e10vq
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
[X] QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
March 31, 2006
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 1-5667
Cabot Corporation
(Exact name of registrant as specified in its charter)
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Delaware
(State of Incorporation)
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04-2271897
(I.R.S. Employer Identification No.) |
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Two Seaport Lane
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02210-2019 |
Boston, Massachusetts
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(Zip Code) |
(Address of principal executive offices) |
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Registrants telephone number, including area code: (617) 345-0100
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, and (2)
has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
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Large accelerated filer [X]
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Accelerated filer [ ]
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Non-accelerated filer
[ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuers classes of Common Stock, as of
the latest practicable date.
As
of May 3, 2006 the Company had 63,421,612 shares of Common
Stock, par value $1 per share, outstanding.
CABOT CORPORATION
INDEX
2
Part I. Financial Information
Item 1. Financial Statements
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended March 31, 2006 and 2005
(In millions, except per share amounts)
UNAUDITED
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Three Months Ended |
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Six Months Ended |
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March 31, | |
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March 31, |
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2006 |
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2005 |
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2006 |
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2005 |
|
Net sales and other operating revenues |
|
$ |
627 |
|
|
$ |
527 |
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|
$ |
1,214 |
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$ |
1,022 |
|
Cost of sales |
|
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542 |
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|
397 |
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|
1,023 |
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|
775 |
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Gross profit |
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85 |
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130 |
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191 |
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247 |
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Selling and administrative expenses |
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59 |
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56 |
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117 |
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110 |
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Research and technical expense |
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14 |
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15 |
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27 |
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30 |
|
Goodwill asset impairment |
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90 |
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90 |
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Income (loss) from operations |
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12 |
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(31 |
) |
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47 |
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17 |
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Interest and dividend income |
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1 |
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1 |
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3 |
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3 |
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Interest expense |
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(7 |
) |
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(8 |
) |
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(13 |
) |
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(16 |
) |
Other income |
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6 |
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3 |
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2 |
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5 |
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Income (loss) from continuing operations before income taxes |
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12 |
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(35 |
) |
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39 |
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9 |
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Provision for income taxes |
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(1 |
) |
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(13 |
) |
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(5 |
) |
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(22 |
) |
Equity in net income of affiliated companies, net of tax |
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4 |
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2 |
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7 |
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4 |
|
Minority interest in net income, net of tax |
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(3 |
) |
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(4 |
) |
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(7 |
) |
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(6 |
) |
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Income (loss) from continuing operations |
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12 |
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|
(50 |
) |
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34 |
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(15 |
) |
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Cumulative effect of an accounting change, net of tax |
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2 |
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Net income (loss) |
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12 |
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(50 |
) |
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36 |
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(15 |
) |
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Dividends on preferred stock, net of tax benefit |
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(1 |
) |
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(1 |
) |
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Net income (loss) available to common shares |
|
$ |
12 |
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$ |
(50 |
) |
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$ |
35 |
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$ |
(16 |
) |
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Weighted-average common shares outstanding: |
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Basic |
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60 |
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60 |
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60 |
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|
60 |
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Diluted |
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69 |
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60 |
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69 |
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60 |
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Income (loss) per common share: |
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Basic: |
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Continuing operations |
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$ |
0.19 |
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|
$ |
(0.84 |
) |
|
$ |
0.54 |
|
|
$ |
(0.26 |
) |
Cumulative effect of an accounting change |
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|
0.04 |
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Net income (loss) per share basic |
|
$ |
0.19 |
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|
$ |
(0.84 |
) |
|
|
0.58 |
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$ |
(0.26 |
) |
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Diluted: |
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Continuing operations |
|
$ |
0.17 |
|
|
$ |
(0.84 |
) |
|
$ |
0.48 |
|
|
$ |
(0.26 |
) |
Cumulative effect of an accounting change |
|
|
|
|
|
|
|
|
|
|
0.04 |
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|
|
|
|
|
|
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|
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|
Net income (loss) per share diluted |
|
$ |
0.17 |
|
|
$ |
(0.84 |
) |
|
$ |
0.52 |
|
|
$ |
(0.26 |
) |
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Dividends per common share |
|
$ |
0.16 |
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|
$ |
0.16 |
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|
$ |
0.32 |
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|
$ |
0.32 |
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|
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|
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|
The accompanying notes are an integral part of these financial statements.
3
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2006 and September 30, 2005
(In millions)
ASSETS
UNAUDITED
|
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March 31, |
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|
September 30, |
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2006 |
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2005 |
|
|
Current assets: |
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|
Cash and cash equivalents |
|
$ |
103 |
|
|
$ |
181 |
|
Short-term marketable securities investments |
|
|
|
|
|
|
30 |
|
Accounts and notes receivable, net of reserve for doubtful
accounts of $6 and $4 |
|
|
511 |
|
|
|
430 |
|
Inventories: |
|
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|
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|
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Raw materials |
|
|
167 |
|
|
|
169 |
|
Work in process |
|
|
117 |
|
|
|
134 |
|
Finished goods |
|
|
171 |
|
|
|
151 |
|
Other |
|
|
40 |
|
|
|
39 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
495 |
|
|
|
493 |
|
Prepaid expenses and other current assets |
|
|
91 |
|
|
|
66 |
|
Assets held for sale |
|
|
|
|
|
|
5 |
|
Deferred income taxes |
|
|
42 |
|
|
|
41 |
|
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|
|
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|
Total current assets |
|
|
1,242 |
|
|
|
1,246 |
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Investments: |
|
|
|
|
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|
Equity affiliates |
|
|
55 |
|
|
|
63 |
|
Long-term marketable securities and cost investments |
|
|
4 |
|
|
|
6 |
|
|
|
|
|
|
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|
Total investments |
|
|
59 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Property, plant and equipment |
|
|
2,393 |
|
|
|
2,264 |
|
Accumulated depreciation and amortization |
|
|
(1,468 |
) |
|
|
(1,430 |
) |
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
925 |
|
|
|
834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
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Goodwill |
|
|
36 |
|
|
|
25 |
|
