst. The result has been much lower selling prices and an adverse product
mix for hydrotreating catalysts. The Company has begun the process of reviewing
all alternatives for this equity investment. CYRO Industries earnings were also
down, primarily as a result of lower selling prices. Equity earnings were also
down $1.6 as a result of the purchase of the remaining 50% ownership in and
subsequent consolidation of the Dyno Business. The Company expects second half
equity earnings to be well below the prior year period.
Interest expense, net was $13.6 and increased $3.8 in 1999 reflecting the
increase in long-term debt.
The income tax provision was reduced to a rate of 35% from 37% in 1998. This was
primarily due to improved tax planning in the foreign and state tax areas, as
well as benefits from the Company's foreign sales corporation.
Net earnings decreased to $56.3 down 14.3% from the $65.7 for the same period
last year. Diluted earnings per share decreased from $1.38 in 1998 to $1.26 in
1999, a decrease of 8.7%.
Liquidity and Financial Condition
- ---------------------------------
At June 30, 1999, the Company's cash balance was $27.7, an increase of $26.0
from year-end 1998.
Net cash flows provided by operating activities totaled $85.5 for the six months
ended June 30, 1999, compared to $70.3 for the six months ended June 30, 1998.
The most significant factor affecting this increase was the Company's lower
working capital levels.
Net cash flows used for investing activities totaled $33.6 for the six months
ended June 30, 1999, compared to $54.6 for the six months ended June 30, 1998.
Included in 1999 was funding for the Nottingham acquisition of $4.0, offset by
proceeds of $5.9 from the sale of the molding compounds product lines and $2.1
from the sale of other assets. Capital additions were $37.6 compared to $49.7 in
1998. Capital additions in 1998 included three large construction projects in
the Performance Products and Water and Industrial Process Chemicals segments -
the Benzotriazole light stabilizer plant in Botlek, The Netherlands, the
expansion of the surfactants plant in the Willow Island, West Virginia facility
and the expansion of emulsion capacity in Mobile, Alabama. For the full year
1999, the Company estimates capital spending to be in the range of $80.0 to
$85.0.
The Company believes that, based on internal cash generation and current levels
of liquid assets, it will be able to fund operating cash requirements and
planned capital expenditures through the end of 1999.
Net cash flows used for financing activities totaled $24.9 for the six months
ended June 30, 1999, compared to $2.3 of net cash flows provided by financing
activities for the six months ended June 30, 1998. In connection with the stock
repurchase program discussed below, the Company purchased 518,545 shares of
treasury stock at a cost of $13.0 during the first six months of 1999. This
compares to the purchase of 617,900 shares of treasury stock at a cost of $29.8
during the comparable period of 1998. Also, during the first six months of 1999,
$10.3 of foreign currency denominated short-term borrowings were paid-off. The
first six months of 1998 included an increase in long-term debt of $35.4.
17
<PAGE>
During January, 1999, in connection with the Company's stock repurchase program,
the Company sold put options to two institutional investors in a series of
private placements exempt from registration under Section 4(2) of the Securities
Act of 1933. The put options entitled the holders to sell an aggregate of
300,000 shares of the Company's common stock to the Company at exercise prices
ranging from $21.68 to $21.99. During July 1999, the 300,000 put options expired
unexercised. The Company received premiums of approximately $0.6 on the sale of
such options.
The Company on January 22, 1999 signed an agreement with Cyanamid providing that
Cyanamid would irrevocably waive certain financial covenants contained in the
Company's Series C Cumulative Preferred Stock ("Series C Stock") so that, in
addition to restricted payments otherwise permitted under the Series C Stock,
which at June 30, 1999, were limited to $35.4, Cytec may make up to $100.0 in
special restricted payments solely for the purpose of repurchasing Cytec's
common stock. On January 25, 1999, the Company announced a program to spend up
to $100.0 to repurchase shares of its outstanding common stock. As indicated
above, through June 30, 1999, the Company had repurchased 518,545 shares at a
cost of $13.0 under this program. The Company expects the timing of its share
repurchase program to be balanced with the related financing requirements of its
long term growth strategies, including research and development, global
expansion and in particular, opportunities for strategic acquisitions arising
from consolidation in the specialty chemicals industry.
On May 14, 1999, the Company entered into an interest rate swap agreement
wherein the counterparty agreed to pay Cytec a fixed interest rate of 6.2375%
and Cytec agreed to pay the counterparty a floating interest rate equal to the
six-month London Interbank Offered Rate ("LIBOR") on a notional amount of $25.0.
