TOP CONTRIBUTORS

Jin Bin Liu

CYT AT A GLANCE

P/E ► -4.45   EV/EBITDA ► -12.0   ROA ► -8.6% AVG ROE ► -20.6% AVG Debt to Equity ► 1.35 AVG Current Ratio ► 2.01 AVG Interest Coverage Ratio ► -14.1 LOW

 

 

 

 

 

 

Cytec Industries manufactures and sells chemicals and carbon composites. Its chemical segments make products used in applications like industrial coatings and adhesives, and the company's carbon composites are used for parts in aircraft.^[1]

From 2006 to 2007, raw material costs of all of Cytec's chemical segments increased a total of $80.4 million.^[2][3][4] Oil and natural gas are important indirect raw materials for many of Cytec’s chemical products in both the Specialties segment and the Building Block segment.^[5] The price of crude oil has risen from around $20 per barrel in 2000 to record-highs of over $140 in mid-2008. ^{[6] [7]}

On the other hand, Cytec's Engineered Materials segment has been buoyed by aerospace demand.^[8] New aircraft orders increased to record levels of 2,871 in 2007.^[9][10]The only downside to making carbon composites is the high cost of carbon fiber, the price of which rose .^[11] From 2004 to 2007, the cost of carbon fiber has increased by more than 65%.^[12] To contend with rising prices of raw materials, Cytec has raised the prices of its own products across every business segment.^[13]

Business Financials

From fiscal 2006 to fiscal 2007, Cytec’s net sales increased 5% to $3.5 billion.^[8] In 2007, Cytec also finished divestiture of its water treatment chemicals and acrylamide product lines, which decreased sales in its Performance Chemicals and Building Block Chemicals segments respectively.^[8] Despite flat or falling sales volumes in its Specialty Chemicals segments, Cytec managed to increase net sales in 2007 due to strong sales volume growth in its other two segments.^[8] Cytec also increased the prices of its products in all its business segments.^[8]

Cytec operates 43 research and manufacturing facilities in 18 countries all over the world.^[14]

Cytec has three business segments: Specialty Chemicals, Engineered Materials, and Building Block Chemicals.

Specialty Chemicals (68% of net sales in 2007)

This is by far the largest segment of Cytec Industries. This segment accounted for 68% of the company's net sales in 2007.^[8] The Specialty Chemicals segment is broken down further into two parts: Performance Chemicals and Surface Specialties. The Specialty Chemicals segment as a whole suffered due to rising prices of oil and natural gas, which are key raw materials in many of their products, and due to weak demand in North America in 2007.

The Surface Specialties division accounted for 69% of the sales in the Specialty Chemicals segment and 47% of Cytec's net sales overall in 2007.^[8] The product lines in the Surface Specialties division include radiation-cured resins (Radcure resins), powder coating resins and liquid coating resins.^[11] These products are used for finishes on cars, agricultural and construction materials, to help preserve packaged materials, and even to make tires stronger.^[15] The Surface Specialties division recently completed its acquisition of the surface specialties business of UCB, a global biopharmaceutical company, in February of 2005.^[16] This transaction was valued at $1.8 billion. The UCB aquisition was supposed to provide synergies with Cytec's existing specialty chemicals segment and to reduce operating costs. In the second quarter of 2008, the Surface Specialties sales increased 13% to $473 million.^[5] Operating earnings, however, dropped from $32.8 million in Q2 of 2007 to $22.2 million.^[5]

The Performance Chemicals division accounted for 31% of the sales in the Specialty Chemicals segment and 21% of Cytec's net sales overall in 2007.^[8] The product lines in the Performance Chemicals division include mining chemicals, phosphines, polymer additives, specialty additives, specialty urethanes and pressure sensitive adhesives.^[11] These products are used as mining reagents, antioxidants, flame retardants, etc. ^[17] In the second quarter of 2008, the Performance Chemicals sales increased 9% to $202 million.^[5] Operating earnings, however, dropped from $23.7 million in Q2 of 2007 to $20.5 million.^[5]

Engineered Materials (19% of net sales in 2007)

The Engineered Materials segment accounted for 19% of Cytec's net sales overall in 2007.^[8] The product lines in the Engineered Materials segment includes advanced composites, carbon fiber, and structural film adhesives.^[11] These products are used in applications like interior and exterior structural aircraft parts, aircraft engines, aircraft and car brakes, etc.^[18] In the second quarter of 2008, the Engineered Materials sales increased 16% to $193 million.^[5] Operating earnings increased from $34.8 million in Q2 of 2007 to $41.8 million.^[5]

Building Block Chemicals (13% of net sales in 2007)

The Building Block Chemicals segment accounted for 13% of Cytec's net sales overall in 2007.^[8] The product lines in the Building Block Chemicals segment principally includes acrylonitrile, hydrocyanic acid, sulfuric acid and melamine.^[11] These products are used to create end products like high-tech coatings for cars and industrial products, plastics, and paper.^[19] In the second quarter of 2008, the Building Block Chemicals sales increased 48% to $138 million.^[5] Operating earnings, however, only increased from $4.6 million in Q2 of 2007 to $6.5 million.^[5]

