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Cytec Industries (NYSE:CYT)

Q4 2011 Earnings Call

February 01, 2012 11:00 am ET

Executives

Jodi Allen -

Shane D. Fleming - Chairman, Chief Executive Officer and President

David Drillock - Chief Financial Officer, Chief Accounting Officer and Vice President

Analysts

P.J. Juvekar - Citigroup Inc, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Carly Mattson - Goldman Sachs Group Inc., Research Division

Unknown Analyst

Operator

Good day, and welcome to the Cytec Industries Fourth Quarter 2011 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Ms. Jodi Allen. Please go ahead.

Jodi Allen

Thank you, Chelsea, and good morning, everyone. We appreciate your participation in our conference call. For our call today, Shane Fleming, Chairman, President and Chief Executive Officer, will provide an overview of operations; and Dave Drillock, Vice President and Chief Financial Officer, will provide additional commentary on our financial statements. Shane will then provide an update on our Coating Resins strategic review and share some commentary on 2012 outlook.

This call is being webcast in listen-only mode and it will be archived in audio format on our website for 3 weeks. Throughout the call, we will be referencing the supporting materials, which can be downloaded from our Investor Relations website under Calendar of Events, or you may follow the slides accompanying today's webcast, which are also available through our website.

During the course of this presentation and in responses to your questions, you will hear certain forward-looking statements. Our actual results may differ materially. Please read our commentary on forward-looking statements in Slide #2 of our supporting materials or at the end of our news release or the statements in our quarterly and annual SEC filings.

In addition, our discussion includes certain non-GAAP financial measurements as defined under SEC rules. We have provided a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP measure at the end of our press release. A copy of our press release is available on our Investor Relations website.

Now, let me turn over the call to Shane.

Shane D. Fleming

Thank you, Jodi, and good morning, everyone. I appreciate you taking the time to join our fourth quarter earnings call. I'm very pleased with our finish to 2011, and the momentum we built going into 2012. I'll begin on Slide 3.

Overall sales in the quarter was $731 million, a 4% increase over the prior-year quarter. The year-on-year sales growth was driven by 3% selling price increases across all of our business segments. I continue to be pleased with our pricing execution particularly given the softening demand environment.

In the quarter, we delivered $48 million in price versus $33 million in raw material increases. And year-to-date, the company achieved approximately $217 million in price, more than offsetting cost increases. Volumes versus the prior-year quarter were down by 2%, attributable primarily to volume declines in Coating Resins and to a lesser degree, in Additives Technologies. This was largely offset by strong volume growth in the Engineered Materials and In Process Separation segments, which I will describe in more detail in the following slides.

Net earnings from operations in the fourth quarter this year were $40.3 million, or $0.86 per diluted share, excluding the special items that Dave will explain. This represents a 25% improvement over the prior-year quarter's EPS and a clear indication of our progress to leverage sales growth and a stronger earnings for the company.

Moving on to the business segment details. Slide 4 highlights results for In Process Separation segment, which delivered sales of $90 million on the fourth quarter, a 10% increase versus the fourth quarter 2010. Selling volumes increased by 3% as a result of continued strong production rates in our primary copper and aluminum-based metal markets. Additionally, the Commercial and Technology teams continue to do a great job commercializing new technologies which have led to both volume growth and improved product mix.

We have also been successful in our penetration of new geographies and in the quarter, secured new business in Latin America and Russia. Selling prices in the quarter were increased by 7% and more than covered cost escalation.

The segment delivered $20.4 million of operating earnings in the quarter, a remarkable 53% increase versus operating earnings of $13.3 million in the prior-year quarter and a record earnings quarter for this segment.

Slide 5 shows a summary of results in Engineered Materials segment, with sales up $239 million, a 16% increase versus the prior-year quarter. Selling volumes were up 11%, driven primarily by increased sales to the large commercial transport sector. New programs driving the growth include the Boeing 787, 747-8 and Airbus 380. The ramp-up in build rates for our legacy aerospace programs such as the Boeing 777, 737 and the Airbus 320 further supported the volume growth. In addition, civil and military rotorcraft programs are maintaining steady growth due to the general recovery in these markets.

Selling prices increased sales by 3% as we continue to make progress offsetting the higher cost of raw materials that began to impact this segment in 2011. Operating earnings of $41.6 million were up significantly over the fourth quarter 2010 as a result of the higher volumes and increased selling prices with some of the pricing being retroactive to previous quarters.

Moving to Additive Technologies. Slide 6 shows sales in the segment of $65 million, slightly higher than the prior-year period. Increased selling price was the primary driver of growth up 7% versus the fourth quarter of 2010.

