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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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.
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(Exact name of registrant as specified in its charter)
Delaware 22-3268660
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No).
Five Garret Mountain Plaza
West Paterson, New Jersey 07424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 357-3100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on
------------------- which registered
Common Stock, par value --------------------
$.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
-----------------------------------------------------------
None
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b-2 of the Act). Yes _x_ No ___.
At June 30, 2003 the aggregate market value of common stock held by
non-affiliates was $1,343,810 based on the closing price ($33.80) of such stock
on such date.
There were 39,157,218 shares of common stock outstanding on January 31, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Documents
--------- Part of Form 10-K
Portions of Proxy Statement for 2004 Annual Meeting -----------------
Of Common Stockholders, dated March 18, 2004. Parts III, IV
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1
COMMENTS ON FORWARD-LOOKING STATEMENTS
A number of the statements made by the Company in the Annual Report on Form
10-K, or in other documents, including but not limited to Chairman, President
and Chief Executive Officer's letter 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 (including its segments) outlook for the future, the accretive effects
of acquisitions, the financial effects of divestitures, pricing trends, the
effects of changes in currency rates and forces within the industry, the
completion dates of and expenditures for capital projects, expected sales
growth, operational excellence strategies and their results, long-term goals of
the Company and other statements of expectations, 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 include, but are not limited to: changes in global and
regional economies; the financial well-being of end consumers of the Company's
products, particularly the airline industry; changes in demand for the Company's
products or in the quality, costs and availability of its raw materials and
energy; customer inventory reduction; the actions of competitors; currency rates
and interest rate fluctuations; technological change; the Company's ability to
renegotiate expiring long-term contracts; changes in employee relations,
including possible strikes; government regulations; including those related to
taxation and those particular to the purchase, sale and manufacture of chemicals
or operation of chemical plants, governmental funding for those military
programs that utilize the Company's products; litigation, including its inherent
uncertainty and changes in the number or severity of various types of claims
brought against the Company; difficulties in plant operations and materials
transportation; environmental matters; the results of and recoverability of
investments in associated companies; returns on employee benefit plan assets and
changes in the discount rates used to estimate employee benefit liabilities;
changes in the medical cost trend rate; changes in accounting principles or new
accounting standards; war, terrorism or sabotage; epidemics; and other
unforeseen circumstances. A number of these factors are discussed in this and
other of the Company's filings with the Securities and Exchange Commission.
AVAILABLE INFORMATION
The Company maintains a website that contains various information on the
Company and its products. It is accessible at www.Cytec.com. Through the
Company's website, stockholders and the general public may access free of charge
(other than any connection charges from internet service providers) filings the
Company makes with the Securities and Exchange Commission as soon as practicable
after filing. Filing accessibility in this manner includes the Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K.
PART I
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Item 1. BUSINESS
The Company is a global specialty chemicals and specialty materials company
that focuses on value-added products. The Company serves major markets for
aerospace, water treatment and mining, automotive and industrial coatings,
plastics and chemical intermediates. The Company manufactures the vast majority
of its products and sells its products worldwide. The Company had net sales of
$1,471.8 million and earnings from operations of $141.1 million in 2003.
The Company operates in four segments: Water and Industrial Process
Chemicals, Performance Products, Specialty Materials and Building Block
Chemicals. Water and Industrial Process Chemicals principally include water
treatment chemicals, mining chemicals and phosphine chemicals and prior to
November 2000, paper chemicals. Performance Products principally include coating
chemicals, performance chemicals and polymer additives. Specialty Materials
principally include advanced composites and film adhesives. Building Block
Chemicals principally include acrylonitrile, hydrocyanic acid, acrylamide,
sulfuric acid and melamine. The Company characterizes its product lines as
platform product lines and value product lines. Platform product lines are those
product lines the Company believes have a competitive advantage to grow
organically and by extension through strategic acquisitions. The Company expects
these product lines to have sales growth over a business cycle considerably in
excess of growth in gross domestic product. The Company also expects its
platform product lines will need investment in research and development and
possibly in capital to increase global capacity to support sales growth. Value
product lines are those product lines which are expected to build sales and
profit growth through greater focus on manufacturing productivity. Value product
lines are expected to provide significant free cash flow and to increase their
economic value with a greater focus on asset management. The Company's platform
product lines are water treating chemicals, mining chemicals, phosphine
chemicals, coating chemicals, performance chemicals and specialty materials. The
Company's value product lines are polymer additives and building block
chemicals.
2
The Company's management regularly reviews the product line portfolio of
the Company in terms of strategic fit and financial performance and may from
time-to-time dispose of or withdraw certain product lines and/or acquire
additional product lines or technologies. Additionally, regular reviews are
performed of the cost effectiveness and profitability of plant sites or
individual facilities within such sites. In management's opinion, the financial
impact of a disposal or withdrawal of certain product lines together with the
impact on plant sites 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.
During 2003, the Company acquired the metal extractant products ("MEP") and
intermediates and stabilizers ("I&S") product lines of Avecia Investments
Limited ("Avecia"). Also during 2003, the Company ended its 50% participation in
its Mitsui Cytec joint venture while simultaneously acquiring 100% of the
venture's coating resins product line. The Company also ended its one-third
participation in the PolymerAdditives.com ("PA.com") joint venture in 2003 that
was previously written-off. The Company completed three other acquisitions
during 2001. (See Note 2 of the Notes to Consolidated Financial Statements).
In addition, the Company has a 50% interest in an associated company CYRO
Industries ("CYRO"). See Note 5 of the Notes to Consolidated Financial
Statements.
Unless indicated otherwise, the terms "Company" and "Cytec" each refer
collectively to Cytec Industries Inc. and its subsidiaries. Cytec was
incorporated as an independent public company in December 1993.
Segment Information
Revenues from external customers, earnings or loss from operations and
total assets for each of the Company's reportable segments can be found in Note
16 of the Notes to Consolidated Financial Statements.
Water and Industrial Process Chemicals Segment
Set forth below are the Company's primary product lines and major products
in this segment and their principal applications.
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PRODUCT LINE MAJOR PRODUCTS PRINCIPAL APPLICATIONS
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Water treating chemicals Flocculants, coagulants, filter aids, Water and wastewater treatment,
drilling and production polymers raw water clarification, process
water treatment, oil field
drilling and recovery, municipal
waste
Mining chemicals Promoters, collectors, solvent Mineral separation and
extractants, flocculants, frothers, processing for copper, alumina
filter and dewatering aids, and certain industrial minerals
antiscalants, dispersants, depressants,
defoamers and reagents
Phosphine chemicals Solvent extractants, flame retardants, Mineral/metal processing;
catalyst ligands, high purity phosphine pharmaceutical, agricultural
gas and biocides chemical and electronic
manufacturing; fumigants
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Many of the Company's products in this segment are manufactured using
acrylamide that is manufactured by the Company's Building Block Chemicals
segment.
3
Water Treating Chemicals
The Company's water treating chemicals product line consists primarily of
the manufacture and sale of products for use in applications such as treatment
of industrial waste streams and industrial influent water supplies to remove
suspended solids, sewage conditioners for municipal wastewater treatment,
treatment of municipal drinking water and as drilling mud conditioners for oil
service companies. Increased demand for clean water, environmental regulations
and regional and global economic development have increased demand for the
Company's water treating chemicals. To support this growing demand, Cytec
completed significant expansions at its Mobile, Alabama and Bradford, England
plants during 2001. Although Cytec sold its paper chemicals product line in two
separate transactions in late 2000, it retained all of its production
facilities, which are also used in its water treating and mining chemicals
product lines, and Cytec now produces paper chemicals under a long-term
manufacturing supply agreement for one of the purchasers of its paper chemicals
product line which expires in November, 2005. The Company is in the process of
negotiating an extension of this agreement. Cytec also retained its paper
wastewater treating product line.
Competition is generally intense in wastewater treatment applications,
particularly for municipal accounts, where contracts generally are awarded on a
competitive bid basis, and for those industrial applications where technical
service is not an important factor. Cytec markets its water treating chemicals
through a specialized sales staff with an emphasis on sales to global
full-service water treatment companies.
Mining Chemicals
The Company's mining chemicals product line is primarily used in
applications to separate minerals from ores. The Company has leading positions
in the copper processing industry, particularly in the flotation and in
extraction of copper. The Company also has a leading position in the alumina
processing industry, where its patented HxPams are particularly effective at the
flocculation of "red mud". The Company also sells phosphine chemicals specialty
reagents which have leading positions in cobalt nickel separation and copper
sulfide recovery applications. In 2003 the Company broadened its mining
chemicals product line by acquiring from Avecia, its MEP product line. The MEP
product line has a leading position for extractants in the processing of copper
oxide ores. In 1999, the Company completed two acquisitions in mining chemicals
broadening its product offerings to the copper processing industry and for
industrial minerals. Demand for mining chemicals is cyclical and varies with
industry conditions for the particular minerals with respect to which the
Company's products have processing applications. The Company strives to develop
new technologies as well as new formulations tailored for specific applications.
The Company's mining chemicals product lines are marketed primarily through a
specialized sales and technical services staff. Cytec has expanded its sales and
technical service presence in South America, South Africa, Asia and Australia,
the growth markets for the Company's mineral processing chemicals.
Phosphine Chemicals
The Company's phosphine chemicals are utilized for a variety of
applications. The Company is the largest supplier of ultra-high purity phosphine
gas, used in semiconductor manufacturing and light emitting diode applications,
and has significant positions in various phosphine derivative products including
phosphonium salts used in pharmaceutical catalysts and biocides. In 2003 the
Company acquired from Avecia its organo phosphorus product line as part of its
I&S product line. The compounds are used primarily as intermediates and catalyst
ligands for organic and chemical synthesis in the pharmaceutical and chemical
industries. The Company acquired a phosphine fumigants product line in 1999
which it markets as an alternative to methyl bromide. Sales of certain phosphine
products are dependent upon obtaining and maintaining necessary registrations
and approvals from applicable regulatory agencies and the Company is seeking
additional product registrations. The Company also seeks to broaden its product
line through development of additional proprietary technologies for
pharmaceuticals, specialty chemicals catalysts and reactive intermediate
applications. In 2002 the Company increased its plant capacity to meet increased
customer demand.
4
Performance Products Segment
Set forth below are the Company's primary product lines and major products
in this segment and their principal applications.
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Product Line Major Products Principal Applications
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Coatings chemicals Amino crosslinking resins, Industrial coatings and paints for appliances,
additives, urethanes and automobiles, containers, metal fixtures, metal
carbamates and wood furniture, heavy duty industrial
machinery
Performance chemicals Adhesion promoters, Adhesives and sealants, inks, electrical and
surfactants, specialty electronic products, wood bonding and
monomers, amino crosslinkers, laminating, textiles, tires, rubber products,
isocyanates, carbamates, non-wovens and super absorbent products,
acrylic stabilizers, flexible packaging, and plastics
thermoplastics, formulated
polyurethane and epoxies
Polymer additives Ultraviolet light stabilizers A broad range of plastics, coatings, and
and absorbers, high performance fibers for agricultural films, automotive parts,
antioxidants, antistatic agents architectural lighting, fiberglass, housewares,
packaging, outdoor furniture, sporting goods,
toys and apparel
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Many of the Company's products in this segment are manufactured using
melamine and acrylamide that are both manufactured by the Company's building
block chemicals segment.
Coatings Chemicals
The Company believes that it is the largest global supplier of amino
crosslinking resins ("Resins"), which the Company markets primarily for
industrial coatings applications under the CYMEL(R) trademark. The Company sells
Resins worldwide to manufacturers producing coatings for automotive, marine,
wood and metal finishings, and appliances, containers, coils and general
industrial maintenance coatings. In 2003 the Company acquired 100% of the
coating resins product line formerly operated by its Mitsui Cytec joint venture.
As part of the project to consolidate and increase the flexibility of the
Company's global Resins production, the Company completed an expansion of its
Resins production capacity at its Lillestrom, Norway plant in the second half of
2001. In 1999, the Company acquired the amino coatings resins product line of
BIP Limited which continued to toll products for the Company. Near the end of
2002, the Company transferred production to its expanded Lillestrom, Norway
facility.
The Company markets coating chemicals through a specialized sales and
technical service staff. Sales are typically made directly to large customers
and through distributors to smaller customers.
Performance Chemicals
The Company's performance chemicals have different functionalities and are
sold into varied end use applications. The largest product group is a line of
adhesion promoters sold under the CYREZ(R) trademark. Adhesion promoters are
used globally in the rubber industry, the major application being in the
manufacture of tires.
The Company is a leading global supplier of acrylamide based specialty
monomers and sulfosuccinate surfactants. These products are used in emulsion
polymers, paints, paper coatings, printing inks, and other diverse customer
applications.
The Company also manufactures and markets urethane chemicals and formulated
urethane and epoxy systems. The Company's urethane chemicals are sold primarily
for use in high performance coating applications and inks and adhesives and
formulated urethane systems are sold primarily for use as potting compounds in
electrical applications.
In 2003 the Company broadened its performance chemicals product line by
acquiring Avecia's I&S product line which broadened its customer base and added
new products, such as acrylic stabilizers and thermoplastics, and manufacturing
technologies.
The Company markets its performance chemicals through several specialized
sales and technical service staffs. Sales are typically made directly to large
customers and through distributors to smaller customers. The Company has
typically achieved growth in its performance chemicals sales by finding new
applications for its existing products. The Company continues to seek additional
new applications.
5
Polymer Additives
The Company is a significant global supplier to the plastics industry of
specialty additives which protect plastics from the ultraviolet radiation of
sunlight and from oxidation. Typical end use applications of the Company's
products include a wide variety of polyolefins that are used in agricultural
films, toys, lawn furniture and automotive applications, fibers for carpets,
spandex applications, engineered plastics and automotive coatings. Ciba
Specialty Chemicals AG is the dominant competitor in this product line. The
Company seeks to enhance its position with new products based on proprietary
chemistries and solutions-based technical support. In 2001 the Company launched
its proprietary CYASORB THT family of light stabilizers based on the Company's
hindered amine light stabilizer and triazine chemistries. These chemistries
provide much higher efficiency as ultraviolet light stabilizers than previous
technologies.
The Company markets polymer additives through a dedicated sales and
technical service staff. Sales are typically made directly to large customers
and through distributors to smaller customers. In 2003 the Company ended its
participation in PA.com, a business-to-business internet joint venture
originally formed by the Company, GE Specialty Chemicals, Inc. and Albemarle
Corporation and began selling directly to its customers previously purchased
through the venture. During 2002, the Company had reduced the carrying value of
its net investment in this venture to zero.
Specialty Materials Segment
The Specialty Materials segment principally manufactures and sells
aerospace materials that are used mainly in commercial and military aviation,
satellite and launch vehicles, and aircraft brakes and high performance
automotive applications such as Formula 1 racing cars and luxury sports cars.
Cytec Engineered Materials
The Company is the major global supplier of aerospace structural film
adhesives and a major supplier of aerospace advanced composite materials.
Advanced composites are exceptionally strong and lightweight materials
manufactured by impregnating fabrics and tapes made from high performance fibers
(such as carbon) with epoxy, bismaleimide, phenolic, polyimide and other resins
formulated or purchased by the Company. The Company acquired 3M's composites
product line in 2001 providing additional customer qualifications and new
products.
The primary applications for both aerospace adhesives and advanced
composites are commercial airliners, regional and business jets, military
aircraft, satellites and launch vehicles, high performance automotive and
specialty applications. Sales are dependent to a large degree on the commercial
and military aircraft build rate and the number of applications and aircraft
programs for which the Company is a qualified supplier. Every major commercial
program in the Western world has qualified and uses certain of the Company's
products. The Company is a major supplier to such military programs as the
F/A-22 and F/A-18 combat aircraft and the C-17 transport aircraft. In 2001 the
Company was also named as the sole source provider of structural composites for
the F-35 Joint Strike Fighter which is in development by a team led by Lockheed.
The Company has a long term agreement, expiring partly in 2005 and partly in
2007, to supply an aerospace customer with its requirements, subject to various
exceptions, of various specialty materials at prices that are fixed by year. The
reduction in air passenger traffic after September 11, 2001 has caused financial
problems for the airline industry with a consequential reduction in overall
demand for commercial aircraft. The Company anticipates, however, that the
long-term trend of growth in passenger air miles will recover.
Advanced composites generally account for a higher percentage of the
structural weight on military aircraft than on commercial aircraft. They also
account for a higher percentage of the structural weight on newer design
commercial aircraft than older design commercial aircraft as technology
progresses and manufacturers design planes to achieve greater fuel efficiency.
Advanced composites made from carbon fibers and epoxy or bismaleimide resins are
primarily used for structural aircraft applications such as wing, tail and
rudder components, engine housings, and fuselage components while advanced
composites made from fiberglass and phenolic resins are primarily used for
secondary structure applications such as fairings and interior aircraft
applications such as sidewall, ceiling and floor panels and storage and cargo
bins. In addition, the Company's ablatives are used in manufacturing rocket
nozzles and the Company's carbon/carbon products are used in manufacturing
aircraft and other high performance brakes. The Company expects the demand for
advanced composites to continue to increase and is currently expanding its
production facility in Oestringen, Germany to meet the expected growth in
demand. The Company expects to complete this project in early 2004.
6
The Company's aerospace adhesives and advanced composites also have various
applications in industrial, high performance automotive and selected
recreational products. The Company is seeking to leverage its engineered
materials portfolio with customers in these and other new markets.
The Company purchases from third parties all of the aramid and glass fibers
and much of the carbon fibers and base resins used in the manufacture of
composites. Other carbon fibers are sourced directly from Cytec Carbon Fibers as
discussed below. See "Customers and Suppliers" and Item 3, "Legal Proceedings."
The Company markets aerospace materials through a dedicated sales and
technical service staff typically direct to customers.
Cytec Carbon Fibers
In 2001 the Company acquired BP's carbon fibers product line to enhance its
ability to maintain a high quality, low cost supply of carbon fiber for its
advanced composite products.
The Company manufactures and sells various high performance grades of both
PAN (polyacrylonitrile) type and pitch type carbon fibers. Carbon fibers are
mainly used as a reinforcement material for advanced composites used in the
aerospace and certain other industries and have many advantageous
characteristics such as light weight, tensile strength and heat resistance.
Over 50% of the Company's carbon production is utilized internally as
reinforcement in producing certain of the Company's advanced composites. The
remainder is sold to third parties through a direct sales force.
Building Block Chemicals Segment
Building Block Chemicals are manufactured primarily at the Company's
world-scale, highly integrated Fortier facility. The Fortier facility is located
on the bank of the Mississippi River near New Orleans, Louisiana and has ready
access to all major forms of transportation and supplies of raw materials. The
Company attempts to run most of its plants at capacity subject to market
conditions and raw material availability.
Acrylonitrile and Hydrocyanic Acid
The Company anticipates that over the near term it will use internally
approximately 25% of its current acrylonitrile annual production capacity of 475
million pounds to produce acrylamide and that up to approximately 25% will be
sold pursuant to a long term supply agreement and 25% through a long term
distribution agreement, the first of which provides for a cost based price
through the first quarter of 2005 and the second of which provides for a market
based price. The profitability of producing acrylonitrile is influenced by
supply and demand, by the cost of propylene and ammonia, which are the largest
components of the cost of producing acrylonitrile, and by manufacturing
efficiency (i.e., yield and co-product recovery). Hydrocyanic acid is produced
as a co-product of the acrylonitrile process. Substantially all of the
hydrocyanic acid produced by the Company is sold to CYRO, as a raw material for
methyl methacrylate ("MMA") under two long-term contracts which have been
renegotiated and superceded by a new contract that will extend until 2011.
Other Building Block Chemicals
The Company also manufactures and sells acrylamide, sulfuric acid and
melamine. The Company anticipates that over the near term it will use internally
approximately 40% of its acrylamide annual production capacity of 200 million
pounds for the production of certain products for the Company's water treating
chemicals, mining chemicals and performance chemicals product lines. The
remainder of the Company's production is sold to third parties. The Company
manufactures acrylamide at its Fortier facility and at its Botlek facility in
the Netherlands.
The Company sells sulfuric acid to third parties and also toll converts
substantially all of CYRO's spent sulfuric acid arising from the manufacture of
MMA under a long-term service contract. This agreement, which was scheduled to
expire at the end of 2003, has recently been renegotiated and extended through
2011.
American Melamine Industries ("AMEL"), a 50% owned manufacturing joint
venture with a subsidiary of DSM N.V., operates a melamine manufacturing plant
with annual production capacity of approximately 160 million pounds at the
Fortier facility. DSM, which is the world's leading manufacturer of melamine,
makes its melamine expertise available to AMEL under a license agreement. The
Company anticipates that over the near term it will use internally up to 80% of
its 50% share of AMEL's annual melamine production, primarily for the production
of Resins. The remainder of the Company's share of production is sold to third
parties.
7
The Company indefinitely idled its only ammonia plant in 2001. The ammonia
plant had been using higher cost, U. S. natural gas as a raw material making
continuing operations economically unviable. It remains unlikely it will be
restarted and the Company is exploring the options of selling the asset, having
it dismantled and shipped to another location. If not successful, the Company
expects to dismantle it by year end 2004.
Prices of building block chemicals are sensitive to the stages of economic
cycles, raw material cost and availability, energy prices and currency rates, as
well as to periods of insufficient and excess capacity. The production of
building block chemicals is generally capital intensive, which may cause strong
downward pressure on prices in poor market environments as producers tend to
operate their plants at capacity even in poor market environments. The Company
sells building block chemicals to third parties through a direct sales force and
distributors.
Associated Companies
At the beginning of 2003 the Company had an ownership interest in three
unconsolidated associated companies. During 2003 the Company ended its
participation in two of the joint ventures as described below. For additional
information see Note 5 of the Notes to Consolidated Financial Statements.
CYRO Industries (50% owned)
CYRO manufactures and sells acrylic sheet and molding compound products,
primarily under the ACRYLITE(R) trademark, and MMA. CYRO operates primarily in
North America and manufactures its acrylic products at four locations in the U.
S. CYRO closed its Canadian manufacturing plant in 2001 in order to enhance its
overall manufacturing efficiency. The Company's partner in CYRO, an indirect
subsidiary of Degussa A.G., has an affiliate, Rohm GmbH and Co. KG., that
manufactures and sells acrylic sheet and molding compounds products and MMA
primarily in Europe and makes its technological expertise available to CYRO.
CYRO uses much of the MMA it manufactures as a raw material in the
manufacture of acrylic sheet and molding compounds and it sells the remainder to
third parties. CYRO's world-scale MMA manufacturing facility is an integrated
part of the Company's Fortier facility, consuming substantially all the
hydrocyanic acid produced by the Company in connection with the manufacture of
acrylonitrile. CYRO's annual MMA production capacity is 290 million pounds.
Mitsui Cytec (formerly 50% owned)
Mitsui Cytec manufactured and sold coating resins in Japan and manufactured
certain water treating chemicals in Japan that it sold throughout Asia. In
September 2003, the Company dissolved this joint venture acquiring 100% of its
coating resins product line, including a manufacturing facility in Japan, and
certain rights associated with the water treating product line in most of Asia,
and relinquished its share of the water treating product line of the former
joint venture.
PolymerAdditives.com LLC (formerly 33 1/3% owned)
In October, 2003 the Company ended its participation in this joint venture.
See "Performance Products Segment--Polymer Additives."
Competition
The Company operates in a highly competitive marketplace. It competes
against a number of other companies in each of its product lines, although none
of such companies competes with the Company in all of its product lines. The
Company's competitors are both larger and smaller than the Company in terms of
resources and market shares. Competition is primarily based on product
performance, reputation for quality, price and customer service and support. The
degree and nature of competition depends on the type of product involved.
In general, the Company competes by maintaining a broad range of products,
focusing its resources on products in which it has a competitive advantage and
fostering its reputation for quality products, competitive prices and excellent
technical service and customer support. Through research and development, the
Company seeks to increase sales and margins by introducing value-added products
and products based on proprietary technologies.
8
Customers and Suppliers
The Company has a diversity of product lines and in 2003 and 2002, no
customer accounted for more than 10% of the Company's net sales. Sales to the
Boeing Company and its subcontractors for commercial and military aerospace and
other components were approximately $150 million, or 11% of consolidated net
sales, in 2001. See also the discussion of various long-term supply agreements
in Note 10 of the Notes to Consolidated Financial Statements.
With respect to suppliers, the Company's vertical integration (i.e., its
manufacture of intermediates used to manufacture certain water treating
chemicals, mining chemicals, coating chemicals and performance chemicals and its
manufacture of carbon fibers for advanced composites) helps protect it from
being reliant on other companies for many significant intermediates. The
significant raw materials required to manufacture the Company's building block
chemicals are natural gas, propylene, ammonia and sulfur which are typically
available. Natural gas is an important indirect raw material for many of the
Company's products, including resins. Because natural gas is not easily
transported, the price may vary widely between geographic regions. The price of
natural gas in the United States has been volatile during the past few years and
is significantly above the price in many other parts of the world. The Company
has not had any problems obtaining the natural gas that it needs. However, many
of the Company's products compete with similar products made with less expensive
natural gas available elsewhere and the Company may not be able to recover any
or all of the increased cost of gas in manufacturing its products. The Fortier
facility is served principally by a single propylene pipeline owned by a
supplier although other suppliers can utilize the pipeline for a transportation
fee. In addition, the Company has made arrangements to obtain propylene by rail.
The Company generally attempts to retain multiple sources for high volume
raw materials, other than its own building block chemicals, in order to minimize
its reliance on any one supplier. The Company sources its requirements of
cationic monomers from a single supplier under a long-term agreement. Cationic
monomers are important raw materials in the water treating chemicals and mining
chemicals product lines. The Company is dependent on a limited number of
suppliers for carbon fibers that are used in many of the Company's advanced
composite products. Availability of certain carbon fibers has occasionally been
limited, although availability has recently been adequate. The risk of future
carbon fiber supply limitations is reduced now that the Company manufactures
some of its own carbon fibers.
A number of the Company's customers operate in cyclical industries such as
the aerospace, automotive and paper industries. As a result, demand for the
Company's products from customers in such industries is also cyclical. In
addition, the profitability of sales of certain of the Company's building block
chemicals varies due to the cyclicality typically experienced with respect to
the amount of industry wide capacity dedicated to producing such chemicals and
the amount of end user demand.
