<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 March 31, 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 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: 41,314,617 shares of Common
----------
Stock, par value $.01 per share, were outstanding at March 31, 2000.
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information
Item 1. Consolidated Financial Statements 3
Consolidated Statements of Income 3
Consolidated 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 19
Part II - Other Information 20
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 22
Exhibit Index 24
</TABLE>
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
Ended
March 31,
---------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Net sales $ 360.4 $ 355.3
Manufacturing cost of sales 251.2 249.9
Selling and technical services 39.5 37.1
Research and process development 9.5 10.3
Administrative and general 11.4 11.4
Amortization of acquisition intangibles 3.1 2.8
------------ -------------
Earnings from operations 45.7 43.8
Other income, net 4.1 2.3
Equity in earnings of associated companies 6.5 4.2
Interest expense, net 7.3 6.9
------------ -------------
Earnings before income taxes 49.0 43.4
Income tax provision 16.9 15.2
------------ -------------
Net earnings $ 32.1 $ 28.2
============ =============
Earnings per common share
Basic $0.77 $0.65
Diluted $0.74 $0.63
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Millions of dollars, except share and per share amounts)
March 31, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3.5 $ 12.0
Accounts receivable, less allowance for doubtful accounts
of $9.5 and $9.3 in 2000 and 1999, respectively 259.6 248.5
Inventories 153.8 139.5
Deferred income taxes 54.1 61.7
Other current assets 34.8 29.4
------------- --------------
Total current assets 505.8 491.1
Investment in associated companies 151.1 146.4
Plants, equipment and facilities, at cost 1,350.6 1,352.6
Less: accumulated depreciation (704.0) (696.9)
------------- --------------
Net plant investment 646.6 655.7
Acquisition intangibles, net of accumulated amortization 392.3 395.2
Deferred income taxes 50.6 48.8
Other assets 26.0 22.7
------------- --------------
Total assets $ 1,772.4 $ 1,759.9
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 107.3 $ 118.5
Accrued expenses 192.5 198.4
Income taxes payable 51.2 49.2
------------- -------------
Total current liabilities 351.0 366.1
Long-term debt 435.8 422.5
Other noncurrent liabilities 461.4 465.5
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 158.9 159.8
Retained earnings 609.6 577.5
Unearned compensation (5.1) (1.9)
Accumulated translation adjustments (18.3) (14.3)
Treasury stock, at cost, 6,818,023 shares in 2000 and
6,522,967 shares in 1999 (221.5) (215.9)
------------- --------------
Total stockholders' equity 524.2 505.8
------------- --------------
Total liabilities and stockholders' equity $ 1,772.4 $ 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>
Three Months Ended
March 31,
2000 1999
---------- ----------
<S> <C> <C>
Cash flows provided by (used for) operating activities
Net earnings $ 32.1 $ 28.2
Noncash items included in earnings:
Dividends from associated companies
less than earnings (5.9) (3.8)
Depreciation 20.5 20.3
Amortization 3.8 2.8
Deferred income taxes 5.9 (4.4)
Gain on sale of assets - (2.4)
Other 0.2 (0.3)
Changes in operating assets and liabilities
Accounts receivable (13.1) (4.6)
Inventories (15.3) 0.6
Accounts payable (10.5) 5.1
Accrued expenses (0.6) (13.8)
Income taxes payable 3.3 23.8
Other assets (12.5) (10.0)
Other liabilities (4.0) (6.4)
---------- ----------
Net cash flows provided by operating activities 3.9 35.1
---------- ----------
Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (15.7) (17.8)
Proceeds received on sale of assets 1.3 5.7
Acquisition of businesses, net of cash received - (4.0)
---------- ----------
Net cash flows used for investing activities (14.4) (16.1)
---------- ----------
Cash flows provided by (used for) financing activities
Proceeds from the exercise of stock options 2.5 0.4
Purchase of treasury stock (13.8) (12.8)
Change in short-term borrowings - (10.3)
Change in long-term debt 13.3 12.0
Proceeds received on sale of put options 0.2 0.6
---------- ----------
Net cash flows provided by (used for) financing activities 2.2 (10.1)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (0.2) 0.1
---------- ----------
Increase (decrease) in cash and cash equivalents (8.5) 9.0
Cash and cash equivalents, beginning of period 12.0 1.7
---------- ----------
Cash and cash equivalents, end of period $ 3.5 $ 10.7
========== ==========
</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 March 31, 2000 and for the three months ended March 31, 2000 and
1999. Such adjustments are of a normal, recurring nature. The consolidated
statement of income for the three months ended March 31, 2000 is 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 date 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.
(3) Restructuring of Operations
---------------------------
In 1997 the Company recorded pretax restructuring charges in the amount of $38.4
related primarily to (i) restructuring at Botlek, The Netherlands; Linden, New
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) redundant costs associated with
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.
