Cytec Industries Remakes Itself With Buys, Divestment

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Cytec Industries' ( CYT ) makeover has moved into a higher gear this year, thanks to a series of deals to expand into certain product areas and exit other ones.

Cytec is a global supplier of specialty chemicals and materials. It makes products for a number of end markets, including aerospace, industrial coatings, chemicals and plastics.

The company used to get about half of its sales from its Coating Resins business. Other business segments include Engineered Materials, which makes carbon fiber products; In-Process Separation, which specializes in mining chemicals and alumina processing; and Additive Technologies.


Cytec's revenue stream is headed for a big change, however. In October, the company announced plans to sell its coatings unit to private-equity firm Advent International for $1.03 billion. The move will let Cytec focus on more profitable businesses that make carbon-fiber composites and chemicals.

Growth Platforms

"This transaction is another significant step in our portfolio transformation," Cytec Chief Executive Shane Fleming said in a statement announcing the deal. "The sale enables us to focus on our industry-leading portfolio of growth platforms, comprised of advanced materials and separation technologies, to drive long-term growth and deliver greater returns to our shareholders."

The decision to sell the coatings business is part of an overall strategy to "divest low-margin businesses and focus its growth on its higher-margin franchises," noted Michael Sison, an analyst at Keybanc Capital Markets.

The coatings transaction is expected to close in the first quarter of 2013. It follows Cytec's earlier sale of its Pressure Sensitive Adhesives product line for $105 million in cash.

Cytec hasn't just been selling off businesses, however. It also has been buying them.

On April 12, Cytec said it would acquire Umeco, a British provider of advanced composite materials, for $439 million.

That deal, which closed in July, bolstered Cytec's positions in the aerospace, industrial and automotive sector. Umeco's customers includeBoeing ( BA ), Airbus and BAE Systems. The unit also makes composite materials for Formula One race cars.

Despite softness during the third quarter in certain European markets that Umeco serves, company watchers sound confident the Umeco business will produce robust returns in coming quarters.

"Management noted on the Q3 call that its expects Engineered Materials to deliver strong revenue and earnings growth in 2013, and that it remains very positive on Umeco's ability to capitalize on future growth opportunities in industrial materials," David Begleiter, an analyst at Deutsche Bank, noted in a third-quarter earnings report.

The Umeco buyout followed Cytec's $37 million acquisition, also in April, of the manufacturing assets of India's Star Orechem International Private Ltd. The acquired operations are used to manufacture Cytec's Acorga solvent extractant products.

All of this wheeling and dealing is designed to improve Cytec's financial returns over the long term even as it faces lower sales and earnings this year.

As recently as 2008, the company logged more than $3.6 billion in annual revenue. Analysts expect that figure to be closer to $1.7 billion this year.

Meanwhile, analysts surveyed by Thomson Reuters expect Cytec to post 2012 full-year earnings of $2.95 a share, down from $3.66 in 2011.

Despite the lower numbers, Cytec's stock price recently set a 5-1/2-year high of 70.86, thanks in part to a share repurchase program.

Following its Q3 earnings report, Cytec confirmed that it would begin repurchasing shares this quarter, noted Citigroup analyst P.J. Juvekar. However, he reckons the bulk of share repurchases will occur in the second quarter of 2013.

"The company also reiterated interest in an accelerated share buyback following the completion of the Coatings sale, which is expected to close in the first quarter of 2013," Juvekar added.

Earnings Growth

Cytec's recent stock gains also stem from "positive insight into 2013 earnings," Deutsche Bank's Begleiter noted.

During the third quarter, Cytec reported earnings from adjusted continuing operations of 91 cents a share, up 75% from the prior year and well above Wall Street estimates for 69 cents.

Sales from continuing operations were $455 million, up 25% from a year earlier but below views for $478 million. Excluding the impact of the Umeco acquisition, sales climbed 7%.

Engineered Materials sales rose 12% to $224 million during the quarter, while the unit's selling volumes gained 9%. Growth here was driven by higher build rates in the commercial transport sector.

"Demand remained strong across the entire aerospace sector, including large commercial aircraft programs, business and regional jet markets," Begleiter said.

Cytec's In-Process Separation business unit also delivered solid results during the quarter. The unit had near-record operating margins of 25% on volume growth of 4%.

The gains came "despite recent softness in alumina as about 5% of global production has been taken offline temporarily as a consequence of high inventories and low prices," Citigroup's Juvekar noted.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BA , CYT

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