International
The Company operates on a global basis with manufacturing plants located in
ten countries. Export sales to unaffiliated customers from the United States
were $186.6 million for 2003, $164.7 million for 2002 and $185.3 million for
2001 or approximately 13%, 12% and 13% of net sales in such years, respectively.
The Company markets its products internationally through Company sales
forces, distributors and agents. International sales were approximately 51% in
2003, 49% in 2002 and 47% in 2001, of net sales to unaffiliated customers.
The Company's identifiable assets located outside of the United States, by
geographical region, at year end 2003 and 2002 are set forth in Note 16 of the
Notes to Consolidated Financial Statements and are incorporated by reference
herein.
International operations are subject to various risks which may not be
present in U. S. operations including political instability, the possibility of
expropriation, restrictions on royalties, dividends and remittances,
instabilities of currencies, requirements for governmental approvals for new
ventures and local participation in operations such as local equity ownership
and workers' councils. The Company does not currently believe that it is likely
to suffer a material adverse effect on its results of operations in connection
with its existing international operations.
Research and Process Development
During 2003, 2002 and 2001, the Company incurred $35.2 million, $33.7
million and $32.4 million, respectively, of research and process development
expense. The Company is currently investing approximately $57.0 million to
renovate and upgrade its main Specialty Chemical research facility located in
Stamford, Connecticut. Through December 31, 2003, the Company has spent $46.5
and expects to be substantially completed with the renovation by the second half
of 2004.
9
Trademarks and Patents
The Company has approximately 2,000 United States and international patents
and also has trademark applications and registrations for approximately 150
product names. The Company believes the loss of patent or trademark protection
on any one product or process would not have a material adverse effect on the
Company. While the existence of a patent is prima facie evidence of its
validity, the Company cannot assure that any of the Company's patents will not
be challenged, and it cannot predict the outcome of any challenge.
Employees
The Company employs approximately 4,500 employees of which approximately
2,200 are covered by union contracts. The Company believes that its relations
with both employees and the related union leaderships are generally good.
Operating Risks
The Company's revenues are largely dependent on the continued operation of
its various manufacturing facilities. The operation of chemical manufacturing
plants involves many risks, including the breakdown, failure or substandard
performance of equipment, operating errors, natural disasters, and the need to
comply with directives of, and maintain all necessary permits from, government
agencies. In addition, the Company's operations can be adversely affected by raw
material or energy supply disruptions, labor force shortages or work stoppages
and events impeding or increasing the cost of transporting the Company's raw
materials and finished products. The occurrence of material operational
problems, including but not limited to the above events, may have a material
adverse effect on the productivity and profitability of a particular
manufacturing facility, or with respect to certain facilities, the Company as a
whole, during the period of such operational difficulties.
The Company's operations are also subject to various hazards incident to
the production of industrial chemicals, including the use, handling, processing,
storage and transportation of certain hazardous materials. Under certain
circumstances, these hazards could cause personal injury and loss of life,
severe damage to and destruction of property and equipment, environmental damage
and suspension of operations. Claims arising from any future catastrophic
occurrence at one of the Company's locations may result in the Company being
named as a defendant in lawsuits asserting potentially large claims.
The Company utilizes third party insurance to cover portions of certain of
these risks to the extent that coverage is available and can be obtained on
terms the Company believes are economically justifiable. After September 11,
2001, the availability of property insurance in particular became much tighter.
In response to an approximate tripling in proposed rates, the Company increased
certain of its deductibles and self-insured retention amounts primarily in the
area of property insurance.
Environmental Matters
The Company is subject to various federal, state and international laws and
regulations which impose stringent requirements for the control and abatement of
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. 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. 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.
10
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 or the inability of the Company to operate
all or part of the facility.
Notes 1 and 10 of the Notes to Consolidated Financial Statements are
incorporated by reference herein.
11
Item 2. PROPERTIES
The Company operates manufacturing and research facilities in ten
countries. Capital spending, exclusive of acquisitions, for the years ended
2003, 2002 and 2001 was $93.8 million, $62.2 million, and $63.9 million,
respectively. Capital expenditures in 2004 are expected to be in the range of
$90.0 to $95.0 million. The increase in spending from 2002 levels is due
primarily to a multi-year project to significantly upgrade and modernize the
Stamford, Connecticut Specialty Chemicals research facility, expanding capacity
at its Oestringen, Germany manufacturing facility, infrastructure upgrades at
its Willow Island, West Virginia manufacturing facility and capital expenditures
at the two plants acquired by the Company during 2003 in Shimonoseki, Japan and
Mount Pleasant, Tennessee. The Company's capital expenditures are intended to
provide increased capacity, to improve the efficiency of production units, to
improve the quality of the Company's products, to modernize or replace older
facilities, or to install equipment for protection of employees, neighboring
communities and the environment.
The Company's major facilities and the segments served by each such
facility are as follows:
-------------------------------------------------------------------------------------------------------------------------------
FACILITY PRINCIPAL SEGMENT
-------------------------------------------------------------------------------------------------------------------------------
Anaheim, California Specialty Materials
Atequiza, Mexico Water and Industrial Process Chemicals; Performance Products
Antofogasta, Chile Water and Industrial Process Chemicals
Avondale (Fortier), Louisiana Building Block Chemicals
Belmont (Willow Island), West Virginia Performance Products
Bogota, Colombia Performance Products
Botlek, the Netherlands Water and Industrial Process Chemicals; Performance Products;
Building Block Chemicals
Bradford, England Water and Industrial Process Chemicals
Greenville, South Carolina Specialty Materials
Greenville, Texas Specialty Materials
Havre de Grace, Maryland Specialty Materials
Kalamazoo, Michigan Water and Industrial Process Chemicals; Performance Products
Lillestrom, Norway Performance Products
Longview, Washington Water and Industrial Process Chemicals
Mobile, Alabama Water and Industrial Process Chemicals
Mount Pleasant, Tennessee Water and Industrial Process Chemicals; Performance Products
Oestringen, Germany Specialty Materials
Olean, New York Performance Products
Orange, California Specialty Materials
Rock Hill, South Carolina Specialty Materials
Shimonoseki, Japan Performance Products
Stamford, Connecticut. Water and Industrial Process Chemicals; Performance Products
Wallingford, Connecticut Performance Products
Welland, Ontario Water and Industrial Process Chemicals
Winona, Minnesota Specialty Materials
Wrexham, Wales, U. K. Specialty Materials
-------------------------------------------------------------------------------------------------------------------------------
The Company owns all of the foregoing facilities and their sites except for
the land at the Botlek, Lillestrom, Shimonoseki and Rock Hill facilities which
is leased under long term leases. The Company leases its corporate and Specialty
Chemicals headquarters in West Paterson, New Jersey and its Specialty Materials
headquarters located in Tempe, Arizona.
12
Item 3. LEGAL PROCEEDINGS
The Company is the subject of numerous lawsuits and claims incidental to
the conduct of its or its predecessors' businesses, including lawsuits and
claims relating to product liability, personal injury, environmental,
contractual, employment and intellectual property matters. Many of the matters
relate to the use, handling, processing, storage, transport or disposal of
hazardous materials. The Company believes that the resolution of such lawsuits
and claims, including those described below, 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, in this section, includes predecessor entities
being indemnified by Cytec.
The Company is among several defendants in approximately 35 cases, in which
plaintiffs assert claims for personal injury, property damage, and other claims
for relief relating to lead pigment that was used as an ingredient decades ago
in paint for use in buildings. The different suits were brought by government
entities and/or individual plaintiffs, on behalf of themselves and others. The
suits variously seek compensatory and punitive damages and/or injunctive relief,
including funds for the cost of monitoring, detecting and removing lead based
paint from buildings and for medical monitoring; for personal injuries allegedly
caused by ingestion of lead based paint; and plaintiffs' attorneys' fees. The
Company believes that the suits are without merit and is vigorously defending
against all such claims.
The Company has access to a substantial amount of primary and excess
general liability insurance for property damage and believes these policies are
available to cover a significant portion of both its defense costs and indemnity
costs, if any, for lead pigment-related property damage claims. The Company has
not recorded an insurance receivable relating to its defense costs although it
is currently pursuing an agreement with various of its insurers concerning
coverage with respect to these matters.
In 1999 the Company received a subpoena to testify before, and provide
documents to, a federal grand jury in California investigating the carbon fiber
and prepreg industry. The Company manufactures prepregs as part of its advanced
composites product line and, since its acquisition of BP's carbon fibers product
line in August 2001, also manufactures carbon fiber. The grand jury was
dismissed in December 2003 without issuing any indictments against the Company
or any indictments for violation of anti-trust laws. After the grand jury
investigation was commenced, the Company and the other companies subpoenaed to
testify before the grand jury were named as defendants in various civil actions,
including several class actions, on behalf of purchasers of carbon fiber, which
the complaints defined to include prepregs manufactured from carbon fiber. The
complaints allege that the defendants conspired to fix the prices of their
products. The Company denies that it conspired to fix prices and is vigorously
defending against all such claims.
The Company, like many other industrial companies, has been increasingly
named as one of hundreds of defendants in a number of lawsuits filed throughout
the United States by persons alleging bodily injury as a result of exposure to
asbestos. Plaintiffs' attorneys have increased their focus on peripheral
defendants, such as the Company, and the number of claims against the Company
has more than doubled since September 30, 2002. The Company believes that a
substantial part of the increase in claims is related to efforts to file cases
before December 31, 2002, the effective date of tort reform legislation in
Mississippi. The claimants allege exposure to asbestos at facilities formerly or
currently owned by the Company or in products formerly manufactured by the
Company for specialized applications. Most of these cases involve numerous
defendants, sometimes as many as several hundred. Historically, most of the
closed asbestos claims against the Company have been dismissed without any
indemnity payment by the Company, and the Company has no information that this
pattern will change.
The following table presents information about the asbestos claims against
the Company.
2003 2002
---- ----
Claims Closed 7,601 530
Claims Filed 7,648 17,511
Claims Open, as of December 31 26,955 26,908
In addition to liabilities with respect to the specific cases described
above, 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.
See also the first four paragraphs of "Environmental Matters" under
"Business" in Item 1 and Note 10 of the Notes to Consolidated Financial
Statements.
13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed on the New York Stock Exchange.
On January 30, 2004, there were approximately 12,000 holders of record of the
Common Stock of the Company.
The high and low stock prices for each quarter were:
1Q 2Q 3Q 4Q
--------------------------------------------------------------------------------
2003
High $30.51 $35.54 $38.76 $38.59
Low 25.98 28.05 34.60 33.45
2002
High $31.67 $34.00 $31.99 $27.89
Low 22.64 27.33 21.41 19.20
--------------------------------------------------------------------------------
On January 22, 2004 the Board of Directors approved the initiation of a
common stock quarterly cash dividend program and declared a $0.10 per share cash
dividend, payable on February 25, 2004 to shareholders of record as of February
10, 2004. The Company is restricted from paying dividends in excess of certain
amounts determined in accordance with the terms of its Series C Cumulative
Preferred Stock. (See Note 15 of the Notes to Consolidated Financial Statements,
which is incorporated by reference herein).
14
Item 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
(Dollars in millions, except per share amounts)
2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Statements of income data:
Net sales $1,471.8 $1,346.2 $1,387.1 $1,492.5 $1,444.5
Earnings from operations 141.1 119.4 (2) 113.8 (4) 177.7 (6) 185.1 (8)
Earnings before accounting change and
extraordinary item 91.0 79.3 (3) 66.2 (5) 177.6 (7) 121.3 (9)
Cumulative effect of accounting change,
net of taxes (13.6) - - - -
Extraordinary gain, net of taxes - - 4.9 - -
--------- ----------- ---------- --------- ---------
Net earnings available to common stockholders $77.4 $79.3 $71.1 $177.6 $121.3
--------- ----------- ---------- --------- ---------
Net earnings per common share:
Basic :
Before accounting change and
extraordinary item $2.34 $2.01 $1.65 $4.34 $2.83
Accounting change (0.35) (1) - - - -
Extraordinary item - - $0.12 - -
--------- ----------- ---------- --------- ---------
Net earnings $1.99 $2.01 $1.77 $4.34 $2.83
--------- ----------- ---------- --------- ---------
Diluted:
Before accounting change and
extraordinary item $ 2.27 $1.96 $1.59 $4.15 $2.73
Accounting change (0.34) - - - -
Extraordinary item - - $0.12 - -
--------- ----------- ---------- --------- ---------
Net earnings $ 1.93 $1.96 $1.71 $4.15 $2.73
--------- ----------- ---------- --------- ---------
Statements of balance sheet data:
Total assets $2,025.9 $1,766.4 $1,650.4 $1,721.6 $1,752.6
Long-term debt $ 416.2 $ 216.0 $ 314.7 $ 313.4 $ 415.2
------------------------------------------------------------------------------------------------------------------------------------
(1) Represents the cumulative effect of adopting Statement of Financial
Accounting Standards ("SFAS") No. 143 ("SFAS No. 143"). Expenses resulting from
SFAS No. 143 included in Earnings from Operations were $1.8 in 2003. Had this
accounting policy been in effect in prior years, additional expenses of $1.7 in
2002, $1.6 in 2001, $1.5 in 2000 and $1.4 in 1999 would have been recognized.
(2) Includes net restructuring charges of $13.7 and a charge of $1.7 for costs
associated with a tax refund related to the prior years' research and
development tax credit.
(3) In addition to the items in Note (2) above, includes restructuring charges
of $0.4 included in equity in earnings of associated companies, $2.0 of interest
income related to the research and development tax credit, and a $6.0 reduction
in income tax expense related to a refund associated with prior years' research
and development tax credits.
(4) Includes a restructuring charge of $5.4 and $9.7 of goodwill amortization
that is no longer amortized under SFAS No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets."
(5) In addition to the items in note (4) above, includes a restructuring charge
of $2.3 included in earnings of associated companies.
(6) Includes a restructuring charge of $10.1, a charge of $1.4 for receivables
which were deemed uncollectible and due the Company from its former ammonia
joint venture and $9.4 of goodwill amortization that is no longer amortized
under SFAS 142.
(7) In addition to the items in note (6) above, includes a gain of $88.3 from
the divestiture of the paper chemicals product line; a gain of $13.3, discounted
and net of expenses, from an environmental remediation insurance settlement; a
gain of $7.1 from the sale of real estate at a former plant site; and a charge
of $4.8 for the write-down of receivables from the AC Molding Compounds joint
venture.
(8) Includes $8.5 of goodwill amortization that is no longer amortized under
SFAS 142.
(9) In addition to the items in note (8) above, includes a credit of $8.0
related to the utilization of prior years' tax credits.
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes to Consolidated Financial
Statements. Dollars are in millions, except per share amounts. Percentages are
approximate.
GENERAL
Cytec Industries Inc. is a global specialty chemicals and materials company
and sells its products to diverse major markets for aerospace, water treatment,
mining, automotive, industrial coatings, plastics and chemical intermediates.
With slightly over half of its sales outside of the U. S., sales volume by
region is an important metric to management and is detailed by segment as well
as the impact of changes in currency rates. The Company reports its net sales in
four segments: Water and Industrial Process Chemicals, Performance Products,
Specialty Materials and Building Block Chemicals. The Water and Industrial
Process Chemicals and Performance Products segments are collectively referred to
as Specialty Chemicals. (See Item 1. Business.) The Company also reports its net
sales in four geographic regions: North America, Latin America, Asia/Pacific and
Europe/Middle East/Africa. The destination of the sale determines the region
under which it is reported consistent with management's view of the business.
North America consists of the United States and Canada. Latin America includes
Mexico, Central America, South America and the Caribbean Islands. Asia/Pacific
is comprised of Asia, Australia and the islands of the South Pacific Rim.
Raw material cost changes year on year are an important factor in
profitability especially in years of high volatility. Key raw materials for the
Specialty Chemical and Building Block Chemicals segments are propylene, ammonia,
methanol derivatives and natural gas for utilities. Discussion of the year to
year impact for raw materials and energy is provided in our segment discussion.
In the course of the Company's ongoing operations, a number of strategic
product line acquisitions and dispositions have been made. All acquisitions have
been recorded using the purchase method of accounting. Accordingly, the results
of operations of the acquired companies have been included in the Company's
consolidated results from the dates of the respective acquisitions. (For further
information about the Company's acquisitions and dispositions, see Note 2 of the
Notes to Consolidated Financial Statements.)
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143") effective
January 1, 2003, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") effective January 1, 2003 and Statement of
Financial Accounting Standards No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132 Revised"). SFAS 143
addresses the accounting and reporting requirements for legal obligations
associated with the retirement of tangible long-lived assets, and SFAS 146
addresses the recognition and measurement of costs associated with an exit or
disposal activity. The adoption of SFAS No. 143 resulted in a net charge of
$13.6 million after-tax. SFAS No. 132 Revised provides for additional financial
statement disclosures for defined benefit plans. In addition, the Company
adopted SFAS No. 141, "Business Combinations" ("SFAS 141") effective July 1,
2001 and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142")
effective January 1, 2002, and SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") effective January 1, 2001. For
further information on these accounting changes, see Note 1 of the Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship that certain
items in the Company's Consolidated Statements of Income bear to net sales:
Years Ended December 31, 2003 2002 2001
--------------------------------------------------------------------------------
Net Sales 100.0% 100.0% 100.0%
Manufacturing cost of sales 75.8 75.8 77.1
Gross profit 24.2 24.2 22.9
Selling and technical services 8.6 9.1 8.2
Research and process development 2.4 2.5 2.3
Administrative and general 3.4 3.5 3.2
Amortization of acquisition
intangibles 0.3 0.2 0.9
-----------------------------------------
Earnings from operations 9.6 8.9 8.2
-----------------------------------------
Net earnings 5.3 5.9 5.1
--------------------------------------------------------------------------------
16
NET SALES BY SEGMENT AND GEOGRAPHIC AREA
Net Sales Europe/
North Latin Asia/ Middle
America America Pacific Rim East/Africa Total
--------------------------------------------------------------------------------------------------------------------------
2003
Water and Industrial Process Chemicals $146.6 $60.2 $ 51.2 $104.2 $ 362.2
Performance Products 248.6 28.9 86.6 125.7 489.8
Specialty Materials 292.3 1.6 15.5 99.3 408.7
Building Block Chemicals 88.9 4.0 58.0 60.2 211.1
---------------------------------------------------------------------
Total $776.4 $94.7 $211.3 $389.4 $1,471.8
---------------------------------------------------------------------
2002
Water and Industrial Process Chemicals $139.9 $51.5 $ 50.1 $89.7 $ 331.2
Performance Products 242.9 26.2 72.3 110.9 452.3
Specialty Materials 290.7 1.3 14.7 88.8 395.5
Building Block Chemicals 68.9 3.9 60.2 34.2 167.2
---------------------------------------------------------------------
Total $742.4 $82.9 $197.3 $323.6 $1,346.2
---------------------------------------------------------------------
2001
Water and Industrial Process Chemicals $156.0 $57.2 $ 36.6 $85.2 $ 335.0
Performance Products 238.0 27.2 65.7 103.8 434.7
Specialty Materials 320.4 1.9 16.8 111.1 450.2
Building Block Chemicals 82.6 4.7 51.6 28.3 167.2
---------------------------------------------------------------------
Total $797.0 $91.0 $170.7 $328.4 $1,387.1
--------------------------------------------------------------------------------------------------------------------------
Net sales in the United States were $719.7, $685.8 and $736.9 for 2003,
2002 and 2001, respectively. International net sales were $752.1, $660.4, and
$650.2, or 51%, 49% and 47% of total net sales, for 2003, 2002 and 2001,
respectively.
For more information on the Company's segments, see Note 16 of the Notes to
Consolidated Financial Statements and further discussions in the Segment Results
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
YEAR ENDED DECEMBER 31, 2003, COMPARED WITH YEAR ENDED DECEMBER 31, 2002
Consolidated Results
Net sales for 2003 were $1,471.8, up 9%, compared to $1,346.2 for 2002.
Overall, sales volume increased 5% with acquisitions accounting for 2% of this
increase, favorable changes in currency rates adding 3%, and higher selling
prices adding 1%.
For a detailed discussion on sales refer to the Segment Results section
below.
Manufacturing cost of sales was $1,114.9, or 75.8% of net sales, for 2003
compared to $1,020.4, or 75.9%, of net sales, for 2002. Included in 2002 is a
$10.8 net restructuring charge or 1.0% of net sales for plant closure costs and
expenses associated with discontinuing a product line. Additional savings
related to 2002 restructuring initiative were $1.4 in 2003 which was the result
of planned personnel reductions under the 2002 initiative. Manufacturing costs
in 2003 were also impacted by higher raw material and energy costs of $37.4,
particularly from petroleum based products globally and natural gas based
products in the U. S. and currency rate changes increased cost $18.2 Freight and
warehousing increased $6.6 of which $3.0 was due to currency rates changes. The
remainder of the increase in freight and warehousing is due primarily to sales
volume increases as well as higher freight rates and fuel surcharges. Insurance
costs increased $1.7 over 2002. Partially offsetting this were lower costs as a
result of the Company's operational excellence initiatives.
Pension expense increased $5.2 principally as a result of the Company
lowering its discount rate in the U. S. by 0.5% to reflect current market rates
on fixed income securities and by the 2003 acquisitions which increased pension
expense by $0.3. This was partly offset by plan changes to the retirement
medical plans in the U. S. which were instituted by the Company in 2002 and
reduced expense by $0.7. Pension expense is primarily reported in manufacturing
cost of sales. See Critical Accounting Policies, Retirement Plans for further
discussion on how changes in discount rates and return on asset assumptions can
impact annual expense.
17
Selling and technical services increased $4.3. Included in prior year
amounts are net restructuring charges of $2.5. Additional savings related to
2002 restructuring were $1.1 in 2003 primarily as a result of planned personnel
reductions. Costs associated with the acquisitions in 2003 added $2.6 and costs
associated with the Company's performance stock plan increased by $1.1 due to a
higher market value for the Company's common stock. The remainder of the
increase is primarily due to currency rate changes.
Research and process development increased $1.5. Included in the prior year
are net restructuring charges of $1.0. Costs associated with the acquisitions in
2003 added $0.5. Headcount additions and costs for outside testing in the
Specialty Chemical segments accounted for the increase in costs.
Administrative expenses increased $2.7 but included in prior year amounts
are net restructuring charges of $0.8 and fees of $1.7 related to a research and
development tax credit filing. The Company's performance stock plan increased
costs by $1.5 due to the higher stock price. The acquisitions of 2003 added $0.7
to administrative costs in 2003 and insurance premiums increased $1.1 over 2002.
Currency rate changes also increased costs.
The increase in the amortization of acquisition intangibles is due to the
amortization of acquisition intangibles from the 2003 acquisitions.
Other expense, net increased $6.9 from the year ago period. This resulted
primarily from currency losses where certain of our international subsidiaries
held dollar denominated assets when the U. S. dollar weakened. Currency rate
changes increased expenses compared to 2002 by $5.3. Cleanup costs of $0.6 at an
operating site related to a divested product line and royalty income of $0.8
that expired in 2002 also contributed to the increase.
Equity in earnings of associated companies increased $1.1 from the year ago
period. Included in 2002 results was a restructuring charge of $0.4 representing
the Company's 50% share of restructuring charges recorded by CYRO, and a charge
of $1.7 to reduce to zero the carrying value of the Company's net investment in
the one-third owned PA.com. In addition, the Company's share of operating losses
from PA.com in 2002 totaled $0.9. CYRO had increased sales of 5% in 2003,
however its product mix was less favorable and raw material and energy costs
were higher than the year ago period. As a result, the Company's share of
earnings in 2003 from CYRO decreased by $1.7.
Interest expense, net was $16.2, a decrease of $0.3, from the prior year
period. Interest income in 2002 was favorably impacted by $2.0 received in
conjunction with research and development tax credit refund. In March 2003 the
Company repaid $100.0 of its existing debt with an interest rate of 6.5% per
annum resulting in lower interest expense. This was largely offset by interest
expense related to the $200.0 principal amount of 4.6% Notes that were issued in
June 2003. The interest expense associated with this new debt was partially
reduced by $0.7 as a result of interest rate swap agreements entered into in
August 2003.
Income tax provision reflects a reduction in the effective tax rate from
33.5%, before the impact of prior years' tax credits, to 28.0%. This reduction
was a result of the Company's continued emphasis on global tax planning and
execution of those plans together with an increased level of investment and
earnings in tax jurisdictions with lower rates as well as a favorable
international tax ruling with respect to a legal entity restructuring that
occurred in the prior year. The 2002 full year effective tax rate of 28%
reflects a reduction for a tax refund of $6.0 associated with prior year's
research & development tax credits.
Net earnings before the cumulative effect of the accounting change were
$91.0, or $2.27 per diluted share, for 2003, compared to $79.3, or $1.96 per
diluted share, in 2002. Included in 2002 was an after-tax net restructuring
charge of $14.1, or $0.23 per diluted share. Also included in 2002 is a net
credit of $0.15 per diluted share related to research and development tax
credits discussed above (a reduction of $6.0 in income tax provision, interest
income of $2.0 or $1.3 after-tax, and a charge of $1.7 or $1.1 after-tax in
administrative expenses for fees related to tax planning).
On January 1, 2003, the Company adopted SFAS 143 and recorded an after-tax,
non-cash charge of $13.6 ($0.34 per diluted share) reported as a cumulative
effect of an accounting change.
Net earnings after the cumulative effect of the accounting change were
$77.4 or $1.93 per diluted share.
18
Segment Results
Year-to-year comparisons and analyses of changes in net sales by product line
segment and region are set forth below.
Water and Industrial Process Chemicals
% Change Due to
Total ----------------------------------------
2003 2002 % Change Price Volume/Mix Currency
----------------------------------------------------------------------------------------------------------------------
North America $ 146.6 $ 139.9 5% -3% 7% 1%
Latin America 60.2 51.5 17% 1% 19% -3%
Asia/Pacific 51.2 50.1 2% -8% -2% 12%
Europe/Middle East/Africa 104.2 89.7 16% -2% 4% 14%
--------------------------
Total $ 362.2 $ 331.2 9% -3% 7% 5%
----------------------------------------------------------------------------------------------------------------------
Overall, sales increased 9%. Currency rate changes increased sales 5% with
acquisitions adding 4%. Base volume increased 3%, and selling prices declined
3%. North American volumes increased 7% with the 2003 acquisitions of the metal
extractant and aromatic phosphines product lines of Avecia accounting for 6%.