Selling volumes are down by 6%, due partly to the softening demand environment that has impacted many of our global markets. The volume decline is also partly attributable to product availability issues resulting from a key raw material shortage in the quarter and certain manufacturing assets running at capacity. Both of which we had anticipated impacting fourth quarter performance.

The overall result in the Additives segment was operating earnings of $7.1 million versus $8.8 million in the prior-year period. I'm happy to report that we've made good progress with the planned capacity expansions and this should improve the supply-demand balance going forward.

Moving on to Slide 7. Coating Resins delivered sales of $337 million, down about 3% from the prior-year period. The decline was driven by an 11% reduction in volume due to weaker demand across our global industrial markets, with the most significant impact in Europe and Asia-Pacific regions. The global slowdown impacted all of our product lines in the Coating Resins segment. Visibility remains very limited through the year end as we operated on short lead times and erratic order patterns. On a positive note, Coating Resins achieved 8% higher selling prices in the fourth quarter despite the weak demand environment, delivering $27 million of selling price increases in the quarter, more than offsetting raw material costs.

I will share the status of our ongoing review of the Coating Resins segment in my commentary on 2012 outlook. Now let me turn the call over to Dave who will review the financial results for the quarter.

David Drillock

Thank you, Shane, and good morning, everyone. Let's go right to Slide 8 and review our operating results for the quarter. Just a reminder, that all amounts and percentages I'll be discussing will exclude any special items unless specifically mentioned otherwise.

So beginning with an analysis of our gross profit. Our gross profit dollars increased 11.5% to $179 million, while our gross margin percentage of 24.5% is about 1.5% above the prior-year period. Total selling price increases of approximately $48 million more than offset raw material cost increases of approximately $33 million. This set the impact of increasing our gross margin percentage by about 1%, with the rest due to higher production levels in the Engineered Material segment and a favorable sales mix in the In Process Separation.

Our order intake has grown above our initial expectations in Engineered Materials for 2012, and as a result we are in the process of adding an additional 100 or so manufacturing personnel to meet the higher demand levels.

Looking at raw materials for a moment, propylene, a key input for many of the raw materials we purchase, was relatively flat in the U.S. and higher in Europe and Asia when compared to the fourth quarter of 2010. Projections have propylene increasing sharply in this current quarter, so we're watching closely to take the appropriate pricing actions. As a reminder, as propylene moves, we generally see it 60 to 90 days later and across of many of our Coating Resins raw materials . As Shane said earlier, all of our segments' commercial teams have done a great job in covering the higher raw material costs in 2011 and we're confident that the vigilance of 2011 will carry over into 2012.

Going on to Corporate and Unallocated, expenses are flat with the prior year. So let's go to Slide 9 to talk about the Special Items for the quarter. We had a special item net pretax charge of $700,000 for restructuring activities, most are reflected in cost of sales. We had a net pretax benefit of $3.1 million reflected in cost of sales, mostly related to a reduction in the projected environmental liability in one of our European sites resulting from an agreement on an alternative remediation approach. Finally, as I discussed last quarter, we completed a sale-leaseback agreement for our research and development facility in Stamford, Connecticut and the accounting led to accelerated depreciation over the 7-year term of the lease. The accelerated depreciation for the quarter was $700,000 in research and development.

Operating expenses were slightly above the prior-year period by about $2 million and as a percent of sales, down about 0.5% to $16 million. Interest expense net is down $1 million mostly due to higher interest income.

Tax expense includes a benefit of a $700,000 related to changes in tax rate and several international jurisdictions. After excluding the adjustments including income tax expense, for rate changes, settlements, completed orders throughout the year, our normalized annual effective tax rate was 30.5%, essentially flat with the prior year. The 30.5% rate is lower than the 31.8% estimated rate at the end of the third quarter of 2011. The favorable impact of the lower rate related to the first 9 months of 2011 was about $0.06 per diluted share.

Moving on to Slide 10. Operating cash flows were $131 million for the fourth quarter of 2011, up from the $90 million of the prior-year period. At quarter end, our net working capital days were 66, slightly below the 67 net working capital days we ended at year end 2010 and well below the year end days in 2009 and '08. What this shows is the sustainability of our efforts that began a few years ago. Adding to this point in a recent study, Cytec was the only company out of 46 chemical companies in the study that showed a gradual improvement in net working capital days, greater than 5% for the 2008 to 2010 period and we held our ground in 2011. That's great work by the Cytec team.