Trends and Forces

Strong aerospace demand boosts sales for Cytec's Engineered Materials segment

The aerospace industry is becoming increasingly dependent on carbon fiber composites, which are lighter and stronger than conventional metals.^[20] In 2005, 2043 aircraft were ordered by Boeing and Airbus, which was a record.^[21] Orders dipped to 1,868 in 2006 and rose again and surpassed the high in 2005 at 2,871 orders.^[9][10] In addition to supplying composites for companies in the commercial aerospace market like Boeing and Airbus, Cytec’s Engineered Material’s segment is a supplier to military programs such as the F-35 Joint Strike Fighter, the F/A-22 and F/A-18 combat aircraft and the C-17 transport aircraft.^[22][3] From 2001 to 2008, spending by the Department of Defense has increased 74%.^[23] In 2008, the Air Force budget was $134.6 billion^[24], nearly double the amount in 2001.^[25] After 2009, however, the national defense budget is expected to drop from $675.1 billion to $519.5 billion in 2013.^[26]

Growth in "Very Light Jet" market creates demand for carbon composites

The Very Light Jet, or VLJ, is becoming an increasingly popular alternative for corporate fliers. The VLJ is half as cheap as the traditional corporate jet^[27] and more cost-effective than commercial airlines.^[28] The price of VLJs range from $1 to $3 million.^[29] Estimates in 2007 predict the delivery of 15,000 VLJs by 2015.^[29] Although some manufacturers continue to use aluminum frames and composites for secondary structures, many others are proceeding to produce VLJs with all-composite airframes, expanding the market for carbon fiber materials (like those made by Cytec).^[29]

High price of carbon fiber increases raw material costs for Cytec's Engineered Materials segment

Due to strong demand from the aerospace industry^[30], the price of carbon fiber is very high, around $10 per pound at the beginning of 2007.^[31] From 2004 to 2007, the cost of carbon fiber has increased by more than 65%.^[32] In comparison, the price for aluminum is about $1.30 per pound in mid-2008.^[33] While strong demand will drive prices up, it is also expected to drive increases in production, which will eventually bring prices back down. In 2007, worldwide output of carbon fiber was about 35,000 tons.^[34] The output in 2010 is expected to be 53,000 tons.^[34] While Cytec does produce some of its own carbon fiber, its own production only fulfills 35% of its needs.^[22] From 2005 to 2007, raw material costs increased $12.3 million in the Engineered Materials segment. Until increased production lowers the cost of carbon fiber, the price of this raw material will continue to adversely affect Cytec’s Engineered Materials segment.

Rising prices for oil and natural gas...

...directly increase raw material costs for Cytec's chemical segments

Oil and natural gas are important indirect raw materials for many of Cytec’s chemical products in both the Specialties segment and the Building Block segment. The price of crude oil has risen from around $20 per barrel in 2000 to record-highs of over $140 in mid-2008. ^{[35] [36]} The industrial price of natural gas has increased from $4.02 per 1000 cu. ft. in 2002 to $7.58 in 2007.^[37] From 2006 to 2007, raw material costs increased $14.4 million in the Performance Chemicals segment^[2], $46.9 million in the Surface Specialties segment^[3], and $29.1 million in the Building Block Chemicals segment^[4]. To combat the increase in raw material prices, Cytec will pass on these price increases to their customers by increasing the prices of their products.^[38]

...indirectly increase demand for carbon composites from Cytec's Engineered Materials segment

Increases in the price of crude oil is driving up fuel prices.^[39] To make their products more fuel-efficient, manufacturers of planes and automobiles are turning to carbon composites as the alternative to traditional steel and aluminum parts.^[40] Carbon composites are lighter and non-corroding.^[41] The VLJ market, which is trending toward all-composite airframes, expects to deliver 15,000 aircraft by 2015 according to 2007 estimates.^[29]

Competition

Competitors of Cytec’s chemical businesses include:

• BASF SE (BASFY) – World’s largest chemical company by sales.^[42]
• Braskem SA (BAK) - An integrated petrochemical cracker and thermoplastics producer in Brazil and Europe.
• Dow Chemical Company (DOW) – Manufactures and sells chemicals, plastic materials, agricultural, and other specialized products and services worldwide.
• DuPont (DD) – Chemical and technology conglomerate. Products include Kevlar, Teflon, and genetically enhanced plant seeds.
• Hercules (HPC) - Manufactures and markets specialty chemicals and related services for business, consumer, and industrial applications worldwide.
• Hexcel (HXL) – Advanced structural materials company. Products include resins, adhesives, and laminates.
• H. B. Fuller Company (FUL) – Worldwide manufacturer and marketer of adhesives, sealants, paints and other specialty chemical offerings.
• Sigma-Aldrich (SIAL) - Produces and sells a broad range of biochemicals, organic and inorganic chemicals and related products.