Also, the Water Treatment product line selling volume was down as the Company
exited certain low profit municipal business but this was offset by increased
Phosphine gas sales. In Latin America, the volume growth of 19% was primarily in
the mining chemicals product line as a result of higher demand in the alumina
market and acquisitions accounting for 3%. Asia/Pacific volumes decreased 2%;
2002 volume included sales for an initial fill of the Company's solvent
extraction product at one of the worlds largest cobalt nickel mines. Europe
volumes increased 4% primarily in the Water Treatment product line. Currency
rate changes were primarily the result of the weaker U. S. dollar, except in
Latin America where the U. S. dollar remained strong for the first three
quarters of 2003. Selling prices decreased in North America in all product lines
due to customer mix and competitive pricing. Latin America pricing increased
offsetting the impact of negative currency rate changes. Asia/Pacific selling
prices decreased principally in mining chemicals where pricing is linked to the
U. S. dollar with an offsetting effect due to currency rate changes.
Earnings from operations were $20.3, or 6% of net sales in 2003, compared
to $26.2, or 8% of net sales, in 2002. Included in 2003 are increased savings
from the 2002 restructuring initiative of $1.4 million as a result of planned
personnel reductions. The impact from the increase in sales and restructuring
savings was more than offset by higher raw material and energy costs of $3.2,
higher freight, warehousing, employee benefit and insurance costs.
Performance Products
% Change Due to
Total ----------------------------------------
2003 2002 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------------------------------------------
North America $ 248.6 $ 242.9 2% 1% 0% 1%
Latin America 28.9 26.2 10% 5% 11% -6%
Asia/Pacific 86.6 72.3 20% -2% 19% 3%
Europe/Middle East/Africa 125.7 110.9 13% 0% -4% 17%
--------------------------
Total $ 489.8 $ 452.3 8% 1% 3% 4%
---------------------------------------------------------------------------------------------------------------------------------
Overall, sales increased 8% with the 2003 acquisitions accounting for 3%.
Currency rate changes increased sales 4%, principally from the stronger Euro
offset somewhat by overall weakness in Latin American currencies. Base volumes
for the year were flat and selling prices were up slightly. The Company
experienced strong demand in the Asia/Pacific and Latin America regions although
off a smaller base but this was almost all offset by lower demand in Europe and
North America due to reduced economic activity in those regions. Selling prices
were up in Latin America offsetting the negative impact of currency rate
changes. Prices in Asia/Pacific were down 2% primarily in Polymer Additives due
to continued competitive pricing initiatives.
Earnings from operations were $37.3, or 8% of net sales, in 2003 compared
to $39.6, or 9% of net sales, in 2002. Included in 2003 are increased savings
from the 2002 restructuring imitative of $1.1 million as a result of planned
personnel reductions. The impact from the increase in sales and restructuring
savings was more than offset by higher raw material and energy costs of $9.2,
increased freight, warehousing, employee benefit and insurance costs.
19
Specialty Materials
% Change Due to
Total ----------------------------------------
2003 2002 % Change Price Volume/Mix Currency
---------------------------------------------------------------------------------------------------------------------------------
North America $ 292.3 $ 290.7 1% 0% 1% 0%
Latin America(1) 1.6 1.3 --- --- --- ---
Asia/Pacific 15.5 14.7 4% -2% 6% 0%
Europe/Middle East/Africa 99.3 88.8 12% -3% 11% 4%
--------------------------
Total $ 408.7 $ 395.5 3% -1% 3% 1%
---------------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
Selling volumes were up 3% overall. Sales to military and rotorcraft
applications added 5% due to increased production levels for military aircraft
and a high level of replacement parts for rotorcraft and restocking by certain
customers from low 2002 year-end inventory levels. Sales to the commercial
aerospace sector for large commercial aircraft, regional jets and business jets
were down 2% from 2002. Sales to Boeing were down in line with the decrease in
large commercial aircraft build rates but offset somewhat by increased sales to
Airbus.
Earnings from operations were $66.3, or 16% of sales, in 2003 compared to
$65.7, or 17% of sales, in 2002. Included in 2003 are increased savings from the
2002 restructuring initiative of $0.5 million as a result of planned personnel
reductions. The impact from the increase in sales, restructuring savings and
higher plant utilization was essentially offset by higher operating costs as the
Company invested in its manufacturing plants and increased its selling and
technical efforts.
Building Block Chemicals (Sales to external customers)
% Change Due to
Total ----------------------------------------
2003 2002 % Change Price Volume/Mix Currency
--------------------------------------------------------------------------------------------------------------------------
North America $ 88.9 $ 68.9 29% 15% 14% 0%
Latin America(1) 4.0 3.9 --- --- --- ---
Asia/Pacific 58.0 60.2 -4% 15% -19% 0%
Europe/Middle East/Africa 60.2 34.2 76% 3% 54% 19%
-------------- ------------
Total $ 211.1 $ 167.2 26% 12% 10% 4%
--------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage
comparisons are not meaningful.
Selling volumes increased 10% overall. North American and European
acrylonitrile volumes were up due to new business. Demand in Asia/Pacific for
acrylonitrile was low principally in the second quarter of the year. Selling
prices were up primarily related to acyrlonitrile due to tighter supply and
increased input costs.
Earnings from operations were $20.3, or 7% of net sales, in 2003 compared
to $5.6, or 3% of net sales, in 2002. The increased earnings were primarily the
result of higher selling volumes and prices and the favorable impact of currency
rate changes. Additionally, earnings increased due to lower plant spending of
$3.2 and higher plant capacity utilization. The increase was partially offset by
significantly higher raw material and energy costs of $24.0 which were primarily
due to the higher cost of ammonia, propylene and natural gas.
20
YEAR ENDED DECEMBER 31, 2002, COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Consolidated Results
Net sales for 2002 were $1,346.2 compared to $1,387.1 for 2001 with modest
declines in prices and volume. Asia/Pacific had the only sales increase, which
was due to strong volume growth. The Americas were down modestly due to lower
volume and Europe/Middle East/Africa was slightly below last year.
For a detailed discussion on sales refer to the Segment Results section
below.
In 2002 the Company recorded an aggregate restructuring charge of $16.0,
which included the elimination of 135 positions worldwide. The charge was
comprised of the following initiatives: reorganization of the Specialty
Chemicals segments resulting in a reduction of 65 personnel and a charge of $5.1
for employee related costs; alignment of the Specialty Materials segment in
connection with reduced demand in the commercial aerospace industry, resulting
in a reduction of 47 personnel and a charge of $1.6 for employee related costs;
closure of the Woodbridge, NJ, facility, resulting in the elimination of 23
positions and a charge of $1.6 for employee related and decommissioning costs;
and the discontinuance of a minor unprofitable product line, resulting in a
charge of $7.7 for the write-down of the net book value of the fixed assets and
costs of decommissioning the facility. The restructuring costs were charged to
the Consolidated Statement of Income as follows: manufacturing cost of sales,
$11.6; selling and technical services, $2.6; research and process development,
$1.0 and administrative and general, $0.8 and were charged to corporate. At the
time the restructuring was initiated, the Company expected cumulative savings of
$6.3 in 2002 and $9.5 in 2003. As of December, 2002, 105 positions were
eliminated resulting in actual savings through December 31, 2002 of $6.1.
In addition, during 2002 the Company recorded charges of $0.4 in equity in
earnings of associated companies for its 50% share of additional restructuring
charges related to CYRO's shutdown of its Niagara Falls, Ontario, Canada
facility in 2001.
In 2001 the Company recorded a restructuring charge of $5.4 related to the
indefinite idling of the Fortier ammonia plant and the Company's share of the
related personnel reduction of 67 positions at the Fortier facility. The
restructuring costs were charged to the Consolidated Statement of Income as
follows: manufacturing cost of sales of $4.6 and selling and technical services
of $0.8 and were charged to corporate. The components of the restructuring
charge included: employee severance costs, $4.3; asset write-downs, $0.9; and
other costs, $0.2. During 2002 the Company reduced this restructuring accrual as
a result of incurring less costs than originally estimated as a result of less
than expected personnel reductions. As a result, the Company recognized a
restructuring credit of $0.9 in the Consolidated Statement of Income as follows:
manufacturing cost of sales, $0.8 and selling and technical services, $0.1. At
the time the restructuring was initiated, the Company expected savings of $2.2
in 2001 and savings of $8.9 in 2002. The actual cumulative savings for 2001 were
$2.1 and $8.5 in 2002.
In addition, during 2001 the Company recorded charges of $2.3 in equity in
earnings of associated companies for its 50% share of CYRO's restructuring
charges including $3.7 related to the shutdown of CYRO's manufacturing facility
in Niagara Falls, Ontario, Canada, and $0.8 related to CYRO's share of the
infrastructure restructuring at the Company's Fortier facility.
Manufacturing cost of sales was $1,020.4, or 75.8% of net sales, for 2002
and included net restructuring charges of $10.8 for plant closure and employee
related costs and expenses associated with discontinuing a product line.
Manufacturing cost of sales was $1,069.0, or 77.1% of net sales, for 2001, and
included a restructuring charge of $4.6 related to the indefinite idling of the
Fortier ammonia plant and the Company's share of the related personnel
reductions at the Fortier facility. Restructuring savings increased $6.4 in 2002
compared to 2001. The remaining increase in gross profit margins was due to
$20.9 lower raw material and energy costs and increased production levels in the
Company's Specialty Chemicals segments.
Pension expense increased $3.6 principally as a result of a decrease in the
discount rate that was used to determine pension expense to reflect market rates
available on fixed-income securities. The Company also lowered its long term
return on assets assumption from 8.8% to 8.3%. The resulting increase in pension
expense was partly offset by plan changes to the retirement medical plans
adopted by the Company in 2002 which reduced expense by $2.7. See Critical
Accounting Policies, Retirement Plans, below for further discussion on how
changes in discount rates and return on asset assumptions can impact annual
expense.
Selling and technical services expenses increased $8.3, research and
process development expenses increased $1.3, and administrative and general
expenses increased $2.2. Included in 2002 were net restructuring charges of
$2.5, $1.0 and $0.8 in selling and technical services, research and process
development and administrative and general expenses, respectively, that
primarily related to employee reductions in the Specialty Chemicals and
Specialty Materials segments. Restructuring savings increased $1.3 in 2002. Also
included in administrative and general expenses for 2002 were charges of $1.7
for fees incurred in connection with a favorable cash settlement of prior years'
research and development tax credits claim with the IRS. Included in selling and
technical services expenses for 2001 was a restructuring charge of $0.8 related
to the personnel reductions at the Fortier facility. Selling and technical
services also increased due to head count additions in certain regions and $1.7
for severance and relocation costs, mostly in Europe and North America as the
Company realigned its selling and customer service organizations and costs
incurred to implement the Specialty Chemicals North American logistics network.
Operating expenses also included an increase of $5.9 compared to 2001 for
accruals for incentive-based compensation. Incentive compensation is performance
based, and for 2002 the Company exceeded several of its 2002 annual targets,
whereas in 2001 economic conditions prevented the Company from attaining several
of its 2001 performance targets and incentive-based compensation expenses were
reduced accordingly.
Amortization of acquisition intangibles was $3.1, down $9.7 from the prior
year period, as goodwill was no longer amortized effective January 1, 2002,
under SFAS 142.
Other income, net, was $1.2 for 2002 and included currency gains of $2.8.
Other income, net, was $6.8 for 2001 and included gains of $7.0 related to the
sale of reclaimed land in Florida and the settlement of a royalty issue
concerning mineral rights associated with a former phosphate rock mining joint
venture also in Florida.
Equity in earnings of associated companies was $6.1 for 2002, compared to
$0.1 for 2001. Included in 2002 and 2001 were restructuring charges of $0.4 and
$2.3, respectively, related to CYRO's shutdown of its Niagara Falls, Ontario,
Canada facility, and CYRO's share of infrastructure restructuring at the
Company's Fortier facility. The increase in equity earnings of associated
companies reflects higher sales and the benefits of the restructuring
initiatives at CYRO. Sales at associated companies were $307.5 for 2002, an
increase of 5% after excluding sales of the former AC Molding Compounds joint
venture which was shut down in November 2001. Included in 2002 was a charge of
$1.7 to reduce to zero the carrying value of the Company's net investment in the
one-third owned PA.com joint venture. Accordingly, the Company no longer
recognized its share of the joint venture's expected future losses. The terms of
the joint venture agreement required the Company to make an additional
contribution of $0.5 during 2002, and this required contribution was included in
the amount of the charge recognized in 2002.
Interest expense, net, was $16.5 for 2002 compared to $19.6 for 2001.
Included in 2002 was interest income of $2.0 received in connection with a
favorable cash settlement of prior years' research and development tax credit
claims with the IRS. The remainder of the decrease was due to increased interest
income attributable to higher cash balances during 2002.
The income tax provision was $30.9 for 2002 and included a reduction of
$6.0 in connection with a cash settlement of prior years' research and
development tax credits claim.
Net earnings for 2002 were $79.3, or $1.96 per diluted share, compared to
$71.1, or $1.59 per diluted share, for 2001. Included in 2002 were after-tax net
restructuring charges of $9.4, or $0.23 per diluted share, and a net credit of
$6.2, or $0.15 per diluted share, related to prior year's research and
development tax credits broken down as follows: a reduction of $6.0, or $0.15
per diluted share, in income tax expense, after-tax interest income of $1.3, or
$0.03 per diluted share, and an after-tax charge of $1.1 million, or $0.03 per
diluted share, in administrative expenses for external costs associated with
such tax planning. Included in 2001 were after-tax restructuring charges of
$5.0, or $0.12 per diluted share, an after-tax extraordinary gain of $4.9, or
$0.12 per diluted share, related to the acquisition of the assets of the carbon
fibers product line of BP, and after-tax goodwill amortization of $6.4, or $0.15
per diluted share, that is no longer required under SFAS 142
Segment Results
Year-to-year comparisons and analyses of changes in net sales by product
line segment and region are set forth below.
Water and Industrial Process Chemicals
% Change Due to
Total ----------------------------------------
2002 2001 % Change Price Volume/Mix Currency
-------------------------------------------------------------------------------------------------------------------------
North America $ 139.9 $ 156.0 -10% 0% -10% 0%
Latin America 51.5 57.2 -10% 10% -10% -10%
Asia/Pacific 50.1 36.6 37% -3% 38% 2%
Europe/Middle East/Africa 89.7 85.2 5% -2% 3% 4%
---------------------------
Total $ 331.2 $ 335.0 -1% 0% -1% 0%
-------------------------------------------------------------------------------------------------------------------------
The decreases in selling volumes were due to 8% lower water treatment sales
in the North American market, primarily the municipal water market, that the
Company was de-emphasizing in favor of industrial markets. The paper and
oilfield markets reflect lower levels of economic activity. Selling volumes for
mining chemicals in the North and Latin American regions were lower 11% each due
to lower economic activity. In the Asia/Pacific region selling volumes for
mining chemicals were up 23% due to increased demand in the copper and cobalt
nickel markets, and in particular an initial fill at one of the world's largest
cobalt nickel mines. In Europe Phosphine sales were $4.5 lower in Europe as a
result of a certain customer experiencing reduced demand in their end market
that resulted in lower purchases of the Company's products offset by growth of
$6.5 in the Water Treatment product line due to new business.
22
Earnings from operations were $26.2, or 7.9% of net sales, in 2002,
compared to $25.2, or 7.5% of net sales, in 2001. The improvement in earnings
from operations was primarily the result of $4.8 lower overall raw material and
energy costs, savings from restructuring of $1.8, and lower amortization expense
of $1.1 from adopting SFAS No. 142, partially offset by the impact of lower
sales.
Performance Products
% Change Due to
Total ----------------------------------------
2002 2001 % Change Price Volume/Mix Currency
----------------------------------------------------------------------------------------------------------------------------
North America $ 242.9 $ 238.0 2% -1% 3% 0%
Latin America 26.2 27.2 -4% 3% 2% -9%
Asia/Pacific 72.3 65.7 10% -6% 15% 1%
Europe/Middle East/Africa 110.9 103.8 7% -2% 4% 5%
---------------------------
Total $ 452.3 $ 434.7 4% -2% 5% 1%
----------------------------------------------------------------------------------------------------------------------------
Sales volumes increased in all product lines, particularly in the
Asia/Pacific region where sales benefited from improved market conditions. In
the United States, demand in the automotive and general industrial markets
improved as compared to 2001. The lower selling prices were primarily in the
polymer additives product line, down 7% globally.
Earnings from operations were $39.6, or 8.8% of net sales, in 2002,
compared to $16.4, or 3.8% of net sales, in 2001. The improvement in earnings
from operations is the result of the leverage achieved from higher selling
volumes, lower raw material and energy costs of $10.0 savings from restructuring
of $2.1, and lower operating costs. Also benefiting earnings was lower
amortization expense of $1.2 from adopting SFAS No. 142.
Specialty Materials
% Change Due to
Total ----------------------------------------
2002 2001 % Change Price Volume/Mix Currency
-----------------------------------------------------------------------------------------------------------------------------
North America $ 290.7 $ 320.4 -9% 0% -9% 0%
Latin America(1) 1.3 1.9 - - - -
Asia/Pacific 14.7 16.8 -13% -2% -11% 0%
Europe/Middle East/Africa 88.8 111.1 -20% -1% -20% 1%
---------------------------
Total $ 395.5 $ 450.2 -12% 0% -12% 0%
-----------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage comparisons
are not meaningful.
The overall decrease in selling volume, which includes a 2.7% increase from
acquisitions, reflects the significant decrease in demand for commercial
aircraft. This affected sales in all regions and was partially offset by higher
growth in the military sector, mainly North America and the high performance
auto sector in Europe.
Earnings from operations were $65.7, or 16.6% of net sales, in 2002,
compared to $97.2, or 21.6% of net sales, in 2001. The decline in earnings from
operations reflects the decrease in selling volumes, which were partially offset
by efforts to keep costs aligned with demand, savings from restructuring of
$2.2, and lower amortization expense of $7.4 from adopting SFAS No. 142.
Building Block Chemicals (Sales to external customers)
% Change Due to
Total ----------------------------------------
2002 2001 % Change Price Volume/Mix Currency
----------------------------------------------------------------------------------------------------------------------------
North America $ 68.9 $ 82.6 -16% -5% -11% 0%
Latin America(1) 3.9 4.7 - - - -
Asia/Pacific 60.2 51.6 17% -1% 18% 0%
Europe/Middle East/Africa 34.2 28.3 21% 6% 10% 5%
---------------------------
Total $ 167.2 $ 167.2 0% -3% 2% 1%
----------------------------------------------------------------------------------------------------------------------------
(1) Due to the level of sales in this geographic region, percentage
comparisons are not meaningful.
The overall decrease in selling prices was primarily due to lower
acrylonitrile and acrylamide selling prices during the first half of 2002.
Demand for acrylonitrile improved with the recovery of certain of the
Asia/Pacific economies and acrylamide sales were higher in Europe. Most of the
sales volume decline in the North America region was due to the idling of the
ammonia plant in April 2001. Ammonia sales were $11.2 in 2001.
23
Earnings from operations were $5.6 in 2002, compared to losses from
operations of $18.7 in 2001. The improvement was due to higher acrylonitrile
margins driven by increased demand in the export markets for acrylonitrile, by
competitors' supply disruptions, and by lower energy costs of $3.1, principally
natural gas in the United States and restructuring savings of $6.5.
LIQUIDITY AND FINANCIAL CONDITION
At December 31, 2003, the Company's cash balance was $251.1, compared to
$210.0 at year end 2002.
Net cash flows provided by operating activities were $132.4 in all of 2003,
compared to $211.6 in 2002.
Accounts receivable decreased $13.6 and days outstanding declined by
approximately two days as more effort was put into collections in 2003. Other
receivables increased $7.9 primarily from receivables for anticipated insurance
and litigation recoveries. Inventories increased $12.2 and days increased by
approximately four days. Much of this increase is due to production campaigning
at certain of our production sites and higher levels of inventory in Asia and
Latin America. Accounts payable is down $13.4 due primarily to timing of
payments, compared to the end of the year in 2002. Accrued expenses decreased
due primarily to higher accruals for incentive compensation cash payments for
2002 performance than the accrual for 2003 performance, thereby reducing the
accrual balance by approximately $2.5, and restructuring payments of $1.9. Other
liabilities decreased $44.0 due to environmental remediation spending of $9.3
and retiree medical payments, net of the accrual, of $16.4 and pension
contributions, net of the accrual, of $14.6.
Net cash flows used for investing activities were $195.3 in 2003 compared
to $56.4 in 2002.
In the third quarter of 2003, the Company used $101.6 to complete two
previously announced acquisitions. In July, the Company acquired Avecia's MEP
and I&S product lines and in September, the Company completed the dissolution of
its joint venture with Mitsui Chemicals Inc. The Company now owns 100% of the
former venture's existing coating resins product line and certain technology
rights associated with the water treating product line in most of Asia, while
Mitsui retains the former venture's existing water treating product line.
Capital spending for 2003 was $93.8 compared to $62.2 for 2002. The ongoing
renovation of the Specialty Chemicals research facility and the expansion of the
advanced composites manufacturing facility in Germany were the main factors in
the increase in capital spending. These projects will continue into 2004. For
the full year 2004, the Company expects capital spending to be approximately
$90.0- $95.0.
The Company believes that, based on its expected operating results for
2004, it will be able to fund operating cash requirements and planned capital
expenditures and dividends through the end of 2004 from its internal cash
generation.
Net cash flows provided by financing activities totaled $85.4 for 2003
compared to a net use of $36.7 for 2002. In March 2003, the Company repaid
$100.0 of its 6.50% debt then due. In June 2003, the Company sold $200.0
principal amount of 4.60% Notes due July 1, 2013. Proceeds to the Company from
the sale of the notes were $198.9. Proceeds from stock option exercises totaled
$14.5 in 2003 compared to $3.1 for the same period of 2002. The total number of
treasury shares reissued because of option exercises was 1,079,800 for 2003
compared to 293,650 shares reissued for the same period in 2002.
In 2003 the Company announced an authorization to repurchase up to an
additional $100.0 of its outstanding common stock. The repurchases are being
made from time to time on the open market or in private transactions and the
shares obtained under this authorization are anticipated to be utilized for
stock option plans, benefit plans and other corporate purposes. During 2003, the
Company repurchased 838,200 shares of stock at a cost of $27.7 that completed
its previous stock repurchase authorization and included the purchase of
approximately 512,000 shares at a cost of $18.1 under its new authorization.
In January, 2004, the Board of Directors approved the initiation of a
common stock quarterly cash dividend program and declared a $0.10 per share cash
dividend, payable on February 25, 2004 to shareholders of record as of February
10, 2004. The Company is restricted from paying dividends in excess of certain
amounts determined in accordance with the terms of its Series C Cumulative
Preferred Stock ("Series C Stock"). See Note 15 of the Notes to Consolidated
Financial Statements.
In April 2002, the Company executed a $100.0, three-year unsecured
revolving credit agreement and a $100.0, 364-day unsecured revolving credit
agreement with a one-year term out option that was renewed in April 2003.
Revolving loans under the agreements are available for the general corporate
purposes of the Company and its subsidiaries, including without limitation, for
purposes of making acquisitions. The credit agreements contain covenants
customary for such facilities. The Company was in compliance with all terms,
covenants and conditions of its credit facilities. The Company also has
available U. S. dollar equivalents of approximately $6.6 under non-U. S. dollar
denominated overdraft facilities. There are no outstanding borrowings under
these facilities at December 31, 2003 or 2002.
24
In 2003, the Company entered into short-term loan agreements relating to
the acquisition of MCY's coatings resins product line (See Note 2 of the Notes
to Consolidated Financial Statements), aggregating approximately 2 billion yen.
The U. S. dollar equivalent debt balance outstanding under these agreements at
December 31, 2003 is $9.3 and is included in short-term borrowings. In January
2004, the company cancelled one of these agreements and reduced the total amount
outstanding by 1 billion yen.
At December 31, 2003 and 2002, long-term debt, including the current
portion, consisted of the following:
2003 2002
---------------------------------------------------------------------------------------- ------------------------
Carrying Carrying
Face Value Face Value
---------------------------- ------------------------
6.50% Notes Due March 15, 2003 - - $100.0 $ 99.9
6.75% Notes Due March 15, 2008 $100.0 $ 97.7 100.0 97.1
6.846% Mandatory Par Put Remarketed Securities 120.0 118.9 120.0 118.9
4.60% Notes Due July 1, 2013 200.0 199.6 - -
---------------------------- ------------------------
420.0 416.2 320.0 315.9
Less: Current maturities - - 100.0 99.9
---------------------------- ------------------------
Long-term debt $420.0 $416.2 $220.0 $216.0
---------------------------------------------------------------------------------------------------------------------
See Note 9 of the Notes to Consolidated Financial Statements for additional
detail.
The Company has not guaranteed any indebtedness of its unconsolidated
associated company.
The Company must maintain certain financial covenants contained in its
Series C Stock, as modified. Under such covenants, the Company would have the
ability to incur up to an additional $699.1 in debt at December 31, 2003 and
make additional restricted payments (which include common stock dividends and
repurchases of common stock) of $92.5. (For further information about the Series
C Stock and financial covenants contained therein, see Note 15 of the Notes to
Consolidated Financial Statements).
The impact of inflation on the Company is considered insignificant since
the rate of inflation has remained relatively low in recent years and
investments in areas of the world where inflation poses a risk are limited.
Contractual Obligations and Commercial Commitments
The following tables set forth our contractual obligations as of December
31, 2003:
Payments Due by Period
-------------------------------------------------------------------------
Less Than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
------------------------------------------------------------------------------------------------------------
Short-term borrowings $ 9.3 $ 9.3
Long-term debt 420.0 - $ 120.0 $ 100.0 $ 200.0
Operating leases 41.6 9.8 10.1 5.2 16.5
Purchase obligations 13.4 6.0 5.3 2.1 -
Unfunded employee benefits 14.2 1.5 2.6 2.8 7.3
-------------------------------------------------------------------------
Total $ 498.5 $ 26.6 $ 138.0 $ 110.1 $ 223.8
------------------------------------------------------------------------------------------------------------
The Company had net contractual commitments under currency forward
contracts in U. S. dollar equivalent amounts of $33.4 that all settle in less
than one year. At December 31, 2003, the Company also had $13.8 of natural gas
forward contracts that settle in less than one year. (See Note 4 of the Notes to
Consolidated Financial Statements).