Intangible assets, net of accumulated amortization of $9 and $9 |
|
|
5 |
|
|
|
6 |
|
Assets held for rent |
|
|
38 |
|
|
|
37 |
|
Deferred income taxes |
|
|
116 |
|
|
|
108 |
|
Other assets |
|
|
35 |
|
|
|
49 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
230 |
|
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,456 |
|
|
$ |
2,374 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
4
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2006 and September 30, 2005
(In millions, except for share and per share amounts)
LIABILITIES & STOCKHOLDERS EQUITY
UNAUDITED
|
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March 31, |
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|
September 30, |
|
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2006 |
|
|
2005 |
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable to banks |
|
$ |
56 |
|
|
$ |
34 |
|
Accounts payable and accrued liabilities |
|
|
340 |
|
|
|
321 |
|
Income taxes payable |
|
|
59 |
|
|
|
30 |
|
Deferred income taxes |
|
|
1 |
|
|
|
1 |
|
Current portion of long-term debt |
|
|
54 |
|
|
|
47 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
510 |
|
|
|
433 |
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|
|
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|
|
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|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
451 |
|
|
|
463 |
|
Deferred income taxes |
|
|
14 |
|
|
|
15 |
|
Other liabilities |
|
|
281 |
|
|
|
307 |
|
|
|
|
|
|
|
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|
Commitments and contingencies (Note I) |
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|
|
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Minority interest |
|
|
62 |
|
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|
57 |
|
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|
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Stockholders equity: |
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Preferred stock: |
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Authorized: 2,000,000 shares of $1 par value |
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Series B ESOP Convertible Preferred Stock 7.75%
Cumulative issued: 75,336
shares; outstanding: 57,844 and 61,068 shares
(aggregate per share
Redemption value of $41 and $44) |
|
|
58 |
|
|
|
61 |
|
Less cost of shares of preferred treasury stock |
|
|
(38 |
) |
|
|
(38 |
) |
Common stock: |
|
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|
|
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|
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|
Authorized: 200,000,000 shares of $1 par value |
|
|
|
|
|
|
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|
Issued and outstanding: 63,531,605 and 62,971,872 shares |
|
|
63 |
|
|
|
63 |
|
Less cost of shares of common treasury stock |
|
|
(5 |
) |
|
|
(5 |
) |
Additional paid-in capital |
|
|
20 |
|
|
|
32 |
|
Retained earnings |
|
|
1,130 |
|
|
|
1,127 |
|
Unearned compensation |
|
|
|
|
|
|
(41 |
) |
Deferred employee benefits |
|
|
(40 |
) |
|
|
(42 |
) |
Notes receivable for restricted stock |
|
|
(18 |
) |
|
|
(19 |
) |
Accumulated other comprehensive loss |
|
|
(32 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,138 |
|
|
|
1,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,456 |
|
|
$ |
2,374 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
5
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 2006 and 2005
(In millions)
UNAUDITED
|
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|
|
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|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
36 |
|
|
$ |
(15 |
) |
Adjustments to reconcile net income (loss) to cash provided by (used
in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
61 |
|
|
|
70 |
|
Deferred tax provision |
|
|
(5 |
) |
|
|
1 |
|
Cumulative effect of an accounting change |
|
|
(2 |
) |
|
|
|
|
Equity in income of affiliated companies |
|
|
(4 |
) |
|
|
(4 |
) |
Goodwill asset impairment |
|
|
|
|
|
|
90 |
|
Non-cash compensation |
|
|
15 |
|
|
|
15 |
|
Other non-cash charges, net |
|
|
12 |
|
|
|
10 |
|
Changes in assets and liabilities (net of effect of acquisition): |
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
|
(42 |
) |
|
|
(24 |
) |
Inventory |
|
|
1 |
|
|
|
(53 |
) |
Prepayments and other current assets |
|
|
4 |
|
|
|
5 |
|
Accounts payable and accrued liabilities |
|
|
(21 |
) |
|
|
(7 |
) |
Income taxes payable |
|
|
(11 |
) |
|
|
(3 |
) |
Other liabilities |
|
|
(17 |
) |
|
|
(13 |
) |
Other, net |
|
|
(3 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
24 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(101 |
) |
|
|
(69 |
) |
Cash paid for acquisition of affiliate, net of cash acquired |
|
|
(19 |
) |
|
|
|
|
Proceeds from sales of property, plant and equipment |
|
|
6 |
|
|
|
1 |
|
Increase in assets held for rent |
|
|
(1 |
) |
|
|
(3 |
) |
Purchase of marketable securities investments |
|
|
(20 |
) |
|
|
(55 |
) |
Proceeds from sale and maturity of marketable securities investments |
|
|
57 |
|
|
|
90 |
|
|
|
|
|
|
|
|
Cash used in investing activities |
|
|
(78 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(31 |
) |
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
26 |
|
|
|
|
|
Proceeds from issuance of notes payable |
|
|
23 |
|
|
|
|
|
Repayments of debt related to Cabot Japan KK |
|
|
(18 |
) |
|
|
|
|
Purchases of common stock |
|
|
|
|
|
|
(11 |
) |
Proceeds from sales of common stock |
|
|
6 |
|
|
|
1 |
|
Cash dividends paid to stockholders |
|
|
(21 |
) |
|
|
(21 |
) |
Cash dividends paid to minority interest stockholders |
|
|
(5 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
Cash used in financing activities |
|
|
(20 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(4 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(78 |
) |
|
|
(3 |
) |
Cash and cash equivalents at beginning of period |
|
|
181 |
|
|
|
159 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
103 |
|
|
$ |
156 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
6
CABOT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
Six Months Ended March 31, 2006
(In millions, except shares in thousands)
UNAUDITED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
from |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
Preferred Stock, net of |
|
|
Common Stock, net of |
|
|
Paid-in |
|
|
Retained |
|
|
Unearned |
|
|
Employee |
|
|
Restricted |
|
|
Comprehensive |
|
|
Stockholders |
|
|
Comprehensive |
|
|
|
Treasury Stock |
|
|
Treasury Stock |
|
|
Capital |
|
|
Earnings |
|
|
Compensation |
|
|
Benefits |
|
|
Stock |
|
|
Loss |
|
|
Equity |
|
|
Income |
|
(Dollars in millions) |
2006 |
|
Shares |
|
|
Cost |
|
|
Shares |
|
|
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 |
|
|
44 |
|
|
$ |
23 |
|
|
|
62,820 |
|
|
$ |
58 |
|
|
$ |
32 |
|
|
$ |
1,127 |
|
|
$ |
(41 |
) |
|
$ |
(42 |
) |
|
$ |
(19 |
) |
|
$ |
(39 |
) |
|
$ |
1,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Unrealized gain on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43 |
|
|
$ |
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
Issuance of stock under employee
compensation plans, net of actual
forfeitures |
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
Preferred stock conversion |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
472 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase and retirement, common and
treasury stock |
|
|
|
|
|
|
|
|
|
|
(161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends paid to Employee
Stock Ownership Plan, net of tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
Principal payment by Employee Stock
Ownership Plan under guaranteed loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Reversal of unearned compensation due to
FAS 123 (R) implementation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29 |
) |
|
|
(12 |
) |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
Notes receivable for restricted stock
repayments and forfeitures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Balance at March 31, 2006 |
|
|
41 |
|
|
$ |
20 |
|
|
|
63,383 |
|
|
$ |
58 |
|
|
$ |
20 |
|
|
$ |
1,130 |
|
|
$ |
|
|
|
$ |
(40 |
) |
|
$ |
(18 |
) |
|
$ |
(32 |
) |
|
$ |
1,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
7
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
Unaudited
A. |
|
Basis of Presentation |
|
|
|
The consolidated financial statements include the accounts of Cabot Corporation and its
majority-owned and controlled U.S. and non-U.S. subsidiaries (Cabot or the Company).
Intercompany transactions have been eliminated. |
|
|
|
The unaudited consolidated financial statements have been prepared in accordance with the
requirements of Form 10-Q and consequently do not include all disclosures required by Form
10-K. Additional information may be obtained by referring to Cabots Annual Report on Form
10-K for the fiscal year ended September 30, 2005 (2005 10-K). |
|
|
|
The financial information submitted herewith is unaudited and reflects all adjustments which
are, in the opinion of management, necessary to provide a fair statement of the results for
the interim periods ended March 31, 2006 and 2005. All such adjustments are of a normal
recurring nature. The results for interim periods are not necessarily indicative of the
results to be expected for the fiscal year. |
|
|
|
Certain amounts in fiscal 2005 have been reclassified to conform to the fiscal 2006
presentation. |
|
B. |
|
Significant Accounting Policies |
|
|
|
Revenue Recognition |
|
|
|
Cabot derives most of its revenues from the sale of rubber blacks, performance products,
inkjet colorants, fumed metal oxides and tantalum and related products and from the rental
and sale of cesium formate. Revenue from product sales is typically recognized when the
product is shipped and title and risk of loss have passed to the customer. Revenue from the
rental of cesium formate is recognized throughout the rental period based on the contracted
rental amount. Customers are also billed and revenue is recognized, typically at the end of
the job, for cesium formate product that is not returned. Other operating revenues, which
represent less than ten percent of total revenues, include tolling, servicing and royalties
for licensed technology. |
|
|
|
Cabots revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition, which establishes criteria that must be satisfied before
revenue is realized or realizable and earned. Cabot recognizes revenue when persuasive
evidence of a sales arrangement exists, delivery has occurred, the sales price is fixed or
determinable and collectibility is probable. Cabot generally is able to ensure that products
meet customer specifications prior to shipment. If we are unable to determine that the
product has met the specified objective criteria prior to shipment, the revenue is deferred
until product acceptance has occurred. |
|
|
|
Certain customer contracts contain price protection clauses that provide for the potential
reduction in past or future sales prices. Cabot analyzes these contract provisions to
determine if an obligation related to these clauses exists and records revenue net of any
estimated price protection commitments. |
|
|
|
Under certain multi-year supply contracts with declining prices and minimum volumes, Cabot
recognizes revenue based on the estimated average selling price over the contract lives. At
March 31, 2006 and September 30, 2005, Cabot had less than a million and $1 million,
respectively, of revenue deferred related to certain supply agreements representing the
difference between the billed price and the estimated average selling price. The revenue
deferred will be recognized as customers purchase the contracted minimum volumes through
2006. |
|
|
|
The Company offers certain of its customers cash discounts and volume rebates as sales
incentives. The discounts and volume rebates are recorded as a reduction of sales at the time
revenue is recognized based on historical experience. Rebates are estimated and recorded
based primarily on historical experience and contractual obligations.
