<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 September 30, 2000
------------------
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 of 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: 40,195,541 shares of Common
Stock, par value $.01 per share, were outstanding at September 30, 2000.
<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 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Part II - Other Information 24
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 26
Item 6. Exhibits and Reports on Form 8-K 26
Exhibit Index 28
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 Nine Months
Ended Ended
September 30, September 30,
---------------------- -------------------------
2000 1999 2000 1999
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 368.1 $ 344.1 $ 1,108.9 $ 1,058.4
Manufacturing cost of sales 258.8 236.4 777.2 733.3
Selling and technical services 38.1 35.7 116.8 110.1
Research and process development 9.8 10.7 28.6 30.5
Administrative and general 11.9 14.4 35.5 39.0
Amortization of acquisition intangibles 3.1 2.7 9.2 8.0
--------- --------- ----------- -----------
Earnings from operations 46.4 44.2 141.6 137.5
Other income (expense), net (0.1) 3.9 20.2 6.8
Equity in earnings (losses) of associated companies 2.3 (0.8) 12.2 3.2
Interest expense, net 6.2 6.5 20.4 20.1
--------- --------- ----------- -----------
Earnings before income taxes 42.4 40.8 153.6 127.4
Income tax provision 14.6 5.6 53.0 36.0
--------- --------- ----------- -----------
Net earnings $ 27.8 $ 35.2 $ 100.6 $ 91.4
========= ========= =========== ===========
Earnings per common share
Basic $ 0.68 $ 0.82 $ 2.45 $ 2.12
Diluted $ 0.65 $ 0.79 $ 2.35 $ 2.05
</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>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 10.5 $ 12.0
Accounts receivable, less allowance for doubtful accounts
of $8.6 and $9.3 in 2000 and 1999, respectively 285.1 248.5
Inventories 150.7 139.5
Deferred income taxes 43.3 61.7
Other current assets 30.9 29.4
---------- ----------
Total current assets 520.5 491.1
Equity in net assets of and advances to associated companies 89.7 146.4
Plants, equipment and facilities, at cost 1,334.6 1,352.6
Less: accumulated depreciation (711.5) (696.9)
---------- ----------
Net plant investment 623.1 655.7
Acquisition intangibles, net of accumulated amortization 388.9 395.2
Deferred income taxes 43.2 48.8
Other assets 30.7 22.7
---------- ----------
Total assets $ 1,696.1 $ 1,759.9
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 121.4 $ 118.5
Accrued expenses 193.5 198.4
Income taxes payable 43.9 49.2
---------- ----------
Total current liabilities 358.8 366.1
Long-term debt 368.6 422.5
Other noncurrent liabilities 426.2 465.5
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 per share 0.1 0.1
Common stock, $.01 par value per share, 150,000,000
shares authorized; issued 48,132,640 shares 0.5 0.5
Additional paid-in capital 157.5 159.8
Retained earnings 678.0 577.5
Unearned compensation (4.0) (1.9)
Accumulated translation adjustments (35.5) (14.3)
Treasury stock, at cost, 7,937,099 shares in 2000 and
6,522,967 shares in 1999 (254.1) (215.9)
---------- ----------
Total stockholders' equity 542.5 505.8
---------- ----------
Total liabilities and stockholders' equity $ 1,696.1 $ 1,759.9
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows provided by (used for) operating activities
Net earnings $ 100.6 $ 91.4
Noncash items included in earnings:
Dividends from associated companies, greater (less)
than equity in earnings (8.1) 3.8
Depreciation 61.5 60.5
Amortization 11.7 9.5
Deferred income taxes 24.9 11.9
Gain on sale of assets (4.8) (4.1)
Other 0.8 0.3
Changes in operating assets and liabilities
Accounts receivable (51.7) (7.8)
Inventories (16.9) 10.2
Accounts payable 16.0 3.0
Accrued expenses (2.3) (23.0)
Income taxes payable (2.4) 2.2
Other assets (5.6) (5.2)
Other liabilities (41.0) (22.5)
-------- --------
Net cash flows provided by operating activities 82.7 130.2
-------- --------
Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (54.3) (54.4)
Proceeds received on sale of assets 73.0 9.4
Acquisition of businesses, net of cash received (0.1) (32.3)
-------- --------
Net cash flows provided by (used for) investing activities 18.6 (77.3)
-------- --------
Cash flows provided by (used for) financing activities
Proceeds from the exercise of stock options and warrants 4.0 1.1
Purchase of treasury stock (51.3) (27.5)
Change in short-term borrowings -- (10.3)
Change in long-term debt (53.9) (4.4)
Proceeds received on sale of put options 0.6 1.0
-------- --------
Net cash flows used for financing activities (100.6) (40.1)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (2.2) (0.4)
-------- --------
Increase (decrease) in cash and cash equivalents (1.5) 12.4
Cash and cash equivalents, beginning of period 12.0 1.7
-------- --------
Cash and cash equivalents, end of period $ 10.5 $ 14.1
======== ========
</TABLE>
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 1999 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 September 30, 2000 and for the three and nine months ended
September 30, 2000 and 1999. Such adjustments are of a normal, recurring nature.
The consolidated statements of income for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for the full year.
(2) Acquisitions and Dispositions
During 1999, the Company acquired assets of the Nottingham Company's industrial
minerals product line, assets of the BOC Gases global phosphine fumigant product
line, Inspec Mining Chemicals S.A., and the amino coatings resins business of
BIP Limited. All four acquisitions were accounted for under the purchase method
of accounting and results of operations have been included from the dates of
acquisition. In addition, on January 21, 1999, the Company sold substantially
all the assets of its engineered moldings compounds business. For a more
detailed description of the 1999 acquisition and disposition transactions, refer
to Note 2 to the consolidated financial statements contained in the Company's
1999 Annual Report on Form 10-K, which is incorporated by reference herein.
At the date of the Inspec Mining Chemicals S.A. acquisition in September 1999,
the purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values. At the time, the purchase price exceeded
the fair value of the identifiable assets acquired and liabilities assumed by
$19.0, which was recorded as goodwill and included in Acquisition Intangibles in
the Consolidated Balance Sheet. Based on further valuation studies during 2000,
the fair value of the assets acquired was revised, which resulted in a $2.8
increase to goodwill. The $2.8 adjustment along with the original $19.0 excess
of the purchase price over the identifiable net assets acquired will be
amortized on a straight-line basis over a period of up to 40 years from the
original date of acquisition.
On July 10, 2000, the Company completed the sale of two subsidiaries, which
owned its 50% interest in Criterion Catalyst Company LP ("Criterion"), to its
joint venture partner CRI International, Inc., a company of the Royal Dutch
Shell Group, for cash consideration of $60.0 plus other consideration of $2.5.
The consideration received approximated the carrying value of the Company's
investment, which was included in equity in net assets of and advances to
associated companies. The sale resulted in taxes paid during the third quarter
of 2000 of $7.5; additional taxes of $2.5 will be paid during the fourth quarter
of 2000.