The swap agreement matures in March, 2008 and effectively converts $25.0 of the
Company's 6.75% fixed rate borrowings due on March 15, 2008 to a floating rate.
The fair value of the swap agreement is not recognized in the financial
statements. Interest rate differentials paid or received under this agreement
are recorded as adjustments to interest expense.
OTHER
Year 2000
- ---------
The Company has conducted a comprehensive review of its information technology
systems ("IT Systems") and its process control and other systems that use
micro-controllers ("Non-IT Systems") to identify the systems that could be
affected by the Year 2000 issue. The Year 2000 issue results from computer
programs using two digits rather than four to define the applicable year. Any of
the Company's systems that have time-sensitive software features may recognize a
date using "00" in the last two places as the year 1900 rather than the year
2000. If not addressed, this could result in a system failure or
miscalculations, and in the case of Non-IT systems that 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, which consisted of identifying the Company's IT and Non-IT Systems,
has been completed. The second phase consisted of determining whether those
systems were Year 2000 compliant, primarily based on certifications from the
vendors of such systems, and developing cost estimates to remediate noncompliant
systems. The second phase is also complete. The Company's current estimate is
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<PAGE>
that it will incur external costs in the range of $5.0 to $6.0 to remediate
noncompliant systems, of which $3.5 has been spent to date, and of which the
remaining funds mostly consist of: (i) funds committed but not yet spent; (ii)
the cost of non-mission critical systems and equipment; and (iii) the cost of
testing. This estimate may change materially as the Company completes its final
testing and as the Company continues to implement required remediation. The
Company does not track its internal costs in connection with Year 2000 issues,
but does not believe they are material.
The third phase of the Company's program is ongoing and consists of remediating
noncompliant systems that are critical to the Company's operations. The Company
has largely completed the third phase. The Company now plans to remediate the
remaining mission critical systems, complete the testing of mission critical
systems and to remediate, if appropriate, noncritical systems by the end of the
third quarter of 1999, although in several cases the actual installation of
previously-prepared corrections will be scheduled to occur later in order to
coincide with previously-scheduled plant maintenance turnarounds. In one case, a
decision was made to shut down a plant on December 31, 1999 and begin an
expansion turnaround on or about the first business day of January, 2000. In
this case, the remediation of noncompliant mission critical systems is scheduled
to occur during the expansion turnaround.
The Company is developing contingency plans for addressing any problems in
completing implementation of all necessary remediation by the Year 2000. The
Company has been addressing the Year 2000 status of its material customers and
suppliers by seeking verification that their systems and processes are, or by
December 31, 1999, will be, Year 2000 compliant. To date, all material customers
and suppliers have indicated that they will be Year 2000 compliant. These
efforts may need to be refined as more information becomes available. The
Company also is reviewing the Year 2000 compliance efforts of the four
associated companies in which it has a 50% equity interest.
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, suppliers or government agencies to remediate Year
2000 problems in their IT and Non-IT Systems (which cannot be controlled or
corrected by the Company) or any general economic slowdown due to Year 2000
problems could also have a material adverse impact on the operations of the
Company. Although more serious problems could occur (including but not limited
to events affecting the safety of the Company's production processes, many of
which involve hazardous materials), the Company believes that the "most
reasonably likely worst case scenario" as a result of the Company, customers,
suppliers or government agencies not being fully Year 2000 compliant includes
temporary plant closings, delays in the delivery of finished products, delays in
the receipt of raw materials and invoice and collection errors. These
consequences could have a material adverse impact on the Company's results of
operation, financial condition and cash flows. As part of its contingency plan,
the Company is addressing these potential consequences in order to mitigate the
adverse effect any such disruptions may have on the Company's operations.
Euro Conversion
- ---------------
On January 1, 1999, 11 of the 15 member countries of the European Union (the
"participating countries") established fixed conversion rates between their
existing sovereign currencies (the "legacy currencies") and the euro. The
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<PAGE>
participating countries adopted the euro as their common legal currency on that
date. Effective January 1, 1999, a newly created European Central Bank assumed
control of monetary policy, including money supply and interest rates for the
participating countries. The legacy currencies are scheduled to remain legal
tender in the participating countries as denominations of the euro between
January 1, 1999, and January 1, 2002 (the "transition period"). During the
transition period, public and private parties may pay for goods and services
using either the euro or the participating country's legacy currency on a "no
compulsion, no prohibition" basis. The Company's principal plants in Europe are
in The Netherlands, the United Kingdom and Norway, and the Company has sales
offices and generates sales throughout Europe. The Netherlands is a
participating country, whereas the United Kingdom and Norway are not currently
participating countries.