Included in Other Liabilities are cash payments to our pension and retirement medical of $20 million in the quarter versus an expense accrual of 8. Sticking with pensions for a moment, we have done a great job in our pension funding and investments. Our full year 2011 payments to our pensions were $64 million, down from 2010's $83 million. Our cash contributions for 2012 are expected to be $40 million. Our net pension liability is $161 million, down from year end 2010's $182 million and much improved from 2009's $234 million. Our 3 largest plants in the U.S., Canada and U.K. have gone to liability-driven investment strategy and as a result, we have much less volatility and a greater match to our investment's liability duration and they are all well-funded.

Our postretirement medical liability at year-end was $191 million, down slightly from the prior year end of $196 million. Our contributions last year were $11 million and the range for our cash contributions are typically $10 million to $15 million and this is our expectation for 2012. So I would characterize both of these areas as much improved, stable and very manageable.

Our capital spending for the quarter increased to $39 million, higher than our average for the prior 3 quarters of 2011 as we are ramping up spending on expansion capital in our Engineered Materials and In Process Separation segments. This brings our full year spending to $117 million essentially flat with 2010.

Speaking of the growth businesses, last quarter we mentioned that we approved spending on some expansion projects in the Engineered Materials and In Process Separation segments. Several of our large projects are also being planned for 2012, including a restart of our Carbon Fiber line and additional capacity for prepregging adhesives. These are all capacity expansion projects will be -- which will be in operation in 2013 and 2014 in order to meet the projected growth in these segments.

And they have excellent returns when you look at the performance of our growth businesses last quarter, one can see why we are excited about our future prospects. Our outlook for 2012's full year capital spending is a range of $200 million to $250 million, so we have a lot of work to do but it's all about execution for profitable revenue growth.

Also during the quarter, we purchased 1,450,000 shares of our common stock for $65 million. This brought our year-to-date share purchases to 4,280,000 at a cost of approximately $196 million. We have $198 million available for share repurchase on a $200 million authorization announced in December of last year.

While this is a significant return of cash to our shareholders, it also reduced our share count for diluted earnings per share. To help you with that, we began 2011 at about 50 million shares for diluted earnings per share and we begin 2012 at approximately 47 million.

Our outstanding debt at year end was $640 million, down from the prior year end balance of $648 million.

Lastly, our ending cash balance for 2011 was $416 million, up from the prior year end of $383 million. We generated about $105 million of -- in free cash flow and we generated $150 million net cash from the sale of Building Block Chemicals. Our priority for the use of cash remains maintenance of business, expansion capital, bolt-on acquisitions, debt repurchases and return of excess cash to shareholders through stock buyback and dividends.

How did we do in 2011? Well we increased our investment in commercial and research and development, and our success in driving new business and new technologies has led us to begin the larger investments and capacity expansions I discussed moments ago. We continue to fund our pensions ahead of amounts required and through the LDI investing strategy, significantly improved our funding levels and reduced risk. We also remain committed to enhancing shareholder value. In 2011, we increased our dividend to pre-financial crisis levels and we started our stock buyback program. The combined programs returned $223 million of cash to shareholders, our highest level ever. As we begin 2012, yes there is plenty of uncertainty and we remain cautious but we're excited about the favorable macro trends in our markets, the momentum we ended the year with and a very good balance sheet.

Thank you, and I'll now turn the call back over to Shane.

Shane D. Fleming

Thanks, Dave. I would now like to provide an update on our review of options to maximize value of the Coatings Resins business. I'm pleased to announce that we've entered a new phase in our review and we've retained JPMorgan Chase to assist in the analysis of alternatives available to Cytec, to effective separation of our entire Coating Resins business.

Included in the scope of considerations is our Pressure Sensitive Adhesives product line which is synergistic with the Coating Resins business from both a technology and a manufacturing standpoint.

We expect to complete our review and make a decision regarding the route we will take for our separation with this business in the second quarter of 2012. This will give us time to complete the work to establish both the financials and organizational structure of the separated business. We will, of course, communicate details on the separation process as additional actions are taken, and depending on the route taken, we would hope to announce the transaction in the fourth quarter.

Until then, we will stay focused on meeting the needs of our customers and continue to operate the Coating Resins business to maximize both short and long-term value creation.

The decision to look at the separation option of 100% of the Coating Resins business is consistent with our strategy of focusing on our profitable and growing Engineered Materials, In Process Separation and Additive Technologies segments. As Dave stated earlier, our cash deployment going forward will continue to include expansion capital and if available, bolt-on acquisitions to our growth platforms. And we expect to continue to return excess cash to shareholders through share repurchases and dividends.