Cabots estimates for discounts and volume rebates are made quarterly and the assumptions underlying the estimates are updated for
changes in facts and circumstances as appropriate. |
|
|
|
Accounts and notes receivable as of March 31, 2006 and September 30, 2005 primarily include
trade accounts receivable, which arise in the normal course of business, income tax
receivables of $25 million and $23 million, respectively,
and the current portion of notes receivable of $7 million and $6 million, respectively. |
8
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
|
|
Trade receivables are recorded at the invoiced amount and do not bear interest. Cabot sells
a portion of its notes receivables from customers related to one of its subsidiaries at a
discount. These transactions are accounted for as a sale under the provisions of FAS No.
140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. The difference between the proceeds from the sale and the carrying value of
the receivables is recognized as a loss on the sale of receivables and is included in other
expense in the accompanying statements of operations. The Company recorded less than a
million dollars of losses related to sales of receivables during the periods ended March 31, 2006 and
2005. |
|
|
|
Cabot maintains allowances for doubtful accounts based on an assessment of the collectibility
of specific customer accounts, the aging of accounts receivable and other economic
information on both a historical and prospective basis. Customer account balances are charged
against the allowance for doubtful accounts when Cabot determines it is probable the
receivable will not be recovered. The activity in the allowance was not material during the
second fiscal quarters of 2006 or 2005. |
|
|
|
Shipping and handling charges related to sales transactions are recorded as sales revenue
when billed to customers or included in the sales price in accordance with Emerging Issues
Task Force (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs. Shipping
and handling costs are included in cost of sales. |
|
|
|
Assets Held for Sale |
|
|
|
Cabot classifies its long-lived assets as held for sale when management commits to a plan to
sell the assets, the assets are ready for immediate sale in their present condition, an
active program to locate buyers has been initiated, the sale of the assets is probable and
expected to be completed within one year, the assets are marketed at reasonable prices in
relation to their fair value and it is unlikely that significant changes will be made to the
plan to sell the assets. The Company measures long-lived assets to be disposed of by sale at
the lower of the carrying amount and fair value, less cost to sell. |
|
|
|
During the second quarter of fiscal 2006, Cabot sold the property, plant and equipment assets
related to Supermetals direct finished tantalum sputtering target business to Tosoh SMD, a
division of Tosoh Corporation. These assets were recorded at their fair value and classified
as assets held for sale at December 31, 2005. There was no gain or loss recognized in
connection with the sale. |
|
|
|
Asset Retirement Obligations |
|
|
|
Cabot accounts for asset retirement obligations in accordance with Statement of Financial
Accounting Standards (FAS) No. 143, Accounting for Asset Retirement Obligations. Cabot
has determined that certain legal obligations exist primarily related to site restoration
activities required upon the closing of certain facilities. However, until a closure date is
determined for a facility, these facilities and the associated legal obligations have been
determined to have an indeterminate life. Accordingly, the fair value of the liability cannot
be reasonably estimated and an asset retirement obligation has not been recognized. Cabot had
$3 million and $5 million of asset retirement obligations at March 31, 2006 and September 30,
2005, respectively, related to the closure of the Companys carbon black manufacturing
facilities in Zierbena, Spain and Altona, Australia (as further discussed in the
restructuring footnote at Note G). Cabot also had a $3 million reserve at both March 31, 2006
and September 30, 2005 related to the decommissioning of storage bins used in the Supermetals
Business that cannot be closed without governmental approval. There was no activity in this
reserve balance during the three or six months ending March 31, 2006. Cabot expects the
liability related to the Supermetals Business to be paid over the next twenty-four to
thirty-six months. |
|
C. |
|
Stock-Based Compensation |
|
|
|
Cabot established the 2006 Long-Term Incentive Plan (the 2006 Plan) in order to provide
equity-based compensation to the Companys key employees, advisors or consultants. The 2006
Plan was approved by Cabots stockholders on March 9, 2006 and replaces the 1996 Equity
Incentive Plan and the 1999 Equity Incentive Plan. Although the 2006 Plan allows Cabot to
issue various forms of equity, Cabot expects to use the 2006 Plan primarily to issue shares
of restricted stock and stock options under its long-term incentive compensation program.
The terms of awards made under this program are determined generally by the Compensation
Committee of the Board of Directors. As the program has been administered since 1992,
participants are granted a specific number of shares of common stock (the Grant Number)
that the participant may then elect either (i) to purchase as shares of restricted |
9
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
|
|
elect either (i) to purchase as shares of restricted stock at a percentage of the market
price of such stock on the date of grant (which in the last six years has been 30%) or (ii)
to receive as non-qualified stock options for a number of shares of common stock equal to two
times the Grant Number, exercisable at 100% of the market price of such stock on the date of
grant. Both the purchase restricted stock and the stock options granted under the program are
subject to a three-year vesting period. Stock options granted under the program expire five
years from the date of grant. Variations of the stock options and restricted stock are made
to international employees in order to provide benefits comparable to U.S. employees. No
awards have been granted under the 2006 Plan and there are 4.5 million shares available for
future grants at March 31, 2006 under the 2006 Plan. No new awards may be granted under
either the 1996 Equity Incentive Plan or the 1999 Equity Incentive Plan although there remain
outstanding certain awards previously granted under these plans. |
|
|
|
Through fiscal year 2005, Cabot followed Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, which resulted in
the accounting for grants of awards to employees at their intrinsic value in the consolidated
financial statements. On October 1, 2005, Cabot adopted FAS No. 123(R), Accounting for
Stock-Based Compensation, using the modified prospective method, which permits the
provisions of FAS 123(R) to be applied to the consolidated financial statements on a
going-forward basis. Prior periods have not been restated. FAS 123(R) requires companies to
recognize share-based payments to employees as compensation expense on a fair value method.
Under the fair value recognition provisions of FAS 123(R), stock-based compensation cost is
measured at the grant date based on the fair value of the award and is recognized as expense
over the service period, which generally represents the vesting period. The fair value of
stock options is calculated using the Black-Scholes option-pricing model and the fair value
of restricted stock is based on intrinsic value. The expense recognized over the service
period is required to include an estimate of the awards that will be forfeited. Previously
under APB 25, Cabot recorded the impact of forfeitures as they occurred. In connection with
the adoption of FAS 123(R) during the first quarter of fiscal year 2006, Cabot recorded a $2
million gain (after-tax) from the cumulative effect of the change from recording forfeitures
as they occur to estimating forfeitures during the service period. In addition, the
previously recorded unearned compensation balance of $41 million, as of the date of adoption,
which was included as a component of stockholders equity, was reclassified to additional
paid-in capital and retained earnings. |
|
|
|
Stock-based Compensation |
|
|
|
Prior to the adoption of FAS No. 123(R), Cabot included in its financial statements the
stock-based compensation disclosure requirements of FAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. The following table illustrates the effect the
fair value recognition provisions of FAS No. 123 would have had on net loss and earnings per
share for the three and six months ended March 31, 2005. |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
(in millions, except for per share amounts) |
|
March 31, 2005 |
|
|
March 31, 2005 |
|
Net loss, as reported |
|
$ |
(50 |
) |
|
$ |
(15 |
) |
Add: Stock-based compensation
expense included in reported net
income, net of related tax effects |
|
|
5 |
|
|
|
10 |
|
Deduct: Stock-based compensation
using fair value method for all
awards, net of related tax effects |
|
|
(5 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(50 |
) |
|
$ |
(16 |
) |
Net loss per common share: |
|
|
|
|
|
|
|
|
Basic, pro forma |
|
($ |
0.84 |
) |
|
($ |
0.28 |
) |
Basic, as reported |
|
($ |
0.84 |
) |
|
($ |
0.26 |
) |
Diluted, pro forma |
|
($ |
0.84 |
) |
|
($ |
0.28 |
) |
Diluted, as reported |
|
($ |
0.84 |
) |
|
($ |
0.26 |
) |
10
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
Stock-based employee compensation expense was $4 million and $8 million after tax for the
three and six months ending March 31, 2006, respectively. The Company recognized the full
impact of its stock-based employee compensation in the consolidated statements of operations for
the six months ended March 31, 2006 under FAS 123(R) and did not capitalize any such costs on
the consolidated balance sheets, as such costs that qualified for capitalization were not
material. The following table presents stock-based compensation expenses included in the
Companys consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
(Dollars in millions) |
|
March 31, 2006 |
|
|
March 31, 2006 |
|
Cost of sales |
|
$ |
3 |
|
|
$ |
5 |
|
Selling and administrative |
|
|
4 |
|
|
|
7 |
|
Research and technical |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
Stock-based compensation expense
before
tax |
|
|
7 |
|
|
|
13 |
|
Income tax benefit |
|
|
(3 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
Net stock-based compensation expense |
|
$ |
4 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
Stock Options- As of March 31, 2006, there was $2 million of total unrecognized compensation
cost related to non-vested options granted under the Companys equity incentive plans. That
cost is expected to be recognized over a weighted-average period of 3.08 years.