The Company had $24.6 of outstanding letters of credit, surety bonds and
bank guarantees at December 31, 2003 that are issued on the Company's behalf in
the ordinary course of business to support certain performance obligations and
commitments of the Company. The instruments are typically renewed on an annual
basis.
25
The Company does not have any unconsolidated limited purpose entities or
any undisclosed material transactions or commitments involving related persons
or entities.
26
Item 7a. 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 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 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 does not hold or issue financial instruments for trading
or speculative purposes. Moreover, the Company enters into financial instrument
transactions with either major financial institutions or highly-rated
counterparties and makes reasonable attempts to diversify transactions among
counterparties, thereby limiting exposure to credit related and performance
related risks.
Currency Risk: The risk of adverse currency rate fluctuations is mitigated by
the fact that there is no concentration of currency exposure outside the U. S.
In addition, the Company periodically enters into currency forward contracts
primarily to hedge currency fluctuations of transactions denominated in
currencies other than the functional currency of the business. At December 31,
2003, the principal transactions hedged involved accounts receivable, accounts
payable and intercompany loans. When hedging currency exposures, the Company's
practice is to hedge such exposures with forward contracts denominated in the
same currency and with similar critical terms as the underlying exposure, and
therefore, the instruments are effective at generating offsetting changes in the
fair value, cash flows or future earnings of the hedged item or transaction.
At December 31, 2003, the currency and net contractual amounts of the
Company's forward contracts translated into U. S. dollar equivalent amounts were
as follows:
Buy
-----------------------------------------
Norwegian Canadian
Sell Euro Krone Dollar
--------------------------------------------------------------
U. S. dollar $10.1 $ 2.2 $4.5
Pound sterling 4.0 1.0 -
Euro - 10.7 -
Other 0.8 0.1 -
--------------------------------------------------------------
The fair value of currency contracts, based on forward exchange rates at
December 31, 2003, exceeded contract values by approximately $0.6. Assuming that
year-end exchange rates between the underlying currencies of all outstanding
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 specific 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: The Company frequently uses natural gas forward contracts
and swaps to reduce the volatility of natural gas costs used for utility
purposes at certain of its facilities. These contracts typically 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 primarily structured to limit the Company's exposure to
increases in commodity prices, they can also limit the potential benefit the
Company might have otherwise received from decreases in commodity prices.
At December 31, 2003, the Company had outstanding natural gas forward
contracts with a notional value of $13.8 and delivery dates of January through
October 2004 and outstanding natural gas swaps with a fair value gain of $0.3,
which will be reclassified into manufacturing cost of sales in the period the
hedged natural gas purchases affect earnings. At December 31, 2003, based on
year-end NYMEX prices, the Company had net unrealized gains on its natural gas
forward contracts of $0.8. Assuming that year-end prices were to decrease by a
hypothetical 10%, the above gain would be reduced by approximately $1.2.
Interest Rate Risk: In March 2003 the Company repaid $100.0 of its outstanding
borrowings. In June 2003, the Company sold $200.0 principal amount of 4.6% Notes
due July 1, 2013. At December 31, 2003, the outstanding borrowings of the
Company consisted of fixed rate long-term debt, which had a carrying value of
$416.2, a face value of $420.0 and a fair value, based on dealer quoted values,
of approximately $426.6. At December 31, 2003, the Company was a party to two
interest rate swap agreements to effectively convert the interest cost on a
total of $50.0 of the Company's 4.60% notes to a floating rate basis for the
life of the notes. The fair value as of December 31, 2003 of the Company's
interest rate swaps was $0.5.
27
Assuming other factors are held constant, interest rate changes generally
affect the fair value of fixed rate debt. Accordingly, assuming a hypothetical
increase of 1% in interest rates and all other variables remaining constant,
interest expense would increase approximately $0.5 per annum and the fair market
value of the fixed rate long-term debt would decrease by approximately $19.3.
OTHER
2004 OUTLOOK
In its January 22, 2004 earnings press release, which was also filed as an
exhibit to a current report on Form 8K, the Company set forth its assumptions
and management's best current estimate of first quarter and full year 2004
earnings at that time based on various assumptions set forth in its press
release. The Company forecasted diluted earnings per share range in the range of
$2.55-$2.65 for the year, a 12% -17% increase over 2003's diluted earnings per
share of $2.27, before the cumulative effect of the accounting change, and first
quarter diluted earnings per share in the range of $0.57-$0.62.
The Company's guidance for 2004 outlook will be updated when it reports
first quarter 2004 earnings in April 2004. There can be no assurance sales or
earnings will develop in the manner projected. Actual results may differ
materially. See "Comments on Forward Looking Statements".
CRITICAL ACCOUNTING POLICIES
Accounting principles generally accepted in the United States require
management to make certain estimates and assumptions. These estimates and
assumptions affect the reported amounts in the consolidated financial statements
and the notes thereto. The areas discussed below involve the use of significant
judgment in the preparation of the Company's consolidated financial statements
and changes in the estimates and assumptions used may impact future results of
operations and financial condition.
Environmental and Other Contingent Liabilities
Accruals for environmental remediation and operating and maintenance costs
directly related to remediation, and other contingent liabilities are recorded
when it is probable that a liability ahs been incurred and the amount of the
liability can be reasonably estimated. Accruals are recorded at management's
best estimate of the ultimate expected liabilities, without any discount to
reflect the time value of money. These accruals are reviewed periodically and
adjusted, if necessary, as additional information becomes available.
The amount accrued for environment remediation reflects the Company's
assumptions about remediation requirements at the contaminated site, the nature
and cost of the remedy, the outcome of discussions with regulatory agencies and
other potentially responsible parties at multi-party sites, and the number and
financial viability of other potentially responsible parties.
Included in other contingent liabilities are workers' compensation, product
liability and toxic tort claims. The amount accrued for other contingent
liabilities reflects the Company's assumptions about the incidence, severity,
indemnity costs and dismissal rates for existing and future claims.
Accruals for environmental remediation and other contingent liabilities can
change substantially if the Company's assumptions are not realized or due to
actions by governmental agencies or private parties. The Company cannot estimate
any additional amount of loss or range of loss in excess of the recorded
amounts. Moreover, environmental and other contingent liabilities are paid over
an extended period, and the timing of such payments cannot be predicted with any
certainty. Accruals for environmental and other contingent liabilities are
recorded as other non current liabilities with any amounts expected to be paid
out in the next twelve months classified as accrued expenses.
Probable insurance recoveries for past and probable future costs are
recorded at management's best estimate of the ultimate expected receipts without
discounting to reflect the time value of money and are recorded as other assets.
A number of factors impact the estimates of insurance reimbursements. These
factors include the financial viability of the insurance companies, the method
in which losses will be allocated to the various insurance policies, how legal
and defense costs will be covered by the insurance polices, the interpretation
of the effect on coverage of various policy terms and limits and the
interrelationships, and the Company's historical recovery rates over the past
ten years.
28
Defense and processing costs are expensed as incurred. Probable insurance
recoveries for defense and processing costs are accrued when the related costs
are incurred and are recorded as other assets.
For additional information see Note 10 of the Notes to Consolidated
Financial Statements and Schedule II, "Valuation and Qualifying Accounts."
Retirement Plans
The Company sponsors defined benefit pension and postretirement benefit
plans. The postretirement plans provide medical and life insurance benefits to
retirees who meet minimum age and service requirements. The Company's most
significant pension plans are in the U. S., and constituted over 78% of the
Company's consolidated pension assets and 80% of projected benefit obligations
as of December 31, 2003. The calculation of the Company's pension expense and
pension liability associated with its defined benefit pension plans requires the
use of a number of assumptions that the Company deems to be "critical accounting
estimates." Changes in these assumptions can result in different pension expense
and liability amounts, and actual experience can differ from the assumptions.
The Company believes that the most critical assumptions are the discount rate
and the expected rate of return on plan assets.
At the end of each year, the Company determines the discount rate to be
used for pension liabilities. In estimating this rate, the Company looks to
rates of return on high quality, long term corporate bonds that receive one of
the two highest ratings given by a recognized ratings agency. The Company
discounted its future pension liabilities using rates of 6.25% and 6.75% at
December 31, 2003 and 2002, respectively. The discount rate used to determine
the value of liabilities has a significant effect on expense. For example, a
change of a quarter percentage point in either direction in the discount rate
would change pension expense by approximately $1.4 and postretirement benefit
expense by a negligible amount.
The decrease in the discount rate assumption is expected to increase the
Company's net periodic pension expense for the U. S. pension plans by
approximately $3.2 million in 2004 compared to 2003. The Company's net periodic
benefit expense for the U. S. postretirement welfare plans is expected to
increase by approximately $0.4 million in 2004 compared to 2003.
The expected rate of return on plan assets reflects the long-term average
rate of return expected on funds invested or to be invested in the pension plans
to provide for the benefits included in the pension liability. The Company
establishes the expected rate of return at the beginning of each fiscal year
based upon information available to the Company at that time, including the
historical returns of major asset classes, the expected investment mix of the
plans' assets, and estimates of future long-term investment returns. The U. S.
pension plan's investment mix at December 31, 2003 approximated 59% equities and
41% fixed income securities compared to 46% equities and 54% fixed income
securities at December 31, 2002. Any differences between actual experience and
assumed experience are deferred as an unrecognized actuarial gain or loss. The
unrecognized net actuarial gain or loss is amortized in accordance with
Statement No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87").
The expected rate of return on assets in the U. S. pension plans is 8.5%
for 2004, the same expected return as 2003. A change of a quarter percentage
point in either direction in the expected rate of return on plan assets would
change pension expense by approximately $0.9 and net postretirement expense by
approximately $0.2 for 2004.
U. S. pension plan and postretirement plan contributions in fiscal 2004 are
expected to be $17.0 and $18.6, respectively. The estimate of contributions is
based on significant assumptions, such as pension plan benefit levels, interest
rate levels and the amount and timing of asset returns. Actual contributions
could differ from this estimate.
For additional information see Note 12 of the Notes to Consolidated
Financial Statements.
Impairment of Goodwill
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," ("SFAS 142") effective January 1, 2002.
Under SFAS 142, identifiable intangible assets are amortized over their useful
life unless the useful life is determined to be indefinite. Goodwill and
indefinite-lived assets are no longer amortized, but instead are reviewed for
impairment and written down only in the periods in which it is determined that
the recorded value is greater than the fair value. The Company does not have
intangibles with indefinite useful lives other than goodwill.
29
The Company has defined its segments as its SFAS 142 reporting units. The
Company tests goodwill for impairment on an annual basis. Goodwill of a
reporting unit will be tested for impairment between annual tests if events
occur or circumstances change that would likely reduce the fair value of the
reporting unit below its carrying value. The Company uses a two-step process to
test goodwill for impairment. First, the reporting unit's fair value is compared
to its carrying value. The Company utilizes a market multiple approach to
determine fair value estimates. Due to the cyclical nature of the Company's
reporting unit's, values are determined utilizing a three year average. The
three year period is comprised of the prior year, current year and one year
projected amounts. If the market multiple approach yields a result, which may
indicate a possible impairment, a discounted cash flow approach is utilized to
more precisely determine the reporting unit's fair value. If a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired, and the second step of the impairment test
would be performed. The second step of the goodwill impairment test is used to
measure the amount of the impairment loss. In the second step, the implied fair
value of the reporting unit's goodwill is determined by allocating the reporting
unit's fair value to all of its assets and liabilities other than goodwill in a
manner similar to a purchase price allocation. The resulting implied fair value
of the goodwill that results from the application of this second step is then
compared to the carrying amount of the goodwill and an impairment charge is
recorded for the difference.
Intangible assets with determinable useful lives are amortized over their
respective estimated useful lives and reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be
recoverable.
These evaluations involve amounts that are based on management's best
estimates and judgments. Because of the uncertainty inherent in such estimates,
actual results may differ from these estimates. The Company is not aware of
reasonably likely events or circumstances that would result in different amounts
being estimated that would have a material impact on these assessments for
impairment.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. The assessment of the recoverability of deferred tax assets, as well as
the ability to utilize net operating loss carryforwards and tax credits,
involves significant judgment in estimating future taxable income in each of the
jurisdictions to which these tax benefits relate. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
The Company intends to reinvest the unremitted earnings of international
subsidiaries. Accordingly, no provision has been made for U. S. or additional
non-U. S. taxes with respect to these earnings. In the event of repatriation to
the U. S., such earnings would be subject to U. S. income taxes in most cases.
Foreign tax credits would be available to substantially reduce the amount of
U.S. tax otherwise payable in future years.
30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
December 31,
-----------------------------
2003 2002
-------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 251.1 $ 210.0
Trade accounts receivable, less allowance for doubtful accounts of
$7.6 and $8.8 in 2003 and 2002, respectively 217.1 199.7
Other accounts receivable 50.2 39.3
Inventories 176.0 131.3
Deferred income taxes 8.2 17.3
Other current assets 8.8 7.2
-------------------------------------------------------------------------------------------------------------------------
Total current assets 711.4 604.8
-------------------------------------------------------------------------------------------------------------------------
Investment in associated companies 82.1 90.4
Plants, equipment and facilities, at cost 1,538.3 1,383.4
Less: accumulated depreciation (875.4) (805.5)
-------------------------------------------------------------------------------------------------------------------------
Net plant investment 662.9 577.9
-------------------------------------------------------------------------------------------------------------------------
Acquisition intangibles, net of accumulated amortization of
$16.6 and $11.7 in 2003 and 2002, respectively 69.9 39.5
Goodwill 339.7 334.0
Deferred income taxes 85.7 86.5
Other assets 74.2 33.3
-------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,025.9 $ 1,766.4
-------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 9.3 -
Current maturity of long-term debt - $ 99.9
Accounts payable 93.5 99.5
Accrued expenses 170.5 175.8
Income taxes payable 63.2 70.5
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 336.5 445.7
-------------------------------------------------------------------------------------------------------------------------
Long-term debt 416.2 216.0
Pension and other postretirement benefit liabilities 345.0 359.3
Other noncurrent liabilities 172.8 122.5
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 122.2 131.1
Retained earnings 982.9 905.5
Unearned compensation (5.3) (6.8)
Minimum pension liability (96.8) (98.0)
Unrealized gains on derivative instruments 0.3 -
Accumulated translation adjustments 38.0 (18.8)
Treasury stock, at cost, 9,139,897 shares in 2003 and 9,332,671 shares in 2002 (286.5) (290.7)
-------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 755.4 622.9
-------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,025.9 $ 1,766.4
-------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
31
Consolidated Statements of Income
(Dollars in millions, except per share amounts)
Years ended December 31,
-------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
Net sales $1,471.8 $1,346.2 $1,387.1
Manufacturing cost of sales 1,114.9 1,020.4 1,069.0
Selling and technical services 126.9 122.6 114.3
Research and process development 35.2 33.7 32.4
Administrative and general 49.7 47.0 44.8
Amortization of acquisition intangibles 4.0 3.1 12.8
-------------------------------------------------------------------------------------------------------------------------------
Earnings from operations 141.1 119.4 113.8
Other income (expense), net (5.7) 1.2 6.8
Equity in earnings of associated companies 7.2 6.1 0.1
Interest expense, net 16.2 16.5 19.6
-------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes, cumulative effect of accounting change and
extraordinary item 126.4 110.2 101.1
Income tax provision 35.4 30.9 34.9
-------------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change and
extraordinary item 91.0 79.3 66.2
Cumulative effect of accounting change, net of taxes of $7.3 (13.6) - -
Extraordinary gain, net of taxes of $2.6 - - 4.9
-------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 77.4 $ 79.3 $ 71.1
-------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share:
Before accounting change and extraordinary item $ 2.34 $ 2.01 $ 1.65
Accounting change (0.35) - -
Extraordinary item - - 0.12
-------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1.99 $ 2.01 $ 1.77
-------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Before accounting change and extraordinary item $ 2.27 $ 1.96 $ 1.59
Accounting change (0.34) - -
Extraordinary item - - 0.12
-------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1.93 $ 1.96 $ 1.71
-------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
32
Consolidated Statements of Cash Flows
(Dollars in millions)
Years ended December 31,
-----------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used for) operating activities
Net earnings $ 77.4 $ 79.3 $ 71.1
Noncash items included in net earnings:
Dividends from associated companies greater (less) than earnings (1.8) (5.5) 2.3
Depreciation 85.9 81.5 78.4
Amortization 7.7 2.2 11.9
Deferred income taxes 29.4 27.9 9.6
Loss on asset write-off 1.7 7.2 -
Gain on sale of assets - (1.2) (2.5)
Extraordinary gain, net of tax - - (4.9)
Cumulative effect of accounting change, net of taxes 13.6 - -
Other - 0.5 (4.6)
Changes in operating assets and liabilities (excluding effect of acquisitions):
Trade accounts receivable 13.6 (12.5) 30.6
Other receivables (7.9) (4.1) 22.9
Inventories (12.2) 21.9 24.7
Accounts payable (13.4) 20.7 (28.3)
Accrued expenses (8.6) 19.3 (17.7)
Income taxes payable (5.7) 9.4 (12.7)
Other assets (3.3) (4.6) (15.4)
Other liabilities (44.0) (30.4) (23.1)
-------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 132.4 211.6 142.3
-------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used for) investing activities
Additions to plants, equipment and facilities (93.8) (62.2) (63.9)
Proceeds received on sale of assets 0.1 6.3 2.9
Acquisition of product lines, net of cash received (101.6) - (9.0)
Investment in unconsolidated affiliates - (0.5) (1.0)
-------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (195.3) (56.4) (71.0)
-------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used for) financing activities
Proceeds from the exercise of stock options and warrants 14.5 3.1 9.5
Purchase of treasury stock (27.7) (32.7) (52.3)
Change in short term borrowings (0.3) - -
Payments of long-term debt (100.0) - -
Proceeds from long-term debt 198.9 - -
Proceeds received on sale of put options - 0.3 0.6
Repayment of seller-financed debt - (7.4) -
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 85.4 (36.7) (42.2)
-------------------------------------------------------------------------------------------------------------------------------
Effect of currency rate changes on cash and cash equivalents 18.6 7.9 (2.3)
-------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 41.1 126.4 26.8
Cash and cash equivalents, beginning of year 210.0 83.6 56.8
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 251.1 $ 210.0 $ 83.6
-------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
33
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2003, 2002 and 2001
(Dollars in millions)
Additional
Additional Unearned Minimum Accumulated
Preferred Common Paid-in Retained Compen- Pension Derivative Translation Treasury
Stock Stock Capital Earnings sation Liability Instruments Adjustment Stock Total
------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2000 $ 0.1 $ 0.5 $ 154.7 $ 755.1 $ (3.9) $ (1.9) $ 0.0 $ (32.7) $ (255.7) $ 616.2
------------------------------------------------------------------------------------------------------------------------------------
Net earnings -- -- -- 71.1 -- -- -- -- -- 71.1
Other comprehensive
income:
Minimum pension
liability
adjustment, net of
taxes of $1.8 -- -- -- -- -- (3.5) -- -- -- (3.5)
Translation adjustments -- -- -- -- -- -- (13.8) -- (13.8)
--------
Comprehensive income $ 53.8
Award of, and changes in,
performance & restricted
stock -- -- (2.0) -- 0.6 -- -- -- 1.4 --
Amortization of
performance
& restricted stock -- -- -- -- (0.7) -- -- -- -- (0.7)
Compensation costs on
variable stock option
award -- -- (0.1) -- -- -- -- -- -- (0.1)
Purchase of treasury stock -- -- -- -- -- -- -- -- (52.3) (52.3)
Exercise of stock options -- -- (26.4) -- -- -- -- -- 35.9 9.5
Premiums received on sales
of put options -- -- 0.6 -- -- -- -- -- -- 0.6
Tax benefit on stock
options -- -- 9.9 -- -- -- -- -- -- 9.9
------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2001 $ 0.1 $ 0.5 $ 136.7 $ 826.2 $ (4.0) $ (5.4) $ 0.0 $ (46.5) $ (270.7) $ 636.9
------------------------------------------------------------------------------------------------------------------------------------
Net earnings -- -- -- 79.3 -- -- -- -- -- $ 79.3
Other comprehensive
income:
Minimum pension
liability
adjustment, net of
taxes of $46.7 -- -- -- -- -- (92.6) -- -- -- (92.6)
Translation adjustments -- -- -- -- -- -- -- 27.7 -- 27.7
--------
Comprehensive income $ 14.4
Award of, and changes in,
performance &
restricted stock -- -- (1.5) -- (1.5) -- -- -- 3.4 0.4
Amortization of
performance
& restricted stock -- -- -- -- (1.3) -- -- -- -- (1.3)
Purchase of treasury stock -- -- -- -- -- -- -- -- (32.7) (32.7)
Exercise of stock options -- -- (6.2) -- -- -- -- -- 9.3 3.1
Premiums received on sales
of put options -- -- 0.3 -- -- -- -- -- -- 0.3
Tax benefit on stock
options -- -- 1.8 -- -- -- -- -- -- 1.8
------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2002 $ 0.1 $ 0.5 $ 131.1 $ 905.5 $ (6.8) $ (98.0) $ 0.0 $ (18.8) $ (290.7) $ 622.9
------------------------------------------------------------------------------------------------------------------------------------
Net earnings -- -- -- 77.4 -- -- -- -- -- $ 77.4
Other comprehensive
income:
Minimum pension
liability
adjustment, net of -- -- -- -- -- 1.2 -- -- -- 1.2
taxes of $2.4
Unrealized gain on
derivative instruments -- -- -- -- -- -- 0.3 -- -- 0.3
Translation adjustments -- -- -- -- -- -- -- 56.8 -- 56.8
--------
Comprehensive income $ 135.7
Award of, and changes in,
performance &
restricted stock -- -- 2.3 -- (0.4) -- -- -- (1.7) 0.2
Amortization of
performance -- -- -- -- 1.9 -- -- -- -- 1.9
& restricted stock
Purchase of treasury stock -- -- -- -- -- -- -- -- (27.7) (27.7)
Exercise of stock options -- -- (19.1) -- -- -- -- -- 33.6 14.5
Tax benefit on stock -- -- 7.9 -- -- -- -- -- -- 7.9
options
------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2003 $ 0.1 $ 0.5 $ 122.2 $ 982.9 $ (5.3) $ (96.8) $ 0.3 $ 38.0 $ (286.5) $ 755.4
------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts, unless otherwise indicated).
1. SUMMARY OF ACCOUNTING POLICIES
Nature of Business and Consolidation Policy: The Company is a global specialty
chemicals and specialty materials company that focuses on value-added products.
The Company serves major markets for aerospace, water treatment and mining,
automotive and industrial coatings, plastics and chemical intermediates. The
Company has manufacturing facilities in ten countries and sells its products
worldwide. The consolidated financial statements include the accounts of the
Company and its subsidiaries on a consolidated basis. All significant
intercompany transactions and balances have been eliminated. The equity method
of accounting is used for investments in associated companies that the Company
does not control, but over whose operating and financial policies the Company
has the ability to exercise significant influence. Certain reclassifications
have been made to prior years' consolidated financial statements in order to
conform to the current year's presentation.
Currency Translation: Operations in non-U. S. subsidiaries are recorded in local
currencies which are also the functional currencies for financial reporting
purposes. The results of operations for non-U. S. subsidiaries are translated
from local currencies into U. S. dollars using the average currency rate during
each period which approximates the results that would be obtained using actual
currency rates on the dates of individual transactions. Assets and liabilities
are translated using currency rates at the end of the period with translation
adjustments recorded in accumulated translation adjustments and recognized as a
component of other comprehensive income. Transaction gains and losses are
recorded as incurred in other income (expense), net in the Consolidated
Statements of Income.
Depreciation: Depreciation in the United States and Canada is provided primarily
on a straight-line composite method over the estimated useful lives of various
classes of assets, with rates periodically reviewed and adjusted if necessary.
When such depreciable assets are sold or otherwise retired from service, their
costs plus demolition costs less amounts realized on sale or salvage are charged
or credited to the accumulated depreciation account. The average composite
depreciation rates, expressed as a percentage of the average depreciable
property in service, were 6.1% in 2003 and 6.4% in both 2002 and 2001.
Depreciation for assets outside the United States and Canada is provided on a
straight-line basis over the estimated useful lives of the assets. Expenditures
for maintenance and repairs are charged to current operating expenses.
Acquisitions, additions and betterments, either to provide necessary capacity,
improve the efficiency of production units, modernize or replace older
facilities or to install equipment for protection of the environment, are
capitalized. The Company capitalizes interest costs incurred during the period
of construction of plants and equipment.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets and
would be charged to earnings. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less the costs to sell.
Goodwill and Other Acquisition Intangibles: The Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
("SFAS 142") effective January 1, 2002. Under SFAS 142, identifiable intangible
assets are amortized over their useful life unless the useful life is determined
to be indefinite. Goodwill and indefinite-lived assets are no longer amortized,
but instead are reviewed for impairment and written down only in the periods in
which it is determined that the recorded value is greater than the fair value.
The Company has defined its product line segments as its SFAS 142 reporting
units. The Company tests goodwill for impairment on an annual basis in its
fourth fiscal quarter. Goodwill of a reporting unit will be tested for
impairment between annual tests if events occur or circumstances change that
would likely reduce the fair value of the reporting unit below its carrying
value. The Company uses a two-step process to test goodwill for impairment.
First, the reporting units' fair value is compared to its carrying value. The
Company utilizes a market multiple approach to determine fair value estimates.
Due to the cyclical nature of the Company's reporting units, market multiple
values are determined utilizing a three-year average. The three-year period is
comprised of the prior year, current year and one year of projected amounts. If
the market multiple approach yields a result, which may indicate a possible
impairment, a discounted cash flow approach is utilized to more precisely
determine the reporting units' fair value. If a reporting unit's carrying amount
exceeds its fair value, an indication exists that the reporting unit's goodwill
may be impaired, and the second step of the impairment test would be performed.