6
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
As of March 31, 2000, approximately 367 eliminations requiring severance
payments were completed and 6 additional reductions requiring severance are
anticipated and will be substantially completed by December 31, 2000. As of
March 31, 2000, payments of $32.1 were made for these restructuring charges. At
March 31, 2000, the liability to be paid was $3.2, 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. 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. The personnel reduction primarily represents
severance costs associated with the elimination of approximately 72 positions
worldwide. As of March 31, 2000, approximately 44 positions were eliminated and
the remainder will be substantially completed by the end of 2000. As of March
31, 2000, payments of $1.2 were made for these charges. At March 31, 2000, the
liability to be paid was $2.5.
(4) Earnings Per Share (EPS)
------------------------
Basic earnings per common share excludes dilution and is 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, weighted for the
period outstanding. Diluted earnings per common share is 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 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 services and not yet recognized and the amount of income taxes that
would be credited to or deducted from capital upon exercise.
7
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
The following represents the reconciliation of the numerators and denominators
of the basic and diluted EPS computations for net earnings for the three months
ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
------------------------------------ -----------------------------------
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 $32.1 41,651,741 $0.77 $28.2 43,186,176 $0.65
Effect of dilutive securities
- -----------------------------
Options - 1,522,186 - - 1,430,359 -
Performance/Restricted stock - 56,390 - - 70,368 -
Warrants - 2,425 - - 7,694 -
Diluted EPS
- -----------
Net earnings divided by the
weighted average shares plus $32.1 43,232,742 $0.74 $28.2 44,694,597 $0.63
assumed conversions
</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 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 March 31, 2000 and December 31, 1999 consisted
of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------ ------
<S> <C> <C>
Finished goods $ 98.9 $ 89.0
Work in process 20.1 17.3
Raw materials & supplies 67.7 65.9
------ ------
186.7 172.2
Less reduction in LIFO cost (32.9) (32.7)
------ ------
$153.8 $139.5
====== ======
</TABLE>
8
<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 months ended March 31, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------
2000 1999
------ ------
<S> <C> <C>
Net sales $164.0 $131.1
Gross profit 41.3 32.9
Net income 19.8 8.4
------ ------
The Company's equity in earnings
of associated companies $ 6.5 $ 4.2
====== ======
</TABLE>
In connection with the audit of its December 31, 1999 financial statements,
Criterion Catalyst, a partnership with CRI International Inc., received a going
concern opinion, in which its independent auditors raise substantial doubt
about Criterion Catalyst's ability to continue as a going concern as Criterion
Catalyst does not currently have the ability to pay its credit facility
borrowings that are due November 30, 2000 absent a refinancing of its credit
facility or financial support by the partners. The Company has agreed to make
additional loans to Criterion Catalyst up to a maximum of $50.0 if Criterion
Catalyst is not in compliance with certain covenants in its principal credit
agreement. Criterion Catalyst expects that it will be able to extend or
refinance the credit facility borrowings before it is due on November 30, 2000.
The Company does not expect to provide Criterion Catalyst with additional
funding.
The Company has previously announced that it is in the process of evaluating all
strategic alternatives for its equity investment in Criterion Catalyst. The
Company believes, if it determines to sell its share of the partnership, that,
in all material respects, it will be able to recover the carrying value of its
investment in this equity investment.
(8) Long-Term Debt
--------------
At March 31, 2000 and December 31, 1999, the Company's long-term debt consisted
of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------ ------
<S> <C> <C>
Credit Facility $116.2 $103.0
Public Debt 319.6 319.5
------ ------
$435.8 $422.5
====== ======
</TABLE>
(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
9
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
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 56 Superfund sites. Since the laws
pertaining to these sites provide for joint and several liability, a
governmental plaintiff could seek to recover all remediation costs at a waste
disposal site from any of the potentially responsible parties ("PRPs") for such
site, including the Company, despite the involvement of other PRPs. In some
cases, the Company is one of several hundred identified PRPs, while in others it
is the only one or one of only a few. Generally, where there are a number of
financially solvent PRPs, liability has been apportioned, or the Company
believes, based on its experience with such matters, that liability will be
apportioned based on the type and amount of waste disposed by each PRP at such
disposal site and the number of financially solvent PRPs. The Company is also
conducting remediation at, or is otherwise responsible for, a number of non-
Superfund sites. Proceedings involving environmental matters, such as alleged
discharge of chemicals or waste material into the air, water or soil, are
pending against the Company in various states. In many cases, future
environmental-related expenditures cannot be quantified with a reasonable degree
of accuracy. In addition, from time to time in the ordinary course of its
business, the Company is informed of, and receives inquiries with respect to,
new sites which may contain environmental contamination for which the Company
may be responsible.