Since January 1, 1999, the Company has been in a position to conduct business in
euros. The Company has initiated and is evaluating on an ongoing basis the
effects, if any, of the euro conversion upon its business. Factors being
considered include, but are not limited to: the possible impact of the euro
conversion on revenues, expenses and income from continuing operations; the
impact on cash management and treasury management functions; the competitive
implications of increased price transparency; the ability to adapt information
technology to accommodate euro-denominated transactions; the market risks with
respect to financial instruments; the continuity of material contracts; and the
potential tax consequences.
The Company does not believe that the introduction of the euro notes and coins
as well as the withdrawal of participating currency notes and coins, which is
scheduled to begin January 1, 2002, will result in any gains or losses since
conversion rates to the euro for participating countries were irrevocably fixed
as of January 1, 1999. The Company believes that some information systems
modifications are required in order for them to be euro compliant. The Company,
however, does not currently believe that the euro conversion will have a
material operational or financial impact.
Comments on Forward-Looking Statements
- --------------------------------------
A number of the statements made by the Company in the Quarterly Report on
Form 10-Q, or in other documents, including but not limited to the Company's
Annual Report to Stockholders, its press releases and other periodic reports to
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 1999 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, long-term goals of the Company, the effects of and
the timing for remediation of the Year 2000 issue, and other statements of
expectation, 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; the rate of
recovery of the Asian economies from the financial crisis that began in 1997;
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'
20
<PAGE>
demands for price decreases; 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; the results of associated
companies, and other unforseen circumstances. A number of these factors are
discussed in the Company's filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
For a discussion of market risks at year-end, refer to Item 7a of the Company's
1998 Annual Report on Form 10-K for the year ended December 31, 1998, filed with
the Securities and Exchange Commission on March 31, 1999.
During January, 1999, in connection with the Company's stock repurchase program,
the Company sold put options in connection with the Company's stock repurchase
program. In July, 1999, the put options expired unexercised. For a further
discussion, see Note 11 of the Notes to Consolidated Financial Statements.
On May 14, 1999, the Company entered into an interest rate swap agreement that
effectively converted $25.0 of the Company's 6.75% fixed rate borrowings to
floating rate. For a further discussion, see Note 8 of the Notes to Consolidated
Financial Statements.
During the first quarter of 1999, the Company paid off the $10.3 of foreign
currency denominated short-term borrowings outstanding at December 31, 1998.
21
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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, NJ Facility. In connection with its acquisition of
substantially all of the assets of Fiberite, Inc., 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 acquisition of Fiberite, respectively,
the Company is the party in interest and is herein described as the defendant.
The Company is a defendant in twenty-nine cases pending in state courts in
Bowie, Brazoria, Jefferson 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. Two of the cases involve several hundred plaintiffs, while the
remainder involve substantially fewer plaintiffs. All of these cases involve
multiple defendants. The Company believes that its involvement in all but nine
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 six suits pending in California Superior Court in
San Francisco and Alameda counties, which were filed by or on behalf 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
six plaintiffs (out of 32 randomly selected members of the class) was completed
in July 1998. In December, 1998 the trial court signed a Judgment recalling the
Court's prior Class Action Certification Order and dismissing all Class Action
claims in the case. The Judgment also dismissed, with prejudice, the claims of
the six named plaintiffs whose cases had been tried in July. The case continues
as a non-class action on behalf of the other named plaintiffs. Plaintiffs have
appealed the Court's Judgment.
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.
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<PAGE>
The Company is also the defendant in six class actions filed in St. Charles
Parish Court, Louisiana on behalf of persons who allegedly sustained injury as a
result of an exotherm and fire at the Company's Fortier facility on January 5,
1999. The Company has little information on whether, or to what extent, most
members of the alleged class actually suffered any injury.