Now I would like to explain our thinking related to the outlook for 2012. Because of our ongoing evaluation of options for the Coating Resins business, we will not be providing full year EPS guidance at this time. I remain excited about the growth opportunities in our Engineered Materials, In Process Separation and Additive Technologies segments. These segments will drive growth in Cytec throughout 2012 and I would like to provide a bit more color on our outlook for each of these businesses.

The In Process Separation business delivered strong performance in 2011, and we expect demand to remain steady in 2012. Production estimates in the base metal markets we serve are expected to remain at current levels, driven by infrastructure growth in China, India and other developing economies. We have made great progress advancing newer high-performing technologies globally, allowing us to win new business and improve our product mix by replacing traditional products.

We continue to upgrade our strong innovation pipeline, and we have customer trials ongoing and planned in our targeted industrial mineral markets. As an example, our recent introduction of the PHOSFLOW product line which was designed to inhibit scale formation during phosphoric gas with production. We commercialized our first PHOSFLOW customer in the fourth quarter of last year and we believe this product will provide significant value to phosphoric acid manufacturers globally.

Based on projected demand growth in our core IPS markets and our ongoing success introducing new technologies, we expect to drive revenue growth in the segment of approximately 10% in 2012 and we anticipate maintaining similar operating margins to a record 2011 levels.

In Engineered Materials, demand for high-performing composite technology continues to be strong in the aerospace market. We expect the large commercial transport center to drive steady growth as our customers ramp up to support build rate increases in key civil aircraft programs. We're also planning for steady demand in both new programs including the Boeing 787, as well as good demand in the business jet and Rotorcraft sectors. As a result, we are forecasting revenue growth of at least 10% above 2011.

As I mentioned earlier, we continue to implement our pricing plan which began in 2011 and expect to fully offset margin dilution in 2012. We're also making good progress utilizing our new production line in China which has enabled us to support the higher demand. We will continue our gradual improvement and profitability as a result of increased volumes and pricing. And we estimate a 1% to 2% operating margin improvement in 2012 versus full year 2011.

In Additive Technologies, we are facing some of the same macroeconomic headwinds that are impacting Coating Resins and we expect a slow start to 2012 with demand anticipated to pick up by the second quarter. Demand for a differentiated technologies in both the Polymer Additives and Specialty Additives product lines remain strong and we continue to have a solid order book for these more specialty products despite the recent market softening.

In Polymer Additives, our capacity expansion is near completion and this will improve our pre-risk product availability issues. We are projecting overall revenue growth in the Additive segment in the range of 5% to 8% in 2012 and we estimate similar operating margins with a possibility of slight expansion given our sales growth of the value-added products.

Corporate and Unallocated expenses are expected to be slightly higher than 2011. This does not include additional costs related to consultants and advisers to assist us in the evaluation of our strategic option for Coating Resins. We plan to report on those specific expense of each quarter. Other Expense and Interest Expense net should be similar to 2011 levels. The forecast for the underlying annual tax rate for ongoing operations is expected to be in the range of 31% to 33%.

Overall, we delivered solid performance in our growth businesses in the fourth quarter and demonstrated excellent pricing discipline across the portfolio. We are well-positioned to benefit from the higher build rates and increased composites content in the aerospace market and we've been successful capturing new business with our value-added technologies in the In Process Separation and Additive Technologies segments.

I remain highly confident in our ability to deliver our long-term growth strategy, including a positive outcome for the Coating Resins business which boasts great significant value for shareholders and positions Cytec with an industry-best portfolio of growth businesses.

Now let me turn the call over to our moderator Chelsea so we can respond to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from P.J. Juvekar with Citi.

P.J. Juvekar - Citigroup Inc, Research Division

You know on Carbon Fiber, once you start your South Carolina plant for Boeing, do you gain share with Boeing given that you'll be a local on-site supplier? And can you just update us on the timing of that plant?

Shane D. Fleming

Yes, I don't think it's going to have an impact on our share situation. I mean, the plant is close to the Boeing facilities but we actually don't make prepreg at that greenfield facility. So we'll still send that fiber out to our other facilities to make prepreg. The timing for the plant, once we announce the formal restart which we expect to do shortly, is about 18 months to 24 months post that point in time. We've got to complete the construction and then we've got to go through the qualification period. So you're probably talking about sometime towards the end of 2014 before the plant would be -- or sorry, sometime in 2014, maybe not the end, but sometime in 2014 before the plant would be supplying commercial material.