The second step of the goodwill impairment test is used to measure the amount of
the impairment loss. In the second step, the implied fair value of the reporting
unit's goodwill is determined by allocating the reporting unit's fair value to
all of its assets and liabilities other than goodwill in a manner similar to a
purchase price allocation. The resulting implied fair value of the goodwill that
results from the application of this second step is then compared to the
carrying amount of the goodwill and an impairment charge is recorded for the
difference.
35
Intangible assets with determinable useful lives are amortized over their
respective estimated useful lives and reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Cash and Cash Equivalents: Securities with maturities of three months or less
when purchased are considered to be cash equivalents.
Financial Instruments: Financial instruments reflected in the Consolidated
Balance Sheets are recorded at cost which approximates fair value for cash and
cash equivalents, accounts receivable, certain other assets, accounts payable,
and certain other liabilities. Fair values are determined through a combination
of management estimates and information obtained from third parties using the
latest available market data. Long-term debt is reflected at amortized cost.
The Company uses derivative instruments in accordance with
Company-established policies to manage exposure to fluctuations in currency
rates, certain commodity (e.g., natural gas) prices, interest rates and equity
prices. Derivative instruments currently utilized by the Company include
currency forward contracts, natural gas forward contracts and swaps, and
interest rate swaps. The Company does not hold or issue derivative financial
instruments for trading or speculative purposes. Moreover, the Company enters
into financial instrument transactions with either major financial institutions
or highly-rated counterparties and makes reasonable attempts to diversify
transactions among counterparties, thereby limiting exposure to credit related
and performance related risks.
The Company periodically enters into currency forward contracts primarily
to hedge currency fluctuations of transactions denominated in currencies other
than the functional currency of the business. The principal transactions hedged
involve accounts receivable, accounts payable and intercompany loans. When
hedging currency exposures, the Company's practice is to hedge such exposures
with forward contracts denominated in the same currency and with similar
critical terms as the underlying exposure, and therefore, the instruments are
effective at generating offsetting changes in the fair value, cash flows or
future earnings of the hedged item or transaction.
..
Currency forward contracts are reported as either assets or liabilities on
the consolidated balance sheets with changes in their fair value recorded in
other income (expense), net, together with the offsetting gain or loss on the
hedged asset or liability. To the extent that the Company's strategy for
managing currency risk changes, including the use of derivative instruments
other than forward contracts or hedging other than recognized assets or
liabilities, the accounting methods used to record those transactions may differ
from the policies described above.
The Company uses natural gas forward contracts, which are physically
settled, to hedge certain utility requirements. 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 can also limit the potential benefit the
Company might have otherwise received from decreases in commodity prices.
Because the Company takes physical delivery of the commodity, these contracts
are not required to be recognized on the balance sheet at fair value. Instead,
realized gains and losses are included in the cost of the commodity upon
settlement of the contract.
The Company also uses natural gas swaps, which are financially settled, to
hedge utility requirements at certain of its other facilities. These swaps,
which are highly effective at achieving offsetting cash flows of the underlying
natural gas purchases, have been designated as cash flow hedges and are reported
on the Consolidated Balance Sheets at fair value, with offsetting amounts
included in Unrealized gains on derivative instruments on an after-tax basis.
Gains and losses are reclassified into earnings, as a component of Manufacturing
Cost of Sales in the period the hedged natural gas purchases affect earnings.
Inventories: Inventories are carried at the lower of cost or market. Cost is
determined on the last-in, first-out ("LIFO") method for substantially all
inventories in the United States with all other inventories determined on the
first-in, first-out or average cost method.
Environmental and Other Contingent Liabilities: Accruals for environmental
remediation, maintenance and operating costs directly related to remediation,
and other contingent liabilities are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated. The amount accrued for environmental remediation reflects the
Company's assumptions about remediation requirements at the contaminated site,
the nature of the remedy, the outcome of discussions with regulatory agencies
and other potentially responsible parties at multi-party sites, and the number
and financial viability of other potentially responsible parties. 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, changes in the
apportionment of costs among responsible parties and other actions by
governmental agencies or private parties.
36
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 certainty.
Accruals for environmental liabilities are recorded as other non-current
liabilities with any amounts expected to be paid out in the next twelve months
classified as current liabilities at undiscounted amounts and exclude claims for
recoveries from insurance companies or other third parties. In those cases where
insurance carriers or third-party indemnitors have agreed to pay any amounts and
management believes that collectability of such amounts is probable, the
undiscounted amounts are recorded as receivables in the consolidated financial
statements. Other contingent liabilities are recorded at undiscounted amounts as
other non-current liabilities with any amounts expected to be paid out in the
next twelve months classified as current liabilities.
Environmental compliance costs are capitalized and depreciated if they
extend the life of the related equipment, increase its capacity, and/or mitigate
or prevent future contamination.
It is the Company's practice to conduct an analysis of its self insured and
insured contingent liabilities annually and whenever circumstances change
significantly. Included in these liabilities are workers' compensation, product
liability and toxic tort claims. Future indemnity costs are recorded at
management's best estimate of the ultimate expected liabilities, without any
discount to reflect the time value of money. The gross indemnity costs are
recorded as other non-current liabilities with any amounts expected to be paid
out in the next twelve months classified as current liabilities. Probable
insurance recoveries for past and future indemnity costs are recorded at
management's best estimate of the ultimate expected receipts without discounting
to reflect the time value of money. Defense and processing costs are expensed as
incurred. Probable insurance recoveries for defense and processing costs relate
only to actual costs incurred.
Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the enactment date.
If repatriation of the undistributed earnings of the Company's international
subsidiaries and associated companies is anticipated then income taxes are
provided for such earnings.
Postretirement Benefits: Costs are recognized as employees render the services
necessary to earn the related benefits.
Revenue Recognition: The Company recognizes revenue when persuasive evidence of
an arrangement exists, the selling price is fixed or determinable, collection is
reasonably assured and title and risk of loss has passed to its customers.
Earnings Per Share: Basic earnings per common share excludes dilution and is
computed by dividing net earnings less preferred stock dividends by the
weighted-average number of common shares outstanding (which includes shares
outstanding less performance and restricted shares for which vesting criteria
have not been met) plus deferred stock awards, weighted for the period
outstanding. Diluted earnings per common share is computed by dividing net
earnings less preferred stock dividends by the sum of the weighted-average
number of common shares outstanding for the period adjusted (i.e., increased)
for all additional common shares that would have been outstanding if potentially
dilutive common shares had been issued and any proceeds of the issuance had been
used to repurchase common stock at the average market price during the period.
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.
37
In calculating basic and diluted earnings per share, there are no
adjustments to income (the numerator). The following shows the reconciliation of
the weighted average shares (the denominator) used in the calculation of diluted
earnings per share:
December 31 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding: 38,957,611 39,469,995 40,203,975
Effect of dilutive shares:
Options 1,082,652 884,337 1,240,592
Performance/Restricted Stock 118,413 150,287 139,921
Warrants - 625 5,593
Put Options - 7,055 657
----------------------------------------------------------------------------------------------------------------------------
Adjusted average shares outstanding 40,158,676 40,512,299 41,590,738
----------------------------------------------------------------------------------------------------------------------------
Stock options to purchase 1,328,100, 3,058,837 and 2,418,087 shares of
common stock at a weighted-average price of $43.25, $35.82 and $38.83 were
outstanding during 2003, 2002 and 2001, respectively, but excluded from the
above calculation because their inclusion would have had an anti-dilutive effect
on earnings per share.
Stock-Based Compensation: At December 31, 2003, the Company has stock-based
employee compensation plans, which are described more fully in Note 14. The
Company accounts for its stock based compensation under the recognition and
measurement principles of Accountant Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based compensation cost is reflected in net earnings for stock options, as
all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of the grant. Compensation cost
for restricted stock is recorded based on the market value on the date of grant,
and compensation cost for performance stock is recorded based on the quoted
market price of the Company's common stock at the end of each period through the
date of vesting. The fair value of restricted and performance stock is charged
to unearned compensation in Stockholders' Equity and amortized to expense over
the requisite vesting periods.
The following table illustrates the pro forma effect on net earnings and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") to stock-based employee compensation:
38
2003 2002 2001
--------------------------------------------------------------------------------------------
Net earnings, as reported $77.4 $ 79.3 $ 71.1
Add (Deduct): Stock-based
employee compensation
expense (income) included in
reported net income, net of 1.3 (0.8) (0.4)
related tax effects
Deduct: Total stock-based
employee compensation
expense determined under fair
value based method for all
awards, net of related tax effects 7.8 6.4 8.5
Pro forma net earnings $ 70.9 $ 72.1 $ 62.2
Net earnings per share:
Basic, as reported $ 1.99 $ 2.01 $ 1.77
Basic, pro forma 1.82 1.83 1.55
Diluted, as reported $ 1.93 $ 1.96 $ 1.71
Diluted, pro forma 1.77 1.79 1.50
--------------------------------------------------------------------------------------------
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2003 2002 2001
--------------------------------------------------------------
Expected life (years) 5.6 5.6 5.7
Expected volatility 47.3% 47.4% 44.1%
Expected dividend yield - - -
Risk-free interest rate 2.9% 3.3% 4.7%
Weighted average fair
value of options granted
during the year $12.69 $11.65 $16.07
-------------------------------------------------------------
Accounting Changes: On January 1, 2003, the Company adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143") that addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The standard applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
and/or normal use of an asset. SFAS 143 requires that the fair value of the
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
present value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability the Company will recognize a gain or loss on settlement.
On January 1, 2003, the Company recorded an increase in Other non-current
liabilities of $22.8, an increase in the gross carrying value of plants,
equipment and facilities of $5.3 and related accumulated depreciation of
approximately $3.4, a long-term deferred tax asset of $7.3 and an after tax
charge of $13.6 for the cumulative effect of prior years for depreciation of the
additional costs and accretion expense on the asset retirement liability. The
other non-current liability relates primarily to estimated costs for disposal of
building materials and other closure obligations for existing structures upon
renovation, closure or dismantlement of certain of the Company's facilities. At
December 31, 2003, the asset retirement liability was $23.1. Accretion and
depreciation expense for the year ended December 31, 2003 were $1.8. The pro
forma amount of the asset retirement liability as of December 31, 2002 and 2001
were $22.8 and $21.2, respectively. The pro forma amounts of the asset
retirement liability were measured using information, assumptions and interest
rates as of the adoption date of January 1, 2003. Pro forma net earnings and
earnings per share for the years ended December 31, 2002 and 2001, assuming SFAS
143 had been applied as of January 1, 2001, are as follows:
2002 2001
Net Basic Diluted Net Basic Diluted
Earnings EPS EPS Earnings EPS EPS
--------------------------------------------------------------------------------------------------------
As Reported $79.3 $2.01 $1.96 $71.1 $1.77 $1.71
Pro forma amounts $78.2 $1.98 $1.92 $70.1 $1.74 $1.68
--------------------------------------------------------------------------------------------------------
In 2003 the Company adopted the SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF 94-3") and
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value in the period in
which the liability is incurred. Under EITF 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
adoption of SFAS 146 is expected to result in delayed recognition for certain
types of exit costs as compared to the provisions of EITF 94-3. The adoption of
SFAS No. 146 did not affect amounts currently reported in the Company's
consolidated financial statements. SFAS 146 will affect the types and timing of
costs included in future restructuring programs, if any, but is not expected to
have a material impact on the Company's financial position or results of
operations.
On December 31, 2003, the Company adopted Statement of Financial Accounting
Standards No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits" ("SFAS 132"), that improves financial statement
disclosures for defined benefit plans. The statement retains the disclosures
required by the original SFAS 132 and requires additional disclosures describing
the types of plan assets, investment strategy, measurement date, plan
obligations, cash flows and components of net periodic benefit cost recognized
during interim periods.
Risks and Uncertainties: The Company is engaged primarily in the manufacture and
sale of a highly diversified line of chemical products and materials throughout
the world. The Company's revenues are dependent on the continued operation of
its various manufacturing facilities. The operation of manufacturing plants
involves many risks, including the breakdown, failure or substandard performance
of equipment, natural disasters, terrorist acts, and the need to comply with
directives of governmental agencies. The occurrence of operational problems,
including but not limited to the above events, may have a materially adverse
effect on the productivity and profitability of a particular manufacturing
facility, or with respect to certain facilities, the Company as a whole during
the period of such operational difficulties.
39
The Company's operations are also subject to various hazards incidental to
the production, use and sale of industrial chemicals, including the use,
handling, processing, storage and transportation of certain hazardous materials.
These hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, environmental damage and suspension of
operations. Claims arising from any future catastrophic occurrence involving the
Company may result in the Company being named as a defendant in lawsuits
potentially asserting large claims.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. The Company
is exposed to credit losses in the event of nonperformance by counterparties on
risk management instruments. The counterparties to these transactions are major
financial institutions, thus the Company considers the risk of default to be
minimal. The Company does not require collateral or other security to support
the financial instruments with credit risk.
International operations are subject to various risks which may not be
present in United States operations, including political instability, the
possibility of expropriation, restrictions on royalties, dividends and
remittances, instabilities of currencies, requirements for governmental
approvals for new ventures and local participation in operations such as local
equity ownership and workers' councils. The Company does not believe that it is
likely to suffer a material adverse effect on its results of operations in
connection with its existing international operations.
Use of Estimates: Financial statements prepared in conformity with accounting
principles generally accepted in the United States require management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses and pro forma compensation expense
during the period reported. Actual results could differ from those estimates.
Estimates are used for, but not limited to: allowance for doubtful accounts,
inventory valuations, useful lives of tangible and intangible assets,
recoverability of goodwill, accrued expenses, environmental and other contingent
liabilities, pension and other postretirement benefits, income tax valuation
allowances and assumptions utilized within the Black-Scholes options pricing
model and the model itself. Accounting estimates require the use of judgment
regarding uncertain future events and their related effects and, accordingly,
may change as additional information is obtained.
2. ACQUISITIONS AND DISPOSITIONS
2003 Transactions: In July 2003, the Company acquired substantially all of
the assets and liabilities of the metal extractant products ("MEP") and
intermediates and stabilizers ("I&S") product lines of Avecia Investments
Limited ("Avecia") for approximately $96.1 in cash, net of cash acquired. The
MEP product line, which had sales in 2002 of approximately $29.0 (unaudited)
broadens the Company's product line for the mining industry with differentiated
technology. This is reported as part of the Water and Industrial Process
Chemicals segment. The I&S product line broadens the Company's customer base and
adds new products and manufacturing technologies. Total sales in 2002 were
approximately $36.0 (unaudited). The reporting of the I&S product line is split
between the Water and Industrial Process Chemicals and Performance Products
segments. The custom organo phosphorus product line of the I&S product line,
which accounted for approximately 20% of the sales in this product line in 2002,
is included in the Water and Industrial Process Chemical segment. The remainder
of the I&S product line is included in the Performance Products segment.
In conjunction with this acquisition, the Company acquired various working
capital and plant, equipment and facilities and recorded amortizable acquisition
intangibles of $24.4 million (technology-based intangibles of $9.1,
marketing-related intangibles of $0.7, and customer-related intangibles of $14.6
with estimated lives ranging from 12 to 15 years and goodwill of $8.4). This
goodwill is recorded as part of the Water and Industrial Products segment.
In September 2003, the Company dissolved its Mitsui Cytec Ltd ("MCY") joint
venture with Mitsui Chemicals Inc. ("Mitsui"). The joint ventures sales in 2002
were approximately $59.0. The transaction resulted in the recognition of
customer-related amortizable acquisition intangibles of $7.0 and goodwill of
$4.6. This goodwill is recorded as part of the Performance Products segment.
The result of the transaction was such that the Company now owns 100% of
MCY's coatings resins product line (2002 sales of $22.0) and the associated
assets and liabilities of the product line that includes a manufacturing
facility in Shimonoseki, Japan. This is now reported as part of the Performance
Products segment. Mitsui now owns 100% of the water treatment product line and
the associated assets and liabilities of the product line that includes a
production facility in Mobarra, Japan.
40
The dissolution of the joint venture occurred as follows. MCY sold the
water treatment business to a separate subsidiary of Mitsui for its fair market
value which approximated its net book value of approximately $8.8. No gain or
loss resulted from this transaction. Mitsui's equity interest in MCY was then
purchased for approximately $11.5 in a two-step process whereby MCY paid
approximately $7.8 and the Company paid approximately $3.7 for the remainder.
The Company assumed the debt of the joint venture of $9.7.
Both acquisitions have been accounted for under the purchase method of
accounting and are subject to finalizing certain asset and liability valuations
which are expected to be completed in early 2004.
In early October 2003, the Company sold, for a nominal amount, its
one-third share in PolymerAdditives.com, LLC ("PA.com"). PA.com was a
business-to-business internet joint venture originally formed by the Company, GE
Specialty Chemicals, Inc. and Albemarle Corporation. The Company is now selling
directly to those customers previously handled through the venture. During 2002,
the Company reduced the carrying value of its net investment in this venture to
zero and, accordingly, no gain or loss was realized on the October 2003 sale.
2001 Transactions: On August 31, 2001, the Company acquired certain assets of
the carbon fiber product line of BP plc ("BP"). The BP carbon fiber product line
had sales for the first half of 2001 of approximately $17.0 (unaudited) of which
approximately 50% were sales to Cytec Engineered Materials ("CEM"), formerly
known as Cytec Fiberite. CEM uses carbon fiber to reinforce engineered resin
matrices and produce composites for a diverse range of commercial and military
aerospace applications and other emerging applications. The acquisition enhances
CEM's ability to maintain an uninterrupted supply of certain classes of carbon
fiber. The acquisition, which includes manufacturing sites in Greenville and
Rock Hill, SC, is reported as part of the Company's Specialty Materials segment.
In accordance with SFAS No. 141, "Business Combination," after reducing to
zero the amounts that would otherwise have been assigned to certain assets
acquired, the remaining "negative goodwill" was recognized as an extraordinary
gain of $4.9, net of taxes, which related to the fair value of the inventories
acquired less liabilities assumed. Taxes recorded related to the extraordinary
gain were $2.6.
On March 30, 2001, the Company acquired the composite materials product
line of Minnesota Mining and Manufacturing Company ("3M") for cash consideration
of $8.2. The acquisition resulted in goodwill of $3.5, which the Company had
been amortizing on a straight-line basis over a period of 25 years. The acquired
product line has been integrated into the Company's Specialty Materials segment.
Both acquisitions have been accounted for under the purchase method of
accounting
Consolidated results of operations would not have been materially different
if any of the above mentioned acquisitions had occurred on January 1 of the
respective year or preceding years. Accordingly, pro forma sales, net earnings
and earnings per share disclosures have not been provided.
3. RESTRUCTURING OF OPERATIONS
In 2003 there were no restructuring initiatives.
In 2002 the Company recorded an aggregate restructuring charge of $16.0,
which included the elimination of 135 positions worldwide. The charge was
comprised of the following initiatives: reorganization of the Specialty
Chemicals segments resulting in a reduction of 65 personnel (related to
redundancies in manufacturing of 24, selling effort of 25, administrative of 4,
and research of 12) and a charge of $5.1 for employee related costs; alignment
of the Specialty Materials segment in connection with reduced demand in the
commercial aerospace industry, resulting in a reduction of 47 manufacturing
related personnel and a charge of $1.6 for employee related costs; closure of
the Woodbridge, NJ, facility, resulting in the elimination of 23 manufacturing
related positions and a charge of $1.6 for employee related and decommissioning
costs; and the discontinuance of a minor unprofitable product line, resulting in
a charge of $7.7 for the write-down of the net book value of the fixed assets
and costs of decommissioning the facility. The restructuring costs were charged
to the Consolidated Statement of Income as follows: manufacturing cost of sales,
$11.6; selling and technical services, $2.6; research and process development,
$1.0 and administrative and general, $0.8. As of December, 2003, cash payments
of $7.8 have been made, 122 positions have been eliminated, and the remaining
liability was $1.0. This restructuring is expected to be completed in 2004.
In addition, during 2002 the Company recorded charges of $0.4 in equity in
earnings of associated companies for its 50% share of additional restructuring
charges related to CYRO's shutdown of its Niagara Falls, Ontario, Canada
facility in 2001.
41
In 2001 the Company recorded a restructuring charge of $5.4 related to the
indefinite idling of the Fortier ammonia plant and the Company's share of the
related personnel reduction of 67 positions at the Fortier facility. Of the
total of 67 positions, 65 were manufacturing related and the remainder were in
the sales and marketing organization. The restructuring costs were charged to
the Consolidated Statement of Income as follows: manufacturing cost of sales of
$4.6 and selling and technical services of $0.8. The components of the
restructuring charge included: employee severance costs, $4.3; asset
write-downs, $0.9; and other costs, $0.2. During 2002 the Company reduced this
restructuring accrual as a result of incurring less costs than originally
estimated as a result of less than expected personnel reductions. As a result,
the Company recognized a restructuring credit of $0.9 in the Consolidated
Statement of Income as follows: manufacturing cost of sales, $0.8 and selling
and technical services, $0.1. This restructuring was completed during 2003.
In addition, during 2001 the Company recorded charges of $2.3 in equity in
earnings of associated companies for its 50% share of CYRO's restructuring
charges including $3.7 related to the shutdown of CYRO's manufacturing facility
in Niagara Falls, Ontario, Canada, and $0.8 related to CYRO's share of the
infrastructure restructuring at the Company's Fortier facility.
The following table shows the accrued restructuring costs, excluding those
of associated companies:
2001 Restructuring 2002 Restructuring Combined
---------------------------------------- ------------------------------------------------
Plant
Decom- Asset
Severance Inventory Other Total Severance mission Writedowns Total
------------------------------------------------------------------------------------------------------------------------------------
2001 charges $4.3 $0.9 $0.2 $5.4 - - - - $5.4
Cash payments (2.9) - - (2.9) - - - - (2.9)
----------------------------------------------------------------------------------------------------------
Balance,
December 31, 2001 1.4 0.9 0.2 2.5 - - - - 2.5
----------------------------------------------------------------------------------------------------------
2002 charges - - - - $ 7.5 $ 0.8 $ 7.7 $16.0 16.0
Reduction in
estimated costs (0.9) - - (0.9) - - - - (0.9)
Cash expenditures (0.2) - (0.1) (0.3) (6.0) (0.1) (0.2) (6.3) (6.6)
Non-cash write off - (0.9) - (0.9) - - (7.2) (7.2) (8.1)
----------------------------------------------------------------------------------------------------------
Balance
December 31, 2002 0.3 - 0.1 0.4 1.5 0.7 0.3 2.5 2.9
----------------------------------------------------------------------------------------------------------
Cash payments (0.3) - (0.1) (0.4) (1.3) (0.2) - (1.5) (1.9)
----------------------------------------------------------------------------------------------------------
Balance
December 31, 2003 - - - - $ 0.2 $ 0.5 $ 0.3 $ 1.0 $ 1.0
------------------------------------------------------------------------------------------------------------------------------------
4. FINANCIAL INSTRUMENTS
At December 31, 2003 and 2002, the currency and net contractual amounts of
forward contracts outstanding translated into U. S. dollar equivalent amounts
were as follows:
2003 2002
---------------------------------------- -----------------------------------------
Buy Buy
Norwegian Canadian Pound Norwegian
Euro Krone Dollar sterling Euro Krone
-----------------------------------------------------------------------------------------------------------
Sell
--------------
U. S. dollar $10.1 $ 2.2 $4.5 $4.3 $13.6 $2.2
Pound sterling 4.0 1.0 - - 8.6 1.1
Euro - 10.7 - - - 6.8
Other 0.8 0.1 - - 0.6 0.2
-----------------------------------------------------------------------------------------------------------
The fair value of currency contracts, based on forward exchange rates at
December 31, 2003 and 2002, exceeded contract values by approximately $0.6 and
$0.5, respectively.
At December 31, 2003, the Company had $13.8 of natural gas forward
contracts with January through October 2004 delivery dates outstanding. At
December 31, 2002, the Company had $8.8 of natural gas forward contracts with
January through December 2003 delivery dates outstanding. Based on year-end
NYMEX prices, the Company had net unrealized gains on its natural gas forward
contracts at December 31, 2003 and 2002 of $0.8 and $1.9, respectively.
42
At December 31, 2003, the Company had outstanding natural gas swaps with a
fair value gain of $0.3, net of taxes. There were no natural gas swaps
outstanding at December 31, 2002.
5. ASSOCIATED COMPANIES
As of December 31, 2003, the Company has one associated company, CYRO a 50%
owned joint venture. The associated companies' information below also includes
the results of the former MCY joint venture through September 30, 2003, the date
the joint venture was dissolved and PA.com through September 2003, the last
effective date of the Company's ownership of the former joint venture. See Note
2 for a description of these two transactions. Equity in earnings of associated
companies excludes the Company's share of losses of the former AC Molding
Compounds ("AC") joint venture after August 2000, when the Company's share of AC
losses reduced the carrying amount of its investment to zero, although the
summarized financial information includes results through November 30, 2001, the
date operations shut down. AC subsequently filed for bankruptcy under Chapter 11
in December 2001 and all of the assets of AC were liquidated by the bankruptcy
court during 2002. Equity in earnings of associated companies also excludes the
Company's share of losses of the former PA.com after September 30, 2002 when the
Company recorded a charge of $1.7 in equity in earnings of associated companies
to reduce the carrying value of its net investment to zero following a review of
anticipated future losses.
Summarized financial information for the associated companies is as
follows:
December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------
Net sales $327.5 $322.0 $320.5
Gross profit 56.5 60.5 52.0
Earnings before cumulative effect of accounting change 13.8 14.4 (2.2)
Cumulative effect of adoption of SFAS 143, net of tax 0.3 - -
Net earnings (losses) 13.5 14.4 (2.2)
The Company's equity in earnings of associated companies $ 7.2 $6.1 $0.1
The Company's equity in cumulative effect of adoption of SFAS 143, net of tax, of
associated companies $ 0.1 - -
Current assets $ 80.8 $124.2
Noncurrent assets 138.2 164.5
Total assets 219.0 288.7
Current liabilities 22.9 70.4
Noncurrent liabilities 31.7 32.2
Equity 164.4 186.1
Total liabilities and equity 219.0 288.7
Company's share of equity $ 82.1 $ 90.4
Company's aggregate cost $ 4.0 $ 17.2
------------------------------------------------------------------------------------------------------------------------
The Company does not guarantee indebtedness of its associated companies and
there were no guarantees outstanding at December 31, 2003 and 2002. At December
31, 2003, CYRO had no outstanding borrowings.