Restricted Stock- As of March 31, 2006, there was $26 million of total unrecognized
compensation cost related to non-vested restricted stock granted under the Companys equity
incentive plans. That cost is expected to be recognized over a weighted-average period of
1.15 years.
Equity Incentive Plan Activity
The following table summarizes the total stock option, non-vested stock option activity and
the restricted stock activity in the equity incentive plans for the three and six months
ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 |
|
|
Stock Options |
|
Restricted Stock |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Non- |
|
Average |
|
|
|
|
|
Weighted |
|
|
Total |
|
Exercise |
|
Vested |
|
Exercise |
|
Restricted |
|
Average |
(Shares in thousands) |
|
Shares |
|
Price |
|
Shares |
|
Price |
|
Shares |
|
Fair Value |
Outstanding at December 31, 2005 |
|
|
795 |
|
|
$ |
29.56 |
|
|
|
432 |
|
|
$ |
29.82 |
|
|
|
3,006 |
|
|
$ |
30.28 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
37.24 |
|
Exercised/Vested |
|
|
(147 |
) |
|
|
30.73 |
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
31.19 |
|
Cancelled/Forfeited |
|
|
(1 |
) |
|
|
28.00 |
|
|
|
(1 |
) |
|
|
28.00 |
|
|
|
(69 |
) |
|
|
30.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
647 |
|
|
|
29.31 |
|
|
|
431 |
|
|
|
29.83 |
|
|
|
2,918 |
|
|
|
30.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
216 |
|
|
|
28.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2006 |
|
|
Stock Options |
|
Restricted Stock |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Non- |
|
Average |
|
|
|
|
|
Weighted |
|
|
Total |
|
Exercise |
|
Vested |
|
Exercise |
|
Restricted |
|
Average |
(Shares in thousands) |
|
Shares |
|
Price |
|
Shares |
|
Price |
|
Shares |
|
Fair Value |
Outstanding at September 30, 2005 |
|
|
866 |
|
|
$ |
29.42 |
|
|
|
450 |
|
|
$ |
29.79 |
|
|
|
3,092 |
|
|
$ |
30.29 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
34.58 |
|
Exercised/Vested |
|
|
(204 |
) |
|
|
29.80 |
|
|
|
(4 |
) |
|
|
28.00 |
|
|
|
(27 |
) |
|
|
30.53 |
|
Cancelled/Forfeited |
|
|
(15 |
) |
|
|
29.22 |
|
|
|
(15 |
) |
|
|
29.22 |
|
|
|
(153 |
) |
|
|
32.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
647 |
|
|
|
29.31 |
|
|
|
431 |
|
|
|
29.83 |
|
|
|
2,918 |
|
|
|
30.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
216 |
|
|
|
28.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
The following table summarizes information
related to the outstanding and vested options
on March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Options |
|
Vested |
|
|
Outstanding |
|
Options |
Aggregate Intrinsic Value (dollars in millions) |
|
$ |
3 |
|
|
$ |
1 |
|
Weighted Average Remaining Contractual Term (in
years) |
|
|
2 |
|
|
|
1 |
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic
value, based on the Companys closing common stock price of
$33.99 on March 31, 2006,
which would have been received by the option holders had all option holders exercised their
options on that date.
The following table summarizes information related to the total intrinsic value of options
exercised during the three and six months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, 2006 |
|
March 31, 2006 |
(Dollars in millions) |
|
|
|
|
|
|
|
|
Intrinsic Value |
|
$ |
1 |
|
|
$ |
2 |
|
Cash Received |
|
|
5 |
|
|
|
6 |
|
Tax Benefit |
|
|
< 1 |
|
|
|
< 1 |
|
The Company settles employee stock option exercises with newly issued common shares. The
total fair value of the shares vested during the three and six months ended March 31, 2006
was less than a million dollars.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of the
options at the grant date. There were no option grants during the three or six months ended
March 31, 2006. The fair values of options outstanding on March 31, 2006 were calculated
using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, |
|
|
2005 |
|
2004 |
|
2003 |
Expected stock price volatility |
|
|
42 |
% |
|
|
44 |
% |
|
|
46 |
% |
Risk free interest rate |
|
|
3.8 |
% |
|
|
3.7 |
% |
|
|
2.2 |
% |
Expected life of options (years) |
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Expected annual dividends per share |
|
$ |
0.64 |
|
|
$ |
0.60 |
|
|
$ |
0.52 |
|
12
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
|
|
|
The expected stock price volatility assumption was determined using the historical volatility
of the Companys common stock over the expected life of the option. |
|
|
D. |
|
Acquisitions |
|
|
|
|
Cabot had a 50:50 joint venture arrangement with Showa Denko K.K. in an entity called Showa
Cabot K.K. (SCK). On November 8, 2005, Cabot purchased Showa Denko K.K.s 50% joint venture
interest in SCK for $19 million and renamed the entity Cabot Japan K.K. (CJKK). In
addition, as part of the acquisition, Cabot assumed approximately $26 million of SCKs debt
obligations and approximately $10 million of unfunded pension liabilities. |
|
|
|
|
Prior to the acquisition, Cabots investment in SCK was accounted for as an equity method
investment. Included in Cabots consolidated results for the period ended March 31, 2006 are
50% of the operating results of SCK from October 1, 2005 through November 7, 2005 and 100% of
the operating results of SCK from November 8, 2005 through March 31, 2006. |
|
|
|
|
The fair value of the assets acquired and liabilities and debt assumed represents the 50% of
SCK that was purchased. A preliminary allocation of the purchase price is as follows: |
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
Cash paid |
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
20 |
|
Inventories |
|
|
3 |
|
Deferred income taxes |
|
|
7 |
|
Investments in marketable securities |
|
|
1 |
|
Property, plant and equipment |
|
|
26 |
|
|
|
|
|
Total assets acquired |
|
$ |
57 |
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
27 |
|
Notes payable |
|
|
12 |
|
Pension obligation |
|
|
10 |
|
|
|
|
|
Total liabilities assumed |
|
$ |
49 |
|
|
|
|
|
Net assets acquired |
|
$ |
8 |
|
|
|
|
|
Excess purchase price |
|
$ |
11 |
|
|
|
|
|
|
|
|
At March 31, 2006, the excess purchase price related to the acquisition of SCK has been
included as a component of goodwill in the accompanying consolidated balance sheets. |
|
|
|
|
The allocation of the purchase price is based on estimates of the fair value of the net
assets acquired, and is subject to adjustment. The allocation is not yet finalized as
management is still in the process of performing the valuation of tangible and intangible
assets and pension obligations. As a result, preliminary estimates and assumptions are subject to
change. The allocation will be finalized during fiscal 2006. |
13
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
|
|
The following unaudited pro forma financial information reflects the consolidated results of
operations of Cabot for the three and six months ended March 31, 2006 and 2005 as though the
acquisition of SCK had occurred on the first day of the respective period. The pro forma
operating results are presented for comparative purposes only and do not purport to present
Cabots actual operating results for these periods or results that may occur in the future: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
(In millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
627 |
|
|
$ |
561 |
|
|
$ |
1,226 |
|
|
$ |
1,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
12 |
|
|
$ |
(50 |
) |
|
$ |
36 |
|
|
$ |
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
(0.82 |
) |
|
$ |
0.58 |
|
|
$ |
(0.22 |
) |
Diluted |
|
$ |
0.17 |
|
|
$ |
(0.82 |
) |
|
$ |
0.52 |
|
|
$ |
(0.22 |
) |
E. |
|
Goodwill and Other Intangible Assets |
|
|
|
The carrying amount of goodwill attributable to each reportable segment with goodwill
balances and the changes in those balances during the six months ended March 31, 2006 are as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carbon Black |
|
|
Metal Oxides |
|
|
|
|
(Dollars in millions) |
|
Business |
|
|
Business |
|
|
Total |
|
Balance at September 30, 2005 |
|
$ |
15 |
|
|
$ |
10 |
|
|
$ |
25 |
|
Increase for Acquisition of CJKK |
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
$ |
26 |
|
|
$ |
10 |
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cabot does not have any indefinite-lived intangible assets. At March 31, 2006 and September
30, 2005, Cabot had $5 million of finite-lived intangible assets. These intangible assets are
comprised of $12 million for patents, $1 million for other intellectual property and $1
million of pension intangible assets related to minimum pension liabilities recorded in
fiscal year 2005, less related accumulated amortization of $8 million for patents and $1
million for other intellectual property at both March 31, 2006 and September 30, 2005.
