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Cytec Reports Second Quarter EPS

Published on 2004-07-23. Author : SpecialChem

West Paterson, New Jersey -- Cytec Industries Inc. (NYSE:CYT) announced that net earnings for the second quarter of 2004 were $29.0 million or $0.72 per diluted share on net sales of $422 million. This includes a net special items charge of $0.06 per diluted share representing an after tax charge of $4.8 million or $0.12 per diluted share in connection with the settlement of several environmental and toxic tort lawsuits partially offset by a $2.4 million credit or $0.06 per diluted share for a favorable outcome of a recently completed international tax audit. Excluding the special items, net earnings for the second quarter of 2004 were $31.4 or $0.78 per diluted share. Net earnings for the comparable period of 2003 were $25.4 million or $0.64 per diluted share, on net sales of $375 million.

David Lilley, Chairman, President and Chief Executive Officer said, "Overall, sales for the second quarter were up 13% with acquisitions adding 6%, base sales volumes up 4%, selling prices up 1% and exchange rate changes accounting for the remainder. Overall, our manufacturing plants ran well to meet the higher demand levels but raw material and energy costs were well above the prior year quarter. In addition, our earnings per share reflect the benefit of a lower effective tax rate.

Water and Industrial Process Chemicals Sales increased 12%; Operating Earnings increase to $4 million

Mr. Lilley continued, "In Water and Industrial Process Chemicals, acquisitions added 10% to sales, exchange rate changes benefited sales by 3%, selling prices increased 1% while base sales volumes decreased 2%. The decrease in selling volumes was in all product lines. Mining Chemicals was impacted by the shutdown of a major mine for repairs and it is now back in operation. Water Treatment Chemicals volumes reflect our decision to exit certain low profit municipal business although sales to the full service providers continues to grow. Phosphine Chemicals sales are down versus the prior year period as the 2003 period reflected a high level of sales for a new mine startup. "Operating earnings improved slightly as the impact from our acquisition offset the impact of higher raw material and energy costs. We are starting to see some benefits from our selling price initiatives but full recovery of the increased raw material and energy costs is unlikely this year."

Performance Products Sales increased 16%; Operating Earnings increase to $17 million

"In Performance Products, acquisitions added 10% to sales, base sales volumes increased 4%, exchange rate changes increased sales 2% and selling prices were essentially flat. Selling volumes were up in all product lines, particularly Coating and Specialty Additives and Polymer Additives.

"Operating earnings improved significantly as the benefit of the acquisitions and higher base sales volumes plus improving manufacturing operations more than offset the effect of higher raw material and energy costs."

Specialty Materials Sales increased 19% and Operating Earnings increase to $26 million

"In Specialty Materials, sales volumes were up 19% and selling prices were slightly lower offset by the impact of favorable exchange. In looking at the sectors, sales for large commercial aircraft, regional and business jets and rotorcraft, military and high performance automotive all increased."

"The increased operating earnings reflect the impact of the higher sales volumes. This was offset somewhat by increased manufacturing costs to meet the higher demand levels and our continuing investments in selling and technical service for the many near and long term growth opportunities before us."

Building Block Chemicals Sales decreased 6% and Operating Earnings decline to breakeven

Building Block Chemicals sales volumes decreased 17% primarily due to the acrylonitrile plant being down for most of the month of May for its scheduled maintenance turnaround. The plant returned to service on schedule and is operating at capacity. Overall, selling prices increased 10%, while exchange rate changes increased sales slightly.

The higher selling prices were offset mostly by increased raw materials costs, primarily propylene, ammonia and natural gas, plus the impact of the maintenance shutdown in the acrylonitrile unit, hence operating earnings declined versus the year ago period."

Earnings in Associated Companies

James P. Cronin, Executive Vice President and Chief Financial Officer commented, "Equity in earnings of associated companies is flat with the prior year. Sales and earnings from our associated company, CYRO Industries were up from the year ago period offset by the absence of equity earnings relating to the former Mitsui-Cytec joint venture.

Special Items

Mr. Cronin added, "During the quarter we recorded a pre-tax charge of $6.1 million ($0.12 per diluted share after tax) in connection with the settlement of several environmental and toxic tort lawsuits which were all related to a single manufacturing site operated by the former American Cyanamid Company prior to 1963. Cytec was spun off from American Cyanamid Company in 1993. The full settlement which, was agreed to and paid in the second quarter, was $8.6 million, of which $2.5 million was charged against our previously established environmental remediation reserve for these matters with the remainder included in other expense, net. While we felt our defenses were strong, developments in the second quarter led us to accelerate negotiations and increase the value of the settlement which ultimately we felt was the best option for Cytec and its shareholders.

"Also during the quarter due to the favorable completion of several years of tax audits in an international jurisdiction, we recorded a reduction in our tax liabilities, resulting in a $2.4 million decrease in our income tax provision."