It is the Company's policy to accrue and charge against earnings, environmental
cleanup costs when it is probable that a liability has been incurred and an
amount is reasonably estimable. As assessments and cleanups proceed, these
accruals are reviewed periodically and adjusted, if necessary, as additional
information becomes available. These accruals can change substantially due to
such factors as additional information on the nature or extent of contamination,
methods of remediation required, and other actions by governmental agencies or
private parties. Cash expenditures often lag behind the period in which an
accrual is recorded by a number of years.
In accordance with the above policies, as of March 31, 2000 and December 31,
1999, the aggregate environmental related accruals were $121.0 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 three months ended March 31, 2000 and 1999 was $2.6
and $3.4, respectively. All accruals have been recorded without giving effect
to any possible future insurance proceeds (see Note 13).
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
<PAGE>
CYTEC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Millions of dollars, except share and per share amounts)
(10) Comprehensive Income
--------------------
The components of comprehensive income, which represents the change in equity
from non-owner sources, for the three months ended March 31, 2000 and 1999 was
as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
<S> <C> <C>
2000 1999
----- -----
Net earnings $32.1 $28.2
Other comprehensive income (loss):
Foreign currency translation adjustments (4.0) (8.0)
----- -----
Comprehensive income $28.1 $20.2
===== =====
</TABLE>
(11) Other Financial Information
---------------------------
Taxes paid for the three months ended March 31, 2000 and 1999 were approximately
$3.1 and $5.7, respectively. Interest paid for the three months ended March 31,
2000 and 1999 was approximately $8.3 and $8.2, 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 March 31, 2000, the
Company had repurchased 2,326,445 shares at a cost of $56.3 under this program
(for further discussions about the share repurchase program see the Liquidity
and Financial Condition section of Management's Discussion and Analysis of
Financial Condition and Results of Operations). 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
acquisitions arising from consolidation in the specialty chemicals and specialty
materials industries.
In connection with the Company's stock repurchase program, during the three
months ended March 31, 2000 the Company sold an aggregate of 200,000 put options
to an institutional investor in a series of private placements exempt from
registration under Section 4(2) of the Securities Act of 1933. The put options
entitle the holder to sell an aggregate of 200,000 shares of the Company's
common stock to the Company at exercise prices ranging from $23.083 to $23.552
per share. The put options expire in July and August 2000. The Company received
premiums of approximately $0.2 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). In addition, the 450,000 put options that were outstanding at
December 31, 1999 expired unexercised in February and April 2000.
11
<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
months ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C> <C> <C>
Net sales
- ---------
Water and Industrial Process Chemicals $ 95.6 $ 87.5
Performance Products 119.1 106.9
Specialty Materials 99.6 120.1
Building Block Chemicals
Sales to external customers 46.1 40.7
Intersegment sales 13.4 10.0
---------- ----------
Net sales from segments 373.8 365.2
Other revenues - 0.1
Elimination of intersegment revenue (13.4) (10.0)
---------- ----------
Total consolidated net sales $ 360.4 $ 355.3
========== ==========
% of % of
Earnings from operations Sales Sales
- ------------------------ ----- -----
Water and Industrial Process Chemicals $ 10.0 10% $ 9.5 11%
Performance Products 15.0 13% 12.0 11%
Specialty Materials 18.5 19% 21.5 18%
Building Block Chemicals 4.0 7% 2.6 5%
---------- ----------
Earnings from segments 47.5 13% 45.6 12%
Corporate and Unallocated (1.8) (1.8)
---------- ----------
Total consolidated earnings from operations $ 45.7 13% $ 43.8 12%
========== ==========
</TABLE>
(13) Insurance Settlements
---------------------
During April 2000, the Company entered into a settlement agreement with a group
of insurance carriers in an environmental remediation coverage suit originally
filed in the early 1990's by American Cyanamid Company ("Cyanamid"), a wholly-
owned subsidiary of American Home Products. In December 1993, the Company was
spun off from Cyanamid and later became a plaintiff in the suit.
As part of the settlement, the Company is to receive, net of expenses,
approximately $9.5 pretax ($5.8 discounted and after tax), which will be
included in other income, net for the quarter ended June 30, 2000. Payments are
expected to be received in eight equal quarterly installments beginning in May
2000. This settlement, together with the settlement of $4.2, net of expenses,
included in this year's first quarter other income, net brings the total net
proceeds to $13.7.
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
- ---------------------
First Quarter of 2000 versus First Quarter of 1999
- --------------------------------------------------
Net sales for the first quarter of 2000 were $360.4, compared with $355.3 for
the first quarter of 1999. The increase was due mainly to sales increases in
the Performance Products, Water and Industrial Process Chemicals and Building
Block Chemicals segments of $12.2, $8.1 and 5.4, respectively. This increase
was partially offset by a sales decrease in the Specialty Materials segment of
$20.5.
