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Cytec Announces Fourth Quarter and Full Year Results - Full Year 2007 Outlook Provided

Published on 2007-02-07. Author : SpecialChem

West Paterson, New Jersey -- Cytec Industries Inc. (NYSE:CYT) announced net earnings for the fourth quarter of 2006 of $83.4 million or $1.70 per diluted share on net sales of $794 million. Included in the quarter are several special items as outlined further in this release. Excluding these special items, net earnings were $37.4 million or $0.76 per diluted share.

Net earnings for the fourth quarter of 2005 were $18.4 million, or $0.39 per diluted share, on net sales of $788 million. Included in the quarter were several special items as outlined further in this release. Excluding these special items, net earnings were $26.4 million or $0.56 per diluted share.

David Lilley, Chairman, President and Chief Executive Officer said, "Overall, we had a solid quarter with our diluted earnings per share up 36% after excluding the special items as discussed further on. The Engineered Materials segment selling volumes were significantly higher than the prior year particularly in the large commercial aircraft sector. Similar to the prior quarters of 2006, our specialty chemicals businesses experienced higher raw material costs and we continue to raise prices to compensate. Overall for Specialty Chemicals, taking into account the water treatment divestiture, volumes were flat with increases in Europe and Asia offset by lower volumes in North America. Building Block Chemicals selling volumes had good growth and they benefited from lower raw material costs for propylene."

Cytec Performance Chemicals Sales decreased 20% to $176 million; Operating Earnings decreased to $11.6 million
Mr. Lilley continued, "In Cytec Performance Chemicals, the effect of the divestiture of the water treatment chemicals product line decreased sales by 20%, other selling volumes were flat, selling prices decreased 2% and the impact of exchange rate changes increased sales by 2%. Mining chemical sales were down due to order pattern and polymer additives were impacted by lower sales of older product technologies. These were offset by higher selling volumes in other product lines principally due to new business.

"Operating earnings of $11.6 million were down compared to the $17.0 million in the fourth quarter of 2005. The decrease is primarily due to the impact of the divestiture of the water treatment chemicals product line, lower selling prices, higher raw material costs, a benefit plan curtailment charge of $0.3 million discussed under special items and $0.8 million related to the application of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" (SFAS 123R)."

Cytec Surface Specialties Sales increased 7% to $375 million; Operating Earnings increased to $17.6 million
"In Cytec Surface Specialties, overall selling volumes were flat, selling prices increased by 2% and the impact of exchange rate changes increased sales by 5%. We benefited from higher selling volumes in Europe and Asia/Pacific but this was offset by lower selling volumes in North America primarily reflecting weaker customer demand.

"Operating earnings of $17.6 million were up compared to the $13.9 million in the fourth quarter of 2005. The benefits of increased selling prices, improved manufacturing performance plus the previous restructuring activities were partially offset by higher raw material costs. Also impacting the quarter was expense of $0.7 million related to the application of SFAS 123R."

Cytec Engineered Materials Sales increased 17% to $160 million; Operating Earnings increased to $27.2 million
"In Cytec Engineered Materials, selling volumes increased by 13%, selling prices increased by 3% and the impact of exchange rate changes on sales increased sales by 1%. The selling volume increase was primarily in the large commercial aircraft and business jet sectors.

"Operating earnings of $27.2 million were up compared to the $26.7 million in the fourth quarter of 2005. The favorable impact of the higher selling volumes and selling prices was mostly offset by increased raw material costs, higher manufacturing period costs as a result of the increased production volumes, planned increases in selling and technical and research expenses and a benefit plan curtailment charge of $2.3 million discussed further under special items. Also included in operating earnings was expense of $0.6 million related to the application of SFAS 123R."