(3) Restructuring of Operations
In 1997 the Company recorded pretax restructuring charges in the amount of $38.4
primarily related to (i) restructuring at Botlek, The Netherlands; Linden, New
6
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
Jersey; Fortier, Louisiana and Willow Island, West Virginia, manufacturing
sites; (ii) restructuring at its corporate headquarters; (iii) costs to realign
its legal entity structure in Europe and (iv) costs associated with redundant
manufacturing sites after integrating Fiberite. The restructuring costs were
charged to the Consolidated Statement of Income as follows; manufacturing cost
of sales, $32.6; selling and technical services, $2.2; research and process
development, $1.0 and administrative and general, $2.6. The components of the
restructuring charges include: $28.6 for employee related costs; $3.8 for fixed
asset write-offs at the Company's facility in Botlek, The Netherlands; $1.2 for
plant closure costs and $4.8 for other actions. The employee related costs
primarily represent severance costs associated with the elimination of
approximately 415 positions worldwide. In the fourth quarter of 1999, the
Company reduced this restructuring accrual due to incurring lower than expected
costs for the shutdown of the Warner's, NJ facility and incurring fewer
personnel reductions by filling unanticipated open positions. As a result,
during the fourth quarter of 1999 the Company recognized a restructuring credit
of $3.0 in the Consolidated Statement of Income as follows: manufacturing cost
of sales, $2.7 and administrative and general, $0.3.
As of September 30, 2000, approximately 370 personnel reductions requiring
severance payments were completed and 3 additional reductions requiring
severance are planned to be completed by December 31, 2000. As of September 30,
2000, payments of $32.8 were made for these restructuring charges. At September
30, 2000, the liability to be paid was $2.3, essentially all of which is for the
remaining personnel reductions and for certain long-term payouts for employee
severance, primarily in Europe. The Company anticipates that, except for these
long-term payouts, all of the remaining restructuring costs will be paid in
2000.
Also in the fourth quarter of 1999, the Company recorded restructuring charges
of $3.6, primarily related to the consolidation of certain Specialty Materials'
manufacturing and research activities and the Fortier methanol plant shutdown
and related personnel reductions of 72 positions worldwide. The restructuring
costs were charged to the Consolidated Statement of Income as follows:
manufacturing cost of sales, $1.2; selling and technical services, $0.3;
research and process development, $1.7 and administrative and general, $0.4. As
of September 30, 2000, approximately 68 positions were eliminated and the
remainder are planned to be completed by the end of 2000. As of September 30,
2000, payments of $2.3 had been made for these charges. At September 30, 2000,
the remaining liability to be paid was $1.3.
For further information about restructuring of operations, refer to Other in
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A").
(4) Earnings Per Share (EPS)
Basic earnings per common share excludes dilution and is computed by dividing
net earnings less preferred stock dividends 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, weighted for the period outstanding. Diluted earnings per
common share is computed by dividing net earnings less preferred stock dividends
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 of the issuance had been used to repurchase common stock at the
average market price during the quarter. The proceeds used to repurchase common
stock are assumed to be the sum of the amount to be paid to the Company upon
exercise of options, the amount of compensation cost attributed to future
7
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
services and not yet recognized and the amount of income taxes that would be
credited to or deducted from capital upon exercise.
The following represents the reconciliation of the numerators and denominators
of the basic and diluted EPS computations for net earnings for the three and
nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
---- ----
Weighted Avg. Per Weighted Avg. Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS
---------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $27.8 40,596,470 $0.68 $35.2 42,904,369 $0.82
Effect of dilutive securities
-----------------------------
Options - 1,789,845 - - 1,502,084 -
Performance/Restricted stock - 103,442 - - 123,850 -
Warrants - 7,644 - - 2,324 -
Diluted EPS
-----------
Net earnings divided by the
weighted average shares
plus effect of dilutive
securities $27.8 42,497,401 $0.65 $35.2 44,532,627 $0.79
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---- ----
Weighted Avg. Per Weighted Avg. Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS
---------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $100.6 41,125,723 $2.45 $91.4 43,042,464 $2.12
Effect of dilutive securities
-----------------------------
Options - 1,651,803 - - 1,532,505 -
Performance/Restricted stock - 96,523 - - 90,751 -
Warrants - 4,266 - - 5,148 -
Diluted EPS
-----------
Net earnings divided by the
weighted average shares
plus effect of dilutive
securities $100.6 42,878,315 $2.35 $91.4 44,670,868 $2.05
</TABLE>
(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, as amended,
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts. In general, SFAS 133 requires an entity to recognize all derivatives
as either assets or liabilities on the balance sheet and measure those
instruments at fair value. It further provides criteria for derivative
instruments to be designated as "fair value," "cash flow," or "foreign currency"
hedges and establishes accounting standards for reporting changes in the fair
value of derivative instruments. If a derivative is deemed to be an effective
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against changes in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized on an
after-tax basis in accumulated other comprehensive income within the equity
section of the balance sheet until such time that the hedged item is recognized
in earnings. Derivatives that are not hedges, as well as the ineffective portion
of hedges must be adjusted to fair value through earnings. In connection with
the Company's risk management strategies, the Company holds certain foreign
8
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
exchange, commodity and interest rate instruments that have been deemed
derivatives pursuant to the criteria established in SFAS 133. Upon adoption, the
Company will be required to adjust certain of these derivatives to fair value in
the balance sheet and recognize the offsetting gains or losses as adjustments to
earnings or accumulated other comprehensive income, as appropriate. SFAS 133
will become effective for the Company beginning January 1, 2001. The Company is
continuing to review the potential impact of SFAS 133 on its consolidated
results of operations and financial position. Based on the expected accounting
treatment and current market conditions, the Company does not believe SFAS 133
will have a material effect on the Company's results of operations or financial
position.
In September 2000, the FASB issued its final consensus on Emerging Issues Task
Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs"
("EITF 00-10"). Among other things, EITF 00-10 prohibits the netting of shipping
and handling costs against shipping and handling revenues. EITF 00-10 permits
companies to adopt a policy of including shipping and handling costs in cost of
sales or on other income statement line items. If shipping or handling costs are
significant and are not included in cost of sales, a company is required to
disclose both the amounts of such costs and the line item(s) on the income
statement that include them. EITF 00-10 will become effective for the Company in
the fourth quarter of 2000 and upon application, requires reclassification of
prior period comparative financial statements. The Company's current policy is
to net shipping costs against shipping revenues as a component of net sales and
to reflect warehousing costs as a component of selling and technical services
expense. The Company expects to implement the requirements set forth in the
consensus during the fourth quarter of 2000. Such implementation will have no
effect on net income, but will result in higher reported net sales offset by
higher operating expenses.