Effective Tax Rate

Mr. Cronin added, "The tax rate for the quarter was 12% which reflected an underlying 22% annual effective tax rate (down from 30% used in the second quarter of 2003) reduced by the favorable impact of the special item discussed above and the favorable cumulative impact of updating the annual effective tax rate from 24% utilized in the first quarter of 2004 to the current estimate of 22%. The lower annual effective tax rate of 22% reflects continued growth in earnings internationally particularly in lower tax jurisdictions and hence, the continued reduction in our annual effective tax rate."

Cash Flow

Mr. Cronin continued, "Second quarter cash flow generated by operations was $36 million bringing our total for the first half of the year to $59 million. Receivable dollars and days remained constant while inventory dollars increased in line with the higher demand levels. Capital expenditures were $19 million in the quarter and our full year forecast for capital expenditures remains at $80-$85 million. In June, we were pleased to dedicate the renovated Specialty Chemicals Technical Center, our R&D laboratory located in Stamford, Connecticut. The majority of the spending for this important project is now behind us."

2004 Outlook

Mr. Lilley continued, "We have developed good momentum as we head into the second half of 2004. While we believe we can build upon this momentum, we are still facing the issues of stubbornly high raw material and energy costs. Costs for oil and natural gas, which are the fundamental feedstocks for many of our raw materials, remain at high levels. While we are continuing in our attempts to increase selling prices, we will be unable to recover all of the higher costs in 2004. However, we expect to benefit from improving demand in the US and Europe, new products introduction, our operational excellence and productivity programs plus a lower effective tax rate. The result of all this leads us to increase our forecasted full year diluted earnings per share to a range of $2.85-$2.95 excluding the net special items charge of $0.06 per diluted share recorded in the second quarter. This compares to 2003's diluted EPS, before the cumulative effect of the change in accounting principle, of $2.27. We expect our third quarter diluted EPS to be in a range of $0.65-$0.70.

"Below are outlined our full year expectations by segment.

"In Water and Industrial Process, we continue to forecast sales growth of 10% of which acquisitions account for approximately half. We will continue to benefit from geographic expansion, new product introductions and increased selling prices. However, due to higher than anticipated raw material and energy costs we now expect operating earnings to be down about 10%. Our previous forecast was for sales to increase 8% and operating earnings to be flat.

"In Performance Products, we forecast sales growth approaching 15% with about 5% coming from acquisitions. The remainder is the result of geographic expansion, new products, higher selling prices and improving demand. Our previous forecast for this segment was for sales to be up about 10% and operating earnings increasing approximately 40%. Despite the higher raw material costs, our forecast for operating earnings remains unchanged due to the improvement in our selling volumes.

"In Building Block Chemicals, we are now forecasting sales to increase 15-20% primarily due to higher selling prices and operating earnings to decline approximately 5-10%. Our expectation is for raw material and energy costs to remain high. Propylene, the key raw material for acrylonitrile, is high and we forecast it to decline somewhat over the second half of the year. Ammonia and natural gas costs are expected to remain high for the remainder of 2004. However, markets for most of our products are tight and we expect to recover much of the high costs for raw materials. Most of our plants are forecast to run at capacity levels for the rest of the year. Our previous forecast was for sales to be up 10-15% and operating earnings down 15-20%.

"In Specialty Materials, we now forecast sales to increase about 15-20% and operating earnings to increase approximately 25-30%. Our forecast is based on continuing growth in sales for military and high performance automotive applications and also to the large commercial aircraft sector. We continue to invest in our growth opportunities and expect to benefit from numerous operational excellence initiatives. Our previous forecast was for sales and operating earnings to be up about 7% and 15%, respectively.

Our forecast for earnings from associated companies is now forecast to be down about 60% due to the high raw material and energy costs impacting our Cyro joint venture. We had previously expected earnings from associated companies to be down about 30%. Our forecast for Corporate and Unallocated is unchanged and is expected to be slightly more unfavorable to last year while interest expense is expected to remain flat year on year. Excluding the special item relating to taxes, our effective tax rate for 2004 is now at 22% versus our last forecast of 24%.

"Our guidance for the 2004 outlook will be updated next when we report third quarter earnings in October 2004.

"We have continued our good momentum from the first quarter. Our diversity of product lines, our operational excellence initiatives and improving demand have helped us mitigate the impact of higher raw material and energy costs. We remain focused on executing our strategic plan so we can deliver increasing value for our shareholders."

Six Month Results

Net earnings for the six months ended June 30, 2003 were $60.3 million or $1.50 per diluted share on sales of $837 million. This includes a net special items charge of $0.06 per diluted share representing an after tax charge of $4.8 million or $0.12 per diluted share in connection with the settlement of several environmental and toxic tort lawsuits partially offset by a $2.4 million credit or $0.06 per diluted share from a favorable outcome of a recently completed international tax audit. Excluding these items net earnings were $62.7 million or $1.56 per diluted share.

Net earnings for the six months ended June 30, 2003 were $54.3 million or $1.36 per diluted share on sales of $742 million, before a cumulative effect of a change in accounting principle of $13.6 million after tax or $0.34 per diluted share for the adoption of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations".

Source: Cytec


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