P.J. Juvekar - Citigroup Inc, Research Division

Okay. And then second question on chemicals and coatings. If I look at your chemicals segments, you got 3 things there. You got high margins in, In Process Separation, I guess decent margins in additives, but weak margins in acetyls. If a buyer wanted to buy all 3 as a package, would you be a willing seller of all 3 segments?

Shane D. Fleming

No. We have no interest right now in selling, divesting our IPS or Additive Technologies business. We've limited the discussion around potential separation to the coatings areas. So that's a business, that is the lower margin portion of the portfolio as you noted that doesn't really fit the criteria for our growth platforms, that's a business that we would look to potentially divesting. The IPS business and Additives business, what we see, is more core to Cytec.

Operator

Your next question comes from David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Shane, can you discuss how you're thinking evolved on Coating Resins since October. And discuss, is a sale a done deal, is it a certainty?

Shane D. Fleming

Let me just talk to your first question on the evolution of our thinking. I think when we announced back in October, we're considering all options. That's exactly what we're doing, very broadly including carving out portions of the business, looking at other ways of improving the business including restructurings. We went through that analysis and reached a point now which we've announced, as we've said, our intent is to separate 100% of the coatings business. And in fact, we would include the PSA adhesives business in that as well. So the decision has been taken to separate, what form that separation ultimately takes is not defined. Likely, divestiture is certainly one big portion of that, but it's not potentially the only route. And as we stated in the press release, we've engaged JPMorgan to help us through that analysis and hopefully, within -- well sometime within Q2 we'll be able to announce specifically what that path will be for separation.

David L. Begleiter - Deutsche Bank AG, Research Division

And Shane, if you do sell the business, can you discuss the allocated overhead that those businesses now incur and how much would be left that cost Cytec on a stranded basis?

Shane D. Fleming

Yes, the amount of stranded cost does depend a little bit on what form that transaction takes. Dave, maybe I'll just put it back to you to answer the question around whether it was a divestiture what that stranded cost number would look like?

David Drillock

Yes, David, if it's a -- if you look at a -- like a straight divestiture, we could have up to, say $60 million of stranded cost and our take is to aggressively go after that.

David L. Begleiter - Deutsche Bank AG, Research Division

How much of that do you think you can get out in a reasonable period of time?

Shane D. Fleming

Yes, I mean, I don't think we want to speculate on a number right now. I think Dave used the right word aggressively go after that but our expectations would be the majority of the stranded cost we would find a way to eliminate.

Operator

[Operator Instructions] Your next question comes from the line of Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies & Company, Inc., Research Division

I guess first question, can you give a little bit of color on what you're seeing in terms of short near-term trends for coatings? And also, some color around what you saw for raw materials swings end of last year. I mean, were you seeing any raw material relief from lower propylene prices and lower derivatives?

Shane D. Fleming

Yes. Let me address those. Short term, I guess I would say the best way I can described the coatings market today is just the lack of visibility. I think our customers are still concerned about what's going on in their end markets so they're not getting good forecasts and hence, we're not getting good forecasts. We clearly saw some softening and you can see that on our fourth quarter numbers. If you look kind of a -- the macro picture, most people expect that softening to continue into the first half of 2012 but then they see some recovery in the second half of the year. We've seen the U.S. hold up relatively well, we saw, we didn't see Asia turn down a little bit in Q4 but it seems to be recovering. I think the big question mark for us is Europe and I think that's really an issue that's broader than the just the coatings market. I think it's the overall sovereign debt issue and lack of confidence in the European market. To your second question on raw materials, as we noted in the press release, we actually saw from a P&L standpoint, we saw our raw materials increase fairly dramatically in Q4 for coatings. We also saw that with price, but just marginally. As you know, Lawrence, we're in FIFO accounting so even though we did see propylene dropped in the quarter and some of the derivatives dropped, we have not seen that financial benefit yet as some of that might roll into Q1. But then unfortunately, as I'm sure you're aware, we're now seeing signs that a lot of those key raw materials are going to turn the other way. I haven't seen the final propylene settlement for February, but it's likely to be up pretty dramatically versus last month. So it looks like about the time we started to see some relief, we've now seen raw materials turn against us.

Laurence Alexander - Jefferies & Company, Inc., Research Division

And secondly, can you give an update on your share buyback activities since the end of the year? And how much scope you have for continuing that?

David Drillock

Yes, well you know as I said in my prepared remarks we have $198 million available and it's a wide range, Laurence. I wouldn't want to speculate on what we're doing in the market right now with that.

Laurence Alexander - Jefferies & Company, Inc., Research Division

I mean, what have you done, so to speak?