(6) Inventories
The components of inventories at September 30, 2000 and December 31, 1999
consisted of the following:
September 30, December 31,
2000 1999
---- ----
Finished goods $ 95.5 $ 89.0
Work in Process 14.4 17.3
Raw materials & supplies 73.7 65.9
------ ------
183.6 172.2
Less reduction in LIFO cost (32.9) (32.7)
------ ------
$150.7 $139.5
====== ======
9
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(7) Equity in Earnings of Associated Companies
Summarized financial information for the Company's equity in earnings of
associated companies for the three and nine months ended September 30, 2000 and
1999 was as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $94.2 $125.3 $406.8 $384.5
Gross profit 15.3 20.4 90.3 77.9
Net income (loss) 2.7 (1.8) 29.3 6.8
----- ------ ------ ------
The Company's equity in earnings
(losses) of associated companies $ 2.3 $ (0.8) $ 12.2 $ 3.2
===== ====== ====== ======
</TABLE>
The above associated companies' information includes the results of the former
Criterion joint venture through July 10, 2000. On July 10, 2000, the Company
sold its 50% interest in the former Criterion joint venture. For further
information about the sale of Criterion see Note 2 of the Notes to Consolidated
Financial Statements.
(8) Long-Term Debt
At September 30, 2000 and December 31, 1999, the Company's long-term debt
consisted of the following:
September 30, December 31,
2000 1999
---- ----
Credit Facility $ 49.0 $103.0
Public Debt 319.6 319.5
------ ------
$368.6 $422.5
====== ======
(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 52 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.
10
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
In addition, from time to time in the ordinary course of its business, the
Company is informed of, and receives inquiries with respect to, new sites which
may contain environmental contamination for which the Company may be
responsible.
It is the Company's policy to accrue and charge against earnings, environmental
cleanup costs when it is probable that a liability has been incurred and an
amount is reasonably estimable. As assessments and cleanups proceed, these
accruals are reviewed periodically and adjusted, if necessary, as additional
information becomes available. These accruals can change substantially due to
such factors as additional information on the nature or extent of contamination,
methods of remediation required, and other actions by governmental agencies or
private parties. Cash expenditures often lag behind the period in which an
accrual is recorded by a number of years.
In accordance with the above policies, as of September 30, 2000 and December 31,
1999, the aggregate environmental related accruals were $110.1 and $122.9,
respectively, of which $20.0 was included in accrued expenses as of both dates,
with the remainder included in other noncurrent liabilities. Environmental
remediation spending for the nine months ended September 30, 2000 and 1999 was
$10.7 and $11.3, respectively. All accruals have been recorded without giving
effect to any possible future insurance proceeds (see also Note 11).
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 nine months ended September 30, 2000
and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Earnings $27.8 $35.2 $100.6 $91.4
Other comprehensive income (loss):
Foreign currency translation adjustments (8.5) 4.0 (21.2) (5.5)
----- ----- ------ -----
Comprehensive income $19.3 $39.2 $ 79.4 $85.9
===== ===== ====== =====
</TABLE>
11
<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 nine months ended September 30, 2000 and 1999 were
approximately $24.4 and $27.4, respectively (for further information about taxes
paid for the nine months ended September 30, 2000 see the discussion about the
sale of Criterion in Note 2 of the Notes to Consolidated Financial Statements).
Interest paid was approximately $22.1 for the nine months ended September 30,
2000 and 1999.
On January 25, 1999, the Company announced a program to spend up to $100.0 to
repurchase shares of its outstanding common stock. Through September 30, 2000,
the Company had repurchased 3,596,345 shares at a cost of $93.7 under this
program (for further information about the share repurchase program see the
Liquidity and Financial Condition section of MD&A. The Company completed the
repurchases under this program during the fourth quarter of 2000.
In connection with the Company's stock repurchase program, during the nine
months ended September 30, 2000 the Company sold an aggregate of 400,000 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 entitle the holder to sell an aggregate of 400,000 shares of the
Company's common stock to the Company at exercise prices ranging from $23.083 to
$24.553 per share. During the nine months ended September 30, 2000, 300,000 of
the put options expired unexercised. The remaining 100,000 put options expire in
December 2000. The Company received premiums of approximately $0.6 on the sale
of such options. In lieu of purchasing the shares from the put option holders,
the Company has the right to elect settlement by paying the holders of the put
options the excess of the strike price over the then market price of the shares
in either cash or additional shares of the Company's common stock, (i.e., net
cash or net share settlement). The 450,000 put options that were outstanding at
December 31, 1999 expired unexercised in February and April 2000.
On August 18, 2000 the early payout conditions of the stock appreciation plan,
which was implemented in 1995, were met and all eligible active employees
qualified for final payout of one thousand dollars per participant. The final
payout under the stock appreciation plan was approximately $2.8. For more
information about the stock appreciation plan, refer to Note 14 to the
consolidated financial statements contained in the Company's 1999 Annual Report
on Form 10-K, which is incorporated by reference herein.
During the nine months ended September 30, 2000, the Company recorded in other
income (expense), net a pre-tax gain of $13.3, discounted and net of expenses,
in connection with insurance settlement agreements entered into with a group of
insurance carriers in an environmental coverage suit. A portion of the proceeds
is scheduled to be received in eight equal quarterly installments, with the
first two payments having already been received during May and August 2000. Also
recorded in other income (expense), net during the nine months of 2000 was a
pre-tax gain of $7.1 related to the sale of real estate at a former plant site.
12
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(12) Segment Information
Summarized segment information for the Company's four segments for the three and
nine months ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales
<S> <C> <C> <C> <C>
Water and Industrial Process Chemicals $100.0 $92.4 $297.9 $274.3
Performance Products 116.5 108.1 358.6 327.5
Specialty Materials 103.9 105.3 310.6 340.0
Building Block Chemicals
Sales to external customers 47.7 38.3 141.8 116.6
Intersegment sales 17.0 8.9 45.6 29.5
------ ----- ------ --------
Net sales from segments 385.1 353.0 1,154.5 1,087.9
Elimination of intersegment revenue (17.0) (8.9) (45.6) (29.5)
------ ----- ------ --------
Total consolidated net sales $368.1 $344.1 $1,108.9 $1,058.4
====== ====== ======== ========
% of % of % of % of
Earnings from operations Sales Sales Sales Sales
----- ----- ----- -----
Water and Industrial Process Chemicals $10.0 10% $12.2 13% $31.1 10% $34.0 12%
Performance Products 14.6 13% 12.0 11% 45.6 13% 38.0 12%
Specialty Materials 21.4 21% 20.2 19% 63.6 20% 64.5 19%
Building Block Chemicals 0.8 1% 2.6 6% 4.7 3% 7.7 5%
----- ----- ------ -----
Earnings from segments 46.8 12% 47.0 13% 145.0 13% 144.2 13%
Corporate and Unallocated (0.4) (2.8) (3.4) (6.7)
----- ----- ------ ------
Total consolidated earnings from operations $46.4 13% $44.2 13% $141.6 13% $137.5 13%
===== ===== ====== ======
</TABLE>
(13) Subsequent Events
On October 16, 2000, the formation of PolymerAdditives.com, LLC, a joint venture
between the Company, Albermarle Corporation and GE Specialty Chemicals, Inc., an
operating unit of General Electric Company, was completed. PolymerAdditives.com,
LLC operates a fully functional business-to-business e-commerce internet site
and provides customers the ability to purchase a variety of polymer additives
from one source. Each founding member has an equal equity interest in the joint
venture.