The Company is one of several alleged processors of lead, lead pigments and/or
lead-based paints named as defendants in five cases pending in state and federal
courts in the states of New York and Ohio. In the first suit, pending in New
York State Supreme Court, New York County, the plaintiff, the New York City
Housing Authority, seeks damages for the cost of removing lead-based paints from
buildings in two public housing projects operated by the Housing Authority. The
second and third suits, also filed in New York State Supreme Court (Erie and
Bronx Counties, respectively), were brought on behalf of minor children, who
seek damages for personal injuries allegedly caused by ingestion of lead-based
paints. The fourth case, filed in United States District Court for the Northern
District of New York, also was brought on behalf of a minor child who seeks
damages for personal injuries allegedly caused by ingestion of lead based
paints. In all four 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 fifth suit 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 five suits filed in New Jersey State
Courts in Essex and Middlesex Counties 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. Two 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 third 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.
The Company also has been named as one of several defendants in twenty-seven
suits filed in Louisiana State Courts in St. Bernard and Orleans Parishes by
individuals who claim that they, or those whom they represent, were injured as a
result of exposure to asbestos while working at various sites, including the
Company's Fortier, Louisiana plant.
In January 1999 the Company received a subpoena to testify before, and provide
documents to, a grand jury in the U.S. District Court for the Central District
of California. The subpoena relates to a Grand Jury Investigation of the carbon
fiber and prepreg industry. The Company has no reason to believe that it is a
target of a grand jury investigation.
See also the first four paragraphs of "Environmental Matters" under Item 1 of
the Company's 1998 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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its annual meeting of Common Stockholders on May 10, 1999. At
this meeting, the only substantive matter voted on was the election of
Directors.
Messrs. D. D. Fry and J. R. Satrum were each elected Directors at the Annual
Meeting for a three-year term ending in 2002 by the following margins:
Name Votes For Votes Withheld
- ---- --------- ---------------
D. D. Fry 39,396,115 388,733
J. R. Satrum 39,385,659 399,189
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.
Lilley and W. P. Powell continue after the meeting.
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 has not filed a current report on Form 8-K during the second quarter
of 1999.
24
<PAGE>
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 12, 1999
25
<PAGE>
Exhibit Index
- -------------
10.13 (j) Rule No. 3 under the 1993 Stock Award and Incentive Plan, as amended
through July 7, 1999
12 Computation of Ratio of Earnings to Fixed Charges for the three and
six months ended June 30, 1999 and 1998
27 Financial Data Schedule
99 Material Incorporated by reference from Annual Report on Form 10-K
26
<PAGE>
Exhibit 10.13(j)
As Amended and Restated 7/7/99
RULES OF GENERAL APPLICATION UNDER
THE CYTEC INDUSTRIES INC. 1993
STOCK AWARD AND INCENTIVE PLAN
Rule 3. This Rule applies to Performance Stock Awards and related Performance
- ------
Cash Awards granted by the Compensation and Management Development Committee
(the "Committee") with respect to the 1999, 2000 and 2001 Performance Periods to
persons (as listed on Exhibits A and B to a separate document entitled "Award
Targets - Non-Officers", such separate document being hereinafter called the
"Target Document") who are not, as of the date of grant, Executive Officers of
the Corporation. This rule is adopted by the Executive Committee pursuant to
Paragraph (f) of Rule No. 1 under the Plan.
(a) Definitions. As used in this Rule, the following terms shall have
-----------
the following respective meanings:
(i) "EBIT" means, with respect to any business unit for any
fiscal year constituting a Performance Period, the earnings
before interest and taxes of such business unit, determined on
a basis consistent with the accounting principles used in
determining EBIT in the Corporation's audited financial
statements for such year; provided, that in the event of an
--------
acquisition by a business unit of another company or business,
pro forma financing charges as determined by the Executive
Committee, representing a financing charge for the purchase
price, will be subtracted from the business unit's actual EBIT
in determining EBIT for purposes of the Target Document
(unless the proforma financing charge was considered by the
Executive Committee in setting the EBIT target); provided,
--------
further, that the setting of new EBIT targets will not be
-------
affected by such financing charges.
<PAGE>
(ii) "Performance Period" means January 1-December 31, 1999,
January 1-December 31, 2000, or January 1-December 31, 2001,
as the context requires.
(iii) "Plan" means the 1993 Stock Award and Incentive Plan of
the Corporation, as amended.
(iv) Terms defined in the Plan and used, but not defined, in
this rule shall have the respective meanings ascribed thereto
in the Plan.