Shane D. Fleming

In the first month, we go and -- we sort of go into a blackout period until we release earnings, Laurence. So I guess I could leave you with that.

Operator

Your next question comes from John McNulty with Credit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Just a few questions. First of all, with regard to the Coating Resins business and the potential to sell it, I believe it's on your books for about $1.1 billion. So in the event you sell it for less than that, can you walk us through how we should think about the tax implications and whether there is a tax hit, if there's an NOL, if it kind of all washes out? Like how should we think about the potential taxes?

Shane D. Fleming

Yes, I am going to turn this one over to Dave.

David Drillock

Yes. Thank you, Shane. It's actually -- rather than -- I don't want to speculate out of the fine course at this point but let me frame this better for you guys. Most of our basis is in when purchased it, it was put in the stock of a one of the subsidiaries of the acquired company. So any gains or losses are going to be less valuable capital losses, let's say, versus operating that we could take against other ordinary income tax stuff. So I could just leave you with that. So I mean, a lot of these depends on the transaction and the price and things like that, so I don't want to say one or the other. But I think once you frame it that, it's -- a lot of our basis is in the stock of our company. It's going to be -- it will also be a capital loss. And we don't generate a lot of capital gains. That should help you.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, now that definitely is helpful. With regard to Engineered Materials, when I look at what -- your performance this past year, you had volumes or total growth of 17%, it looks like aerospace builds are expected to be up more from the industry at least in 2012 and 2013. So I guess I'm wondering why you're guiding to only a 10%-plus kind of growth number and maybe what some of the headwinds would be if there are any in there?

Shane D. Fleming

Yes, let me address that, John. I think the way we phrase that was 10% minimum. So I think there is some upside to that number, one. Two, that setting does get a little bit of drag from the Engineered Adhesives business which is not growing greater than 10%. That business has been hit some of the same macroeconomic factors that impacted coatings. So that's probably pulled that down a little bit. But in terms of headwinds, really not much. I mean, we're fine, and also -- and there's a same growth coming from large commercial transport. We've reached the point now where the JSF growth should offset the downturn on the F-22 so we should see some modest growth in the military segment. And because of our mix in business jets, we're seeing -- we'll see some growth there in 2012 as well. So I would say the 10% is kind of a minimum guidance number and I wouldn't characterize really any headwinds in demand for that sector.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, great. And then on the Pressure Sensitive business, can you just remind us what roughly the earnings power that was on an EBITDA basis in 2011?

Shane D. Fleming

I can't give you an exact number. It was I think I would say low- to mid-single, I'm sorry low to mid-double digit in that range, a high single digit EBIT.

Operator

Your next question comes from Mike Sison with KeyBanc.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Congratulations on a great quarter and some more aggressive looks at Coating Resins. But in terms of your outlook for In Process Separation, looks like you're looking for pretty impressive growth there, 10%. Can you sort of give us a feel for how that sort flushes through the year. Did you win a lot of new business? Or is that just what the market is looking to grow?

Shane D. Fleming

Yes, I'd say kind of 3 different categories. Some of that being wins where we've had actually been able to take some market share, some fairly large tenders towards the end of last year and we came out on top on a couple of those. So we've seen some share increase. Also seen growth coming from new projects so there are a number of new mining projects starting up particularly in Africa and in Eastern Europe and we've been specified as the start-up supplier for those projects. And then the third category is the continued progress we're making in bringing new products to market. We've -- I referenced the success we've had with this new PHOSFLOW product for industrial minerals. We've got high aspirations for that technology growing elsewhere and we've got other extract and in flotation products that we're bringing to market where we see good opportunities for growth. So taken some share, new project startups and bringing new technology to markets, I think, the combination of the 3 is where the 10% comes from.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

And given the notion that you feel this business as well as Additive Technologies is a good business for Cytec longer-term, are these areas where you would want to get bigger via acquisitions, maybe post Coating Resins?

Shane D. Fleming

Yes. I think I'm not going to speculate certainly on the timing for doing this, because we're always looking for the right opportunities. But let me say it this way. The Engineered Materials segment and particularly, the industrial portion of that segment and IPS are areas where we're clearly looking for potential bolt-on opportunities. And we'll continue to do so.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Okay, great, and then last question on the Coating Resins, you have potential there. Can you sort of walk us through some of the options, is it strictly just to maybe find somebody to buy it or are there other areas that could come out of the analysis?