On November 1, 2000, the Company completed the sales of its paper chemicals
sizing and strength business to Bayer Corporation and the direct sales portion
of its retention and drainage aids and fixative products business to the Ciba
Specialty Chemicals. The Company also agreed to produce paper chemicals for
Bayer Corporation and Ciba Specialty Chemicals under long-term manufacturing
agreements. The Company received approximately $116.0 in connection with these
transactions. Based on preliminary allocations of the purchase price, the
Company expects the after-tax proceeds to be approximately $80.0. Included in
the sale were the sales, marketing, research and development, and the technical
services personnel and the dedicated field and laboratory equipment associated
with the respective businesses. The Company retained approximately $15.0 of
paper chemicals' accounts receivable and all of its Water and Industrial Process
Chemicals production facilities.
On November 2, 2000, the Company announced a new program to spend up to $100.0
to repurchase shares of the Company's outstanding common stock. The repurchases
will be made from time to time on the open market or in private transactions and
will be utilized for stock option plans, benefit plans and other corporate
purposes.
13
<PAGE>
(Millions of dollars, except share and per share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
---------------------
Third Quarter of 2000 versus Third Quarter of 1999
--------------------------------------------------
Net sales for the third quarter of 2000 were $368.1, compared with $344.1 for
the third quarter of 1999. The increase was primarily due to sales increases in
the Water and Industrial Process Chemicals, Performance Products and Building
Block Chemicals segments of $7.6, $8.4 and $9.4, respectively. This increase was
partially offset by a sales decrease in the Specialty Materials segment of $1.4.
Net sales in the United States were $197.4 for the third quarter of 2000,
compared with $195.4 for the third quarter of 1999. International net sales were
$170.7 for the third quarter of 2000, or 46.4% of total net sales, compared with
$148.7, or 43.2% of total net sales for the third quarter of 1999.
In the North America region (i.e., United States and Canada), net sales were
approximately $213.5 for the third quarter of 2000, up 1.0% from the prior year
period. The increase was mainly due to a 2.3% increase in selling prices
(primarily in the Building Block Chemicals segment), partially offset by the
adverse effect of exchange rate changes, which reduced sales 0.4% and lower
selling volumes, which reduced sales another 0.9%.
In the Europe/Mideast/Africa region, net sales were $80.0 for the third quarter
of 2000, up 3.1% from the prior year period. Selling volumes, which were up in
all of the business segments, increased 10.0% and selling prices, which were up
mainly in the Building Block Chemicals segment, increased 2.0%. Partially
offsetting these increases were the adverse effects of exchange rate changes,
which reduced sales approximately 8.9%.
In the Asia/Pacific region, net sales were $49.3 for the third quarter of 2000,
up 30.1% from the prior year period. Selling volumes, which were up in the Water
and Industrial Process Chemicals, Performance Products and Specialty Materials
segments, increased about 14.9% and selling prices, which were up mainly in the
Building Block Chemicals segment, increased 15.0%. The favorable effects of
exchange rate changes also increased sales by approximately 0.2%.
In the Latin America region, net sales were $25.3 for the third quarter of 2000,
up 47.1% from the prior year period. The increase was primarily due to an
increase of approximately 46.0% in selling volumes. Selling volumes increased in
the Water and Industrial Process Chemicals, Performance Products and Building
Block Chemical segments. The increase in the Water and Industrial Process
Chemicals segment was mainly due to the acquisition of Inspec Mining Chemicals
S.A. ("IMC") in September of last year. Selling prices increased approximately
4.5%, while the adverse effect of exchange rate changes reduced sales by about
3.4%.
Manufacturing cost of sales was $258.8 or 70.3% of net sales in the third
quarter of 2000, which as a percentage of sales was up slightly when compared
with $236.4 or 68.7% of net sales for the prior year period. The combined
results of higher raw material costs and net unfavorable exchange rate changes
slightly offset the benefits from increased selling volumes, increased selling
prices, manufacturing rationalization programs and productivity initiatives.
Selling and technical services expenses were $38.1 for the third quarter of
2000, an increase of $2.4 from the prior year period. The increase was primarily
due to higher selling expenses (primarily sales force additions) in the Water
and Industrial Process Chemicals and Performance Products segments.
14
<PAGE>
(Millions of dollars, except share and per share amounts)
Research and process development expenses were $9.8 for the third quarter of
2000, a decrease of $0.9 from the prior year period. The decrease was due to
lower patent costs, which tend to fluctuate quarter to quarter depending on
activity and, lower research expenses, mainly in the Water and Industrial
Process Chemicals segment.
Administrative and general expenses were $11.9 for the third quarter of 2000, a
decrease of $2.5 from the prior year period. Included in the third quarter of
1999 was a charge of $2.5 for external costs associated with tax planning, which
resulted in a significant reduction in tax expenses.
Amortization of acquisition intangibles was $3.1 for the third quarter of 2000,
an increase of $0.4 from the prior year period. The increase was due to the
additional intangibles resulting from the acquisitions of the BOC Gases' global
phosphines fumigant product line, IMC and the amino coatings resins business of
BIP Limited (the "BIP Business") during 1999.
Other income (expense), net consisted of $0.1 of expenses for the third quarter
of 2000, compared with $3.9 of income for the prior year period. Included in
1999 were gains from divested product lines, sale of property and sale of
investments in unaffiliated companies.
Equity in earnings (losses) of associated companies, which represents the
Company's before-tax share of its 50% owned associates' earnings, was $2.3 for
the third quarter of 2000, an increase of $3.1 from the $0.8 loss of the prior
year period. The increase was primarily due to the absence of losses from
Criterion Catalyst Company LP ("Criterion"), in which the Company's interest was
sold on July 10, 2000. For further information about the sale of Criterion see
Note 2 of the Notes to Consolidated Financial Statements. Cyro Industries sales
were up about 11.2%, but earnings were essentially flat due to higher raw
material costs, principally acetone and methanol, which offset the benefits of
the higher sales.
Interest expense, net was $6.2 for the third quarter of 2000, a decrease of $0.3
from the prior year period. The decrease was primarily due to the lower
outstanding debt levels during the third quarter of this year.
The income tax provision was $14.6 for the third quarter of 2000, which reflects
an underlying effective tax rate of 34.5%. The income tax provision was $5.6 for
the prior year period and included a credit of $8.0 related to the utilization
of prior years' tax credits and a credit of $0.4 as a result of the Company
reducing its underlying effective tax rate for the nine months ended September
30, 1999 to 34.5%, from 35.0% during the third quarter in 1999.