Net sales in the United States were $195.3 for the first quarter of 2000,
compared with $206.2 for the first quarter of 1999. International net sales
were $165.1 for 2000, or 45.8% of total net sales, compared with $149.1, or
42.0% of total net sales for the first quarter of 1999.
In the North America region, (i.e., United States and Canada) net sales were
$211.4 for the first quarter of 2000, down 5.2% from the prior year period. The
decrease was due mainly to a 4.8% decrease in selling volumes (primarily in the
Specialty Materials segment) and lower selling prices, which were down about
0.4%.
In the Europe/Mideast/Africa region, net sales were $83.1 for the first quarter
of 2000, up 1.0% from the prior year period. The increase was due mainly to an
8.5% increase in selling volumes. Selling volumes increased in the Performance
Products and Water and Industrial Process Chemicals segments. The increase in
the Performance Products segment was due primarily to the October 1999
acquisition of the amino coatings resins business of BIP Limited (the "BIP
Business") and the re-launch of certain polymer additives products in Europe.
The increase in selling volumes was partially offset by the adverse effect of
exchange rate changes, which reduced sales 6.9% and lower selling prices, which
reduced sales another 0.6%.
In the Asia/Pacific region, net sales were $45.0 for the first quarter of 2000,
up 37.6% from the prior year period. Selling volumes, which were up in all
business segments, increased 26.1% and selling prices, which were up in the
Building Blocks Chemicals segment, increased 9.6% and exchange rate changes
increased sales 1.9%.
In the Latin America region, net sales were $20.9 for the first quarter of 2000,
up 21.5% from the prior year period. The increase was due mainly to a 22.2%
increase in selling volumes. Selling volumes increased in the Building Block
Chemicals, Water and Industrial Process Chemicals and Performance Products
segments. The increase in the Water and Industrial Process Chemicals segment
was due mainly to the September 1999 acquisition of Inspec Mining Chemicals S.A.
("IMC"). Selling prices increased 0.2% in the region. Partially offsetting
these increases was the adverse effect of exchange rate changes, which reduced
sales about 0.9%.
Manufacturing cost of sales was $251.2 or 69.7% of net sales in the first
quarter of 2000, which as a percentage of sales was down slightly when compared
with $249.9, or 70.3% of net sales for the prior year period. Manufacturing
costs as a percentage of net sales continued to benefit in the first quarter of
2000 from plant productivity improvements in the Performance Products segment,
13
<PAGE>
(Millions of dollars, except share and per share amounts)
manufacturing rationalization and consolidation of operations in the Specialty
Materials segment, increased selling volumes in the Water and Industrial Process
Chemicals and Performance Products segments and increased selling prices in the
Building Blocks Chemicals segment. Partially offsetting these benefits were
higher raw material costs in the Building Block Chemicals segment and the
adverse effects of exchange rate changes.
Selling and technical services expenses were $39.5 for the first quarter of
2000, an increase of $2.4 from the prior year period. The increase was due
mainly to higher international selling expenses resulting from the acquisitions
in the Water and Industrial Process Chemicals and Performance Products segments.
Research and process development expenses were $9.5 for the first quarter of
2000, a decrease of $0.8 from the prior year period. The decrease was due
mainly to lower patent costs, which tend to fluctuate quarter to quarter
depending on activity, and lower research expenses at the business unit level.
Administrative and general expenses were $11.4 for the first quarter of 2000 and
remained unchanged from the prior year period.
Amortization of acquisition intangibles was $3.1 for the first quarter of 2000,
an increase of $0.3 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, net was $4.1 for the first quarter of 2000 and included proceeds
of $4.2, net of expenses, received from an insurance settlement agreement
entered into with a group of insurance carriers in an environmental coverage
suit. As part of the settlement, the Company is to receive, net of expenses,
approximately $9.5 pretax ($5.8 discounted and after tax or $0.13 per diluted
share using the first quarter effective tax rate and share basis), which will be
included in other income, net for the quarter ended June 30, 2000. Payments are
expected to be received in eight equal quarterly installments beginning in May
2000. This settlement, together with the settlement of $4.2, net of expenses,
included in this year's first quarter other income, net brings the total net
proceeds to $13.7. For further discussions about the insurance settlement
agreement see Note 13 of the Notes to Consolidated Financial Statements. Other
income, net was $2.3 for the first quarter of 1999 and included approximately
$2.6 of gains from divested product lines.
Equity in earnings of associated companies, which represents the Company's
before-tax share of its 50% owned associates' earnings, was $6.5 for the first
quarter of 2000, an increase of $2.3 from the prior year period. The increase
was primarily due to improved sales volume and improved cost controls at
Criterion Catalyst. CYRO Industries earnings were down due primarily to higher
raw material costs.
Interest expense, net was $7.3 for the first quarter of 2000, an increase of
$0.4 from the prior year period.