Shane D. Fleming

Well, I think there are potentially other areas and I don't want to speculate right now because we're still going through that analysis and as we noted, we're asking JPMorgan Chase to help us through that work. The divestiture scenario is a likely scenario but there are other things that we could consider and I just don't feel comfortable speculating on those at this point.

Operator

You have a follow-up question from the line of P.J. Juvekar with Citi.

P.J. Juvekar - Citigroup Inc, Research Division

Just quickly, you mentioned engineering materials for industrial area for engineering materials to be an area for bolt-on opportunities. How are you positioned in the automotive market if carbon fiber usage begins to sort of tick up in that market?

Shane D. Fleming

Well, like most folks that are suppliers today of the materials that we bring to aerospace, none of us have a real significant position there because the market's today not really developed. Where we do have a nice market share is in Formula 1 and in supercars. So to date, that's where most of the materials going, the carbon fiber-reinforced composite material is going into automotive. We believe that you're going to see programs moving forward that are going to expand that market significantly and our look at industrial materials is potentially broader than just automotive but automotive is clearly a target segment for us. And we feel we're well-positioned given our product technology or applications know-how and the relationships we have today with the supercar producers in Formula 1.

P.J. Juvekar - Citigroup Inc, Research Division

Okay, and then just quickly on the quarter. In the -- in Engineered Materials, you got a retroactive price increase from your customers. How does that work in your contract? And I assume you booked all that price in this quarter and it all fell to the bottom line?

Shane D. Fleming

Right, that's about $2.5 million to $3 million of retroactive pricing in the fourth quarter that had been accumulated over the course of really Q2, Q3 and Q4. So some of that is nonrecurring. Of course, where we have raised price, won't have the benefit of that higher price going forward. But it was just simply not effective, not settling agreements until the fourth quarter and then having the ability to reach back and reprice materials that have been sold previously.

Operator

You have a follow-up question from the line of John McNulty with Credit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Just 2 quick follow-ups. On the Coating Resins business, can you refresh my memory, I think there was still some incremental cost saves from 2011 that were going to roll in, in 2012. And how should we think about that kind of balancing out versus potentially some of the near-term headwinds that you're seeing there?

Shane D. Fleming

Yes, I'm a little bit low to give too much color around coatings given where we're at in the decision-making process in the separation. But your memory is correct on it. I think we did have some modest cost savings from different types of restructuring programs that had been put in place in the third and fourth quarter of last year. How they would offset, those cost savings against demand going forward, I just don't think I can speculate.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, fair enough. And then on -- just last thing on the Engineered Materials business, your guidance is for 100 to 200 basis points of margin improvement, which basically looks like a 15.5% to 16.5% kind of range for 2012. In the fourth quarter, even after you back out the kind of one-time benefit on the retroactive pricing, it looks like you're pretty much at the high-end of that range already. So I guess I'm wondering how we should be thinking about the incremental volumes coming in and why wouldn't we be seeing margins come in at least at the high-end of the range, if not higher?

Shane D. Fleming

I think the only potential reduction to that sort of high-end of the range would be based on the additional costs that we need to bring in to supply that demand going forward. So we've got -- I think we've got planned about 100 -- an additional 100 headcount addition to our manufacturing facilities and in our engineering group over the course of the year to continue to add capacity, debottleneck as you've seen assets, et cetera. So our cost base is going to go up. We still expect to see gross margin expansion as we get leverage from the volume but that's really the only piece of it that's pushing us back.

Operator

You have a follow-up question from the line of David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Shane, just also on EM, you did spend a lot in 2011 on development expenditures, on new programs. Can you quantify what that number was in 2011 and what will it be in 2012, either up, down or the same?

Shane D. Fleming

Yes, I can probably give you color on the last piece. I don't think it's going to be significantly different from the 2011 number. I think we're going to have to get through the exact spend offline, I don't have it in my fingertips. But we do expect to continue to make significant investments because many of these programs are continuing to advance, that's the good news. We're still in the game. We're still in a position where we have a high likelihood of winning. But the costs don't go away until you actually have secured that business development cost. So it's going to continue at a relatively higher level for 2012.

David L. Begleiter - Deutsche Bank AG, Research Division

And what was the impact on the operating margin, is it 100 or 200 basis points, do you think?

Shane D. Fleming

I think maybe the way to characterize it, David, and I'm not going to be able to do this for 2011, but just post say 2008, 2009, we have been running at about 150 to 200 basis points higher investment and overall development. That includes both specific project-related investments as well as just the higher level of R&D spending. And we've said that we expect that to continue for some time. And that's part of the reason that we've guided back from previous high operating profit levels in this segment because we do have that extra 150, 200 basis points of investment, just given all of the opportunities that are out there right now.