Net earnings for the third quarter of 2000 were $27.8, or $0.65 per diluted
share, compared with $35.2, or $0.79 per diluted share for the prior year
period. Excluding from 1999 the credit of $8.0 ($0.18 per diluted share) in
income tax expense related to the utilization of prior years' tax credits, the
credit of $0.4 ($0.01 per diluted share) as a result of the Company reducing its
effective tax rate and the charge of $2.5 ($1.6 after-tax or $0.04 per diluted
share) in administrative and general expenses related to external costs
associated with such tax planning, net earnings for the third quarter of 1999
would have been $28.4 ($0.64 per diluted share). The period-over-period earnings
per diluted share growth reflects the sales growth and the favorable effect of
the Company's stock repurchase program.
15
<PAGE>
(Millions of dollars, except share and per share amounts)
Segment Results
---------------
Water and Industrial Process Chemicals:
Water and Industrial Process Chemicals sales increased 8.2% to $100.0 and
earnings from operations decreased 18.0% to $10.0.
Sales increased within all four product lines of the segment. For the overall
segment, selling volumes increased 12.0%, with approximately 5.2 percentage
points of the increase due to the acquisition of IMC in September of last year.
The increase in selling volumes was partially offset by the adverse effects of
exchange rate changes, which reduced sales by about 3.5%, and lower selling
prices, which were down about 0.3%.
The lower earnings from operations were primarily the result of higher raw
material costs of petroleum derivatives, such as propylene, net unfavorable
exchange rate changes, particularly in Europe, and lower selling prices which
more than offset the benefits from higher selling volumes and lower operating
costs.
On November 1, 2000, the Company completed the sale of its paper chemicals
business. For further discussions about the sale of the paper chemicals
business, see Note 13 of the Notes to Consolidated Financial Statements and
further discussions in the Liquidity and Financial Condition section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A").
Performance Products:
Performance Products sales increased 7.8% to $116.5 and earnings from operations
increased 21.7% to $14.6.
Sales increased within all three product lines of the segment. Specifically in
the polymer additives product line, sales increased as a result of strong demand
in Europe, Asia and North America. For the overall segment, selling volumes
increased 11.3%, with approximately 4.2 percentage points of the increase due to
the acquisition of the BIP Business in October of last year. The increase in
selling volumes was partially offset by the adverse effects of exchange rate
changes, which reduced sales by about 2.9%, and lower selling prices, which were
down about 0.6%.
The improved earnings from operations were primarily the result of higher
selling volumes, increased manufacturing productivity and certain licensing
fees, partially offset by higher raw material costs, lower selling prices and
the net adverse effects of exchange rate changes.
Specialty Materials:
Specialty Materials sales decreased 1.3% to $103.9 and earnings from operations
increased 5.9% to $21.4.
Selling volumes increased 1.1% due to increased demand from the commercial
aircraft markets including large commercial airliners, regional and business
jets. The Company's other aerospace markets, such as military aircraft, also
experienced sales volume growth. The increase in selling volumes was offset by
lower sales in the undivested portion of the engineered molding compounds
product line, lower selling prices and the adverse effects of exchange rate
changes, which reduced sales 1.3%, 0.4% and 0.7%, respectively.
The improved earnings from operations were primarily the result of the favorable
effects of manufacturing rationalization programs, productivity initiatives,
product mix and lower raw material costs.
16
<PAGE>
(Millions of dollars, except share and per share amounts)
Building Block Chemicals:
Building Block Chemicals sales to external customers were $47.7, an increase of
24.6% from the previous year period. Sales were favorably impacted by a sharp
increase in acrylonitrile selling prices, primarily due to strong global demand.
However, higher propylene costs, the key raw material for acrylonitrile, and
higher natural gas costs have adversely impacted this segment. As a result,
earnings from operations decreased 69.2% to $0.8.
For the overall segment, selling prices increased 37.2%, while the adverse
effects of exchange rate changes, the divestiture of the methanol plant in
December of last year and lower selling volumes reduced sales 3.2%, 3.4% and
6.0%, respectively.
Nine Months of 2000 versus Nine Months of 1999
----------------------------------------------
Net sales for the nine months of 2000 were $1,108.9, compared with $1,058.4 for
the nine months of 1999. The increase was primarily due to sales increases in
the Water and Industrial Process Chemicals, Performance Products and Building
Block Chemicals segments of $23.6, $31.1 and $25.2, respectively. This increase
was partially offset by a sales decrease in the Specialty Materials segment of
$29.4.
Net sales in the United States were $599.0 for the nine months of 2000, compared
with $605.4 for the nine months of 1999. International net sales were about
$509.9 for the nine months of 2000, or 46.0% of total net sales, compared with
$453.0, or 42.8% of total net sales for the nine months of 1999.
In the North America region, (i.e., United States and Canada) net sales were
approximately $648.7 for the nine months of 2000, down 0.7% from the prior year
period. The decrease was primarily due to a 1.9% decrease in selling volumes and
the adverse effect of exchange rate changes, which reduced sales 0.3%. The
decrease in selling volumes was in the Specialty Materials and Building Block
Chemicals segments. This decrease was partially offset by an increase in selling
prices, which were up about 1.5%.
In the Europe/Mideast/Africa region, net sales were $249.7 for the nine months
of 2000, up 2.1% from the prior year period. Selling volumes, which were up in
all of the business segments, increased about 9.0% and selling prices, which
were up mainly in the Building Block Chemicals segment, increased 0.6%. These
increases were partially offset by the adverse effect of exchange rate changes,
which reduced sales 7.5%.
In the Asia/Pacific region, net sales were $141.3 for the nine months of 2000,
up 31.0% from the prior year period. Selling volumes, which were up in all of
the business segments, increased approximately 17.9% and selling prices, which
were up in the Building Blocks Chemicals segment, increased 12.6%. The favorable
effects of exchange rate changes also increased sales by approximately 0.5%.
In the Latin America region, net sales were $69.2 for the nine months of 2000,
up 32.1% from the prior year period. The increase was primarily due to a 32.2%
increase in selling volumes. Selling volumes were up in the Water and Industrial
Process Chemicals, Performance Products and Building Block Chemicals segments.
The increase in the Water and Industrial Process Chemicals segment was mainly
due to the acquisition of IMC in September of last year. Selling prices
increased 2.6%, while the adverse effect of exchange rate changes reduced sales
by about 2.7%.
Manufacturing cost of sales was $777.2 or 70.1% of net sales for the nine months
of 2000, which as a percentage of sales was up slightly when compared with
$733.3 or 69.3% of net sales for the prior year period. The combined results of
higher raw material costs and net unfavorable exchange rate changes slightly
17
<PAGE>
(Millions of dollars, except share and per share amounts)
offset the benefits from increased selling volumes, increased selling prices,
manufacturing rationalization programs and productivity initiatives.
Selling and technical services expenses were $116.8 for the nine months of 2000,
an increase of $6.7 from the prior year period. The increase was primarily due
to higher selling expenses in the Performance Products segment.