The income tax provision was $16.9 for the first quarter of 2000, which reflects
an underlying effective tax rate of 34.5%, down from 35.0% utilized for the
first quarter of 1999.
Net earnings for the first quarter of 2000 were $32.1, or $0.74 per diluted
share, compared with $28.2, or $0.63 per diluted share for the prior year
period. Included in the first quarter of 2000 was an after-tax gain of $2.8, or
14
<PAGE>
(Millions of dollars, except share and per share amounts)
$0.06 per diluted share from an environmental remediation insurance settlement.
Excluding this item diluted earnings per share were $0.68 for the first quarter
of 2000, an increase of $0.05, or 7.9% from the prior year period. The period-
over-period increase in diluted earnings per share 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 9.3% to $95.6 and
earnings from operations increased 5.3% to $10.0. Sales increased in the water,
mining and paper chemical product lines. As previously announced, the Company
is reviewing strategic options for the paper chemicals product line.
For the segment overall, selling volumes were up 12.9%, with the acquisition of
IMC accounting for approximately 5.4 percentage points of the increase. The
increase in selling volumes was partially offset by lower selling prices, which
were down about 1.6%, and the adverse effect of exchange rate changes, which
reduced sales another 2.0%.
The improved earnings from operations were primarily the result of higher
selling volumes partially offset by lower selling prices, the adverse effects of
exchange rate changes in Europe and increased raw material costs, primarily
driven by propylene.
Performance Products:
Performance Products sales increased 11.4% to $119.1 and earnings from
operations increased 25.0% to $15.0. Sales increased in all three product
lines, with specialty resins and polymer additives achieving sales increases of
15.1% and 11.3%, respectively.
For the segment overall, selling volumes were up 15.6%, with the acquisition of
the BIP Business accounting for approximately 5.7 percentage points of the
increase. The increase in polymer additives sales volumes resulted from strong
sales of most products in Asia and North America, and the success of re-
launching certain products in Europe. 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 2.2%.
The improved earnings from operations were primarily the result of higher
selling volume, lower raw material costs, increased manufacturing productivity,
and lower costs associated with certain triazines licensing fees, partially
offset by lower selling prices and the adverse effects of exchange rate changes.
Specialty Materials:
Specialty Materials sales were $99.6, a decrease of 17.1% from the previous year
period. Sales were negatively impacted by lower build rates primarily for large
commercial aircraft, customer cycle time improvements, which lead to inventory
and supply chain reductions, and the transition from carbon fibers to less
expensive glass fibers for certain aircraft interiors. For the segment overall,
selling volumes decreased 16.3%, with the divestiture of the engineered molding
compounds product line accounting for approximately 0.6 percentage points of the
decrease in selling volumes. Selling prices decreased 0.6% and exchange rate
changes reduced sales by 0.2%.
15
<PAGE>
(Millions of dollars, except share and per share amounts)
Earnings from operations decreased 14.0% to $18.5. Earnings from operations
were negatively impacted from lower selling volumes and lower selling prices,
partially offset by the benefits of the ongoing manufacturing rationalization
programs started last year.
Building Block Chemicals:
Building Block Chemicals sales to external customers were $46.1, an increase of
13.3% from the previous year period. Improved global demand and plant outages
have caused a tight acrylonitrile market and sharply increased selling prices.
However, the cost for propylene, the key raw material for acrylonitrile, has
risen faster than selling prices, which reduced first quarter acrylonitrile
margins when compared to the same period last year. Earnings from operations
were $4.0 compared to $2.6 for the same period last year as the Company's plants
ran well and at lower costs.
For the segment overall, selling prices increased 14.8%, exchange rate changes
reduced sales 2.2% and selling volumes increased 0.6%. Excluding the effect of
the methanol divestiture in the fourth quarter of 1999, selling volumes
increased 6.0%.
Liquidity and Financial Condition
- ---------------------------------
At March 31, 2000, the Company's cash balance was $3.5, a decrease of $8.5 from
year-end 1999.
Net cash flows provided by operating activities totaled $3.9 for the three
months ended March 31, 2000, compared with $35.1 for the three months ended
March 31, 1999. Cash flows from operations were impacted by several events.
Accounts payable decreased due to the timing of year-end 1999 vendor payments as
a precaution against any Year 2000 events, thereby increasing cash clearing in
the first quarter of 2000. Inventory increased as a result of the timing of
production campaigns and inventory build in anticipation of ending certain
tolling arrangements in several businesses.
Net cash flows used for investing activities totaled $14.4 for the three months
ended March 31, 2000, compared with $16.1 for the three months ended March 31,
1999. Included in 2000 were proceeds received of $1.3 from the sale of the
former Newark, Delaware facility. Capital additions for the three months ended
March 31, 2000 were $15.7, compared with $17.8 for the same period last year.