Included in the Company's share of equity at December 31, 2003 and 2002 ,
is an accumulated charge of $9.2 and $8.0, respectively representing the
Company's share of pretax charges by CYRO to other comprehensive income related
to recognition of a minimum pension liability.
Sales to associated companies, primarily CYRO, amounted to $37.4, $29.2 and
$26.9 in 2003, 2002 and 2001, respectively. Amounts due from CYRO at December
31, 2003, 2002 and 2001 were $9.2, $11.5 and $9.9, respectively. The Company has
determined that the profit or loss on sales to its joint ventures is not
material; therefore, no adjustments have been made to eliminate such profit or
loss on sales to our joint venture partners for inventory that our associated
companies held at the balance sheet dates.
Fees received from associated companies, primarily CYRO, were $7.8, $7.7
and $7.8 in 2003, 2002 and 2001, respectively. Fees from CYRO are recorded in
manufacturing cost of sales and are related primarily to manufacturing services
provided to CYRO at the Company's Fortier, Louisiana, manufacturing complex.
43
6. INVENTORIES
December 31, 2003 2002
--------------------------------------------------------------------------------
Finished goods $114.9 $ 81.4
Work in progress 21.5 15.1
Raw materials and supplies 73.2 65.5
--------------------------------------------------------------------------------
209.6 162.0
Less reduction to LIFO cost (33.6) (30.7)
--------------------------------------------------------------------------------
Total inventories $176.0 $131.3
--------------------------------------------------------------------------------
LIFO inventories as a % of total inventories 55% 67%
--------------------------------------------------------------------------------
7. PLANTS, EQUIPMENT AND FACILITIES
December 31, 2003 2002
--------------------------------------------------------------------------------
Land and land improvements $ 36.6 $ 30.0
Buildings 202.9 174.9
Machinery and equipment 1,241.2 1,135.9
Construction in progress 57.6 42.6
--------------------------------------------------------------------------------
Plants, equipment and facilities, at cost $ 1,538.3 $1,383.4
--------------------------------------------------------------------------------
8. GOODWILL AND OTHER ACQUISITION INTANGIBLES
The following is the activity in the goodwill balances for each segment:
Water and
Industrial
Process Performance Specialty
Chemicals Products Materials Corporate Total
----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 31.3 $ 49.1 $ 250.2 - $ 330.6
Reclassification to -
identifiable acquisition
intangibles on adoption of
SFAS 142 (0.2) 1.0 2.4 3.2
------------------------------------------------------------------------------------------
Balance, January 1, 2002 $ 31.1 $ 50.1 $ 252.6 - $ 333.8
Purchase adjustment 0.1 - - $ 0.6 0.7
Currency Exchange (0.3) - (0.2) - (0.5)
------------------------------------------------------------------------------------------
Balance, December 31, 2002 30.9 50.1 252.4 0.6 334.0
2003 acquisitions 8.4 4.6 - - 13.0
Purchase adjustment (1) - - (4.7) - (4.7)
Currency exchange (3.0) 0.5 (0.2) 0.1 (2.6)
------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 36.3 $ 55.2 $ 247.5 $ 0.7 $ 339.7
-----------------------------------------------------------------------------------------------------------------------------
(1) Purchase accounting adjustment relates to the recognition of deferred tax
assets from the Company's 1998 acquisition of The American Materials &
Technologies Corporation (See Note 11).
Other acquisition intangibles consisted of the following major classes:
Weighted
average
useful life Accumulated
December 31, (years) Gross carrying value amortization Net carrying value
-----------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
--------------------------------------------------------------------------
Technology-based 16.9 $41.0 $29.9 $(9.3) $(6.9) $31.7 $23.0
Marketing-related 17.3 11.0 9.4 (3.0) (2.1) 8.0 7.3
Customer-related 15.4 34.5 11.9 (4.3) (2.7) 30.2 9.2
--------------------------------------------------------------------------
Total $86.5 $51.2 $(16.6) $(11.7) $69.9 $39.5
-----------------------------------------------------------------------------------------------------------------------------
44
Amortization of acquisition intangibles for the years ended December 31,
2003, 2002 and 2001 was $4.0, $3.1, and $12.8 respectively. Estimated future
amortization expense for the years 2004 through 2006 is $5.0 and for the years
2007 and 2008 is $4.9. The Company does not have intangibles with indefinite
useful lives other than goodwill.
9. DEBT
Long-term debt, including the current portion in 2002, consisted of the
following:
2003 2002
------------------------- -----------------------
Carrying Carrying
Face Value Face Value
---------------------------------------------------------------------------------------- -----------------------
6.50% Notes Due March 15, 2003 - - $100.0 $ 99.9
6.75% Notes Due March 15, 2008 $100.0 $ 97.7 100.0 97.1
6.846% Mandatory Par Put Remarketed Securities 120.0 118.9 120.0 118.9
4.60% Notes Due July 1, 2013 200.0 199.6 - -
-----------------------------------------------------
420.0 416.2 320.0 315.9
Less: Current maturities - - 100.0 99.9
-----------------------------------------------------
Long-term debt $420.0 $416.2 $220.0 $216.0
--------------------------------------------------------------------------------------------------------------------
The fair value of the Company's long-term debt, based on dealer quoted
values, was $426.6 at December 31, 2003, and $336.0 at December 31, 2002.
In March 2003, the Company repaid the $100.0 current maturity of its
long-term debt. In June 2003, the Company sold $200.0 principal amount of 4.60%
Notes due July 1, 2013. The securities were offered under the Company's $400.0
shelf registration statement described below. The Company received approximately
$198.5 in proceeds from the sale after deducting costs associated with the sale.
The proceeds were intended to be used for general corporate purposes, including
the acquisition of the MEP and I&S product lines. (See Note 2).
Under the terms and conditions of the Mandatory Par Put Remarketed
securities ("MOPPRS"), the final maturity date of this debt obligation will be
determined on May 6, 2005 based on the yield of 30-year U. S. Treasury bonds. If
the yield on these securities is less than 5.95% on that date, the MOPPRS are
expected to be tendered by investors on May 11, 2005 to the Remarketing Agent
for payment by the Company of face value plus accrued interest and immediately
remarketed to investors for an additional 20 years at an interest cost to the
Company equal to 5.951% plus an Applicable Spread as defined in the Prospectus
Supplement for this security. If the 30-year Treasury yield is above 5.951% on
May 6, 2005, investors are expected to put the MOPPRS back to the Company and
have them redeemed at face value plus accrued interest. The put premium of $4.5
that was received by the Company upon issuance of the MOPPRS was recorded as an
increase in the carrying value of the securities and is being amortized over the
life of the issue as a decrease in interest expense. If the securities are
redeemed by the Company on May 11, 2005, the Company would recognize a net
expense of $1.0 from amounts related to the unamortized put premium and rate
lock agreements discussed below. Based on current interest rates, the Company
believes that it is highly likely that the MOPPRS will be tendered to the
remarketing agent at face value plus accrued interest and reissued to investors
for an additional 20 years.
Commencing in September 1997, the Company entered into a series of rate
lock agreements to hedge against the risk of an increase in treasury rates
related to the Company's offering of $300.0 in long-term debt securities. During
1997 and 1998, the Company made payments aggregating approximately $11.2 to
settle the rate lock agreements, which is being amortized over the life of the
6.50% Notes, 6.75% Notes and 6.846% MOPPRS as an increase in interest expense
of such Notes. In June 2003, the Company received $0.4 under rate lock
agreements it entered into as a hedge against the risk of an increase in
Treasury rates related to the Company's offering of $200.0 in long-term debt
securities. It is being amortized over the life of the 4.60% Notes. The amount
of unamortized rate lock agreements included in long-term debt was $5.2 at
December 31, 2003, and $6.3 at December 31, 2002.
The weighted average interest rate on long-term debt was approximately 6.1%
for 2003 and 7.1% for 2002. At December 31, 2003, the Company was a party to two
interest rate swap agreements to effectively convert a total of $50.0 of the
Company's 4.60% fixed rate obligations to a floating rate basis. The net
interest income from these swaps is included in interest expense, net.
At December 31, 2003 and 2002, the Company has available for short-term use
approximately $6.6 and $5.5, respectively, of non-U. S. dollar denominated
overdraft facilities. There were no outstanding borrowings under these
facilities at December 31, 2003 or 2002.
45
In 2003 the Company entered into short-term loan agreements relating to the
acquisition of MCY's coatings resins product line (See Note 2), aggregating
approximately 2 billion yen. The U.S. dollar equivalent debt balance outstanding
under these agreements at December 31, 2003 is $9.3 and is included in
short-term borrowings.
Under the revised terms of the Company's Series C Cumulative Preferred
Stock ("Series C Stock"), the Company would have the ability to incur up to an
additional $699.1 in debt at December 31, 2003 (see Note 15).
In April, 2002, the Company executed a $100.0, three-year unsecured
revolving credit agreement and a $100.0, 364-day unsecured revolving credit
agreement with a one-year term out option which was renewed in April 2003.
Revolving loans under the agreements are available for the general corporate
purposes of the Company and its subsidiaries, including without limitations, for
purposes of making acquisitions permitted under the agreements. The credit
agreements contain covenants customary for such facilities. There are no
outstanding balances under these agreements at December 31, 2003.
The Company has the ability to issue $200.0 more of debt securities under a
$400.0 shelf registration agreement it has with the Securities and Exchange
Commission and that has been effective since December 2000. The securities may
be offered by the Company from time to time. Proceeds of any sale will be used
for general corporate purposes, which may include payment of indebtedness and
other liabilities, share repurchases, additions to working capital, capital
expenditures and acquisitions. The Company has no immediate plans to offer
securities under the registration statement.
10. ENVIRONMENTAL MATTERS AND OTHER CONTINGENT LIABILITIES AND COMMITMENTS
Environmental Matters
The Company is subject to substantial costs arising out of environmental
laws and regulations, which include obligations to remove or limit the effects
on the environment of the disposal or release of certain wastes or substances at
various sites or to pay compensation to others for doing so. The Company's most
significant environmental liabilities relate to remediation and regulatory
closure obligations at manufacturing sites now or formerly owned by the Company.
The Company is also involved in legal proceedings directed at the cleanup of
various other sites, including a number of federal or state Superfund sites.
Since the laws pertaining to Superfund sites generally impose retroactive,
strict, joint and several liability, a governmental plaintiff could seek to
recover all remediation costs at any such 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. In many cases, the nature of future environmental expenditures
cannot be quantified with 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, additional sites that may be environmentally impaired
and for which the Company may be responsible.
As of December 31, 2003 and 2002, the aggregate environmental related
accruals were $79.6 and $83.7, respectively, of which $11.0 and $15.0,
respectively, are included in accrued expenses with the remainder included in
other noncurrent liabilities. Environmental remediation spending, for the years
ended December 31, 2003, 2002 and 2001, was $9.3, $10.2, and $10.8,
respectively.
Other Contingent Liabilities
During 2003 the Company commissioned a study by the Actuarial and Analytics
Practice of AON Risk Consultants ("AON") of its self-insured and insured
contingent liabilities and estimated insurance recoveries. The Company, like
many other industrial companies, has been increasingly named as one of hundreds
of defendants in a number of lawsuits filed throughout the United States by
persons alleging bodily injury as a result of exposure to asbestos. Plaintiffs'
attorneys have increased their focus on peripheral defendants, such as the
Company, and the number of claims against the Company has more than doubled
since September 30, 2002. The Company believes that a substantial part of the
increase in claims was related to efforts to file cases before December 31,
2002, the effective date of tort reform legislation in Mississippi. The
claimants allege exposure to asbestos at facilities formerly or currently owned
by the Company or in products formerly manufactured by the Company for
specialized applications. Most of these cases involve numerous defendants,
sometimes as many as several hundred. Historically, most of the closed asbestos
claims against the Company have been dismissed without any indemnity payment by
the Company, and the Company has no information that this pattern will change.
46
The following table presents information about the asbestos claims against
the Company:
2003 2002
---- ----
Claims Closed 7,601 530
Claims Filed 7,648 17,511
Claims Open, as of December 31 26,955 26,908
The Company worked with the consulting specialists of AON who have
extensive experience in estimating certain liabilities, including asbestos
liabilities, to evaluate the Company's estimated indemnity costs. The Company
provided AON with, among other things, detailed data for the past ten years on
the incidence of claims, the incidence of malignancy claims, indemnity payments
for malignancy and non-malignancy claims, and dismissal rates by claim. The
actuarial methodology employed by AON was primarily based on epidemiological
data assumptions regarding asbestos disease manifestation, the information
provided by the Company, and the estimates of claim filing and indemnity costs
that may occur in the future.
The Company has access to a substantial amount of primary and excess
general liability insurance. Therefore, the Company, in conjunction with AON,
conducted a detailed review of its insurance policies and estimated insurance
recoveries. The Company expects to recover close to 50% of its future indemnity
costs and certain defense and processing costs already incurred. Most of the
Company's insurance is with carriers with investment grade ratings and only
those with such ratings were included in the estimation of the recovery of
indemnity and defense costs.
As a result of these findings, in the third quarter of 2003, the Company
recorded an increase of $32.4 to its self insured and insured contingent
liabilities for pending and anticipated probable future claims and recorded a
receivable for probable insurance recoveries for past, pending and future claims
of $34.6. Because the receivable was larger than the increase in the liability,
the Company recognized $2.2 of income in 2003. As of December 31, 2003 and 2002,
the aggregate self-insured and insured contingent liability was $72.5 and $39.4,
respectively. The asbestos liability at December 31, 2003 was $54.0 and the
related receivable was $29.1. The Company anticipates receiving a net tax
benefit for payment of those claims to which full insurance recovery is not
realized. It should be noted that the ultimate liability and related insurance
recovery for all pending and anticipated future claims cannot be determined with
certainty due to the difficulty of forecasting the numerous variables that can
affect the amount of the liability and insurance recovery. These variables
include but are not limited to: (i) significant changes in the number of future
claims; (ii) significant changes in the average cost of resolving claims; (iii)
changes in the nature of claims received; (iv) changes in the laws applicable to
these claims; and (v) financial viability of co-defendants and insurers.
The Company is among several defendants in approximately 35 cases in which
plaintiffs assert claims for personal injury, property damage, and other claims
for relief relating to lead pigment that was used as an ingredient decades ago
in paint for the use in buildings. The different suits variously seek
compensatory and punitive damages and/or injunctive relief, including funds for
the cost of monitoring, detecting and removing lead based paint from buildings
and for medical monitoring; for personal injuries allegedly caused by ingestion
of lead based paint; and plaintiffs' attorneys' fees. The Company believes that
the suits are without merit and is vigorously defending against all such claims.
Accordingly, no loss contingency has been recorded. The Company has access to a
substantial amount of primary and excess general liability insurance for
property damage, and believes that these policies are available to cover a
significant portion of both its defense costs and indemnity costs, if any, for
lead pigment-related property damage claims. The Company has not recorded an
insurance receivable relating to its defense costs although it is currently
pursuing an agreement with various of its insurers concerning coverage with
respect to these matters.
In 1999 the Company received a subpoena to testify before, and provide
documents to, a federal grand jury in California investigating the carbon fiber
and prepreg industry. The Company manufactures prepregs as part of its advanced
composites product line and, since its acquisition of BP's carbon fibers
business in August 2001, also manufactures carbon fiber. The grand jury was
dismissed in December 2003 without issuing any indictments against the Company
or any indictments for violation of the antitrust laws against any companies
subject to the investigation. After the grand jury investigation was commenced,
the Company and the other companies subpoenaed to testify before the grand jury
were named as defendants in various civil actions, including several class
actions, on behalf of purchasers of carbon fiber, which the complaints defined
to include prepregs manufactured from carbon fiber. The complaints allege that
the defendants conspired to fix the prices of their products. The Company denies
that it conspired to fix prices of their products and is vigorously defending
against all such claims. Accordingly, no loss contingency has been recorded.
While it is not feasible to predict the outcome of all pending
environmental matters, lawsuits and claims, it is reasonably possible that there
will be a necessity for future provisions for costs for environmental matters
and for other contingent liabilities 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, many of
these liabilities are paid over an extended period, and the timing of such
payments cannot be predicted with any certainty.
47
Commitments
- Rental expense under property and equipment leases was $10.2 in 2003, $10.9 in
2002 and $10.7 in 2001. Estimated future minimum rental expenses under property
and equipment leases that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 2003, are:
Operating
Leases
------------------------------------------------
2004 $ 9.8
2005 6.1
2006 4.0
2007 2.8
2008 2.4
Thereafter 16.5
------------------------------------------------
Total minimum lease payments $41.6
------------------------------------------------
- The Company frequently enters into long-term contracts with customers with
terms that vary depending on specific industry practices. The Company's business
is not substantially dependent on any single contract or any series of related
contracts. Set forth below are more specific terms about the Company's
significant sales contracts.
The Company is obligated to sell, and an affiliate of an international
trading company is obligated to buy, approximately 25% of the Company's
production capacity of acrylonitrile per year under an agreement that is
scheduled to expire May 1, 2005. Price under this contract is cost-based
and adjusted periodically. If the price of acrylonitrile in certain markets
is at least a specified amount greater than certain cost components of the
Company's acrylonitrile, the customer is also obligated to pay the Company
a portion of the excess.
The Company has the option to sell, and a different affiliate of the same
international trading company described above is obligated to buy, up to
approximately 25% of the Company's production capacity of acrylonitrile per
year under a long term distributorship agreement that is scheduled to
expire on May 1, 2008. On expiration of the cost based agreement described
above, the Company will be obligated to sell, and the customer to buy, an
additional amount of acrylonitrile under the distributorship agreement
equal to approximately 25% of the Company's production capacity of
acrylonitrile per year. The price under this distributorship agreement is
market-based less certain costs and commissions.
The Company is obligated to sell, and, CYRO is obligated to buy,
substantially all of the Company's nominal production capacity of
hydrocyanic acid under an agreement with an initial term expiring December
31, 2011. Price is determined by a formula based on the raw materials used
to manufacture hydrocyanic acid and to a lesser extent on the selling price
of CYRO's product based on hydrocyanic acid and is adjusted periodically.
This agreement became effective January 1, 2004 and superseded two
agreements which expired December 31, 2003.
The Company is obligated to sell sulfuric acid, and also to regenerate used
sulfuric acid, and CYRO is obligated to buy such product and services,
under an agreement with an initial term expiring December 31, 2011. The
price for regenerated sulfuric acid is cost based and the price for
sulfuric acid is set between the price for regenerated sulfuric acid and a
market price for sulfuric acid and both prices are adjusted periodically.
The cost to regenerate sulfuric acid is substantially in excess of the cost
of producing sulfuric acid. Regenerated sulfuric acid and sulfuric acid are
produced in the same plant at the same time. This agreement became
effective January 1, 2004 and superseded an agreement which expired
December 31, 2003.
The Company is obligated to manufacture, at the customer's option, up to
100% of the customer's requirements for certain paper chemical products
under an agreement with an initial term expiring December 1, 2005, subject
to various volume limitations. The Company also agreed to sell and the
customer agreed to buy, 100% of the customer's requirements for two raw
materials produced by the Company for use in the manufacture of certain
paper chemicals by the customer in the U. S. and certain other countries.
The price for the Company's services is cost based, including a fixed
component, and is adjusted periodically. The prices for the raw materials
produced by the Company are market based and are adjusted periodically.
The Company is obligated to sell and, subject to numerous exceptions, an
aerospace customer is obligated to buy its requirements of various
specialty materials for certain of its products as determined by the
customer, under an agreement that is scheduled to expire June 30, 2005, or
for some products, June 30, 2007. Price is in US dollars, and is fixed by
year.
48
- The Company had $24.6 of outstanding letters of credit, surety bonds and bank
guarantees at December 31, 2003 that are issued on the Company's behalf in the
ordinary course of business to support certain performance obligations and
commitments of the Company. The instruments are typically renewed on an annual
basis.
11. INCOME TAXES
The income tax provision is based on earnings before income taxes,
cumulative effect of accounting change and extraordinary item as follows:
2003 2002 2001
-----------------------------------------------------------------
U. S. $ 65.7 $ 52.4 $ 55.5
Non-U. S. 60.7 57.8 45.6
-----------------------------------------------------------------
Total $ 126.4 $ 110.2 $101.1
-----------------------------------------------------------------
The components of the income tax provision are as follows:
2003 2002 2001
-----------------------------------------------------------------
Current:
U. S. Federal $ 1.9 $ 1.3 $ (3.0)
Non-U. S. 16.2 16.1 18.5
Other, principally state 1.4 1.6 1.9
-----------------------------------------------------------------
Total 19.5 19.0 17.4
-----------------------------------------------------------------
Deferred:
U. S. Federal 9.4 7.8 14.5
Non-U. S. .9 2.9 1.0
Other, principally state 5.6 1.2 2.0
-----------------------------------------------------------------
Total 15.9 11.9 17.5
-----------------------------------------------------------------
Total income tax provision $ 35.4 $30.9 $ 34.9
-----------------------------------------------------------------
49
U. S. and non-U. S. earnings of consolidated companies, before income taxes
and extraordinary item, include all earnings derived from operations in the
respective U.S and non-U. S. geographic areas; whereas provisions (benefits) for
income taxes include all income taxes payable to (receivable from) U. S.
Federal, non-U. S. and other governments as applicable, regardless of the situs
in which the taxable income (loss) is generated. The temporary differences that
give rise to a significant portion of deferred tax assets and liabilities were
as follows:
December 31, 2003 2002
------------------------------------------------------------------
Deferred tax assets:
Allowance for bad debts $ 1.9 $ 2.3
Insurance accruals 28.3 15.5
Operating accruals 12.5 14.3
Inventory 6.2 5.9
Environmental accruals 30.4 32.3
Pension and postretirement benefit
liabilities 154.4 155.3
Tax credit carryforwards 17.6 10.3
Net operating losses 8.8 4.6
Other 2.7 2.6
-----------------------------------------------------------------
Gross deferred tax assets 262.8 243.1
-----------------------------------------------------------------
Valuation Allowance (4.6) -
-----------------------------------------------------------------
Total net deferred tax assets 258.2 243.1
-----------------------------------------------------------------
Deferred tax liabilities:
Plants, equipment and facilities (122.0) (119.9)
Insurance receivables (13.7) -
Employee benefit accruals (5.0) (3.8)
Other (23.6) (15.6)
-----------------------------------------------------------------
Gross deferred tax liabilities (164.3) (139.3)
-----------------------------------------------------------------
Net deferred tax asset $ 93.9 $ 103.8
-----------------------------------------------------------------
No provision has been made for U. S. or additional non-U. S. taxes on the
undistributed earnings of international subsidiaries since the Company intends
to reinvest these earnings. Foreign tax credits would be available to
substantially reduce any amount of additional U. S. tax that might be payable on
these earnings in the event of a distribution or sale.
At December 31, 2003, the Company has U. S. federal income tax net
operating loss carryforwards of $12.0 relating to the Company's 1998 acquisition
of The American Materials & Technologies Corporation available to offset future
taxable income. Utilization of those loss carryforwards are limited under
certain provisions of the Internal Revenue Code. The carryforwards begin to
expire at various dates starting in 2008 through 2018.
The Company has U. S. research and development tax credit carryforwards of
$13.6 available as of December 31, 2003, to offset future tax liabilities. These
carryforwards begin to expire at various dates starting in 2020 through 2023.
Foreign tax credit carryforwards of $3.5 are also available to offset future tax
liabilities. Those foreign tax credits begin to expire at various dates starting
in 2007 through 2009. The Company also has an alternative minimum tax credit
carryforward of $0.5 that may be carried forward indefinitely as a credit
against its regular tax liability.
The long-term earnings trend of the Company makes it more likely than not
that the Company will generate sufficient taxable income on a consolidated basis
to realize its net deferred tax assets with the exception of state net operating
loss carryforwards. Accordingly, for the year ended December 31, 2003, the
Company established a valuation allowance of $4.6 for the deferred tax assets
attributable to state income tax net operating loss carryforwards due to the
uncertainty of future earnings with respect to various U. S. entities of the
Company.
50
A reconciliation between the Company's effective tax rate and the U. S.
federal income tax rate is as follows:
2003 2002 2001
--------------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
Research and
development credit (3.3) (3.3) (3.6)
Prior period tax credits (a) - (5.4) -
Income subject to other than
the federal income tax rate (6.5) (2.7) (0.7)
State taxes, net of
federal benefits 2.0 2.2 3.5
Valuation allowance 3.6 - -
Other (credits) charges, net (2.8) 2.3 0.3
-----------------------------------------------------------------
Effective tax rate 28.0% 28.1% 34.5%
-----------------------------------------------------------------
(a) In 2002 the Company recognized a $6.0 reduction in income tax expense
related to U. S. approval of a claim for refund with respect to prior years'
research and development tax credits.
Tax benefits on stock option exercises of $7.9, $1.8 and $9.9 were
allocated directly to stockholders' equity for 2003, 2002 and 2001,
respectively.
In 2003 a tax benefit of $7.3 was allocated to the cumulative effect of
accounting change. In 2001 a tax expense of $2.6 was allocated to the
extraordinary gain.
51
12. EMPLOYEE BENEFIT PLANS
The Company has defined benefit pension plans that cover employees in the
United States and in a number of other countries. Almost all of the plans
provide defined benefits based on years of service and career average salary.
The Company also sponsors postretirement and postemployment benefit plans. The
postretirement plans provide medical and life insurance benefits to retirees who
meet minimum age and service requirements. The medical plans are contributory
and non-contributory with certain participant's contributions adjusted annually;
the life insurance plans are non-contributory. The accounting for the
postretirement plans anticipates future cost-sharing and changes to the plans.
The postretirement plans include a cap on the Company's share of costs for
recent and future retirees. The postemployment plans provide salary
continuation, disability related benefits, severance pay and continuation of
health costs during the period after employment but before retirement.
The Company uses a measurement date of December 31 for the U. S. and
Canada's pension and postretirement benefit plans and uses a measurement date of
November 30 for the majority of all other pension plans.