Research and process development expenses were $28.6 for the nine months of
2000, a decrease of $1.9 from the prior year period. The decrease was due
primarily to lower patent costs, which tend to fluctuate depending on activity.
Administrative and general expenses were $35.5 for the nine months of 2000, a
decrease of $3.5 from the prior year period. Included in the nine months of 1999
was a charge of $2.5 for external costs associated with tax planning, which
resulted in a significant reduction in tax expenses.
Amortization of acquisition intangibles was $9.2 for the nine months of 2000, an
increase of $1.2 from the prior year period. The increase was due to the
additional intangibles resulting from the acquisitions of the BOC Gases' global
phosphines fumigant product line, IMC and the BIP Business.
Other income (expense), net was $20.2 for the nine months of 2000 and included a
pre-tax gain of $13.3, discounted and net of expenses, in connection with
insurance settlement agreements entered into with a group of insurance carriers
in an environmental coverage suit. A portion of the proceeds is scheduled to be
received in eight equal quarterly installments, with the first two payments
having already been received during May and August 2000. Also recorded in other
income (expense), net during the nine months of 2000 was a pre-tax gain of $7.1
related to the sale of real estate at a former plant site. Other income
(expense), net was $6.8 for the nine months of 1999 and included gains from
divested product lines, sale of property, and sale of investments in
unaffiliated companies.
Equity in earnings (losses) of associated companies, which represents the
Company's before-tax share of its 50% owned associates' earnings, was $12.2 for
the nine months of 2000, an increase of $9.0 from the prior year period. The
increase was primarily due to the operational improvements at Criterion,
relative to its loss last year. The Company's interest in Criterion was sold on
July 10, 2000. For further information about the sale of the Company's interest
in Criterion see Note 2 of the Notes to Consolidated Financial Statements. Cyro
Industries sales were up about 9.7%, but earnings were flat due to higher raw
material costs, principally acetone and methanol, which offset the benefits of
the higher sales.
Interest expense, net was $20.4 for the nine months of 2000, an increase of $0.3
from the prior year period. The increase was primarily due to the higher
interest rates during the nine months of this year.
The income tax provision was $53.0 for the nine months of 2000, which reflects
an underlying effective tax rate of 34.5%. The income tax provision was $36.0
for the prior year period and included a credit of $8.0 related to the
utilization of prior years' tax credits. Additionally, during the third quarter
of 1999, the Company reduced its underlying effective tax rate for the nine
months ended September 30, 1999 to 34.5%, down from 35.0% utilized for the six
months ended June 30, 1999.
Net earnings for the nine months of 2000 were $100.6, or $2.35 per diluted
share. Included in the nine months of 2000 was a gain of $13.3 ($8.7 after-tax
or $0.20 per diluted share) relating to environmental remediation insurance
settlements and a gain of $7.1 ($4.7 after-tax or $0.11 per diluted share) from
the sale of real estate at a former plant site. Excluding these gains, net
earnings for the nine months of 2000 were $87.2, or $2.03 per diluted share. Net
earnings for the nine months of 1999 were $91.4, or $2.05 per diluted share.
18
<PAGE>
(Millions of dollars, except share and per share amounts)
Included in the nine months of 1999 was a credit of $8.0 ($0.18 per diluted
share) in income tax expense related to the utilization of prior years' tax
credits and a charge of $2.5 ($1.6 after-tax or $0.04 per diluted share) in
administrative and general expenses related to external costs associated with
such tax planning. Excluding these items, net earnings for the nine months of
1999 were $85.0, or $1.90 per diluted share. The period-over-period earnings per
diluted share growth reflects the sales and earnings growth, as well as the
favorable effect of the Company's stock repurchase program.
Segment Results
---------------
Water and Industrial Process Chemicals:
Water and Industrial Process Chemicals sales increased 8.6% to $297.9 and
earnings from operations decreased 8.5% to $31.1.
Sales increased within all four product lines of the segment. For the overall
segment, selling volumes increased 12.1%, with approximately 4.7 percentage
points of the increase due to the acquisition of IMC in September of last year.
The increase in selling volumes was partially offset by the adverse effects of
exchange rate changes, which reduced sales by about 2.7% and lower selling
prices, which were down about 0.8%.
The lower earnings from operations were primarily the result of higher raw
material costs of petroleum derivatives, such as propylene, net unfavorable
exchange rate changes, particularly in Europe, and lower selling prices which
more than offset the benefits from higher selling volumes and lower operating
costs.
On November 1, 2000, the Company completed the sale of its paper chemicals
business. For further discussions about the sale of the paper chemicals
business, see Note 13 of the Notes to Consolidated Financial Statements and
further discussions in the Liquidity and Financial Condition section of MD&A.
Performance Products:
Performance Products sales increased 9.5% to $358.6. Specifically in the polymer
additives product line, sales increased as a result of strong demand in Europe,
Asia and North America. Earnings from operations increased 20.0% to $45.6.
For the overall segment, selling volumes increased 13.0%, with approximately 4.3
percentage points of the increase due to the acquisition of the BIP Business in
October of last year. The increase in selling volumes was partially offset by
the adverse effects of exchange rate changes, which reduced sales by about 2.7%
and lower selling prices, which were down about 0.8%.
The improved earnings from operations were primarily the result of higher
selling volumes, increased manufacturing productivity and certain licensing
fees, partially offset by higher raw material costs, lower selling prices and
the net adverse effects of exchange rate changes.
Specialty Materials:
Specialty Materials sales decreased 8.6% to $310.6 and earnings from operations
decreased 1.3% to $63.6.
Selling volumes decreased 7.0% primarily due to lower Boeing commercial aircraft
build rates and Boeing's transition from carbon to glass fiber composites for
certain aircraft interiors. Lower selling prices, the divestiture of the
engineered molding compounds product line and the adverse effects of exchange
rate changes reduced sales another 0.3% and 0.9% and 0.4%, respectively.
19
<PAGE>
(Millions of dollars, except share and per share amounts)
The lower earnings from operations were primarily the result of lower sales
volumes and slightly lower selling prices, partially offset by favorable product
mix, lower raw material costs, the net favorable effects of exchange rate
changes and the continuing benefits of manufacturing rationalization programs.
Building Block Chemicals:
Building Block Chemicals sales to external customers were $141.8, an increase of
21.6% from the previous year period. Sales were favorably impacted by a sharp
increase in acrylonitrile selling prices, primarily due to strong global demand.
However, higher propylene costs, the key raw material for acrylonitrile, and
higher natural gas costs have adversely impacted this segment. As a result,
earnings from operations decreased 39.0% to $4.7.
For the overall segment, selling prices increased 27.5% and selling volumes
increased 0.7%, while the adverse effects of exchange rate changes and the
divestiture of the methanol plant in December of last year reduced sales
approximately 2.6% and 4.0%, respectively.