Operator

Your next question comes from the line of Carly Mattson, Goldman Sachs.

Carly Mattson - Goldman Sachs Group Inc., Research Division

On the acquisition opportunities, is there any potential that Cytec could look at larger acquisition opportunities, given the large cash balance, relatively large cash balance and the potential cash that could be coming in down the road? And can you frame that just from the perspective of how the company's thinking about its rating at this point?

Shane D. Fleming

Yes, let me just address the issue of acquisitions and then Dave, if you maybe want to get back to that second piece of the question. Our focus right now for growing our business is to really bolt-on to our existing platforms. And I just don't see any substantially large opportunities out there to bolt-on and we certainly don't want to look at diversifying and creating another leg. So I think it's unlikely that you would see us do any type of a major, major transaction. A significant bolt on? Absolutely, I think we've guided in the past that $500 million bolt-on is something that we would consider but I think it's pretty unlikely you would see us go much beyond that.

David Drillock

Yes, and as far as the rating agencies. I mean, our intent is to remain investment-grade rated and that's why we're taking steps to fund our pensions and debt reduction when it becomes available. So we're going to take all the right steps to maintain that.

Operator

You have a follow-up question from the line of Mike Sison with KeyBanc.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Quick question on Engineered Materials. Any updates on the A350. Is that -- have you made any progress there in terms of winning business?

Shane D. Fleming

Yes, Mike, I don't know that I've got what -- I certainly don't have anything that I can share publicly right now that I'm aware of. As soon as we've got any additional news, we'll get it out there. But I just don't think there's anything that we can share publicly at this point in time.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Got it. And in terms of your outlook for Engineered Materials in terms of top line growth. Is it -- is your outlook for the -- is it largely driven by the 787 and some of the other newer areas or just sort of a broad improvement from build rates across-the-board?

Shane D. Fleming

Yes, I don't want that to get too granular here. But I would say kind of generally speaking, the growth in large commercial transport which is probably the bulk of our 10% growth, say 3/4 of it is coming from that large commercial transport sector. It's relatively evenly split between the increased build rates on the legacy programs and the ramp ups of the new programs, the 787, 747-8 and even the 380 are carrying a fairly significant amount of growth as well.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Any upside potential from regional business?

Shane D. Fleming

Well, we have seen, as I said before, some growth through 2011 into 2012. The sector itself is not growing that strongly but we're fortunate to be doing business with customers that are seeing some growth. So we do project growth in that sector -- in that, sorry, segment versus last year. And could there be some upside I guess if we start to see the business jet side pickup particularly that's where we would be positively impacted because it's still pretty much near bottom. There's some recovery globally but it's still pretty modest. So if that sector starts to pick up, I think we would benefit from that.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Got it. And last question, might be a little bit early to sort of think about it, but if you -- you divested Building Blocks early this year, you're looking to do something with Coating Resins, I mean, what do you sort of see 3 to 5 years from now when you think about Cytec and I mean, what type of company are you -- do you think you're going to evolve into?

Shane D. Fleming

Certainly characterize us as a high-growth company. We're trying to focus on sectors where there are positive secular trends, where we've got market positions, technology positions that will help us capture share, drive growth, create new opportunities with new technology. And right now, I think our portfolio, absent Coatings, is an enviable portfolio, with CMN and IPS we have great market positions in very attractive markets. So I would definitely see us getting substantially larger in those sectors, both through organic growth as well as through bolt-ons. I think that would be more the focus, accelerating growth by increasing our investment and expanding our position in those 2 growth platforms.

Operator

Your last question comes from James Synergy [ph] with Citi.

Unknown Analyst

Just a follow-up to Carly's question. In terms of the use of proceeds of a possible divestiture, would there be any debt reduction? It doesn't seem like you have much debt to reduce but just checking.

David Drillock

The nearest debt we have is for 2013 so depending on the timing, it might just flow right into that, that's about $130 million, $140 million.

Unknown Analyst

And so you have -- you possibly could reduce the level of debt from where you are right now? You're not comfortable with the total debt balance you have?

David Drillock

No, we're comfortable with the total debt balance. But we could use some -- if there are any possible proceeds, we could use it towards that, that would be one of our options. But saying anything more definitive right now would just be guessing.

Operator

There are no further questions.

Jodi Allen

Thank you, everyone for your participation in today's conference call. If you have any follow-up questions, please contact me directly at (973) 357-3283. Thanks, and have a good day.

Operator

This concludes today's conference call. You may now disconnect.

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