Building Block Chemicals Sales increased 4% to $82 million; Operating Earnings increased to $3.5 million
"In Building Block Chemicals, the effect of the divestiture of the acrylamide product line decreased sales by 18% but this was more than offset by an increase in sales of acrylonitrile to the purchaser of the divested product line. Acrylonitrile is the key material used to make acrylamide and in conjunction with the divestiture we signed a long-term agreement to provide acrylonitrile to Kemira. Excluding these two factors, selling volumes decreased by 7% principally due to shipping delays as a result of poor weather in the Gulf Coast of the U.S. Selling prices increased by 3% and the impact of exchange rate changes was neutral.

"Operating earnings increased to $3.5 million compared to a loss of $3.9 million in the fourth quarter of 2005 when our manufacturing operations were still adversely impacted by the hurricanes. The increase was mostly due to higher selling prices, increased plant production levels and the benefit of lower raw material costs, due principally to lower costs for propylene, all of which more than covered the loss of the earnings from the divested acrylamide product line. Also included is expense of $0.3 million related to the application of SFAS 123R."

Special Items

James P. Cronin, Executive Vice President and Chief Financial Officer commented, "Included in Corporate and Unallocated in the fourth quarter of 2006 are several items as follows.

We recorded a pre-tax restructuring charge of $9.7 million (after-tax $9.4 million or $0.19 per diluted share). Most of the charge relates to our Cytec Surface Specialties manufacturing site in France which produces solvent-borne alkyds and solvent-borne acrylics primarily for the European market. The products made in France are mature products, in a declining market with supplier overcapacity and severe price erosion, thus the operations are generating losses. After the appropriate consultations with the Works Council concerning the site, we have commenced shutdown activities and recorded a pre-tax $8.4 million restructuring charge, primarily for severance. The remaining pre-tax $1.3 million is primarily for net restructuring charges related to employee severance for our Cytec Performance Chemicals manufacturing site in New Castle, Delaware which makes a key polymer for our Engineered Materials segment. We are exiting the site and the products made in New Castle will be made in our recently completed manufacturing plant at our Kalamazoo, Michigan location.

"We changed our pension plan in the U.K. from a defined benefit to a defined contribution plan and as a result we incurred a pre-tax curtailment charge of $2.6 million ($1.9 million after-tax or $0.04 per diluted share). Approximately $2.3 million of the pre-tax amount is included in the Cytec Engineered Materials segment and the remainder in the Cytec Performance Chemicals segment.

"We incurred integration costs of $0.5 million ($0.4 million after-tax or $0.01 per diluted share) related to the Surface Specialties acquisition. These costs are included in Corporate and Unallocated and this will be the last quarter where we are separately tracking and reporting integration costs.

"Finally, included in tax expense for the quarter is a charge of $1.7 million or $0.04 per diluted share related to a taxable capital reduction in one of our Southeast Asian subsidiaries as we reduced our cash exposure there."

Included in Corporate and Unallocated in the fourth quarter of 2005 was a pre-tax charge of $14.1 million ($10.5 million after-tax or $0.22 per diluted share) for employee related severance costs principally related to the formation of Cytec Specialty Chemicals which combined the specialty chemicals product lines into one organization under one leadership team. Also included were integration costs of $0.2 million related to the Surface Specialties acquisition. In addition, included in 2005 income tax expense was a $2.6 million or $0.05 per diluted share gain related to a favorable tax development in an international jurisdiction.

Special Items Continued - Sale of Water Treatment and Acrylamide Product Lines
Mr. Cronin continued, "In October 2006 we completed the first of three phases of the sale of our water treatment and acrylamide product lines to Kemira Group. This first phase included the entire product lines, excluding specific assets covered in the other two phases as discussed below. We received approximately $208 million in proceeds for this phase and recorded in Corporate and Unallocated in the fourth quarter of 2006 is a pre-tax gain of $75.5 million (after-tax $59.6 million or $1.22 per diluted share) related to the first phase closing.

"In January 2007, we completed the second phase of the sale of our water treatment chemicals and acrylamide product lines to Kemira Group. This second phase completes the transfer of the Botlek site in the Netherlands to Kemira and adds approximately $21 million of proceeds to the $208 million received for the first phase closing. The remaining phase includes certain assets at various subsidiaries in Asia-Pacific and Latin America which are expected to close in the next three months and we expect an estimated $10 million of additional proceeds upon completion. The remaining closings are subject to certain other conditions and the amounts could change due to final working capital transferred."