Liquidity and Financial Condition
---------------------------------
At September 30, 2000, the Company's cash balance was $10.5, a decrease of $1.5
from year-end 1999.
Net cash flows provided by operating activities totaled $82.7 for the nine
months ended September 30, 2000, compared with $130.2 for the nine months ended
September 30, 1999. The decrease in operating cash was due primarily to higher
working capital levels and voluntary contributions to pre-fund the Company's
retiree medical benefits fund, partially offset by higher net earnings. Trade
receivables have increased due to higher net sales. Other receivables increased
$6.8 due to the environmental remediation insurance settlements, a portion of
which is payable in quarterly installments over the next two years and higher
receivables from product exchanges. Inventory has increased in certain areas to
support international sales growth. The Company continues to explore tactics to
reduce its overall inventory levels. Also included in the nine months ended
September 30, 2000 were taxes paid of $7.5 relating to the sale of the Company's
interest in Criterion.
Net cash flows provided by investing activities totaled $18.6 for the nine
months ended September 30, 2000, compared with net cash flows used for investing
activities of $77.3 for the nine months ended September 30, 1999. Included in
2000 was $60.0 from the sale of the Company's interest in Criterion (for further
information about the sale of the Company's interest in Criterion, refer to Note
2 of the Notes to Consolidated Financial Statements) and $10.3 from the sale of
former plant sites. Included in 1999 was funding of $32.3 for the acquisitions
of IMC, assets from the Nottingham Company's industrial minerals product line
and the BOC Gases' global phosphines fumigants product line, offset by proceeds
received of $9.4 from the sale of the molding compounds product line and from
the sale of other assets. Capital additions for the nine months ended September
30, 2000 were $54.3, compared with $54.4 for the same period last year. For the
full year 2000, the Company expects capital spending to be somewhere in the
range of $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 2000.
Net cash flows used for financing activities totaled $100.6 for the nine months
ended September 30, 2000, compared with $40.1 for the nine months ended
September 30, 1999. In connection with the stock repurchase program discussed
below, during the nine months ended September 30, 2000, the Company purchased
1,812,300 shares of treasury stock at a cost of $51.3. This compares with the
purchase of 1,149,245 shares of
20
<PAGE>
(Millions of dollars, except share and per share amounts)
Included in the nine months of 1999 was a treasury stock at a cost of $27.5
during the nine months ended September 30, 1999. For the nine months ended
September 30, 2000, $53.9 of long-term debt was paid. Whereas, during the nine
months ended September 30, 1999, $4.4 of long-term debt and $10.3 of foreign
currency denominated short-term borrowings were paid-off.
At September 30, 2000, the Company had $49.0 of outstanding borrowings under its
$200.0 credit Facility. On July 14, 2000, the Company terminated a second
364-day credit facility, dated August 20, 1999, which provided up to $200.0 in
unsecured revolving loans for general corporate purposes. During its term there
were no borrowings made under the second credit facility.
Through September 30, 2000, the Company repurchased 3,596,345 shares at a cost
of $93.7 under its $100.0 stock repurchase program. The Company completed the
repurchases under this program during the fourth quarter of 2000.
At September 30, 2000, $95.6 was available for stock repurchases under the terms
of the Company's Series C Cumulative Preferred Stock ("Series C Stock") and a
January 1999 agreement with American Cyanamid Company ("Cyanamid"), a
wholly-owned subsidiary of American Home Products Corporation and holder of the
Series C Stock, by which Cyanamid irrevocably waived certain financial covenants
contained in the Series C Stock. 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, capital expenditures and opportunities for strategic acquisitions. In
connection with the Company's stock repurchase program, the Company periodically
sells put options entitling the holder to sell shares of the Company's common
stock to the Company. For further information about the put options see Part II,
Item 2, Changes in Securities and Use of Proceeds.
On November 1, 2000, the Company completed the sales of its paper chemicals
sizing and strength business to Bayer Corporation and the direct sales portion
of its retention and drainage aids and fixative products business to the Ciba
Specialty Chemicals. The Company also agreed to produce paper chemicals for
Bayer Corporation and Ciba Specialty Chemicals under long-term manufacturing
agreements. The Company received approximately $116.0 in connection with these
transactions. Based on preliminary allocations of the purchase price, the
Company expects the after-tax proceeds to be approximately $80.0. Included in
the sale were the sales, marketing, research and development, and the technical
services personnel and the dedicated field and laboratory equipment associated
with the respective businesses. The Company retained approximately $15.0 of
paper chemicals' accounts receivable and all of its Water and Industrial Process
Chemicals production facilities.
Other
-----
The Company has announced that in conjunction with its strategic realignment and
other initiatives being planned or underway, the Company expects to take a
one-time charge against earnings in the fourth quarter of this year. While not
yet quantifiable, such charge is expected to be significant.
The Company has announced that industry conditions such as higher raw material
costs and likely softening in some end markets together with the adverse effects
of the Euro exchange rate changes will make achieving the First Call Consensus
estimate for the fourth quarter earnings per diluted share challenging, but that
the Company expects to meet such estimate before any one-time charges.
AC Molding Compounds, a partnership between a subsidiary of the Company and
Creative Moldings Ltd., has completed a consolidation of operations at its
Dallas, Texas facilities from Wallingford, Connecticut. Demand in end markets
for its products have slowed and AC Molding is currently operating at near
breakeven results. A new management team has been installed, but it is unlikely
21
<PAGE>
(Millions of dollars, except share and per share amounts)
the operations will improve over the next few quarters. While the partnership is
currently generating sufficient cash flows to meet its operational and financial
obligations, it is not in compliance with its existing bank covenants. AC
Molding owes the Company approximately $4.5 million, which is classified by the
Company as a current receivable. The Company is reviewing its strategic options
for the joint venture with its partner.
LaRoche Industries Inc. and LaRoche Fortier Inc., the Company's partner in
Avondale Ammonia Company, filed for bankruptcy under Chapter 11 during May 2000.
Although LaRoche Fortier "rejected" the Avondale Ammonia partnership agreement
and related ammonia supply agreement effective September 1, 2000, it retains a
50% interest in the assets of the partnership. The ammonia plant is continuing
to operate at near full rates with the Company purchasing from Avondale 100
percent of the plant's output. The Company is evaluating its alternatives.
On November 2, 2000, the Company announced a new program to spend up to $100.0
to repurchase shares of the Company's outstanding common stock. The repurchases
will be made from time to time on the open market or in private transactions and
will be utilized for stock option plans, benefit plans and other corporate
purposes.
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 will become effective
for the Company beginning January 1, 2001. In September 2000, the FASB issued
its final consensus on Emerging Issues Task Force Issue No. 00-10, "Accounting
for Shipping and Handling Fees and Costs" ("EITF 00-10"). EITF 00-10 will become
effective for the Company in the fourth quarter of 2000. For further discussions
about SFAS 133 and EITF 00-10 see Note 5 of the Notes to Consolidated Financial
Statements.
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
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.