(b) Staff Personnel. Set forth on Exhibit A to the Target Document are
---------------
the names of certain Participants who have been granted Performance
Stock Awards and Performance Cash Awards. Subject to Paragraph (d)
below ("Right to Change Targets") and subject to Paragraph (e) below
("Deferred Stock Awards"), and subject to the terms of the Performance
Stock Award and Performance Cash Award Grant Letters, lapsing of the
restrictions on the Performance Stock Awards and payment of the cash
provided for in the related Performance Cash Awards for the 1999, 2000
and 2001 Performance Periods for these Participants, as applicable,
shall be governed (except to the extent otherwise specified on Exhibit
A), as to 100% of such Awards, by the targets established under Rule
No. 1 under the Plan, as adopted by the Committee ("Rule No. 1"), such
targets being adopted by the Executive Committee for purposes of this
Rule and incorporated herein by reference.
(c) Business Group Personnel. Set forth on Exhibit B to the Target
------------------------
Document are the names and business units of certain other Participants
who have been granted Performance Stock Awards and Performance Cash
Awards. As to these Participants (except to the extent otherwise
specified on Exhibit B), Performance Stock Awards and related
Performance Cash Awards for the 1999, 2000 and 2001 Performance Periods
shall each be divided into two portions: the "30% Portion," consisting
of 30% of each Award (rounded up to the nearest whole dollar or the
nearest whole share, as the case may be), and the "70% Portion,"
consisting of the remaining portion of each such Award. Subject to
Paragraph (d) below ("Right to Change Targets") and subject to
Paragraph (e) below ("Deferred Stock Awards"), and subject to the terms
of the Performance Stock Award and Performance Cash Award Grant
Letters:
2
<PAGE>
(i) Payout Targets - 30% Portion. Lapsing of the restrictions
----------------------------
on the 30% Portion of these Performance Stock Awards and
payment of the cash provided for in the related 30% Portion of
the Performance Cash Awards shall be governed by the targets
established under Rule No. 1, which are incorporated herein by
reference; and
(ii) Payout Targets - 70% Portion. Lapsing of restrictions on
----------------------------
the 70% Portion of these Performance Stock Awards and payment
of the cash provided for in the related 70% Portion of the
Performance Cash Awards shall occur if and to the extent that
the respective business unit EBIT targets set forth on Exhibit
B to the Target Document are met. If business unit EBIT is, in
any fiscal year, greater than any applicable minimum amount
shown on Exhibit B to the Target Document for such fiscal
year, and less than the applicable maximum amount, then, in
the case of the 70% Portion for a Participant named on such
Exhibit B, the actual number of shares of Common Stock that
shall vest, and the actual payout on the Performance Cash
Award, shall be pro-rated. Any resulting fractional shares
that vest shall be rounded up to the nearest whole share. The
amount payable in respect of any Performance Cash Award shall
be paid as soon as practicable after determination that the
Award is payable.
(d) Right to Change Targets. The Executive Committee (or, in the case
-----------------------
of any Grantee who subsequently becomes an Executive Officer of the
Corporation, the Committee) reserves the right from time to time in its
sole discretion to change the EBIT, EPS and Cash Flow Targets set forth
in the Target Document, or incorporated herein by reference, to take
into account developments in the Corporation's business, or in the
business of any one or more business units, and/or to take into account
changes in the structure of any business unit or of any Participant's
responsibilities which were not fully contemplated at the time the
targets were set or last revised; provided that any such change must be
made at or prior to the end of the Performance Period to which the
target relates.
(e) Deferred Stock Awards. (i) If, as of the date on which any
---------------------
Performance Stock Award is to vest, any Participant's compensation for
such year is such that it would exceed
3
<PAGE>
the maximum amount which is deductible by the Corporation under Section
162(m) of the Internal Revenue Code, the number of shares constituting
such Performance Stock Award, to the extent of such excess amount,
shall be forfeited and the Participant will be issued a Deferred Stock
Award as defined in Section 6(h) of the Plan, equal to the number of
shares so forfeited. Such Deferred Stock Award shall accrue Dividend
Equivalents which will be deferred in the form of additional Deferred
Stock Awards based on the Closing Price of the Corporation's Common
Stock in the New York Stock Exchange Consolidated Tape on the date on
which the related dividend is paid on the Corporation's Common Stock.