Intangible assets are amortized over their estimated useful lives, which range from two to
fifteen years, with a weighted average amortization period of ten years. Amortization expense
is estimated to be approximately $1 million in each of the next five years. |
14
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
F. |
|
Employee Benefit Plans |
|
|
|
Net periodic defined benefit pension and other postretirement benefit costs include the
following components for the three months ended March 31, 2006 and 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
Pension Benefits |
|
|
Postretirement Benefits |
|
(Dollars in millions) |
|
U.S. |
|
|
Foreign |
|
|
U.S. |
|
|
Foreign |
|
|
U.S. |
|
|
Foreign |
|
|
U.S. |
|
|
Foreign |
|
Service cost |
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
1 |
|
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Expected gain on plan assets |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized loss |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
|
|
|
$ |
3 |
|
|
$ |
|
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
|
|
|
$ |
2 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic defined benefit pension and other postretirement benefit costs include the
following components for the six months ended March 31, 2006 and 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
|
|
2006 |
| 2005 |
|
|
2006 |
| 2005 |
|
|
|
Pension Benefits |
|
|
Postretirement Benefits |
|
(Dollars in millions) |
|
U.S. |
|
|
Foreign |
|
|
U.S. |
|
|
Foreign |
|
|
U.S. |
|
|
Foreign |
|
|
U.S. |
|
|
Foreign |
|
Service cost |
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
Interest cost |
|
|
3 |
|
|
|
5 |
|
|
|
3 |
|
|
|
6 |
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Expected gain on plan assets |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized loss |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
|
|
|
$ |
4 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the Altona plant closure and subsequent windup of the related employee
benefit plans, during the first quarter of 2006 the Company recognized $1 million of
previously unrecognized actuarial gains. This has been included as a component of the Altona
restructuring charges. |
|
G. |
|
Restructuring |
|
|
|
Altona Restructuring |
|
|
|
In October 2004, Cabot initiated a plan to shut down its Altona, Australia carbon black
manufacturing facility due to an indication by Cabots raw materials supplier that it would
cease supply in September 2005, as well as the decline of the carbon black business in
Australia. Production at this facility ceased on October 3, 2005. As of March 31, 2006, Cabot
expects the shutdown plan to result in a pre-tax charge to earnings of approximately $25
million, which is expected to be partly offset by gains on the sale of the land on which the
facility is located. These gains are estimated to be between approximately $7 million and $10
million (net of transaction costs). The $25 million of estimated charges includes
approximately $7 million for severance and employee benefits, $6 million for accelerated
depreciation of the facility assets, $3 million for the demolition of the facility, $2
million for asset retirement obligations related to site remediation and restoration and $7
million for the realization of foreign currency translation adjustments. All charges
associated with this restructuring initiative are related to the Carbon Black Business. Cabot
has recorded $17 million of these charges in the consolidated statements of operations since
October 2004 and anticipates that the remaining $8 million of charges, including the foreign
currency translation adjustment, will be incurred over the next six months in connection with
the closure, demolition, remediation and restoration of the property. |
15
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
|
|
Details of the Altona restructuring activity and changes in the reserve during the three
months ended March 31, 2006 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
|
|
|
|
|
|
|
and |
|
|
Asset |
|
|
|
|
|
|
Employee |
|
|
Retirement |
|
|
|
|
(Dollars in millions) |
|
Benefits |
|
|
Obligation |
|
|
Total |
|
Reserve at December 31, 2005 |
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
4 |
|
Charges for the three months ended
March 31, 2006 |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Cash Paid |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Reserve at March 31, 2006 |
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Details of the Altona restructuring activity and changes in the reserve during the six months
ended March 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
|
|
|
|
|
|
|
and |
|
|
Asset |
|
|
|
|
|
|
Employee |
|
|
Retirement |
|
|
|
|
(Dollars in millions) |
|
Benefits |
|
|
Obligation |
|
|
Total |
|
Reserve at September 30, 2005 |
|
$ |
4 |
|
|
$ |
2 |
|
|
$ |
6 |
|
Charges for the six months ended March 31, 2006 |
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
Costs charged against assets |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Cash Paid |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
Reserve at March 31, 2006 |
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The charges related to the Altona restructuring for the three and six month periods ended
March 31, 2006 are exclusive of $1 million of gains on the sale of fixed assets during the
second quarter. |
|
|
|
European and Zierbena Restructuring |
|
|
|
As of March 31, 2006, the Company had $1 million of restructuring reserves for severance and
employee benefits related to the Companys fiscal 2003 European restructuring plan and
closure of its carbon black manufacturing facility in Zierbena, Spain and $1 million of asset
retirement obligations related to site remediation and restoration of the Zierbena facility.
The facility is located on leased land and Cabot is required to perform site remediation and
restoration activities as a condition of the lease agreement. As of March 31, 2006, the
Company has recorded $55 million of restructuring charges related to the European
restructuring plan and closure of the Zierbena facility, and, with the exception of the
foreign currency translation adjustment related to the Zierbena entity, does not expect to
incur significant additional charges related to these activities. Charges associated with
this restructuring initiative are primarily related to the Carbon Black Business. Cabot
expects the remaining accruals to be paid out over the next three to six months in connection
with the completion of the site remediation and restoration. |
|
|
|
Details of the activity in the European and Zierbena restructuring reserve during the three
months ended March 31, 2006 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Asset |
|
|
|
|
|
|
and Employee |
|
|
Retirement |
|
|
|
|
(Dollars in millions) |
|
Benefits |
|
|
Obligation |
|
|
Total |
|
Reserve at December 31, 2005 |
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
3 |
|
Charges for the three months ended March 31, 2006 |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Cash Paid |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Reserve at March 31, 2006 |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
16
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
|
|
Details of the activity in the European and Zierbena restructuring reserve during the six
months ended March 31, 2006 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Asset |
|
|
|
|
|
|
and Employee |
|
|
Retirement |
|
|
|
|
(Dollars in millions) |
|
Benefits |
|
|
Obligation |
|
|
Total |
|
Reserve at September 30, 2005 |
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
4 |
|
Charges for the three months ended March 31, 2006 |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Cash Paid |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Reserve at March 31, 2006 |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006, the reserve balances for the Altona, European and Zierbena
restructurings are included in accrued expenses in the consolidated balance sheets. |
|
|
|
Restructuring costs were recorded in the consolidated statements of operations for the three
and six months ended March 31, 2006 and 2005 as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
(Dollars in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net sales and other operating revenue |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
Cost of sales |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(7 |
) |
Selling and administrative expense |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(2 |
) |
|
$ |
(4 |
) |
|
$ |
(3 |
) |
|
$ |
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
H. |
|
Financing |
|
|
|
Chinese Renminbi Debt |
|
|
|
During fiscal 2006, majority owned
joint-ventures operating in China
entered into new long-term bank agreements in Chinese Renminbi (RMB)
totaling 205 million RMB (26 million USD). The financing will
be used to fund capital expenditures at the Tianjin and Bluestar joint ventures and overall
working capital needs. These loans mature at various dates between
2007 and 2011 and bear
interest at rates ranging from 5.2% to 5.3%. |
|
|
|
Medium-term Notes Interest Rate Swap |
|
|
|
During January 2006, Cabot entered into a fixed-to-variable interest rate swap to swap the
fixed interest rate of 7.18% on a $30 million medium-term note maturing in February 2009 to a
variable interest rate. The variable rate of interest is calculated based on the 6-month
London Interbank Offer Rate (LIBOR) plus an agreed upon spread. The LIBOR rate will be reset
each June 15 and December 15 until the maturity date. The notional value of the swap is $30
million. This swap has been designated as a fair value hedge under FAS No. 133, Accounting
for Derivative Instruments and Hedging Activities and related interpretations, to offset
changes in the fair value of the underlying debt. The fair value of the derivative
instrument was less than negative $1 million as of March 31, 2006. The fair value interest
rate swap is determined to be highly effective and no amount of ineffectiveness was recorded
in earnings during the three months ended March 31, 2006. |
17
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
I. |
|
Commitments and Contingencies |
|
|
|
Reserves |
|
|
|
As of March 31, 2006 and September 30, 2005, Cabot had approximately $15 million and $17
million, respectively, reserved for environmental matters primarily related to divested
businesses. This reserve represents Cabots best estimate of its share of costs likely to be
incurred at those sites where costs are reasonably estimable based on its analysis of the
extent of clean up required, alternative clean up methods available, abilities of other
responsible parties to contribute and its interpretation of laws and regulations applicable
to each site. At March 31, 2006, $5 million of the $15 million reserve for environmental
matters is recognized on a discounted basis and is being accreted up to the undiscounted
liability through interest expense over the expected cash flow period. |
|
|
|
Cabot has exposure in connection with a safety respiratory products business that a
subsidiary acquired from American Optical Corporation (AO) in an April 1990 asset
transaction. As more fully described in the fiscal 2005 Form 10-K, the Companys respirator
liabilities involve claims for personal injury, including asbestosis and silicosis, allegedly
resulting from the use of AO respirators that are alleged to have been negligently designed
or labeled. As of March 31, 2006, there were approximately 82,000 claimants in pending cases
asserting claims against AO in connection with respiratory products. The reserve recorded is
expected to cover Cabots share of liability for existing and future respirator liability
claims. The book value of the reserve is being accreted up to the undiscounted liability
through interest expense over the expected cash flow period, and, at March 31, 2006, is
approximately $18 million (or $31 million on an undiscounted basis). |
|
|
|
Cabot is a party to various other lawsuits and subject to other claims and contingent
liabilities arising in the ordinary course of its business. Although final disposition of
some or all of these suits and claims may impact Cabots financial statements in a particular
period, the Company does not expect the disposition of these suits and claims, in the
aggregate, to have a material adverse effect on Cabots financial position. |
|
|
|
Purchase Commitments |
|
|
|
Cabot has entered into long-term purchase agreements for various key raw materials in the
Carbon Black, Metal Oxides and Supermetals Businesses. On February 8, 2006, the Company and
the Sons of Gwalia settled their dispute over the price to be paid by Cabot for tantalum ore
under an existing supply agreement. As part of the settlement, the companies terminated their
existing agreement and entered into a new three-year tantalum ore supply agreement that
incorporates a significantly reduced annual volume commitment. Cabot made a lump sum payment
of $27 million to terminate the existing supply agreement and other related agreements.