The leading carbon fiber companies are competitors of Cytec’s Engineered Materials Segment. They include:

• Hexcel (HXL) – Hexcel is the largest producer of carbon fiber in the US.^[51]
• Mitsubishi Rayon Co., Ltd. – Produces carbon fibers, intermediate materials, and fabricated composite products.
• SGL Technologies – Produces oxidized fiber, partially carbonized fiber, and heavy-tow carbon fiber.
• Toho Tenax Co., Ltd. – Mass-produces polyacrylonitrile based fibers.
• Toray Industries Inc (TRYIY) – One of Toray’s business segment is Carbon Fiber Composite Materials.
• Zoltek (ZOLT) – Has 85% of the commercial aircraft brake pad market. ^[52] Producer of wind turbine blades.

Toray, Mitsubishi Rayon and Teijin, Ltd. have 70% of the world's carbon fiber market share.^[53] Toray alone has 30% of the world's carbon fiber market share.^[54]

References

1. ↑ Cytec 10-K 2007: P.3-7
2. ↑ ^{2.0 2.1} Cytec Annual Report 2007: P.20
3. ↑ ^{3.0 3.1 3.2} Cytec Annual Report 2007: P.21
4. ↑ ^{4.0 4.1} Cytec Annual Report 2007: P.22
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8} Cytec Announces Second Quarter 2008 Results
6. ↑ zFacts: "Crude Oil Prices Drive up Cost of U.S. Addiction"
7. ↑ VOA News: "Oil Prices Soar to Record High of Nearly $146 a Barrel"
8. ↑ ^{8.00 8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 8.10 8.11} Cytec 10-K 2007: P.18
9. ↑ ^{9.0 9.1} Boeing Sets Third Consecutive Record in Commercial Airplane Orders in 2007
10. ↑ ^{10.0 10.1} Airbus Orders & Deliveries: 1992-2007 Results
11. ↑ ^{11.0 11.1 11.2 11.3 11.4} Cytec 10-K 2007: P.2
12. ↑ Industry Experts Call of Carbon Fiber Commodity Trading
13. ↑ Cytec Announces Second Quarter 2008 Results
14. ↑ Cytec 10-K 2007: P.12
15. ↑ Liquid Coating Resins
16. ↑ Cytec Completes Acquisition of UCB's Surface Specialties Business
17. ↑ Specialty Chemicals
18. ↑ Engineered Materials Selector Guides
19. ↑ Building Block Products
20. ↑ Fibre reinforced composites in aircraft construction
21. ↑ Aerospace: current signals could steer you wrong
22. ↑ ^{22.0 22.1} Cytec Annual Report 2007: P.6
23. ↑ U.S. Federal Budget 2008 P.5
24. ↑ Air Force Budget 2008 P.6
25. ↑ Air Force Budget 2001 P.1
26. ↑ National Defense Budget Estimates for FY 2009 P.5
27. ↑ Feeling the Need for Speed
28. ↑ Very Light Jets Creating A Demand For Composites
29. ↑ ^{29.0 29.1 29.2 29.3} Very Light Jets Are Taking Off from Ultralight Living
30. ↑ Why Bike Prices Are Shifting Higher
31. ↑ Zoltek Rewards True Believers
32. ↑ Industry Experts Call of Carbon Fiber Commodity Trading
33. ↑ Metal Prices & News on the Internet
34. ↑ ^{34.0 34.1} Carbon fiber makers see broad use of it in cars
35. ↑ zFacts: "Crude Oil Prices Drive up Cost of U.S. Addiction"
36. ↑ VOA News: "Oil Prices Soar to Record High of Nearly $146 a Barrel"
37. ↑ Natural Gas Prices
38. ↑ Cytec Announces Second Quarter 2008 Results
39. ↑ Soaring Gasoline, Diesel, and Crude Oil Prices
40. ↑ Recyclable Carbon Fiber: Extreme Fuel-Efficiency
41. ↑ Advantages of Carbon Composites
42. ↑ Competitors: Chemical Companies Ranked by Chemical Sales
43. ↑ BASF SE - Key Financial Data
44. ↑ Braskem SA - Income Statement
45. ↑ Dow Chemical Company – Income Statement
46. ↑ DuPont – Income Statement
47. ↑ Hercules – Income Statement
48. ↑ ^{48.0 48.1} Hexcel Annual Report 2007: Selected Financial Data P.12
49. ↑ HB Fuller Co. – Income Statement
50. ↑ Sigma-Aldrich – Income Statement
51. ↑ About Hexcel
52. ↑ Zoltek Rewards True Believers
53. ↑ Carbon fiber makers see broad use of it in cars
54. ↑ Carbon fiber makers see broad use of it in cars
55. ↑ Mitsubishi Rayon Annual Report: Business Performance Breakdown by Segment P.12
56. ↑ SGL Annual Report 2007: Business Unit Performance P.59
57. ↑ TOHO Tenax Annual Report: Review of Operations P.4
58. ↑ Financial Data: Business Segments
59. ↑ Zoltek Annual Report 2007: Management’s Discussion & Analysis P.8