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Cytec Announces Second Quarter Results Full Year 2007 Outlook Updated

Published on 2007-07-23. Author : SpecialChem

Cytec Industries Inc. announced net earnings for the second quarter of 2007 of $54.8 million or $1.11 per diluted share on net sales of $864 million. Included in the quarter is an after-tax net restructuring charge of $1.8 million or $0.04 per diluted share as outlined further in this release. Excluding this item, net earnings were $56.6 million or $1.15 per diluted share.

Net earnings for the second quarter of 2006 were $48.5 million or $1.00 per diluted share on net sales of $853 million. Included in the quarter were several special items as outlined further in this release. Excluding these special items, net earnings were $48.8 million or $1.00 per diluted share.

David Lilley, Chairman, President and Chief Executive Officer said, "Our second quarter results reflect the continuing sales growth in Engineered Materials, and our efforts in Specialty Chemicals to increase selling prices to improve our recovery of higher raw material costs. We also had an improved product mix and we are seeing the benefits of our efficiency and improvement initiatives, particularly in our specialty chemical segments. Our overall operating margin improved to over 10%, reflecting a strong performance by all our segments.

Cytec Performance Chemicals Sales decreased 20% to $185 million; Operating Earnings increased to $23.7 million

Mr. Lilley continued, "In Cytec Performance Chemicals, the divestiture of the water treatment chemicals product line decreased sales by 22%, base selling volumes and selling prices were up slightly and exchange rate changes increased sales 2%. Mining chemicals, phosphine chemicals and urethanes specialties had higher selling volumes, mostly offset by lower selling volumes in all other product lines.

"Operating earnings increased 30% to $23.7 million primarily due to the benefits of our efficiency and improvement initiatives in both manufacturing and operating expenses and an improved product mix.

Cytec Surface Specialties Sales increased 7% to $420 million; Operating Earnings increased to $32.8 million

"In Cytec Surface Specialties, selling volumes decreased 3%, selling prices increased 6% and exchange rate changes increased sales 4%. Higher volumes in water-borne resins were more than offset by lower volumes primarily in solvent-borne and powder coating resins. Solvent-borne sales were negatively impacted by the shutdown of our unprofitable manufacturing facility in France which led us to discontinue certain products. In addition, we continue to experience weak demand in North America. The increase in selling prices was across most product lines.

"Operating earnings increased 11% to $32.8 million primarily due to the higher selling prices more than offsetting the increase in raw material costs plus the impact of our efficiency and improvement initiatives begun in prior periods.

Cytec Engineered Materials Sales increased 10% to $167 million; Operating Earnings increased to $34.8 million

"Cytec Engineered Materials selling volumes increased 7%, selling prices increased 2% and exchange rate changes increased sales 1%. The selling volume increase was primarily due to higher build rates in the large commercial aircraft, business jet and high performance automotive sectors.

"Operating earnings improved 23% to $34.8 million, primarily due to increased selling volumes and selling prices.

Building Block Chemicals Sales increased 15% to $93 million; Operating earnings decrease to $4.6 million

"In Building Block Chemicals, the divestiture of the acrylamide product line decreased sales by 19% which was more than offset by a 29% increase due to sales of acrylonitrile, (the key chemical used to make acrylamide), to the purchaser of the divested product line. Excluding these two factors, selling volumes decreased by 1% primarily due to lower selling volumes of acrylonitrile partially offset by higher selling volumes of melamine in North America and Europe. Selling prices increased by 6% and the impact of exchange rate changes was neutral.

"Operating earnings decreased to $4.6 million compared to $6.4 million in the same period of 2006. Our plant ran well, however, in the quarter our acrylonitrile plant was down for 16 days for its planned maintenance turnaround. This, as well as the divestiture of the acrylamide product line, adversely impacted earnings. Our acrylonitrile plant started back up on schedule and is now running at capacity. Our melamine plant ran at capacity in the quarter as we continue to increase our market presence in North America.

Corporate and Unallocated

David M. Drillock, Vice President and Chief Financial Officer commented, "During the quarter, we recorded a pre-tax restructuring charge of $1.8 million in Corporate and Unallocated. The costs are principally related to the shutdown of our manufacturing operations in France which were expected but not accruable under accounting rules as part of the charge taken in the fourth quarter of 2006."

Included in Corporate and Unallocated in the second quarter of 2006 were the following:

  • A net restructuring charge of $22.6 million principally relating to permanently shutting down manufacturing operations for two older technology polymer additive light stabilizer products produced at our manufacturing facility in Botlek, the Netherlands which included a full review of the support and commercial infrastructure at the site.
  • Integration costs of $1.0 million related to the Surface Specialties acquisition which was recorded in administrative expense. These integration costs were duplicative in nature, and incurred primarily as a result of the elimination of transition service agreements that were in place with the former owner surface specialties business regarding the information technology hardware infrastructure.
  • A realized gain of $15.6 million which was included in other income (expense), net relating to a legal dispute with a European firm that was in arbitration proceedings since 2000.