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 by the end of the transition period in order for them
to be euro compliant. The Company's current estimate is that it will incur
system modification costs of approximately $0.3 and that the modifications will
be completed by the end of 2001. The Company does not currently believe that the
euro conversion will have a material operational impact.
22
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(Millions of dollars, except share and per share amounts)
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 2000 and beyond, the accretiveness of acquisitions, the
financial effects of divestitures, pricing trends, the effects of changes in
foreign exchange rates 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 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 global and regional economies; changes
in demand for the Company's products or in the costs and availability of its raw
materials; the actions of competitors; exchange rate fluctuations; the financial
condition of joint venture partners; the success of our customers' 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 and recoverability of investments in
associated companies and other unforeseen 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
1999 Annual Report on Form 10-K for the year ended December 31, 1999, filed with
the Securities and Exchange Commission on March 30, 2000 and incorporated by
reference herein. During 2000, the Company executed various financial instrument
transactions which do not give rise to significant market risk and thereby do
not materially alter the market risk assessment performed as of December 31,
1999. Included among those transactions are the following:
In connection with the Company's stock repurchase program, during the nine
months ended September 30, 2000 the Company sold an aggregate of 400,000
put options. The put options entitle the holder to sell an aggregate of
400,000 shares of the Company's common stock to the Company at exercise
prices ranging from $23.083 to $24.553 per share. During the quarters ended
June 30, 2000 and September 30, 2000, 300,000 of the put options expired
unexercised. The remaining 100,000 put options expire in December 2000. The
Company received premiums of approximately $0.6 on the sale of such
options. In addition, the 450,000 put options that were outstanding at
December 31, 1999 expired unexercised in February and April 2000. For a
further discussion, see Note 11 of the Notes to Consolidated Financial
Statements and further discussion in the Liquidity and Financial Condition
section of MD&A.
23
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
In connection with the 1993 Spin-off from American Cyanamid Company
("Cyanamid"), a wholly-owned subsidiary of American Home Products Corporation,
the Company assumed from Cyanamid substantially all liabilities for legal
proceedings relating to Cyanamid's chemicals businesses, other than any legal
proceedings related to remediation of Cyanamid's Bound Brook facility. In
connection with the Fiberite Acquisition, the Company assumed responsibility for
certain liabilities related to Fiberite's business. As a result, although
Cyanamid or Fiberite is the named defendant in cases relating to events prior to
the Spin-off or the Fiberite Acquisition, respectively, the Company is the party
in interest and is herein described as the defendant.
The Company is a defendant in 38 cases pending in state courts in Brazoria,
Galveston, Jefferson, Dallas and Nueces 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 involves 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 16 suits pending in California Superior Court in
Orange, Alameda, Los Angeles and San Francisco 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 law suit 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 a group 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. The Judgment also dismissed, with prejudice, the claims of
the six named plaintiffs whose cases had been tried in July. That decision was
affirmed on appeal. The case continues as a non-class action on behalf of the
other named plaintiffs.
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 little information on whether, or to what extent, most
members of the alleged class actually suffered any injury.
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 classes actually suffered any injury.
24
<PAGE>
The Company is one of several alleged processors of lead, lead pigments and/or
lead-based paints named as defendants in 12 cases pending in state and federal
courts in the states of New York, Ohio, Maryland, Rhode Island, Missouri,
California, Texas, Illinois and Wisconsin. The suits have been brought by
governmental entities and individual plaintiffs, on behalf of themselves and
others. The suits variously seek damages for the cost of removing lead-based
paints from buildings; for personal injuries allegedly caused by ingestion of
lead-based paints; the cost of monitoring, detecting and abating lead paint; the
cost of educating the public about lead paint; compensatory and punitive
damages; the cost of providing health care and special education to children
harmed by lead poisoning; and plaintiffs' attorneys' fees. The Company is sued
primarily as the alleged successor to MacGregor Lead Company from which the
Company purchased certain assets in 1971. The Company denies it is a successor
to MacGregor Lead Company. In some cases there are allegations that the Company
is liable in its own right, but none of the complaints specify any acts on which
such liability could be based.
The Company is one of several defendants in seven 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. Plaintiff in this action seeks 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 other four
cases include individuals who claim they developed various diseases as a result
of exposure to various chemicals while working at a Courtaulds Coatings plant in
New Jersey.
The Company also has been named as one of several defendants in 66 suits filed
in Louisiana state courts in St. Bernard, Orleans, Iberville and Jefferson
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 the grand jury investigation. As a result of the Grand Jury
Investigation, the Company and the other companies subpoenaed to testify before
the grand jury, are defendants in two civil antitrust class actions, brought on
behalf of purchasers of carbon fiber, which the complaints defined to include
prepregs manufactured from carbon fiber. One of these actions was brought in the
U.S. District Court for the Central District of California and the other was
brought in the California Superior Court in Dumboldt County. In each case the
complaint alleges that the defendants, manufacturers of carbon fiber and/or
prepregs manufactured therefrom, conspired to fix the prices of their products.
The Company is a party to an arbitration arising out of an agreement pursuant to
which the Company licensed certain technology. The Licensor alleges that the
Company is obligated to commercialize the licensed technology and compensate the
Licensor with royalty payments set forth in the agreement. The Company maintains
that commercialization is not feasible and that it has met all its obligations.
25
<PAGE>
See also the first four paragraphs of "Environmental Matters" under Item 1 of
the Company's 1999 Annual Report on Form 10-K, which is incorporated by
reference herein, and Note 9 of the Notes to the Consolidated Financial
Statements (unaudited) on Part I, item (1).
In addition to liabilities with respect to the specific cases described
previously, because the production of certain chemicals involves the use,
handling, processing, storage, transportation and disposal 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 past events.
Item 2. Changes in Securities and Use of Proceeds
In connection with the Company's stock repurchase program, during the nine
months ended September 30, 2000 the Company sold an aggregate of 400,000 put
options to two institutional investors in a series of private placements exempt
from registrations under Section 4(2) of the Securities Act of 1933. The put
options entitle the holder to sell an aggregate of 400,000 shares of the
Company's common stock to the Company at exercise prices ranging from $23.083 to
$24.553 per share. During the quarters ended June 30, 2000 and September 30,
2000, 300,000 of the put options expired unexercised. The remaining 100,000 put
options expire in December 2000. The Company received premiums of approximately
$0.6 on the sale of such options. In lieu of purchasing the shares from the put
option holders, the Company has the right to elect settlement by paying the
holders of the put options the excess of the strike price over the then market
price of the shares in either cash or additional shares of the Company's common
stock, (i.e., net cash or net share settlement).
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
See Exhibit Index on page 28 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 third quarter
of 2000.
26
<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
November 14, 2000
27
<PAGE>
Exhibit Index
-------------
12 Computation of Ratio of Earnings to Fixed Charges for the three and
nine months ended September 30, 2000 and 1999.
27 Financial Data Schedule
99 Material Incorporated by reference from Annual Report on Form 10-K
28