(ii) The Committee may, prior to the beginning of the Performance
Period with respect to a Performance Stock Award (or during such
Performance Period, with respect to a Performance Stock Award granted
during such Performance Period or not more than one month prior
thereto), offer a Participant who has been granted such an award the
opportunity to elect to defer all or a specified portion of such award
in the form of a Deferred Stock Award. If a Participant elects deferral
in accordance with the procedures established by the Committee, then,
effective as of the date on which the related award of Performance
Stock is to vest, the total award (or such lesser percentage of such
total award as shall have been elected by the Participant and accepted
by the Committee) shall be forfeited, and the Participant will be
issued instead a Deferred Stock Award, as defined in Section 6(h) of
the Plan, equal to the number of shares of Performance Stock so
forfeited. Such Deferred Stock Award shall accrue Dividend Equivalents
which will be deferred in the form of additional Deferred Stock based
on the Closing Price of the Corporation's Common Stock in the New York
Stock Exchange Consolidated Tape on the date on which the related
dividend is paid on the Corporation's Common Stock. In the event that
the Participant qualifies for a Deferred Stock Award under either this
sub-paragraph or under sub-paragraph (e)(i) of this Rule No. 3, the
Deferred Stock Award provided for under this sub-paragraph shall be
granted first, before any Deferred Stock Award shall be granted under
said sub-paragraph (e)(i).
(iii) Deferred Stock resulting from deferral of Dividend Equivalents
will likewise bear Dividend Equivalents.
(f) Performance Cash Awards.
-----------------------
4
<PAGE>
(i) As provided in the Target Document, under certain circumstances the
amount of Performance Cash that vests may exceed the nominal amount of
the award, as set forth in the Grant Letter. Beginning with the Year
2000 Performance Period, the nominal percentage of Performance Cash
that vests, as set forth in the Target Document, is multiplied by the
applicable Market Value index set forth in the target document
established under Rule No. 1 in order to determine the actual amount of
Performance Cash that vests.
(ii) In the case of a "Change in Control," the amount of a Performance
Cash Award that vests in respect of any Performance Period for which a
greater than 100% payout is possible is as follows: the full potential
amount of the Award (i.e. the Award at the 200% payout level) is deemed
to be the size of the Award, and shall be multiplied by the applicable
Market Value index (determined as provided in Rule No. 1) in order to
determine the amount of Performance Cash that so vests.
(iii) Two individuals, as specified on the Target Document, were
granted a second Award of Performance Cash for the 1999 Performance
Period. As an exception to clause (ii) of this Paragraph (f), there is
no Market Value index multiplier with respect to these Awards.
(g) Committee Approval. The targets set forth herein and in the Target
------------------
Document, to the extent not previously reported to the Committee, will
be reported to the Committee and, pursuant to Paragraph (f) of Rule No.
1, will be deemed approved and ratified by such Committee. Changes made
to targets (see paragraph (d) above) may be so reported after the close
of the Performance Period without affecting the validity of any change.
(h) Additional Bonuses. The foregoing long-term incentive awards are
------------------
not intended to be exclusive, and the Corporation may grant any other
additional forms of compensation, including but not limited to annual
incentive compensation, stock options, special recognition awards,
stock appreciation rights or any other form of compensation whatsoever.
5
<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,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings before income taxes and equity in
earnings of associated companies 43.3 48.7 82.6 93.1
Add:
Distributed income of associated companies 4.8 5.2 4.9 5.2
Amortization of capitalized interest 0.1 - 0.1 -
Fixed Charges 8.7 7.3 17.4 13.8
Less:
Capitalized interest (0.3) (0.3) (0.3) (0.3)
----- ---- ---- -----
Earnings as adjusted 56.6 60.9 104.7 111.8
Fixed Charges:
Interest on indebtedness including
amortized premiums, discounts and
deferred financing costs 7.5 5.9 15.0 11.0
Portion of rents representative of the
interest factor 1.2 1.4 2.4 2.8
----- ---- ---- ----
Fixed charges 8.7 7.3 17.4 13.8
----- ---- ---- ----
Ratio of earnings to fixed charges 6.5 8.3 6.0 8.1
===== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM-10Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<PERIOD-START> JAN-01-1999
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 27,700
<SECURITIES> 0
<RECEIVABLES> 246,800
<ALLOWANCES> 9,200
<INVENTORY> 133,800
<CURRENT-ASSETS> 501,000
<PP&E> 1,361,500
<DEPRECIATION> (706,600)
<TOTAL-ASSETS> 1,729,800
<CURRENT-LIABILITIES> 379,600
<BONDS> 319,500
0
100
<COMMON> 500
<OTHER-SE> 467,100
<TOTAL-LIABILITY-AND-EQUITY> 1,729,800
<SALES> 714,400
<TOTAL-REVENUES> 714,400
<CGS> 496,900
<TOTAL-COSTS> 621,100
<OTHER-EXPENSES> (2,900)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,600 <F1>
<INCOME-PRETAX> 86,600 <F2>
<INCOME-TAX> 30,300
<INCOME-CONTINUING> 56,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,300
<EPS-BASIC> 1.31
<EPS-DILUTED> 1.26
<FN>
<F1> THIS NUMBER REPRESENTS INTEREST EXPENSE, NET
<F2> THIS NUMBER INCLUDES EQUITY IN NET INCOME OF ASSOCIATED COMPANIES OF $4,000
FOR THE SIX MONTHS ENDED JUNE 30, 1999.