Interest Expense

Mr. Drillock commented, "Interest expense, net was reduced 22% from the prior year quarter reflecting the continued good progress we have made in reducing our debt levels."

Income Tax Expense

Mr. Drillock added, "Our tax provision for the second quarter of 2007 was $24.3 million, or 30.7%, on our earnings before income taxes. Impacting the rate for the quarter was our inability to recognize any tax benefit on the French restructuring charge due to continuing losses at our French entity, similar to the French restructuring charges recorded in prior periods. Excluding this item, our underlying effective tax rate for the second quarter of 2007 was 29.75% versus the underlying rate for the second quarter of 2006 of 27%. The increase in the tax rate from 2006 is due to the effect of the divestiture of the water treatment chemicals and acrylamide product lines and unfavorable changes in U.S. tax laws regarding manufacturing export incentives.

"For the second quarter of 2006 our effective tax rate of 18.5% was favorably impacted by a reduction in income tax expense of $3.5 million related to the completion of prior years' U.S. tax audits. Also favorably impacting the tax rate was the tax benefit from the restructuring charge which was recorded at 29.6% and the gain on the favorable resolution of the previously mentioned legal dispute which was effectively recorded at a tax provision of 20%."

Cash Flow

Mr. Drillock commented further, "Cash flow provided by operations was $67 million for the quarter. Trade accounts receivable dollars were in line with the increase in sales and days outstanding were flat at approximately 58. Inventory dollars increased $14 million and days in inventory are 73, up about 6 days from the prior quarter end as we built up certain inventories to meet expected higher demand. Capital spending for the quarter was $25 million bringing our year to date total to $39 million. Our full year estimate of $130-$140 million is unchanged as we expect spending to increase in the second half of the year for our growth expansion projects.

"During the quarter we purchased 263 thousand shares of our common stock for approximately $15 million. For the six months year to date we have purchased 433 thousand shares of our common stock for approximately $25 million leaving about $44 million remaining on our current authorization. We expect to continue our stock buyback program into the second half of 2007."

2007 Outlook

Mr. Lilley commented, "Our expectations going forward are for the Specialty Chemical segments to have good growth in all parts of the world except North America where we are forecasting demand to be weak. We expect to continue to have selling prices cover higher raw material costs although we must remain vigilant with oil costs increasing and natural gas costs still volatile. Our efforts to improve the underlying profitability of the Specialty Chemical segments are evident and we are on track to complete the review of additional improvement options during the third quarter. In Building Block Chemicals we expect the markets for acrylonitrile and melamine to remain tight and thus retain our ability to pass through higher raw material costs. Finally, increasing build rates in the large commercial aircraft, rotorcraft and business jet sectors plus new composite applications on new aerospace platforms provide an excellent growth platform for our Engineered Materials segment, both in the near and long term.

"Taking into account our strong second quarter results and our view for increasing raw material costs our overall guidance is to remain on track with our previous guidance for 2007 full year adjusted diluted earnings per share of $3.60 to $3.80 which is up from the 2006 adjusted diluted earnings per share of $3.45."

In closing Mr. Lilley commented, "While we remain cautious about near term external economic factors, our efforts to improve our businesses are gaining momentum, creating a strong base for future growth. We are committed to delivering the highest performance for all our stakeholders."

Six Month Results

Net earnings for the six months ended June 30, 2007 were $106.5 million or $2.17 per diluted share on sales of $1,728 million. Included in the results for the six months ended June 30, 2007 were - (a) net restructuring charges of pre-tax $2.6 million (after-tax $2.6 million or $0.05 per diluted share), (b) a pre-tax $15.7 million (after-tax $15.3 million or $0.31 per diluted share) gain as a result of completing the second phase of the sale of our water treatment chemicals and acrylamide product lines to Kemira Group. Excluding these items, net earnings were $93.8 million or $1.91 per diluted share.

Net earnings for the six months ended June 30, 2006 were $86.6 million or $1.79 per diluted share on sales of $1,673 million. Included in the results for the six months ended June 30, 2006 were - (a) net restructuring charges of pre-tax $22.3 million (after-tax $15.7 million or $0.33 per diluted share), (b) a pre-tax $15.6 million (after-tax $12.4 million or $0.26 per diluted share) gain related to resolution of a legal dispute, (c) a pre-tax charge of $1.0 million (after tax $0.8 million or $0.01 per diluted share) for integration expenses related to the Surface Specialties acquisition, (d) 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, and (e) 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 items, net earnings were $88.4 million or $1.82 per diluted share.

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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