Under the new agreement, which is denominated in Australian dollars, Cabot will pay higher
prices for ore than under the prior agreement. The $27 million lump sum payment has been
recorded as an expense for the period ended March 31, 2006 and has been included as a
component of cost of goods sold. |
|
|
|
The table below includes all of the Companys long-term
purchase commitments, including those under the
new tantalum ore supply agreement: |
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
2006 |
|
$ |
139 |
|
2007 |
|
|
120 |
|
2008 |
|
|
115 |
|
2009 |
|
|
55 |
|
2010 |
|
|
44 |
|
Thereafter |
|
|
536 |
|
|
|
|
|
Total future purchase commitments |
|
$ |
1,009 |
|
|
|
|
|
18
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
|
|
To mitigate the foreign currency exposure associated with the future settlement of the
Australian dollar denominated payables under the new agreement with
the Sons of Gwalia, during April 2006 Cabot
entered into option contracts with a total notional amount of $136 million Australian dollars
(97 million US dollars). These contracts provide Cabot with the right, but not the
obligation, to purchase Australian dollars at agreed strike prices through January 2009.
Certain of these option contracts have been designated as foreign currency cash flow hedges
under FAS No. 133. Thus, the effective portion of gains and losses for those options will be
deferred as a component of accumulated other comprehensive income and will be recognized in
cost of goods sold when the hedged item affects cost of goods sold. The changes in fair
value of the options contracts that have not been designated as a hedge under FAS No. 133
will be marked to market through earnings. |
|
|
|
Guarantee Agreements |
|
|
|
Cabot has provided certain indemnities pursuant to which it may be required to make
payments to an indemnified party in connection with certain transactions and agreements. In
connection with certain acquisitions and divestitures, Cabot has provided routine
indemnities with respect to such matters as environmental, tax, insurance, product and
employee liabilities. In connection with various other agreements, including service and
supply agreements, Cabot may provide routine indemnities for certain contingencies and
routine warranties. Cabot is unable to estimate the maximum potential liability for these
types of indemnities as a maximum obligation is not explicitly stated in most cases and
the amounts, if any, are dependent upon the outcome of future contingent events, the nature and
likelihood of which cannot be reasonably estimated. The duration of the indemnities varies,
and in many cases is indefinite. Cabot has not recorded any liability for these
indemnities in the consolidated financial statements, except as otherwise disclosed
above under Reserves. |
|
J. |
|
Earnings Per Share |
|
|
|
Basic and diluted earnings per share (EPS) were calculated for the three and six months
ended March 31, 2006 and 2005 as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, |
|
March 31, |
|
(Dollars in millions, except per share amounts) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shares (numerator) |
|
$ |
12 |
|
|
$ |
(50 |
) |
|
$ |
35 |
|
|
$ |
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
63 |
|
|
|
63 |
|
|
|
63 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: contingently issuable shares (1) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares
(denominator) |
|
|
60 |
|
|
|
60 |
|
|
|
60 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
0.19 |
|
|
$ |
(0.84 |
) |
|
$ |
0.58 |
|
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shares |
|
$ |
12 |
|
|
$ |
(50 |
) |
|
$ |
35 |
|
|
$ |
(16 |
) |
|
Dividends on preferred stock (2) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shares plus
assumed conversions (numerator) |
|
$ |
12 |
|
|
$ |
(50 |
) |
|
$ |
36 |
|
|
$ |
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
60 |
|
|
|
60 |
|
|
|
60 |
|
|
|
60 |
|
Effect of dilutive securities (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed conversion of preferred stock (2) |
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
Common shares issuable (2) (4) |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares (denominator) |
|
|
69 |
|
|
|
60 |
|
|
|
69 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
0.17 |
|
|
$ |
(0.84 |
) |
|
$ |
0.52 |
|
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents outstanding restricted stock issued under Cabots Equity
Incentive Plans. |
|
(2) |
|
Dividends on preferred stock were not added back to income
(loss) available to common shares for the three and six month periods ending March 31,
2005 when calculating diluted EPS due to the Companys net loss position. For the
three and six month periods ending March 31, 2005, approximately 7 million of common
shares based on assumed conversion of preferred stock and 2 million of issuable common
shares representing restricted stock and stock options issued under Cabots Equity
Incentive Plans were excluded from the calculation of diluted earnings per share as
those shares would have been anti-dilutive due to the Companys net loss position. |
|
(3) |
|
Represents outstanding restricted stock and stock options issued under
Cabots Equity Incentive Plans. |
|
(4) |
|
For the three and six month periods ending March 31, 2006, there
were no options to purchase shares of common stock excluded in the
calculation of diluted earnings per share. |
19
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
K. |
|
Financial Information by Segment |
|
|
|
During the last quarter of fiscal 2005, management changed its segment reporting structure to
better reflect the way the Company manages and thinks about the businesses. Under the new
reporting structure, Cabot is organized into four reportable segments: the Carbon Black
Business, the Metal Oxides Business, the Supermetals Business, and the Specialty Fluids
Business. Prior year segment information, which included the disclosure of reportable
segments, has been restated to reflect this change. The following table provides financial
information by segment for the three and six months ended March 31, 2006 and 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carbon |
|
Metal |
|
|
|
|
|
Specialty |
|
Segment |
|
Unallocated |
|
Consolidated |
(Dollars in millions) |
|
Black(1) |
|
Oxides |
|
Supermetals(2) |
|
Fluids |
|
Total |
|
and Other(3) |
|
Total |
Three months ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and other operating
revenues(4) |
|
$ |
476 |
|
|
$ |
62 |
|
|
$ |
67 |
|
|
$ |
11 |
|
|
$ |
616 |
|
|
$ |
11 |
|
|
$ |
627 |
|
Income (loss) before taxes (5) |
|
$ |
26 |
|
|
$ |
5 |
|
|
$ |
12 |
|
|
$ |
4 |
|
|
$ |
47 |
|
|
$ |
(35 |
) |
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and other operating
revenues(4) |
|
$ |
369 |
|
|
$ |
58 |
|
|
$ |
86 |
|
|
$ |
8 |
|
|
$ |
521 |
|
|
$ |
6 |
|
|
$ |
527 |
|
Income (loss) before taxes (5) |
|
$ |
41 |
|
|
$ |
5 |
|
|
$ |
16 |
|
|
$ |
4 |
|
|
$ |
66 |
|
|
$ |
(101 |
) |
|
$ |
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and other operating
revenues(4) |
|
$ |
895 |
|
|
$ |
119 |
|
|
$ |
160 |
|
|
$ |
21 |
|
|
$ |
1,195 |
|
|
$ |
19 |
|
|
$ |
1,214 |
|
Income (loss) before taxes (5) |
|
$ |
47 |
|
|
$ |
7 |
|
|
$ |
23 |
|
|
$ |
8 |
|
|
$ |
85 |
|
|
$ |
(46 |
) |
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and other operating
revenues(4) |
|
$ |
714 |
|
|
$ |
118 |
|
|
$ |
163 |
|
|
$ |
15 |
|
|
$ |
1,010 |
|
|
$ |
12 |
|
|
$ |
1,022 |
|
Income (loss) before taxes (5) |
|
$ |
71 |
|
|
$ |
11 |
|
|
$ |
32 |
|
|
$ |
6 |
|
|
$ |
120 |
|
|
$ |
(111 |
) |
|
$ |
9 |
|
|
|
|
(1) |
|
The assets of the Carbon Black Business include 100% of the assets of
Showa Cabot K.K., which have increased the assets of the Carbon Black Business from
$1,287 million at September 31, 2005 to $1,533 million at March 31, 2006. Segment