Pension Plans Postretirement Plans
---------------------------------- ----------------------------
2003 2002 2001 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------
Net Periodic Cost:
Service cost $ 12.5 $ 11.3 $ 9.6 $ 1.4 $ 1.1 $ 1.4
Interest cost 32.5 29.3 27.2 16.6 16.7 18.1
Expected return on plan assets (35.5) (33.9) (33.3) (5.0) (5.4) (5.2)
Net amortization and deferral 3.4 1.0 0.6 (10.7) (9.4) (8.6)
---------------------------------- ----------------------------
Net periodic expense $ 12.9 $ 7.7 $ 4.1 $ 2.3 $ 3.0 $ 5.7
----------------------------------------------------------------------------
Weighted-average assumptions used
to determine net periodic cost,
during the year:
Discount rate 6.4% 6.6% 6.9% 6.8% 7.3% 7.5%
Expected return on plan assets 8.1% 8.3% 8.8% 6.5% 7.0% 7.0%
Rate of compensation increase 3%-10% 3%-10% 3%-10% - - -
Weighted-average assumptions used
to determine benefit obligations,
end of year:
Discount rate 6.1% 6.6% 7.0% 6.3% 6.8% 7.3%
Rate of compensation increase 3%-10% 3%-10% 3%-10% - - -
----------------------------------------------------------------------------------------------------------------------
The expected rate of return on U. S. plan assets was determined by
examining the annualized rates of return over the past five and ten year periods
for the major U. S. stock and bond indexes and the estimated long-term asset mix
of the plan assets of 55% - 65% stocks and 35% - 45% bonds. Since the long-term
average annualized return is approximately 9% - 11% for stocks and 5% - 7% for
bonds, the expected long-term weighted average return was estimated to be 8.5%
for the U. S. pension plan in 2003. This return is based on an assumed
allocation of assets of 62% in stocks and 38% in bonds with long-term investment
returns of 10% and 6%, respectively. The expected long-term weighted average
return on all the Company's pension plans, including the U. S. plan, was 8.1% in
2003. For postretirement plans, all of which are assets held in the U. S., the
expected rate of return was 6.5% in 2003, based on the same investment return
assumptions and an assumed asset allocation of 45% in stocks, 33% in bonds and
22% in cash. The investment strategy for the Company's worldwide benefit plan
assets is to maintain broadly-diversified portfolios of stocks, bonds and money
market instruments that, along with periodic plan contributions, provide the
necessary liquidity for ongoing benefit obligations.
52
Pension Plans Postretirement Plans
---------------------------------- ----------------------------------
2003 2002 2001 2003 2002 2001
--------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1 $ 489.1 $ 404.0 $372.5 $ 253.6 $ 247.7 $ 249.1
Addition of a plan 0.7 8.7 - - - -
Service cost 12.5 11.3 9.6 1.4 1.1 1.4
Interest cost 32.5 29.3 27.2 16.6 16.7 18.1
Amendments (0.2) - - - (31.2) (9.4)
Acquisitions 18.2 - - 2.7 - -
Translation difference 16.1 9.9 (2.9) 0.1 0.1 (0.1)
Actuarial gains/losses 21.2 48.3 15.2 20.1 43.3 11.5
Employee contributions 0.5 0.6 0.4 2.6 2.2 1.5
Benefits paid (25.2) (23.0) (18.0) (25.6) (26.3) (24.4)
---------------------------------- ----------------------------------
Benefit obligation at December 31 $ 565.4 $ 489.1 $404.0 $ 271.5 $ 253.6 $ 247.7
---------------------------------- ----------------------------------
Accumulated Benefit Obligation at
December 31 $ 544.2 $ 489.2 $359.8 - - -
---------------------------------- ----------------------------------
Change in plan assets:
Fair value of plan assets at January 1 $ 350.0 $ 354.7 $374.3 $ 70.5 $ 73.3 $ 72.8
Addition of a plan 0.3 6.5 - - - -
Actual return/(losses) on plan assets 52.5 (18.1) (18.0) 8.3 0.5 1.9
Company contributions 27.5 20.5 18.9 18.7 20.8 21.5
Employee contributions 0.5 0.6 0.4 2.7 2.2 1.5
Acquisitions 10.7 - - - - -
Translation difference 14.2 8.8 (2.9) - - -
Benefits paid (25.2) (23.0) (18.0) (25.6) (26.3) (24.4)
---------------------------------- ----------------------------------
Fair value of plan assets at
December 31 $ 430.5 $ 350.0 $354.7 $ 74.6 $ 70.5 $ 73.3
---------------------------------- ----------------------------------
Funded status: $(134.9) $ (139.1) $(49.3) $(196.9) $(183.1) $ (174.4)
Unrecognized actuarial loss/(gain) 174.1 170.9 73.2 35.0 18.6 (30.4)
Unrecognized prior service cost 0.3 (0.8) (0.7) (85.1) (95.7) (73.1)
Unrecognized net transition obligation - - (0.8) - - -
Net amount recognized $ 39.5 $ 31.0 $ 22.4 $(247.0) $(260.2) $ (277.9)
Amounts recognized in the statements
of financial position consist of:
Prepaid benefit cost $ 10.6 $ 3.9 41.0 - - -
Accrued benefit cost (118.1) (119.1) (30.4) (247.0) (260.2) (277.9)
Intangible asset 6.2 6.9 3.5 - - -
Accumulated other comprehensive
income 140.8 139.3 8.3 - - -
Net amount recognized $ 39.5 $ 31.0 $ 22.4 $(247.0) $ (260.2) $ (277.9)
--------------------------------------------------------------------------------------------------------------------------
The accrued postretirement benefit cost recognized in the consolidated
balance sheets at December 31, 2003 and 2002, includes $20.0 in accrued expenses
and $227.0 and $240.2, respectively, in pension and other postretirement benefit
liabilities.
The Company recorded a non-cash after-tax minimum pension liability
adjustment credit of $1.2 to Other Comprehensive Income in 2003 and a charge of
$92.6 and $3.5 in 2002 and 2001, respectively. The significant charge in 2002
was a result of the combination of decreases in the fair value of plan assets
due to a declining equity market and increased pension liabilities primarily due
to the lower weighted average discount rate of 6.6% in 2002 from 7.0% in 2001.
The charge to Other Comprehensive Income did not trigger any special funding
requirements. The Company has contributed to its U. S. pension plan every year
since its inception in 1993. The Company is not currently required to make any
minimum contributions.
53
The assumed rate of future increases in the per capita cost of healthcare
benefits (healthcare cost trend rate) is 9.5% in 2004, decreasing to ultimate
trend of 5.5% in 2008. The healthcare cost trend rate has a significant effect
on the reported amounts of accumulated postretirement benefit obligation
("APBO") and related expense. A 1.0% change in assumed health care cost trend
rates would have the following effect:
2003 2002
-------------------------------- --------------------------------
1% Increase 1% Decrease 1% Increase 1% Decrease
-------------------------------------------------------------------------------------------------------------------------------
Approximate effect on the total of service and
interest cost components of other postretirement
benefit cost $ 1.4 $ (1.3) $ 1.3 $ (1.2)
Approximate effect on accumulated
postretirement benefit obligation $21.6 $(20.0) $20.6 $(19.1)
-------------------------------------------------------------------------------------------------------------------------------
At the end of 2003 and 2002, the projected benefit obligation, accumulated
benefit obligation, and fair value of plan assets for the U. S. pension plans,
pension plans outside the U. S., and pension plans with an accumulated benefit
obligation in excess of plan assets, were as follows:
U. S. Plans Non-U. S. Plans Total
----------------------- --------------------- ------------------------------
End of Year 2003 2002 2003 2002 2003 2002
-------------------------------------- ------------------------------------------------------------------------------------
Projected benefit obligation $(455.7) $(400.5) $(55.1) $(43.7) $(510.8) $(444.2)
Accumulated benefit obligation (438.8) (383.9) (51.2) (40.2) (490.0) (424.1)
Fair value of plan assets 337.0 277.1 37.2 28.2 374.2 305.3
-------------------------------------------------------------------------------------------------------------------------------
The asset allocation for the Company's U. S. pension plans and
postretirement plans at the end of 2003 and 2002, and the target allocation for
2004, by asset category, are as follows:
Pension Plans Postretirement Plans
--------------------------------------------------------------- ------------------------------------------------------------
Percentage of Percentage of
Target Plan Assets Target Plan Assets
allocation at Year End allocations at Year End
--------------------------------------------------------------- ------------------------------------------------------------
Asset Category 2004 2003 2002 Asset Category 2004 2003 2002
--------------------------------------------------------------- ------------------------------------------------------------
Equity Securities 55%-60% 59% 46% Equity Securities 40%-60% 45% 21%
Fixed Income 35%-45% 41% 54% Fixed Income 40%-60% 55% 79%
------------------- -----------------
Total 100% 100% Total 100% 100%
--------------------------------------------------------------- ------------------------------------------------------------
The total fair value of U. S. pension and postretirement plan assets was
$411.6 at December 31, 2003. The Company uses a combination of active and
passive stock and bond managers to invest the assets of the U. S. pension and
postretirement plans. The managers are selected based on an analysis of, among
other things, their historical investment results, frequency of management
turnover, cost structure, and assets under management. Assets are periodically
reallocated among the investment managers to maintain the appropriate asset mix
and occasionally transferred to new or existing managers in the event that a
manager is terminated.
54
Information about the expected cash flows for the U. S. pension and
postretirement benefit plans follows:
Expected Employer Contributions Pension Benefits Postretirement Benefits
------------------------------------- ---------------------------------------------------------
2004 $17.0 $18.6
Expected Benefit Payments Pension Benefits Postretirement Benefits
------------------------------------- ---------------------------------------------------------
2004 $20.4 $18.5
2005 21.2 17.3
2006 22.1 17.6
2007 23.3 17.8
2008 24.5 17.9
2009-2013 149.3 90.6
------------------------------------- ---------------------------------------------------------
The above table reflects the total benefits expected to be paid from the
plan and the Company's assets.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was enacted. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare D. Because of the short
amount of time between the enactment date and the 2003 calendar year-end, as
well as certain legislative matters that still require clarification, the
Company elected to defer the effects of the Act according to FASB Staff Position
FAS 106-1. As a result, any measures of the accumulated postretirement benefit
obligation or net periodic postretirement benefit cost do not reflect the
effects of the Act. Specific authoritative guidance on accounting for the
federal subsidy is pending and the issued guidance could require the Company to
change previously reported information.
The Company also sponsors various defined contribution retirement plans in
the United States and a number of other countries, consisting primarily of
savings and profit growth sharing plans. Contributions to the savings plans are
based on matching a percentage of employees' contributions. Contributions to the
profit growth sharing plans are generally based on the Company's financial
performance. Amounts expensed related to these plans in 2003, 2002, and 2001 are
as follows:
2003 2002 2001
----------------------------------------------------------
U.S
Profit Growth
Sharing $ 5.5 $ 5.0 -
Savings Plan 6.1 5.7 $5.7
---------- --------- ---------
Total $11.6 $10.7 $5.7
---------- --------- ---------
Non-U. S.
Others $ 1.2 $ 1.0 $0.8
----------------------------------------------------------
The Company also sponsors postemployment plans that, in certain
circumstances, provide salary continuation, disability related benefits,
severance pay and continuation of health care coverage during the period after
employment but before retirement.
Certain of the Company's benefit plans provide for enhanced benefits in the
event of a "change of control" as defined in the plans.
55
13. OTHER FINANCIAL INFORMATION
Accrued expenses at December 31 included the following:
December 31, 2003 2002
-----------------------------------------------------------------
Employee benefits $ 27.4 $ 25.1
Other postretirement employee benefits 20.0 20.0
Salaries and wages 15.5 15.9
Taxes other than income taxes 14.4 17.2
Environmental 11.0 15.0
Interest 7.2 5.1
Other 75.0 77.5
----------------------------------------------------------------
Total $170.5 $175.8
----------------------------------------------------------------
Cash payments during the years ended December 31, 2003, 2002 and 2001,
included interest of $18.2, $21.5 and $21.5, respectively. Income taxes paid in
2003, 2002 and 2001 were $14.7, $13.4 and $33.1, respectively. Income taxes paid
include non-U. S. taxes of $12.0, $9.6 and $16.8 in 2003, 2002 and 2001,
respectively.
Included in interest expense, net, for the years ended December 31, 2003,
2002 and 2001, is interest income of $3.8, $5.5 and $3.0, respectively. Included
in 2002 interest income is $2.0 received in connection with a favorable
settlement of a prior years' research and development tax credits claims with
the IRS.
14. COMMON STOCK
The Company is authorized to issue 150 million shares of common stock with
a par value of $.01 per share, of which 38,992,743 shares were outstanding at
December 31, 2003. A summary of changes in common stock issued and treasury
stock is presented below.
Common Stock Treasury Stock
------------ --------------
Balance at December 31, 2000 48,132,640 7,966,229
Purchase of treasury stock - 1,711,300
Issuance pursuant to stock option plan - (1,118,634)
Award of performance stock and restricted stock (81,278)
Forfeitures and deferrals of stock awards - 33,915
------------ --------------
Balance at December 31, 2001 48,132,640 8,511,532
Purchase of treasury stock - 1,225,282
Issuance pursuant to stock option plan - (293,647)
Award of performance stock and restricted stock (145,904)
Forfeitures and deferrals of stock awards - 35,408
------------ --------------
Balance at December 31, 2002 48,132,640 9,332,671
Purchase of treasury stock - 838,200
Issuance pursuant to stock option plan - (1,079,792)
Award of performance stock and restricted stock - (80,731)
Forfeitures and deferrals of stock awards - 129,549
------------ --------------
Balance at December 31, 2003 48,132,640 9,139,897
------------------------------------------------------------------------------
On January 22, 2004 the Board of Directors approved the initiation of a
common stock quarterly cash dividend program and declared a $0.10 per share cash
dividend, payable on February 25, 2004 to shareholders of record as of February
10, 2004.
In March 2003, the Company announced an authorization to repurchase up to
an additional $100.0 of its outstanding common stock. The repurchases are made
from time to time on the open market or in private transactions and the shares
obtained under this authorization are anticipated to be utilized for stock
option plans, benefit plans and other corporate purposes. During 2003, the
Company repurchased 838,200 shares of stock at a cost of $27.7 that completed
its previous stock repurchase authorization and included $18.1 under its new
authorization. (See also Note 15).
56
Stock Award and Incentive Plan: The 1993 Stock Award and Incentive Plan (the
"1993 Plan") provides for grants of a variety of awards, such as stock options
(including incentive stock options and nonqualified stock options), restricted
stock (including performance shares), and deferred stock awards and dividend
equivalents. In addition, automatic formula grants of restricted stock and
nonqualified stock options are awarded to non-employee directors. At December
31, 2003, the Company had reserved approximately 8,783,890 shares for issuance
under the 1993 Plan.
The Company has utilized the stock option component of the 1993 Plan to
provide for the granting of nonqualified stock options at 100% of the market
price on the date the option is granted. Options are generally exercisable in
cumulative installments of 33 1/3% per year commencing one year after the date
of grant and annually thereafter, with contract lives of generally 10 years from
the date of grant.
A summary of stock options activity is presented below.
2003 2002 2001
------------------------ --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Shares under option:
Outstanding at beginning of year 6,692,689 $26.15 6,250,734 $25.73 6,484,300 $21.68
Granted 873,600 27.06 951,100 24.48 938,655 33.54
Exercised (1,079,792) 13.44 (293,647) 10.59 (1,118,634) 8.50
Forfeited (166,387) 31.68 (215,498) 27.70 (53,587) 31.72
------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 6,320,110 $28.31 6,692,689 $26.15 6,250,734 $25.73
------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 4,687,172 $28.64 4,996,336 $25.67 4,382,219 $24.59
------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2003:
Options Outstanding Options Exercisable
------------------------------------ ---------------------
Weighted
Average Weighted
Remaining Average Weighted
Contractual Exercise Number Average
Range of Exercise Prices Outstanding Life (Years) Price Exercisable Price
-------------------------------------------------------------------------------------------------------------------
$ 2.77-10.00 269,784 0.16 $ 5.47 269,784 $ 5.47
11.66-24.57 2,379,694 5.84 21.87 1,889,179 21.31
25.08-37.75 2,349,532 6.59 29.20 1,217,456 29.34
37.87-47.32 803,400 3.23 39.71 793,053 40.21
47.81-57.44 517,700 4.08 48.09 517,700 48.09
------------------------------------------------------------------------------------------------------------------
$ 2.77-57.44 6,320,110 5.40 $28.31 4,687,172 $28.64
------------------------------------------------------------------------------------------------------------------
57
As provided under the 1993 Plan, the Company has also issued restricted
stock and performance stock. Restricted shares are subject to certain
restrictions on ownership and transferability that lapse upon vesting.
Performance share payouts are based on the attainment of certain financial
performance objectives and may vary depending on the degree to which the
performance objectives are met. Performance shares awarded in 2001, 2002 and
2003 relate to the 2003, 2004 and 2005 performance periods, respectively. The
total amount of stock-based compensation expense (income) recognized for
restricted stock and performance stock was $2.0 in 2003, $(1.3) in 2002 and
$(0.7) in 2001. A summary of restricted stock and performance stock activity is
as follows:
2003 2002 2001
--------------------------------------------------------------------------------
Outstanding awards - beginning of year 297,655 265,323 244,161
New awards granted 80,731 145,904 81,278
Shares with restrictions lapsed(1) (13,739) (34,226) (45,402)
Restricted shares forfeited (134,067) (79,346) (14,714)
--------------------------------------------------------------------------------
Outstanding awards - end of year 230,580 297,655 265,323
--------------------------------------------------------------------------------
Weighted average market value of
new awards on award date $26.93 $24.67 $33.44
--------------------------------------------------------------------------------
(1) Shares with restrictions that lapsed in each period above include shares
deferred by certain participants. The Company issued these participants
equivalent deferred stock awards that will be distributed in the form of
shares of common stock, generally, following termination of employment.
The compensation costs that have been charged against income for restricted
stock and performance stock awards have been noted above. The effects of
applying the fair value method provided under SFAS No. 123 are shown in Note 1
and are not necessarily indicative of future amounts.
In the event of a "change of control" (as defined in the 1993 Plan), (i)
any award under that Plan carrying a right to exercise that was not previously
exercisable and vested will become fully exercisable and vested, (ii) the
restrictions, deferral limitations, payment conditions and forfeiture applicable
to any other award granted under the 1993 Plan will lapse and such awards will
be deemed fully vested and (iii) any performance conditions imposed with respect
to awards shall be deemed to be fully achieved.
15. PREFERRED STOCK
The Company is authorized to issue 20 million shares of preferred stock
with a par value of $.01 per share in one or more classes or series with rights
and privileges as adopted by the Board of Directors. As of December 17, 1993,
the Company had issued to American Cyanamid Company ("Cyanamid"), a subsidiary
of Wyeth,, eight million shares of preferred stock, of which only the Series C
Stock remains outstanding.
The Series C Stock, of which 4,000 shares are issued and outstanding, is
perpetual, has a liquidation and redemption value of $0.1, has an annual
dividend of $1.83 per share (7.32%) and is redeemable at the Company's option
under certain limited circumstances. Shares of Series C Stock are not
transferable except to a subsidiary of Cyanamid. In 2001 Cyanamid transferred
the Series C Stock to MDP Holdings, Inc. ("MDP"), its wholly owned subsidiary.
The Series C Stock, as amended, provides MDP with the right to elect one
director to the Company's Board of Directors and contains certain covenants
requiring the Company to satisfy certain of its environmental remediation
obligations, retiree health care and life insurance obligations and pension
contribution obligations in a timely and proper manner. It also contains certain
other covenants requiring the Company to maintain specified financial ratios and
restricting the Company from taking certain actions, including paying dividends
on its common stock in certain circumstances, merging or consolidating or
selling all or substantially all of the Company's assets or incurring
indebtedness in violation of certain covenants, without the consent of MDP as
the holder of the Series C Stock. In the event that the Company fails to comply
with certain of such covenants, MDP as the holder of the Series C Stock, will
have additional rights which may include approval of the Company's capital
expenditures and in certain more limited circumstances, appointing additional
directors to the Company's Board of Directors, which together with MDP's
existing representative, would constitute a majority of the Company's Board of
Directors.
58
Under the terms of the Series C stock, the Company must maintain a
debt-to-equity ratio of no more than 2-to-1 and a minimum fixed charge coverage
ratio of not less than 3-to-1 for the average of the fixed charge coverage
ratios for the four consecutive fiscal quarters most recently ended and must not
incur more than $150.0 of debt unless the Company's equity is in excess of
$200.0. If the Company has more than $200.0 in equity, then it may incur
additional debt as long as its ratio of debt-to-equity is not more than
1.5-to-1. At December 31, 2003, the Company had $431.3 of debt and $755.3 of
equity as defined in the Series C Stock covenant and, under the revised terms,
would have the ability to incur up to an additional $699.1 in debt.
At December 31, 2003 and 2002, restricted payments permitted under the
Series C Stock were limited to $92.5 and $82.7, respectively. Quarterly
adjustments in the amounts available for restricted payments include, but are
not limited to, 100% of the net cash proceeds from common stock offerings, 30%
of consolidated after-tax net earnings, and 100% of restricted payments made
during the quarter. Restricted payments include, but are not limited to,
payments of cash dividends on common stock, payments for the repurchase of
common stock outstanding and payments on certain classes of debt.
16. OPERATIONS BY SEGMENT AND GEOGRAPHIC AREAS
Segments: The Company has four reportable segments: Water and Industrial
Process Chemicals, Performance Products, Specialty Materials and Building Block
Chemicals.
The Water and Industrial Process Chemicals segment produces water treating,
mining, and phosphine chemicals that are used mainly in water and wastewater
treatment, mineral separation processing and semiconductor manufacturing. The
segment includes the paper chemicals product line that was substantially
divested on November 1, 2000. (For more information about the sale of the paper
chemicals product line see Note 2.) The Performance Products segment produces
coatings chemicals, performance chemicals and polymer additives that are used
primarily in coatings, adhesives and plastics applications. The Specialty
Materials segment manufactures and sells materials that are used mainly in
commercial and military aviation and launch vehicles, satellites and aircraft
brakes. The Building Block Chemicals segment manufactures acrylonitrile,
acrylamide, hydrocyanic acid, melamine and sulfuric acid. Some of these chemical
intermediates are used in the manufacture of the Company's specialty chemicals,
with the remainder sold to third parties.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements. All
intersegment sales prices are cost based. The Company evaluates the performance
of its operating segments based on earnings from operations and cash flows of
the respective segment.
59
Summarized segment information is as follows:
Water and
Industrial Building
Process Performance Specialty Block Total
Chemicals Products Materials Chemicals Segments
-------------------------------------------------------------------------------------------------------------
2003
Net sales to external customers $362.2 $489.8 $408.7 $211.1 $1,471.8
Intersegment net sales -- -- -- 65.7 65.7
-------------------------------------------------------------------------------------------------------------
Total net sales 362.2 489.8 408.7 276.8 1,537.5
Earnings from operations 20.3 37.3 66.3 20.3 144.2
Percentage of sales 5.6% 7.6% 16.2% 7.3% 9.4%
Total assets 347.9 479.6 478.9 197.5 1,503.9
Capital expenditures 26.0 33.7 18.3 10.0 88.0
Depreciation and amortization 20.0 29.6 11.5 27.3 88.4
-------------------------------------------------------------------------------------------------------------
2002
Net sales to external customers $331.2 $452.3 $395.5 $167.2 $1,346.2
Intersegment net sales - - - 53.1 53.1
-------------------------------------------------------------------------------------------------------------
Total net sales 331.2 452.3 395.5 220.3 1,399.3
Earnings from operations 26.2 39.6 65.7 5.6 137.1
Percentage of sales 7.9% 8.8% 16.6% 2.5% 9.8%
Total assets 248.9 389.5 477.8 204.4 1,320.6
Capital expenditures 15.3 10.2 13.4 7.9 46.8
Depreciation and amortization 17.2 28.4 10.7 26.8 83.1
-------------------------------------------------------------------------------------------------------------
2001
Net sales to external customers $335.0 $434.7 $450.2 $167.2 $1,387.1
Intersegment net sales - - - 48.6 48.6
-------------------------------------------------------------------------------------------------------------
Total net sales 335.0 434.7 450.2 215.8 1,435.7
Earnings (loss) from operations (1) 25.2 16.4 97.2 (18.5) 120.3
Percentage of sales 7.5% 3.8% 21.6% (8.6)% 8.4%
Total assets 241.5 384.8 487.3 226.2 1,339.8
Capital expenditures 22.0 16.0 8.5 13.3 59.8
Depreciation and amortization 17.5 29.2 16.9 27.3 90.9
-------------------------------------------------------------------------------------------------------------
(1) 2001 includes goodwill amortization in the Water and Industrial Process
Chemicals, Performance Products and Specialty Materials segments of $1.1, $1.2
and $7.4, respectively, that is no longer amortized under SFAS 142.
The following table provides a reconciliation of selected segment
information to corresponding amounts contained in the Company's Consolidated
Financial Statements:
2003 2002 2001
--------------------------------------------------------------------------------
Net sales:
Net sales from segments $ 1,537.5 $1,399.3 $1,435.7
Elimination of
intersegment revenue (65.7) (53.1) (48.6)
--------------------------------------------------------------------------------
Total consolidated net sales $ 1,471.8 $1,346.2 $1,387.1
--------------------------------------------------------------------------------
Earnings from operations:
Earnings from segments $ 144.2 $ 137.1 $ 120.3
Corporate unallocated (1) (3.1) (17.7) (6.5)
--------------------------------------------------------------------------------
Total consolidated
earnings from operations $ 141.1 $ 119.4 $ 113.8
--------------------------------------------------------------------------------
Total assets:
Assets from segments $ 1,503.9 $1,320.6
Other assets (2) 522.0 445.8
------------------------------------------------------------------------
Total consolidated assets $ 2,025.9 $1,766.4
------------------------------------------------------------------------
(1) Includes net restructuring in 2002 and 2001 (see Note 3).
(2) Includes cash and cash equivalents at December 31, 2003 and 2002, of $251.1
and $210.0, respectively.