Also included in 1999 was funding of $4.0 for the acquisition of the Nottingham
industrial minerals product line and proceeds received of $5.7 from the sale of
the molding compounds product lines. For the full year 2000, the Company expects
capital spending to be in the range of $100.0 to $105.0.
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 provided by financing activities totaled $2.2 for the three
months ended March 31, 2000, compared with $10.1 of net cash flows used for
financing activities for the three months ended March 31, 1999. In connection
with the stock repurchase program discussed below, during the three months ended
March 31, 2000, the Company purchased 542,400 shares of treasury stock at a cost
of $13.8. This compares with the purchase of 510,800 shares of treasury stock
at a cost of $12.8 during the three months ended March 31, 1999. Also, during
the three months ended March 31, 1999, $10.3 of foreign currency denominated
16
<PAGE>
(Millions of dollars, except share and per share amounts)
short-term borrowings were paid-off. Partially offsetting these uses of cash in
2000 and in 1999 were increases in long term debt of $13.3 and 12.0,
respectively.
In connection with the Company's stock repurchase program, during the three
months ended March 31, 2000 the Company sold an aggregate of 200,000 put options
to an institutional investor in a series of private placements exempt from
registration under Section 4(2) of the Securities Act of 1933. The put options
entitle the holder to sell an aggregate of 200,000 shares of the Company's
common stock to the Company at exercise prices ranging from $23.083 to $23.552
per share. The put options expire in July and August 2000. The Company received
premiums of approximately $0.2 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). In addition, the 450,000 put options that were outstanding at
December 31, 1999 expired unexercised in February and April 2000.
Through March 31, 2000, the Company had repurchased 2,326,445 shares at a cost
of $56.3 under its $100.0 stock repurchase program. At March 31, 2000, $111.1
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, the holder of the Series C Stock irrevocably waiving
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 acquisitions arising from consolidation in the Specialty
Chemicals and Specialty Materials industry.
In connection with the audit of its December 31, 1999 financial statements,
Criterion Catalyst, a partnership with CRI International Inc., received a going
concern opinion, in which its independent auditors raise substantial doubt
about Criterion Catalyst's ability to continue as a going concern as Criterion
Catalyst does not currently have the ability to pay its credit facility
borrowings that are due November 30, 2000 absent a refinancing of its credit
facility or financial support by the partners. The Company has agreed to make
additional loans to Criterion Catalyst up to a maximum of $50.0 if Criterion
Catalyst is not in compliance with certain covenants in its principal credit
agreement. Criterion Catalyst expects that it will be able to extend or
refinance the credit facility borrowings before it is due on November 30, 2000.
The Company does not expect to provide Criterion Catalyst with additional
funding.
The Company has previously announced that it is in the process of evaluating all
strategic alternatives for its equity investment in Criterion Catalyst. The
Company believes, if it determines to sell its share of the partnership, that,
in all material respects, it will be able to recover the carrying value of its
investment in this equity investment.
LaRoche Industries Inc. and LaRoche Fortier Inc., the Company's partner in
Avondale Ammonia Company, filed for bankruptcy under Chapter 11 during May 2000.
The Company is evaluating the effect of LaRoche's bankruptcy filing on the joint
venture operations.
17
<PAGE>
(Millions of dollars, except share and per share amounts)
OTHER
- ------
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.
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 at the end of the transition period in order for them
to be euro compliant and it is currently assessing the financial impact of such
modifications. The Company expects to complete this assessment by the end of the
second quarter of 2000. The Company does not currently believe that the euro
conversion will have a material operational 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 2000 and beyond, the accretiveness of acquisitions, the
financial effects of divestitures, 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
18
<PAGE>
(Millions of dollars, except share and per share amounts)
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 the general economy; changes in demand
for the Company's products or in the costs and availability of its raw
materials; the actions of competitors; the 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 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
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 three
months ended March 31, 2000 the Company sold an aggregate of 200,000 put
options. The put options entitle the holder to sell an aggregate of 200,000
shares of the Company's common stock to the Company at exercise prices ranging
from $23.083 to $23.552 per share. The put options expire in July and August
2000. The Company received premiums of approximately $0.2 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 Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A").
19
<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 commenced 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 33 cases pending in state courts in Brazoria,
Galveston, Jefferson 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. One 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 seven
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 ten suits pending in California Superior Court in
Alameda 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 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 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 in the case. The Judgment also dismissed, with prejudice,
the claims of the six named plaintiffs whose cases had been tried in July. The
Louisiana Court of Appeals for the 5th Circuit affirmed that decision. 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 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.
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.
20
<PAGE>
The Company is one of several alleged processors of lead, lead pigments and/or
lead-based paints named as defendants in ten cases pending in state and federal
courts in the states of New York, Ohio, Maryland, Rhode Island, Missouri,
California 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 named a defendant 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.
