S&P Affirms Ratings on Cytec Industries (CYT) Following Q2 Results

Standard & Poor's Ratings Services affirmed all ratings, including its 'BBB-' corporate credit rating, on Woodland Park, N.J.-based Cytec Industries Inc. (NYSE: CYT). The outlook is stable.

"Healthy demand from commercial aerospace customers is driving revenue gains, improving earnings, and better credit measures," said Standard & Poor's credit analyst Chris Mooney.

Funds from operations (FFO) to debt rose to 31% for the 12 months ended June 30, 2014, compared with 25% for the same period a year earlier. At the current rating, we expect this ratio to remain between 30% and 40%.

Cytec continues to generate high profit margins with relatively low volatility. The company's EBITDA margins, at about 18.5% for the 12 months ended June 30, 2014, are slightly above the aerospace and defense industry average of 10% to 18% and at the high-end of the specialty chemicals average of 12% to 20%. Although commercial aerospace demand is cyclical (accounting for about 55% of Cytec's 2013 earnings) and currently is in an upturn, we believe the company benefits from end-market diversity, which can serve to offset some volatility in profitability over time. Cytec also has the No. 1 international market position in specialty mining chemicals for copper and alumina processing. These positive rating factors are partly offset by Cytec's smaller overall market share and positions on riskier aircraft than its two primary aerospace competitors--Toray Industries Inc. and Hexcel Corp.--and its relatively narrow scope of operations, with niche capabilities.

We are revising our liquidity assessment to "strong" from "adequate" primarily because of an expectation for positive free cash flow over the next two years, as the company moves past peak capital spending. In recent years, Cytec has been expanding both carbon fiber and phosphane capacity to meet higher demand. However, the company completed the construction phase of its carbon fiber expansion project in the first quarter of 2014 and expects to complete the construction for the phosphane expansion plant by the end of 2014. As a result, capital spending should be significantly lower than it was in 2013 ($300 million). Furthermore, the company contributed about $70 million to pension plans in 2013, which we do not expect to recur, as most of its pension plans are now fully funded.

The stable outlook reflects our expectation that Cytec's credit measures -- some of which are at the weak end of our expected range for the rating -- will improve over the next two years because of earnings growth driven by healthy commercial aerospace market conditions and better cash generation stemming from lower capital expenditures. At the current rating, we expect FFO to debt in the 30% to 40% range and positive free cash flow over time.

We could lower rating if Cytec's earnings do not improve as we expect because of unanticipated operating challenges, such that FFO to debt falls below 30% without any prospect for improvement in the near term.

We could raise rating if strong growth in earnings combined with debt reduction result in FFO to debt of more than 40% and the company generates moderate free cash flow for a sustained period.

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