60
Operations by Geographic Areas: Net sales to unaffiliated customers presented
below are based upon the sales destination, which is consistent with
management's view of the business. U. S. exports included in net sales are based
upon the sales destination and represent direct sales of U. S.-based entities to
unaffiliated customers outside of the United States. Earnings from operations
are also based upon destination and consist of total net sales less operating
expenses. Identifiable assets are those assets used in the Company's operations
in each geographic area. Unallocated assets are primarily cash and cash
equivalents, deferred taxes, miscellaneous receivables and construction in
progress. Except for the United States, no country accounted for more than 10%
of consolidated net sales.
2003 2002 2001
--------------------------------------------------------------------------------
Net sales
United States $ 719.7 $ 685.8 $ 736.9
Other Americas 151.6 139.5 151.1
Asia/Pacific 211.1 197.3 170.7
Europe, Middle East, Africa 389.4 323.6 328.4
--------------------------------------------------------------------------------
Total $ 1,471.8 $ 1,346.2 $ 1,387.1
--------------------------------------------------------------------------------
U. S. exports included in
net sales above
Other Americas $ 47.8 $ 40.3 $ 50.7
Asia/Pacific 85.2 86.1 80.6
Europe, Middle East, Africa 53.6 38.3 54.0
--------------------------------------------------------------------------------
Total $ 186.6 $ 164.7 $ 185.3
--------------------------------------------------------------------------------
Earnings from operations(1)
United States $ 55.3 $ 37.0 $ 28.3
Other Americas 27.3 24.9 28.7
Asia/Pacific 22.0 28.2 20.1
Europe, Middle East, Africa 36.5 29.3 36.7
--------------------------------------------------------------------------------
Total $ 141.1 $ 119.4 $ 113.8
--------------------------------------------------------------------------------
Identifiable assets
United States $ 933.3 $ 843.9
Other Americas 138.9 136.7
Asia/Pacific 76.6 24.7
Europe, Middle East, Africa 259.1 234.4
---------------------------------------------------------------
Total $ 1,407.9 $ 1,239.7
---------------------------------------------------------------
Equity in net assets of and
Advances to associated
Companies $ 82.1 90.4
Unallocated assets 535.9 436.3
---------------------------------------------------------------
Total assets $ 2,025.9 $ 1,766.4
---------------------------------------------------------------
(1) Earnings from operations in 2002 include restructuring charges of $13.6 and
$0.1 in the United States and Europe/Middle East/Africa, respectively. Earnings
from operations in 2001 include restructuring charges of $5.4 in the United
States and goodwill amortization of $7.9, $0.7, $0.1 and $1.0 in the United
States, Other Americas, Asia/Pacific and Europe/Middle East/Africa,
respectively, that is no longer amortized under SFAS 142.
Major Customers: The Company has a diversity of product lines and in 2003 and
2002 no customer accounted for more than 10% of the Company's net sales. Sales
to the Boeing Company and its subcontractors for commercial and military
aerospace and other components were approximately $150 million, or 11% of
consolidated net sales, in 2001.
61
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders,
Cytec Industries Inc.:
We have audited the accompanying consolidated balance sheets of Cytec
Industries Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cytec
Industries Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations," effective January 1,
2003. Also as discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002.
Finally, as discussed in Note 2 to the consolidated financial statements,
effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 141, "Business Combinations."
/S/KPMG LLP
Short Hills, New Jersey
January 22, 2004
62
QUARTERLY DATA (UNAUDITED)
(Dollars in millions, except per share amounts) 1Q 2Q 3Q 4Q Year
-------------------------------------------------------------------------------------------------------------------
2003
Net Sales $367.4 $374.9 $367.7 $361.8 $1,471.8
Gross profit (1) 95.0 95.9 83.1 82.9 356.9
Net earnings 15.3 25.4 22.1 14.6 77.4
Basic net earnings per common share (2) - - - - -
Earning before accounting changes (2) $ 0.75 $ 0.65 $ 0.56 $ 0.37 $ 2.34
Accounting Change (0.35) - - - (0.35)
--------------------------------------------------------------
Basic net earnings per common share (2) $ 0.40 $ 0.65 $ 0.56 $ 0.37 $ 1.99
-------------------------------------------------------------
Diluted net earnings per common share (2) - - - - -
Earnings before accounting change $ 0.73 $ 0.64 $ 0.55 $ 0.33 $ 2.27
Accounting change (0.34) - - - (0.34)
-------------------------------------------------------------
Diluted net earnings per common share $ 0.39 $ 0.64 $ 0.55 $ 0.33 $ 1.93
-------------------------------------------------------------
2002
Net Sales $318.0 $350.9 $332.8 $344.5 $1,346.2
Gross profit (1) 70.0 87.0 86.1 82.7 325.8
Net earnings 7.0 21.4 31.6 19.3 79.3
Basic net earnings per common share (2) $ 0.18 $ 0.54 $ 0.80 $ 0.49 $ 2.01
Diluted net earnings per common share (2) $ 0.17 $ 0.52 $ 0.78 $ 0.49 $ 1.96
------------------------------------------------------------
2001
Net Sales $376.1 $354.1 $342.1 $314.8 $1,387.1
Gross profit (1) 81.8 84.9 84.8 66.6 318.1
Earnings before extraordinary item 17.2 20.9 21.3 6.8 66.2
Extraordinary item, net of taxes - - 4.9 - 4.9
Net earnings 17.2 20.9 26.2 6.8 71.1
Basic net earnings per common share (2)
Earnings before extraordinary item $ 0.43 $ 0.52 $ 0.53 $ 0.17 $ 1.65
Extraordinary item - - 0.12 - 0.12
-------------------------------------------------------------
Basic net earnings per common share $ 0.43 $ 0.52 $ 0.65 $ 0.17 $ 1.77
-------------------------------------------------------------
Diluted net earnings per common share (2)
Earnings before extraordinary item $ 0.41 $ 0.50 $ 0.51 $ 0.17 $ 1.59
Extraordinary item - - 0.12 - 0.12
-------------------------------------------------------------
Diluted net earnings per common share $ 0.41 $ 0.50 $ 0.63 $ 0.17 $ 1.71
-------------------------------------------------------------------------------------------------------------------
(1) Gross profit is derived by subtracting manufacturing cost of sales from net
sales.
(2) The sum of the quarters may not equal the full year basic and diluted
earnings per share since each period is calculated separately.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
63
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers
Set forth below is certain information concerning the executive
officers of the Company. Each such person serves at the pleasure of the Board of
Directors of the Company.
Name Age Positions
D. Lilley 57 Mr. Lilley is Chairman of the Board, President and Chief Executive Officer of the
Company. He was elected Chairman in January 1999 and President and Chief Executive
Officer of the Company effective May 11, 1998, having previously served as President and
Chief Operating Officer of the Company from January 8, 1997.
J. P. Cronin 50 Mr. Cronin is Executive Vice President and Chief Financial Officer of the Company,
having previously served as Vice President and Chief Financial Officer of the Company
from its inception in 1993 until he was elected an Executive Vice President in September
1996.
W. N. Avrin 48 Mr. Avrin was elected Vice President, Corporate and Business Development of the Company
in December 1999, having previously served the same role for one year in a non-officer
capacity. From 1997 through 1998, Mr. Avrin was vice president and general manager of
Cytec's paper, water treating and mining chemicals business.
D. M. Drillock 46 Mr. Drillock was elected Vice President, Controller and Investor Relations of the
Company in April 2002. He previously served as Controller for more than four years.
J.E. Marosits 51 Mr. Marosits was elected Vice President, Human Resources in July 2002. For more than
four years prior to that, he had been Cytec's Director, Human Recources for Building
Block Chemicals and Corporate Manager, Labor Relations.
R. Smith 45 Mr. Smith was elected Vice President, General Counsel and Secretary of the Company
effective January 1, 2002, having previously served as Assistant General Counsel for
more than three years prior thereto.
T. P. Wozniak 50 Mr. Wozniak is Treasurer of the Company and has held this position for more than five
years.
The Company has adopted a Code of Ethics for Cytec Senior Executives
which is applicable to its chief executive officer, its chief financial officer,
its chief accounting officer and its controller. The Code of Ethics for Senior
Executive Officers sets forth certain of the Company's expectations, including
that the officers will act with honesty and integrity, will avoid actual and
apparent conflicts of interest, will comply with all applicable laws, will
disclose information that is complete and understandable and will act in good
faith and responsibly. The Code also requires the prompt internal reporting of
violations to the Chair of the Audit Committee. A current copy of the Code is
available on the Company's website accessible at www.Cytec.com. The Company will
disclose information regarding any amendment to the Code or any waiver from any
of its provisions on the same website.
The remainder of the information required by this Item is incorporated by
reference from the "Election of Directors" section of the Registrant's
definitive Proxy Statement for its 2004 Annual Meeting of Common Stockholders,
dated March 18, 2004.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the "Executive Compensation," the "Employment and Severance Arrangements," the
"Compensation under Retirement Plans," the "Compensation of Directors," the
"Compensation and Management Development Committee Report," and the "Performance
Graph" sections of the Registrant's definitive Proxy Statement for its 2004
Annual Meeting of Common Stockholders, dated March 18, 2004.
64
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
"Cytec Stock Ownership by Directors & Officers" and the "Security Ownership of
Certain Beneficial Owners" sections of the Registrant's definitive Proxy
Statement for its 2004 Annual Meeting of Common Stockholders, dated March 18,
2004.
65
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
"Certain Relationships and Related Transactions" section of the Registrant's
definitive Proxy Statement for its 2004 Annual Meeting of Common Stockholders,
dated March 18, 2004.
Item 14. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the Company's disclosure controls and procedures as
defined in Exchange Act Rule 13a-14 as of the period ended December 31, 2003.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's current disclosure controls and
procedures are reasonably effective. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the date of the evaluation by the Chief
Executive Officer and Chief Financial Officer.
The remainder of the information required by this Item is incorporated by
reference from the "Fees Paid to the Independent Accountants" Section of the
Registrant's definitive Proxy Statement for its 2004 Annual Meeting of Common
Stockholders, dated March 18, 2004.
66
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) List of Financial Statements:
Cytec Industries Inc. and Subsidiaries Consolidated Financial Statements
(See Item 8):
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the Years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) Cytec Industries Inc. and Subsidiaries Financial Statement Schedules
Independent Auditors' Report
Schedule II - Valuation and Qualifying Accounts
Schedules, other than Schedule II---Valuation and Qualifying Accounts,
are omitted because of the absence of the conditions under which they are
required or because the information called for is included in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits.
Exhibit No. Description
2.1(a) Transfer and Distribution Agreement dated as of December 17, 1993 between American Cyanamid Company
("Cyanamid") and the Registrant (incorporated by reference to exhibit 2.1 to Registrant's annual
report on Form 10-K for the year ended December 31, 1993).
2.1(b) Transfer and Distribution Agreement Amendment, dated April 8, 1997 between Cyanamid and the
Registrant (incorporated by reference to exhibit 2.1(a) to Registrant's quarterly report on Form
10-Q for the quarter ended March 31, 1997).
2.1(c) Transfer and Distribution Agreement Second Amendment, dated as of January 22, 1999, between
Cyanamid and the Registrant (incorporated by reference to exhibit 2.1(c) to Registrant's annual
report on Form 10-K for the year ended December 31, 1998).
2.2(a) Preferred Stock Repurchase Agreement, dated as of August 17, 1995, between Cyanamid and the
Registrant (incorporated by reference to exhibit 2(b) to Registrant's registration statement on
Form S-3, registration number 33-97328).
2.2(b) Amendment No. 1 to Preferred Stock Repurchase Agreement, dated as of October 10, 1995, between
Cyanamid and Registrant (incorporated by reference to exhibit 2(c) to Registrant's registration
statement on Form S-3, registration number 33-97328).
3.1(a) Certificate of Incorporation (incorporated by reference to exhibit 3.1(a) to Registrant's quarterly
report on Form 10-Q for the quarter ended September 30, 1996).
3.1(b) Certificate of Amendment to Certificate of Incorporation dated May 13, 1997 (incorporated by
reference to exhibit 3.1(a) to Registrant's quarterly report on Form 10-Q for the quarter ended
June 30, 1997).
3.1(c) Conformed copy of the Registrant's certificate of incorporation, as amended (incorporated by
reference to exhibit 3(c) to Registrant's registration statement on Form S-8, registration number
333-45577).
67
3.2 By-laws, as amended through January 22, 2002 (incorporated by reference to Exhibit 3.2 to
Registrant's annual report on Form 10-K for the year ended December 31, 2001).
4.1 Form of Common Stock Certificate (incorporated by reference to exhibit 4.1 to Registrant's
registration statement on Form 10).
4.2 Certificate of Designations, Preferences and Rights of Series C Preferred Stock (incorporated
by reference to exhibit 4.4 to Registrant's annual report on Form 10-K for the year ended
December 31, 1993). Reference is also made to exhibits 2.1(b), 2.1(c), 2.2(a) and 2.2(b).
4.3 Form of Series C Preferred Stock Certificate (incorporated by reference to exhibit 4.7 to Registrant's
registration statement on Form 10).
4.4(a) Indenture, dated as of March 15, 1998 between the Registrant and PNC Bank, National Association as
Trustee (incorporated by reference to Exhibit 4.1 of Registrant's current report on Form 8-K, dated
March 18, 1998).
4.4(b) Supplemental Indenture, dated as of May 11, 1998 between the Registrant and PNC Bank National
Association, as Trustee (incorporated by reference to Exhibit 4.2 to Registrant's quarterly report
on Form 10-Q for the quarter ended March 31, 1998).
4.5 6.75% Global Note due March 15, 2008 (incorporated by reference to Exhibit 4.3 of Registrant's
current report on Form 8-K dated March 18, 1998).
4.6 6.846% Mandatory Par Put Remarketed Securities due May 11, 2025 (incorporated by
reference to Exhibit 4.5 to Registrant's quarterly report on Form 10-Q for the
quarter ended March 31, 1998).
4.7 4.60% Senior Note due 2013 (incorporated by reference to Exhibit 4.2 to Registrant's quarterly
report on Form 10-Q for the quarter ended June 30, 2003).
10.1(a) Environmental Matters Agreement, dated as of December 17, 1993, between Cyanamid and the Registrant
(incorporated by reference to exhibit 10.1 to Registrant's annual report on Form 10-K for the year
ended December 31, 1993).
10.1(b) Amendment to Environmental Matters Agreement, dated as of January 29, 2003, between Cyanamid and
the Registrant (incorporated by reference to exhibit 10.1(b) to Registrant's annual report on Form
10-K for the year ended December 31, 2002.)
10.2 OPEB Matters Agreement, dated as of December 17, 1993, between Cyanamid and the Registrant
(incorporated by reference to exhibit 10.2 to Registrant's annual report on Form 10-K for the year
ended December 31, 1993).
10.3 Intellectual Property Agreements, each dated as of December 17, 1993 and each between Cyanamid and
Cytec Technology Corp. (consisting of (i) Assignment of U. S. Patents, (ii) Assignment of U. S.
Patent Applications, (iii) Assignment of Foreign Patents and Patent Applications, (iv) Assignment
of Records of Invention, (v) Exclusive Patent and Knowhow License, (vi) Option Agreement for
Non-Exclusive Patent and Knowhow License, (vii) Non-Exclusive Patent and Knowhow License, (viii)
Agreement re access to CL File and (ix) Assignment of Knowhow)(incorporated by reference to exhibit
10.7 to Registrant's annual report on Form 10-K for the year ended December 31, 1993).
10.4 Trademarks and Copyrights Transfer Agreement, Assignment and Bill of Sale, dated as of December 17,
1993, among Cyanamid, Cytec Technology Corp. and the Registrant (incorporated by reference to
exhibit 10.8 to Registrant's annual report on Form 10-K for the year ended December 31, 1993).
68
10.6 Three year Credit Agreement dated as of April 11, 2002, among the Registrant, the banks named
therein and Citibank N.A., as Administrative Agent, Wachovia Bank, as Syndication Agent, and ABN
Amro Bank N. V., as Documentation Agent (incorporated by reference to exhibit 10.6 to Registrant's
quarterly report on form 10-Q for the quarter ended March 31, 2002).
10.8(a) Partnership Agreement (the "CYRO Partnership Agreement") between Cyanamid Plastics, Inc., and
Rohacryl, Inc., dated July 1, 1976 (incorporated by reference to exhibit 10.17 to Registrant's
registration statement on Form 10).
10.8(b) Letter amendment, dated February 19, 1993, among CYRO Industries, Cyanamid Plastics Inc. and
Rohacryl Inc. to the CYRO Partnership Agreement (incorporated by reference to Exhibit 10.1 to the
Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 1998).
10.8(c) Letter amendment, dated as of March 27, 2002 between Cytec Plastics Inc. and Rohacryl Inc., to the
CYRO Partnership Agreement incorporated by reference to Exhibit 10.8(c) to the Registrant's annual
report on Form 10-K for the year ended December 31, 2001).
10.9(a) Joint Venture Agreement (the "AMEL Joint Venture Agreement") between Cyanamid Melamine Inc., and
DCP Melamine North America, Inc., dated April 15, 1986 (incorporated by reference to exhibit
10.18(a) to Registrant's registration statement on Form 10).
10.9(b) Amendment No. 1 to AMEL Joint Venture Agreement, dated April 30, 1987, by and between Cyanamid
Melamine Inc. and DCP Melamine North America, Inc. (incorporated by reference to Exhibit 10.2 to
Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 1998).
10.9(c) Amendment No. 2 to AMEL Joint Venture Agreement, dated May 1, 1994, by and between DSM Melamine
Americas, Inc. and Cytec Melamine Inc. (incorporated by reference to Exhibit 10.3 to Registrant's
quarterly report on Form 10-Q for the quarter ended March 31, 1998).
10.9(d) Amendment No. 3 to AMEL Joint Venture Agreement, dated January 30, 1995 by and between Cytec
Melamine Inc. and DSM Melamine Americas, Inc. (incorporated by reference to Exhibit 10.4 to
Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 1998).
10.9(e) Agreement dated April 15, 1986 between Cyanamid and DSM Chemische Production BV, as amended October
24, 1994 (incorporated by reference to exhibit 10.18(b) to Registrant's annual report on Form 10-K
for the year ended December 31, 1994).
10.12 Executive Compensation Plans and Arrangements
10.12(a) 1993 Stock Award and Incentive Plan, as amended through October 16, 2003 (incorporated by reference
to Exhibit 10.12(a) to the Registrant's quarterly report on Form 10-Q for the quarter ended
September 30, 2003).
10.12(b) Form of Performance Stock Award/Performance Cash Award Grant Letter.
(incorporated by reference to exhibit 10.12(b) to Registrant's annual report on
Form 10-K for the year ended December 31, 1999).
10.12(c) Rule No. 1 under 1993 Stock Award and Incentive Plan as amended through January 20, 2003
(incorporated by reference to exhibit 10.12(c) to Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002.)
10.12(d)(i) Form of Stock Option Grant Letter (incorporated by reference to exhibit 10.13(d) of Registrant's
annual report on Form 10-K for the year ended December 31, 1998).
69
10.12(d)(ii) Form of Stock Option Grant Letter used for grants to officers from January 21, 2002 through
January 19, 2004 (incorporated by reference to Exhibit 10.12(d)(ii) to Registrant's annual report on
Form 10-K for the year ended December 31, 2001).
10.12(d)(iii) Form of Stock Option Grant Letter used for grants to officers from January 21, 2004.
10.12(d)(iv) Form of Performance Stock Award Grant Letter used for grants to officers from January 21, 2004.
10.12(e) Rule No. 2, as amended through January 27, 1997, under 1993 Stock Award and Incentive Plan
(incorporated by reference to exhibit 10.13(e) to Registrant's annual report on Form 10-K for the
year ended December 31, 1996).
10.12(f) Executive Income Continuity Plan, as amended through September 12, 2003 (incorporated by reference
to exhibit 10.12(f) to Registrant's quarterly report on Form 10-Q for the quarter ended September
30, 2003).
10.12(g) Key Manager Income Continuity Plan, as amended through September 12, 2003 (incorporated by
reference to exhibit 10.12(g) to Registrant's quarterly report on Form 10-Q for the quarter ended
September 30, 2003).
10.12(h) Employee Income Continuity Plan, as amended through September 12, 2003 (incorporated by reference
to exhibit 10.12(h) to Registrant's quarterly report on Form 10-Q for the quarter ended September
30, 2003).
10.12(i) Cytec Excess Retirement Benefit Plan, as amended through May 11, 2000 (incorporated by reference to
exhibit 10.12(j) to Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2000).
10.12(j) Cytec Supplemental Employees Retirement Plan, as amended through April 13, 2000 (incorporated by
reference to exhibit 10.12(k) to Registrant's quarterly report on Form 10-Q for the quarter ended
June 30, 2000).
10.12(k) Cytec Executive Supplemental Employees Retirement Plan, as amended through October 14, 1999
(incorporated by reference to exhibit 10.13(k) to Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1999).
10.12(l) Cytec Compensation Tax Equalization Plan (incorporated by reference to exhibit 10(G) to Registrant's
quarterly report on Form 10-Q for the quarter ended September 30, 1994).
10.12(m) Cytec Supplemental Savings and Profit Sharing Plan, as amended and restated through July 22, 2003
(incorporated by reference to exhibit 4.4 to Registrant's Registration Statement on Form S-8,
registration number 333-107221).
10.12(n) Amended and Restated Trust Agreement effective as of December 15, 1994 between the Registrant and
Vanguard Fiduciary Trust Company, as successor trustee (incorporated by reference to exhibit
10.12(p) to Registrant's annual report on Form 10-K for the year ended December 31, 1999).
10.12(o) Deferred Compensation Plan as amended through December 9, 2002 (incorporated by reference to
exhibit 10.12(o) to Registrant's annual report on Form 10-K for the year ended December 31, 2002).
10.12(p) Cytec Industries Inc. Estate Enhancement Plan including form of agreement, form of death benefit
agreement, and form of election to forego compensation and enrollment form (incorporated by reference
to Exhibit 10.13(u) to Registrant's annual report on Form 10-K for the year ended December 31, 1997).
12 Computation of Ratio of Earnings to Fixed Charges
70
21 Subsidiaries of the Company (incorporated by reference to Exhibit 21 to Registrant's annual report
on Form 10-K for the year ended December 31, 2002).
23 Consent of KPMG LLP
24(a-i) Powers of Attorney of J. E. Akitt, F. W. Armstrong, C.A. Davis, A.G. Fernandes, L. L. Hoynes, Jr.,
B. C. Johnson, W. P. Powell, J. R. Satrum and J. R. Stanley.
31.1 Certification of David Lilley, Chief Executive Officer pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of James P. Cronin, Chief Financial Officer pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of David Lilley, Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of James P. Cronin, Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K dated October 17, 2003 regarding its
disclosure of results of operations and financial condition for the third
quarter of 2003.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
DATE: February 25, 2004 By: /S/ D. Lilley
-------------------------
D. Lilley
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
DATE: February 25, 2004 /S/ D. Lilley
-------------------------
D. Lilley
Chairman, President and
Chief Executive Officer
DATE: February 25 , 2004 /S/ J. P. Cronin
-------------------------
J. P. Cronin,
Executive Vice President,
Chief Financial and
Accounting Officer
*
-----------------------------------
J. E. Akitt, Director
*
-----------------------------------
F. W. Armstrong, Director
*
-----------------------------------
C.A. Davis, Director
*
------------------------------------
A. G. Fernandes, Director
*
-----------------------------------
L.L. Hoynes, Jr., Director
*By: /S/ R. Smith
----------------------
Attorney-in-Fact
*
-----------------------------------
B. C. Johnson, Director
*
-----------------------------------
W. P. Powell, Director
*
-----------------------------------
J. R. Satrum, Director
*
-----------------------------------
J. R. Stanley, Director
DATE: February 25, 2004
72
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cytec Industries Inc.:
Under date of January 22, 2004, we reported on the consolidated balance sheets
of Cytec Industries Inc. and subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2003. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/S/KPMG LLP
Short Hills, New Jersey
January 22, 2004
73
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2003, 2002 And 2001
(In Millions)
Additions or
(deductions)
charged or
Balance (credited) Other additions Balance
Description 12/31/2002 to expenses or (deductions) 12/31/2003
----------- ---------- ----------- ------------- ----------
Reserves deducted from
related assets:
Doubtful accounts receivable $ 8.8 $ 0.2 $ (l.4) (1) $ 7.6
Total investments, advances
and other assets $ 17.0 - $ (17.0) (2) $ -
Environmental accruals $ 83.7 $ 1.8 $ (5.9) (3) $ 79.6
Deferred tax assets - - $ 4.6 (4) $ 4.6
(1) Principally bad debts written off, less recoveries.
(2) Liquidation of associated company and write-off of preferred stock of
company in bankruptcy both of which were fully reserved.
(3) Environmental remediation spending of $9.3, net of $1.7 currency exchange
and $1.7 for the gross up of a certain liability and related receivable.
(4) Attributable to U. S. state income tax net operating loss carryforwards.
Additions or
(deductions)
charged or
Balance (credited) Other additions Balance
Description 12/31/2001 to expenses or (deductions) 12/31/2002
----------- ---------- ----------- ------------- ----------
Reserves deducted from
related assets:
Doubtful accounts receivable $ 7.8 $ 2.2 $ (1.2) (1) $ 8.8
Total investments, advances
and other assets $ 15.4 $ 1.7 (2) $ (0.1) $ 17.0
Environmental accruals $ 93.9 - $ (10.2) (3) $ 83.7
(1) Principally bad debts written off, less recoveries.
(2) Write-off of unconsolidated associated company.
(3) Environmental remediation spending, excluding external efforts.
Additions or
(deductions)
charged or
Balance (credited) Other additions Balance
Description 12/31/2000 to expenses or (deductions) 12/31/2001
----------- ---------- ----------- ------------- ----------
Reserves deducted from
related assets:
Doubtful accounts receivable $ 8.8 $ 0.1 $ (1.1) (1) $ 7.8
Total investments, advances
and other assets $ 14.0 - $ 1.4 (2) $ 15.4
Environmental accruals $ 104.7 - $ (10.8) (3) $ 93.9
(1) Principally bad debts written off, less recoveries.
(2) Payment-in-kind preferred stock dividend received from a company currently
in bankruptcy, as such value reserved upon receipt.
(3) Environmental remediation spending, excluding internal efforts
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