assets exclude cash, short-term investments, investments other than equity basis,
income taxes receivable and deferred taxes, which are not allocated to the
businesses. |
|
(2) |
|
Income (loss) before taxes related to the Supermetals Business is
exclusive of goodwill impairment charges of $90 million recorded in the second
quarter of fiscal 2005 and the $27 million Gwalia settlement payment recorded in the
second quarter of fiscal 2006, as well as other certain items, which
are included in
Unallocated and Other charges. |
|
(3) |
|
Unallocated and Other includes certain items and eliminations that are not
allocated to the operating segments. |
|
|
|
(4) |
|
Revenues from external customers for the Carbon Black Business includes
100% of sales from one equity affiliate and transfers of materials at cost and at
market-based prices. Unallocated and Other reflects an adjustment for the equity
affiliate sales and includes royalties paid by equity affiliates offset by external
shipping and handling fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
(Dollars in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Equity affiliate sales |
|
$ |
(9 |
) |
|
$ |
(9 |
) |
|
$ |
(17 |
) |
|
$ |
(18 |
) |
Royalties paid by equity affiliates |
|
|
3 |
|
|
|
2 |
|
|
|
5 |
|
|
|
4 |
|
Shipping and handling fees and other |
|
|
17 |
|
|
|
13 |
|
|
|
31 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11 |
|
|
$ |
6 |
|
|
$ |
19 |
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
Profit or loss from continuing operations before taxes for Unallocated and
Other includes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
(Dollars in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Interest expense |
|
$ |
(7 |
) |
|
$ |
(8 |
) |
|
$ |
(13 |
) |
|
$ |
(16 |
) |
Certain items(a) |
|
|
(31 |
) |
|
|
(94 |
) |
|
|
(33 |
) |
|
|
(98 |
) |
Equity in net income of affiliated companies |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(7 |
) |
|
|
(4 |
) |
Foreign currency transaction gains (losses) (b) |
|
|
3 |
|
|
|
(1 |
) |
|
|
|
|
|
|
2 |
|
Other unallocated income (expense) (c) |
|
|
4 |
|
|
|
4 |
|
|
|
7 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(35 |
) |
|
$ |
(101 |
) |
|
$ |
(46 |
) |
|
$ |
(111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain items for the second quarter of fiscal 2006 include restructuring charges of $2 million as
discussed in Note G, the $27 million Sons of Gwalia settlement payment and $2
million of cost reduction initiatives in the Supermetals Business. Certain items for the first six months of fiscal 2006
include $3 million of restructuring charges, $27 million related to the
Sons of Gwalia settlement payment and $3 million of cost reduction initiatives in
the Supermetals Business. Certain items for the second quarter of fiscal
2005 included $4 million of restructuring charges and $90 million of
goodwill impairment charges related to the Supermetals Business. Certain
items for the first six months of fiscal 2005 included $8 million of
restructuring charges and $90 million of goodwill impairment charges. |
|
(b) |
|
Net of other foreign currency risk management activity. |
|
(c) |
|
Other unallocated income (expense) includes investment income
and other items that are not included
segment PBT. |
20
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2006
Unaudited
|
|
The Carbon Black Business is primarily comprised of the rubber blacks, performance products
and inkjet colorants product lines as well as the business development activities of Superior
MicroPowders. The revenues from each of these product lines are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
(Dollars in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Rubber blacks |
|
$ |
346 |
|
|
$ |
235 |
|
|
$ |
644 |
|
|
$ |
460 |
|
Performance products |
|
|
117 |
|
|
|
123 |
|
|
|
226 |
|
|
|
233 |
|
Inkjet colorants |
|
|
12 |
|
|
|
9 |
|
|
|
23 |
|
|
|
18 |
|
Superior MicroPowders |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Carbon Black Sales |
|
$ |
476 |
|
|
$ |
369 |
|
|
$ |
895 |
|
|
$ |
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2006
Unaudited
|
|
The Metal Oxides Business is primarily comprised of the fumed metal oxides (including fumed
silica, fumed alumina and dispersions thereof) and aerogel product lines. The revenues from
each of these product lines are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
(Dollars in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Fumed metal oxides |
|
$ |
62 |
|
|
$ |
58 |
|
|
$ |
119 |
|
|
$ |
118 |
|
Aerogel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Metal Oxides Sales |
|
$ |
62 |
|
|
$ |
58 |
|
|
$ |
119 |
|
|
$ |
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L. |
|
Recent Accounting Pronouncements |
|
|
|
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations (FIN 47), which clarifies certain terminology contained in FAS No.
143, Accounting for Asset Retirement Obligations. The interpretation will result in (i)
more consistent recognition of liabilities relating to asset retirement obligations, (ii)
more information about expected future cash outflows associated with those obligations and
(iii) more information about investments in long-lived assets because additional asset
retirement costs will be recognized as part of the carrying amounts of the assets. The
guidance is effective for the Company no later than the fourth quarter of fiscal 2006,
although earlier adoption is permitted. Cabot is in the process of
evaluating the impact of FIN 47 on its consolidated financial
statements which could have a material impact to earnings upon
adoption. |
|
|
|
In October 2004, the American Jobs Creation Act of 2004 (AJCA) was signed into law. The
AJCA replaces an export incentive with a deduction from domestic manufacturing income. Cabot
is both an exporter and a domestic manufacturer. The Companys loss of the export incentive
tax benefit is expected to materially exceed the tax benefit it should receive from the
domestic manufacturing deduction. The AJCA also allows U.S. companies to repatriate certain
earnings from their foreign subsidiaries in 2006 at an effective tax rate of 5.25%. The
Company does not expect that there is a material benefit available given Cabots particular
circumstances and the various requirements under the law. The Company, however, will continue
to study the impact and opportunities of the AJCA. The FASB has issued Staff Position (FSP)
Nos. 109-1 and 109-2, which outline the accounting treatment for the impacts of the AJCA. The
FSPs state that (i) any benefit that companies may have from the domestic manufacturing
deduction be treated as a special deduction and, accordingly, any benefit would be reported
in the year in which the income is earned and (ii) regarding the impact resulting from the
repatriation of unremitted earnings in the period in which the enacted tax law was passed,
companies may wait until they have the information necessary to determine the amount of the
earnings they intend to repatriate. |
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
I. Critical Accounting Policies
The preparation of our financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and
related disclosure of contingent assets and liabilities. We consider an accounting estimate
to be critical to the financial statements if 1) the estimate is complex in nature or
requires a high degree of judgment and 2) if different estimates and assumptions were used,
the result could have a material impact on the consolidated financial statements. On an
ongoing basis, we evaluate our policies and estimates. We base our estimates on historical
experience, current conditions and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or
conditions. The estimates that we believe are critical to the preparation of the Consolidated
Financial Statements are presented below.