Interest Expense

Mr. Cronin commented, "Interest expense decreased primarily due to the overall lower debt level. In the quarter we used the net proceeds from the aforementioned divestiture to pay down debt."

Income Tax Expense

Mr. Cronin added, "Our tax provision for the fourth quarter of 2006 was $28.5 million, or 25.5%, on earnings before income taxes. Impacting the rate for the quarter was: the fact that no tax benefit was available on the French restructuring charge; the 21% tax rate associated with the gain on the divestiture of the water treatment and acrylamide product lines; the incremental tax on the capital reduction at one of our Southeast Asian subsidiaries; and the adjustment for lowering the full year underlying effective tax rate to 26.8% primarily due to the renewal of the 2006 research and development tax credit in the U.S. Our underlying effective tax rate for the fourth quarter of 2005 was 26%."

Cash Flow

Mr. Cronin commented further, "We are again pleased with our cash flow generation in the quarter. Cash flow provided by operations was $39.8 million for the quarter which is net of additional pension contributions of $26 million to our U.S. plans and $5 million to our U.K. plan. Trade accounts receivable dollars decreased $25 million and days outstanding are essentially flat with the days outstanding at the end of the third quarter. Inventory dollars increased $6 million and days on hand are 77, up from the 71 days on hand at the end of the third quarter. The largest increase in inventory was in Building Block Chemicals primarily due to weather delayed shipments. Capital spending for the quarter was $40 million bringing our full year spending to $103 million. We continue to pay down debt in advance of scheduled payment dates, primarily from the net proceeds received from the divestiture, and during the quarter we paid down $215 million of our debt.

"Our cash flow from operations for the year ended December 31, 2006 is $201 million and year to date we have a net reduction in our debt of $391 million."

2007 Outlook

Mr. Lilley commented, "As we begin 2007 we expect our aerospace markets to continue to grow, particularly in the large commercial aerospace, business jet and rotorcraft sectors. This is expected to come from increasing build rates and the increasing share of composites in newer aircraft programs. Military aircraft is expected to have modest growth in 2007 as the F-35 Joint Strike Fighter program production rate will slowly ramp up. For our Specialty Chemicals segments we expect demand in North America to be flat to down and our expectation for Europe and Asia-Pacific is to continue their 2006 growing demand pattern into 2007. This should lead to only modest growth despite continuing benefits from new product introductions.

"On the input side, we expect a continuation of high raw material costs. Through the past quarter, tightness in various raw material areas has mostly offset the impact of the reduced costs of oil and natural gas and we expect this situation to continue. We continue to be concerned about the raw material price volatility and we are raising selling prices where we can.

"We expect some change in currencies year on year but our overall mix of business is such that changes in currencies have a relatively small impact on our overall results."

The following comparisons to 2006 are exclusive of the special items as noted in this press release.

Mr. Lilley continued with some additional comments on the individual segments, "In Cytec Performance Chemicals, we forecast continued good growth in mining chemicals with moderate to low growth in the remainder of the product lines. Our full year guidance is for sales to be in a range of $700 million to $720 million, down from the prior years $865 million and for operating earnings to be in a range of $67 million to $71 million, about flat with the prior year. This reflects the divestiture of our water treatment chemicals product line in October of last year, which reduced sales by approximately $185 million. After excluding the divested product line, sales are increasing in a range of 2% to 5%, with about half of the forecasted increase due to volume and the remainder due to selling price.