The Company is one of several defendants in six 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 33 suits filed
in Louisiana state courts in St. Bernard, Orleans, Webster 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 is a defendant in an antitrust class action filed in
the U.S. District Court for the Central District of California on behalf of
purchasers of carbon fiber, which the complaint defined to include prepregs
manufactured from carbon fiber. The complaint alleges that the defendants,
manufacturers of carbon fiber and/or prepregs manufactured therefrom, conspired
to fix the prices of their products.
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
21
<PAGE>
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 6. Exhibits and Reports on Form 8-K
--------------------------------
(a). Exhibits
--------
See Exhibit Index on page 24 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 first quarter
of 2000.
22
<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
May 15, 2000
23
<PAGE>
Exhibit Index
- -------------
12 Computation of Ratio of Earnings to Fixed Charges for the three months
ended March 31, 2000 and 1999
27 Financial Data Schedule
99 Material Incorporated by reference from Annual Report on Form 10-K
24
<PAGE>
Exhibit 12
Cytec Industries Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in millions)
Three Months
Ended
March 31,
---------
2000 1999
---- ----
Earnings before income taxes and equity in
earnings of associated companies 42.5 39.2
Add:
Distributed income of associated companies 0.6 0.1
Amortization of capitalized interest - -
Fixed Charges 8.8 8.7
Less:
Capitalized interest - -
---- ----
Earnings as adjusted 51.9 48.0
Fixed Charges:
Interest on indebtedness including
amortized premiums, discounts and
deferred financing costs 7.8 7.5
Portion of rents representative of the
interest factor 1.0 1.2
---- ----
Fixed charges 8.8 8.7
---- ----
Ratio of earnings to fixed charges 5.9 5.5
==== ====
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 3,500
<SECURITIES> 0
<RECEIVABLES> 269,100
<ALLOWANCES> 9,500
<INVENTORY> 153,800
<CURRENT-ASSETS> 505,800
<PP&E> 1,350,600
<DEPRECIATION> (704,000)
<TOTAL-ASSETS> 1,772,400
<CURRENT-LIABILITIES> 351,000
<BONDS> 319,600
0
100
<COMMON> 500
<OTHER-SE> 523,600
<TOTAL-LIABILITY-AND-EQUITY> 1,772,400
<SALES> 360,400
<TOTAL-REVENUES> 360,400
<CGS> 251,200
<TOTAL-COSTS> 314,700
<OTHER-EXPENSES> (4,100)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,300<F1>
<INCOME-PRETAX> 49,000<F2>
<INCOME-TAX> 16,900
<INCOME-CONTINUING> 32,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,100
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.74
<FN>
<F1>This number represents interest expense, net
<F2>This number includes equity in net income of associated companies of $6,500 for
the three months ended March 31, 2000.
</FN>
</TABLE>
<PAGE>
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 Note 2 to Part I, Item 1 ("Notes to Consolidated
Financial Statements").
During 1999 the Company completed the following acquisition and disposition
transactions:
On January 25, 1999, the Company acquired assets of the Nottingham Company's
industrial minerals product line for $4.0. The purchase price exceeded the fair
value of the identifiable assets acquired by $0.5, which 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 Water and Industrial Process Chemicals segment.
On August 11, 1999, the Company acquired assets of the BOC Gases' global
phosphine fumigants product line for $3.5. The purchase price exceeded the fair
value of the identifiable assets acquired by $1.2, which will be amortized on a
straight-line basis over a period of up to 20 years. The terms of the
acquisition provide for up to two additional payments aggregating up to $1.0 to
be paid upon approval by the U.S. Environmental Protection Agency of certain
fumigant registrations and for additional consideration to be paid if the
acquired product line's net sales exceed certain targeted levels. The
contingency for payment of $0.3 of additional consideration was met during the
first quarter of 2000 and was recorded as additional goodwill. All additional
payments are payable in cash and will be recorded as additional goodwill when
the contingencies for payment have been met. The acquired business was
integrated into the Company's Water and Industrial Process Chemicals segment.
On September 16, 1999, the Company acquired Inspec Mining Chemicals S.A. from
Laporte plc for $25.1, net of $0.8 cash received. The purchase price exceeded
the fair value of the identifiable assets acquired by $19.0, which will be
amortized on a straight-line basis over a period of up to 40 years. The
acquisition, which included two manufacturing operations and a research and
development center located in Chile, was integrated into the Company's Water and
Industrial Process Chemicals segment.
On October 29, 1999, the Company acquired the amino coatings resins business of
BIP Limited for approximately $37.2 in cash plus future consideration with a
value equivalent to approximately $8.3. The purchase price exceeded the fair
value of the identifiable assets acquired by $36.7, which will be
<PAGE>
amortized on a straight-line basis over a period of up to 40 years. The acquired
business was integrated into the Company's Performance Products segment. BIP
will retain its manufacturing plant in Oldbury, United Kingdom, where it will
continue to manufacture certain amino coatings resins for Cytec for at least one
year.