</FN>
</TABLE>
<PAGE>
Exhibit 99
Pursuant to Rule 12b-23 under the Securities and Exchange Act, the text below
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 ability 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
<PAGE>
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 and equipment which contains or is contaminated by polychlorinated
biphenyls.
Pursuant to Rule 12b-23 under the Securities and Exchange Act, the text below
from the Company's Annual Report on Form 10-K is filed as to matters
incorporated by reference in footnote 2 to Part I, Item 1 ("Notes to
Consolidated Financial Statements").
During 1998 the Company completed the following acquisitions and dispositions:
On June 24, 1998, the Company acquired assets of the OrePrep minerals processing
product line ("OrePrep") from Baker Petrolite Corporation for approximately
$9.0. The acquisition resulted in an excess of the purchase price over the
assets acquired of $8.3, which is included in Acquisition Intangibles in the
Consolidated Balance Sheet and will be amortized on a straight-line basis over a
period of up to 40 years. OrePrep supplies mineral processing reagents and
services to the mining industry. The acquired product line was integrated into
the Company's existing mining chemicals product line.
On July 31, 1998, the Company completed the purchase from Dyno Industrier ASA of
Oslo, Norway, of Dyno's global amino coatings resin business (the "Dyno
Business"), which consisted primarily of Dyno's 50% interest in Dyno-Cytec, a
European joint venture, for approximately $55.7. Payment of the purchase price
was funded under the Company's Credit Facility. The acquisition resulted in an
excess of the purchase price over the assets acquired of $40.7, which is
included in Acquisition Intangibles in the Consolidated Balance Sheet and will
be amortized on a straight-line basis over a period of up to 40 years. The
acquired business produces and sells cross-linking resins for coating
applications primarily in Europe from a single manufacturing plant in
Lillestrom, Norway. The acquired business was integrated into the Company's
existing specialty resins product line.
On October 9, 1998, the Company completed its acquisition of The American
Materials & Technologies Corporation ("AMT") in a stock transaction designed to
qualify as a tax-free reorganization. Under the terms of the transaction, each
AMT share was converted into the right to receive 0.3098 of a share of Cytec
common stock. In the transaction, the Company issued from Treasury 1,248,620
shares of common stock. In addition, outstanding options and warrants to acquire
AMT stock were converted into a total of 259,308 incentive and non-qualified
stock options, at a weighted average exercise price of $10.07 per share, and
75,901 warrants that allow the holders to purchase the Company's common stock at
a weighted average price of $25.14 per share. The cost of the acquisition was
<PAGE>
approximately $26.8, including the shares issued, options and warrants converted
and previous shares acquired, plus the assumption of approximately $5.4 in debt.
AMT manufactures and markets advanced composite materials for customers in the
aerospace, defense, transportation and other industries. The acquisition
resulted in an excess of the purchase price over the assets acquired of $23.6,
which is included in Acquisition Intangibles in the Consolidated Balance Sheet
and will be amortized on a straight-line basis over a period of up to 40 years.
The acquired business was integrated into the Company's existing specialty
materials product line. On October 26, 1998, the Company sold the assets of the
AMT graphite golf shaft business for approximately $6.2 in cash.
All three acquisitions have been accounted for under the purchase method of
accounting. Consolidated results of operations have been included from the date
of acquisition. Consolidated results of operations for 1998 or 1997 would not
have been materially different if any of the acquisitions had occurred on
January 1, 1997. Accordingly, pro forma sales, net earnings and earnings per
share disclosures have not been provided.
On November 23, 1998, the Company completed the sale of its bulk molding
compounds business to Bulk Molding Compounds, Inc. of West Chicago, Illinois for
$17.0 in cash, resulting in a pretax gain of $4.4. The business acquired by Bulk
Molding Compounds, Inc. included Cytec's manufacturing, laboratory and sales
facility located at Perrysburg, Ohio.