"In Cytec Surface Specialties, we forecast good growth in our environmentally friendly, differentiated products although this is somewhat muted by our expectation of weak North American demand. Raw material costs continue to be a significant factor for this segment. We expect no overall relief in 2007 and we are continuing to raise prices where we can although in some of the mature product technologies this has proven difficult. Overall, we are on track with the initiatives we have identified to date in manufacturing, supply chain and other operational areas but there is much more to do and our people are diligently working towards our goal of a 10% operating margin in the next two to three years. We have begun a number of other improvement initiatives, including a review of product line profitability, which led to our decision to shutdown our solvent-borne alkyds manufacturing plant in France, but the full benefits from this will not be realized until 2008. We expect to continue these product line reviews as we seek to improve operating margins through product line and asset rationalizations. As a result of all the above, our full year guidance is for sales to be in a range of $1.58 billion to $1.64 billion, up 4% to 8% from the prior years $1.52 billion, with about a third of the forecasted increase due to volume and the remainder due to selling price. Our forecast for operating earnings is to be in a range of $97 million to $105 million, up from the prior years $95.5 million.

"In Cytec Engineered Materials, demand continues to improve due to increasing build rates for aircraft, particularly large commercial and business jet aircraft, and higher use of composite materials in emerging programs. Our investments in new products are important for these emerging programs and we will continue to make investments in product qualifications as the manufacturers develop these new aircraft platforms for the future. Taking into account the above, our full year guidance for sales is to be in a range of $650 million to $660 million, up 8% to 10% from the prior years $602 million, primarily due to increases in forecasted selling volumes, and operating earnings to be in a range of $125 million to $130 million, up from the prior years $108.4 million.

"For Building Block Chemicals, two events in 2006 will impact our results for 2007. We divested our acrylamide product line in October of last year but under a long-term agreement we will provide acrylonitrile to the purchaser of the acrylamide product line; although the margins for acrylonitrile are lower than acrylamide. In addition, we took full ownership of the melamine plant from our joint venture partner in the third quarter of last year so we no longer have the benefit of our partner paying for half of the fixed costs. Our sales and marketing people are making good progress in marketing the additional melamine capacity that we now own, although margins have been poor. We are attempting to raise prices to improve the profitability, but it will take time to see if we are successful. Acrylonitrile export margins have improved and our expectation for the cost of propylene is to be flat with the average for 2006 of about $0.45 per pound. Taking into account the above, our full year guidance for sales is to be about $390 million, up 15% from the prior years $339 million, primarily due to increases in forecasted selling volumes, and operating earnings to be about $12 million, down from the prior years $19.3 million.

"Our guidance for Corporate and Unallocated is expense of $7 million which is flat with the prior year. Other income/(expense) is forecast to be expense of $4 million and equity earnings is forecast to be flat with the prior year at about $3 million. Our forecast for interest expense, net, is to be in a range of $42 to $44 million down from the prior year amount of $56 million and our forecast for our underlying annual effective tax rate for ongoing operations is a range of 29.5% to 30.5% up from 2006's underlying annual effective tax rate of 26.8%. The increase in the 2007 tax rate is primarily due to the effect of the divestiture of the water treatment chemicals and acrylamide product lines and increased earnings in 2007 in higher tax jurisdictions.

"Overall, our demand drivers and our improvement initiatives remain mostly on track. We remain vigilant to take the appropriate actions given the volatility in raw materials. Taking all the above into account, our guidance for full year diluted earnings per share is to be in a range of $3.60 to $3.80 per share up from the 2006 adjusted diluted earnings per share of $3.45.

"We continue to see growth opportunities for our specialty units and we expect to increase capital expenditures to a range of $130 to $140 million in 2007 to support this growth as well as continue to enhance our infrastructure."

In closing Mr. Lilley commented, "Looking back at 2006, we put in place a number of improvement initiatives to benefit earnings, including a renewed focus on new product introductions, and we expect to continue this approach in 2007. As always, our goal is to build a strong growing company and provide returns we can all be proud of."