All four acquisitions have been recorded under the purchase method of accounting
with the purchase prices allocated to the assets received and liabilities
assumed, based on their estimated fair values. The results of operations for the
acquired businesses are included from the dates of acquisition in the
Consolidated Financial Statements. Amounts recorded as excesses of the purchase
price over the identifiable assets acquired ("goodwill") are included in
Acquisition Intangibles in the Consolidated Balance Sheet. Goodwill, net of
accumulated amortization, totaled $343.9 at December 31, 1999. Consolidated
results of operations for 1999 or 1998 would not have been materially different
if any of the acquisitions had occurred on January 1, 1998. Accordingly, pro
forma sales, net earnings and earnings per share disclosures have not been
provided.
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.
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, interest rates and equity
price changes. Actual results could differ materially from those projected in
this forward-looking analysis.
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
or speculative purposes. Moreover, the Company enters into financial instrument
transactions primarily with major financial institutions or highly-rated
counterparties, thereby limiting exposure to credit- and performance-related
risks.
<PAGE>
Foreign Exchange Rate Risk
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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,
1999, 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, 1999, the Company had net foreign exchange contracts to purchase
$6.5 of various currencies, primarily Dutch guilders and German marks and to
sell $5.8 of various currencies, primarily British pounds for U.S. dollars. The
Company also had contracts to sell Dutch guilders with a value equivalent to
$13.4 for British pounds and contracts to purchase Norwegian krone with a value
equivalent to $4.3 for other European currencies. 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 $3.4. 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.
Commodity Price Risk
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The Company selectively utilizes natural gas derivative contracts including
forward contracts, which are principally settled through actual delivery of the
physical commodity, and other hedging arrangements, predominantly cash-settled
swap transactions, to manage its exposure to price risk associated with the
production of ammonia and other building block chemical products. The maturity
of these contracts correlate highly to the actual purchases of the commodity and
have the effect of securing predetermined prices that the Company pays for the
underlying commodity. While these contracts are structured to 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. Realized gains and losses on these contracts are included in
the cost of the commodity upon settlement of the contract, with amounts paid or
received on early termination deferred on the balance sheet until such time.
At December 31, 1999, the Company had $2.8 net natural gas forward commodity and
cash-settled swap contracts outstanding. Based on year-end prices, the Company
had a net unrealized loss of $0.4. Assuming that year-end prices were to
adversely change
<PAGE>
by a hypothetical 10%, the incremental increase in cost of goods sold would be
approximately $0.2.
Interest Rate Risk
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At December 31, 1999, the financial liabilities of the Company exposed to
changes in interest rates consisted primarily of long-term debt, which had a
carrying value of $422.5 (fixed rate public debt of $319.5 and variable rate
credit facility borrowings of $103.0) and a fair value of approximately $399.1.
Additionally the Company was party to two interest rate swap agreements that
effectively change the characteristics of the long-term debt. One of the
interest rate swap agreements converts $25.0 of the Company's $319.5 fixed rate
public debt to variable rate debt and the other interest rate swap agreement
converts $20.0 of variable rate credit facility borrowings to fixed rate
interest obligations. For fixed rate debt, interest rate changes affect fair
value but do not impact earnings or cash flows. Conversely, for variable rate
debt, interest rate changes generally do not affect fair value but do impact the
future earnings and cash flows, assuming other factors are held constant.
At December 31, 1999, after adjusting for the effects of interest rate swap
agreements, the Company had fixed rate long-term debt of $314.5 and variable
rate long-term debt of $108.0. Assuming a hypothetical increase of 1% in
interest rates and all other variables (such as debt levels) were to remain
constant, interest expense on variable rate long-term debt would increase $1.1
per year and the fair market value of the fixed rate long-term debt would
decrease $12.5.
Equity Price Risk
- -----------------
In connection with the Company's stock repurchase program, the Company
selectively utilizes freestanding put option contracts that are indexed to the
Company's stock. 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 put option contracts are initially measured
at fair value and reported in Stockholders' Equity. Subsequent changes in fair
value are not recognized in the financial statements.
At December 31, 1999, the Company had 450,000 put options outstanding that
expire on various dates in February and April 2000 and entitled the holders to
sell an aggregate of 450,000 shares of the Company's common stock to the Company
at exercise prices ranging from $21.00 to $22.125 per share. The Company
received premiums of approximately $0.5 on the sale of such put options. The put
options outstanding at December 31, 1999, had exercise prices that were less
than the Company's stock price as of that date. Assuming that the Company's
stock price were to adversely change by a hypothetical 10% or greater from its
year-end closing price, the Company could be subject to purchasing the 450,000
shares of common stock for a maximum of $9.6, which would be recognized as an
adjustment to Stockholders' Equity.