Pursuant to Rule 12b-23 under the Securities and Exchange Act, the text below
from the Company's Annual Report on Form 10-K is filed as to matters
incorporated by reference in Part I, Item 3 ("Quantitative and Qualitative
Disclosures About Market Risk").
The following discussion provides forward-looking quantitative and qualitative
information about the Company's potential exposures to market risk arising from
changes in foreign currency rates, commodity prices and interest rates. Actual
results could differ materially from those projected in this forward-looking
analysis. The Company's exposure to market risk from equity price changes was
immaterial at December 31, 1998.
Market risk represents the potential loss arising from adverse changes in the
value of financial instruments. The risk of loss is assessed based on the
likelihood of adverse changes in fair values, cash flows or future earnings.
In the ordinary course of business, the Company is exposed to various market
risks, including fluctuations in foreign currency rates, commodity prices and
interest rates. To manage the exposure related to these risks, the Company may
engage in various derivative transactions in accordance with Company-established
policies. The Company neither holds nor issues financial instruments for trading
purposes. Moreover, the Company enters into financial instrument transactions
either
<PAGE>
through regulated future exchanges or with major financial institutions, thereby
limiting exposure to credit- and performance-related risks.
Foreign Exchange Rate Risk
- --------------------------
The risk of adverse exchange rate fluctuations is mitigated by the fact that
there is no concentration of foreign currency exposure. In addition, the Company
enters into foreign exchange forward contracts primarily to hedge currency
fluctuations of transactions denominated in foreign currencies. At December 31,
1998, the principal transactions hedged were short-term intercompany loans and
intercompany trade accounts receivable and payable. The maturity dates of the
foreign exchange contracts are less than six months and strongly correlate to
the maturity date of the underlying transaction. The foreign exchange gains or
losses and the offsetting losses or gains of the hedged transaction are marked
to market and reflected in net earnings.
At December 31, 1998, the Company had net foreign exchange contracts to purchase
various currencies, principally British pounds and Dutch guilders, for $21.4 and
to sell various currencies, principally British pounds and German marks for
$11.3. The differences between fair value of all outstanding contracts at
year-end and the contract amounts were immaterial. Assuming that year-end
exchange rates between the underlying currencies of all outstanding foreign
exchange contracts and the various hedged currencies were to adversely change by
a hypothetical 10%, the change in the fair value of all outstanding contracts at
year-end would be a decrease of approximately $2.8. However, since these
contracts hedge foreign currency denominated transactions, any change in the
fair value of the contracts would be offset by changes in the underlying value
of the transaction being hedged.
At December 31, 1998, non-derivative financial instruments subject to foreign
exchange rate risk consisted primarily of $10.3 in foreign currency denominated
short-term debt. Assuming that year-end exchange rates were to adversely change
by a hypothetical 10%, the increase in the fair value would be approximately
$1.0.
Commodity Price Risk
- --------------------
Occasionally, the Company utilizes futures contracts, predominately involving
natural gas, to manage its exposure to price risk associated with the production
of ammonia, methanol and other building block chemical products. The maturity of
these contracts correlate highly to the actual purchases of the commodity. The
contracts are principally settled through actual delivery of the physical
commodity and have the effect of securing predetermined prices that the Company
pays for the underlying commodity. Accordingly, while these contracts limit the
Company's exposure to increases in commodity prices, they also limit the
potential benefit the Company might have otherwise received from decreases in
commodity prices.
<PAGE>
At December 31, 1998, the Company had $4.6 net natural gas futures contracts
with January, February and March 1999 delivery dates outstanding. Based on
year-end prices, the Company had a net unrealized loss of $1.0. Assuming that
year-end prices were to adversely change by a hypothetical 10%, the incremental
increase in cost of goods sold would be approximately $0.4.
Interest Rate Risk
- ------------------
At December 31, 1998, the financial liabilities of the Company exposed to
changes in interest rates consisted mainly of $10.3 in foreign currency
denominated short-term borrowings and $100.0 variable rate borrowings
outstanding under the Credit Facility. The Company is also party to an interest
rate swap agreement that converts $20.0 of variable rate interest obligations on
the Company's Credit Facility to fixed rate interest obligations. Assuming that
a hypothetical increase of 1% in interest rates and all other variables, i.e.,
foreign exchange rates and debt levels, were to remain constant, interest
expense would increase $0.9 per year. Included in long-term debt is also $319.5
of fixed rate public debt, which is not subject to interest rate risk.