Full Year Results

Net earnings for the full year ended December 31, 2006 were $194.9 million or $4.01 per diluted share on sales of $3,330 million. Included in the results for the full year ended December 31, 2006 were – (a) asset impairment charges of pre-tax $29.3 million (after-tax $24.6 million or $0.51 per diluted share), (b) net restructuring charges of pre-tax $19.2 million (after-tax $16.1 million or $0.33 per diluted share), (c) a pre-tax gain of $15.7 million (after-tax $12.4 million or $0.26 per diluted share) related to resolution of a legal dispute, (d) a pre-tax charge of $1.7 million (after-tax $1.3 million or $0.03 per diluted share) for integration expenses related to the Surface Specialties acquisition, (e) a pre-tax charge of $2.2 million (after-tax $1.6 million or $0.03 per diluted share) related to a contingent liability study/update, (f) a pre-tax charge of $2.6 million (after-tax $1.9 million or $0.04 per diluted share) for a benefit plan curtailment, (g) a pre-tax gain on divestiture of two product lines of $75.5 million (after-tax $59.6 million or $1.23 per diluted share) (h) a reduction in income tax expense of $3.5 million or $0.07 per diluted share relating to the completion of prior years tax audits, (i) a charge of $1.7 million or $0.04 per diluted share related to a taxable capital reduction in one of our Southeast Asian subsidiaries and (j) the cumulative effect of an accounting change after-tax charge of $1.2 million or $0.02 per diluted share related to the adoption of SFAS 123R. Excluding these special items, net earnings were $167.8 million or $3.45 per diluted share.

Net earnings for the full year ended December 31, 2005 were $59.1 million or $1.27 per diluted share on sales of $2,926 million. Included in the results for the full year ended December 31, 2005 were – (a) purchase accounting related charges of $20.8 million pre-tax (after-tax $15.2 million, or $0.33 per diluted share) related to acquired inventories from Surface Specialties being recorded at fair value which exceeded normal manufacturing cost, (b) a charge of $37.0 million or $0.80 per diluted share related to the write-off of in-process research and development costs of Surface Specialties, (c) a pre-tax charge of $44.2 million (after-tax $28.1 million or $0.60 per diluted share) related to currency and interest rate derivative transactions associated with the Surface Specialties acquisition, (d) a pre-tax charge of $2.4 million (after-tax $1.8 million or $0.04 per diluted share) related to an anticipated settlement of a certain litigation matter, (e) a pre-tax charge of $22.0 million (after-tax $14.0 million or $0.30 per diluted share) related to the optional redemption of our MOPPRS prior to their maturity, (f) an income tax benefit of $28.3 million, or $0.61 per diluted share, reflecting favorable resolution of tax audits with respect to prior year tax returns, (g) employee restructuring costs of $16.8 million (after-tax net $12.4 million or $0.27 per diluted share), (h) a $4.4 million (after-tax net $3.2 million or $0.07 per diluted share) settlement to resolve a dispute over an environmental matter and (i) a pre-tax charge of $0.2 million ($0.1 after-tax) for integration costs related to the acquired surface specialties business. Excluding these special items, net earnings were $142.6 million or $3.07 on a diluted share basis.

Use of Non-GAAP Measures

Management believes that net earnings, basic and diluted earnings per share before special items, which are non-GAAP measurements, are meaningful to investors because they provide a view of the Company with respect to ongoing operating results. Special items represent significant charges or credits that are important to an understanding of the Company's overall operating results in the period presented. Such non-GAAP measurements are not recognized in accordance with generally accepted accounting principles (GAAP) and should not be viewed as an alternative to GAAP measures of performance. A reconciliation of GAAP measurements to non-GAAP can be found at the end of this release.

Corporate Profile

Cytec Industries Inc. is a global specialty chemicals and materials company focused on developing, manufacturing and selling value-added products. Our products serve a diverse range of end markets including aerospace, adhesives, automotive and industrial coatings, chemical intermediates, inks, mining and plastics. We use our technology and application development expertise to create chemical and material solutions that are formulated to perform specific and important functions in the finished products of our customers.

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this release may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Achieving the results described in these statements involves a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed in Cytec's filings with the Securities and Exchange Commission.

Source: Cytec Industries Inc.


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