Revenue Recognition and Accounts Receivable
We derive most of our revenues from the sale of rubber blacks, performance products, inkjet
colorants, fumed metal oxides, tantalum and related products and from the rental and sale of
cesium formate. Revenue from product sales is typically recognized when the product is
shipped and title and risk of loss have passed to the customer. Revenue from the rental of
cesium formate is recognized throughout the rental period based on the contracted rental
amount. Customers are also billed and revenue is recognized, typically at the end of the job,
for cesium formate product that is not returned. Other operating revenues, which represent
less than ten percent of total revenues, include tolling, servicing and royalties for
licensed technology.
Our revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition, which establishes criteria that must be satisfied before revenue
is realized or realizable and earned. We recognize revenue when persuasive evidence of a
sales arrangement exists, delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. We generally are able to ensure that products meet customer
specifications prior to shipment. If we are unable to determine that the product has met the
specified objective criteria prior to shipment, the revenue is deferred until product
acceptance has occurred.
Under certain multi-year supply contracts with declining prices and minimum volumes, we
recognize revenue based on the estimated average selling price over the contract lives.
Certain customer contracts contain price protection clauses that provide for the potential
reduction in past or future sales prices. We analyze these contract provisions to determine
if an obligation related to these clauses exists and record revenue net of any estimated
price protection commitments. Significant changes in future market conditions and future
sales prices could trigger these price protection obligations and adversely impact our
revenue.
The allowance for doubtful accounts is based on our assessment of the collectibility of
specific customer accounts, the aging of our accounts receivable and other economic
information on both an historical and prospective basis. Additionally, we estimate sales
returns based on historical trends in our customers product returns. While bad debt
charge-offs and product returns have not been significant historically, if there is a
deterioration of a major customers creditworthiness, actual defaults are higher than our
previous experience or actual returns do not reflect historical trends, our estimates of the
recoverability of the amounts due us and our sales would be adversely affected.
We offer sales discounts and volume rebates to certain customers as sales incentives. The
discounts and volume rebates are recorded as a reduction of sales at the time revenue is recognized
based on historical experience. Rebates are estimated and recorded based primarily on
historical experience and contractual obligations. We estimate for
discounts and volume rebates quarterly
and the assumptions underlying the estimates are updated for changes in fact and
circumstances as appropriate. If sales are significantly different from our historical
experience, our estimates of sales discounts and volume rebates would be affected.
Inventory Valuation
The cost of most raw materials and finished goods inventories in the U.S. is determined by
the last-in, first-out (LIFO) method. Had we used the first-in, first-out (FIFO) method
instead of the LIFO method for such inventories the value of those
inventories would have been
23
$78 million higher as of March 31, 2006. The cost of other
U.S. and all non-U.S. inventories is determined using the average cost method or the FIFO
method.
We periodically review inventory for potential obsolescence recoverability. In this review,
we make assumptions about the future demand for and market value of the inventory and based
on these assumptions estimate the amount of any obsolete, unmarketable or slow moving
inventory. We write down our inventories for estimated obsolescence or unmarketable inventory
by an amount equal to the difference between the cost of inventory and the estimated market
value. In cases where the market value of inventories is below cost, the inventory is
adjusted to its market value. Historically, such write-downs have not been significant. If
actual market conditions are less favorable than those projected by management at
the time of the assessment, however, additional inventory write-downs may be required, which
could have a negative impact on gross profit.
Stock-based Compensation
On October 1, 2005, we adopted FAS No. 123 (R), Accounting for Stock-Based Compensation,
using the modified prospective method, which results in the provisions of FAS 123(R) being
applied to the consolidated financial statements on a going-forward basis. Prior periods
have not been restated, therefore the financial results for 2006 are not necessarily
comparable to the same period in the prior year. FAS 123(R) requires companies to recognize
share-based awards granted to employees as compensation expense on a fair value method.
Under the fair value recognition provisions of FAS 123(R), stock-based compensation cost is
measured at the grant date based on the fair value of the award and is recognized as expense
over the service period, which generally represents the vesting period. We use the
Black-Scholes option-pricing model to calculate the fair value of stock options. The fair
value of restricted stock is based on intrinsic value. In determining the fair value of
share-based awards at the grant date we make judgments with respect to expected dividends to
be paid on shares and the number of share-based awards that may be forfeited. If actual
results differ significantly from these estimates, stock-based compensation expense and our
results of operations could be materially impacted.
Goodwill and Other Intangible Assets
We perform an impairment test for goodwill at least annually and when events or changes in
business circumstances indicate that the carrying value may not be recoverable. To test
whether an impairment exists, the fair value of the applicable reporting unit is estimated
based on discounted cash flows. The calculation is sensitive to both the estimated future
cash flows and the discount rate. The assumptions used to estimate the discounted cash flows
are based on managements best estimates about selling prices, production and sales volume,
costs, future growth rates, capital expenditures and market conditions over an estimate of
the remaining operating period at the reporting unit. The discount rate is based on the
weighted average cost of capital which is determined by evaluating the risk free rate of
return, cost of debt and expected equity premiums. If an impairment exists, a loss to write
down the value of goodwill to its implied fair value is recorded.
Valuation of Long-Lived Assets
Our long-lived assets primarily include property, plant, equipment, long-term investments and
assets held for rent. We review the carrying values of long-lived assets for impairment
whenever events or changes in business circumstances indicate that the carrying amount of an
asset may not be recoverable. Such circumstances would include, but are not limited to, a
significant decrease in the market price of the long-lived asset, a significant adverse
change in the way the asset is being used, a decline in the physical condition of the asset
or a history of operating or cash flow losses associated with the use of the asset.
We make various estimates and assumptions when analyzing whether there is an impairment of
our long-lived assets, excluding goodwill and long-term investments. These estimates and
assumptions include determining which cash flows are directly related to the potentially
impaired asset, the useful life of the asset over which the cash flows will occur, their
amounts and the assets residual value, if any. An asset impairment exists when the carrying
value of the asset is not recoverable based on the undiscounted estimated cash flows expected
from the asset. The impairment loss is then determined based on the excess of the assets
carrying value over its fair value. Our estimated cash flows reflect managements assumptions
about selling prices, production and sales volume, costs and market conditions over an
estimate of the remaining useful life.
The fair values of long-term investments are dependent on the financial performance of the
entities in which we invest and the external factors inherent in the markets in which they
operate. We consider these factors as well as the forecasted financial performance of the
investment entities when assessing the potential impairment of these investments.
24
Pensions and Other Postretirement Benefits
We maintain both defined benefit and defined contribution plans for our employees. In
addition, we provide certain health care and life insurance benefits for retired employees.
Plan obligations and annual expense calculations of the defined benefit plans are based on a
number of key assumptions. The assumptions, which are specific for each of our U.S. and
foreign plans, are related to general economic conditions, including interest rates, expected
return on plan assets, and the rate of compensation increases for employees. Projected health
care benefits reflect our assumptions about health care cost trends. The cost of providing
plan benefits also depends on participant demographic assumptions, including assumptions
regarding retirements, mortality, employee turnover and plan participation levels. If actual
experience differs from these assumptions, the cost of providing these benefits could
increase or decrease. Actual results that differ from the assumptions are generally
accumulated and amortized over future periods and, therefore, affect the recognized expense
and recorded obligation in such future periods.
Litigation and Contingencies
Cabot is involved in litigation in the ordinary course of business, including personal injury
and environmental litigation. We
accrue a liability for litigation when it is probable that a liability has been incurred and
the amount can be reasonably estimated. The estimated reserves are recorded based on our best
estimate of the liability associated with such matters or the low end of the estimated range
of liability if we are unable to identify a better estimate within that range. Our best
estimate is determined through the evaluation of various information, including claims,
settlement offers, demands by government agencies, estimates performed by independent third
parties, identification of other responsible parties and an assessment of their ability to
contribute and our prior experience. Litigation is highly uncertain and there is always the
possibility of an unusual result in any particular case that may have an adverse effect on
the results of operations.
The most significant reserves that we have established are for environmental remediation and
respirator litigation claims. As of March 31, 2006, we had $15 million reserved for various
environmental matters primarily related to divested businesses. The amount accrued reflects
our assumptions about remediation requirements at the contaminated sites, the nature of the
remedies, 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. A portion of the reserve for environmental matters is
recognized on a discounted basis, which requires the use of an estimated discount rate and
estimates of future cash flows associated with the liability. These liabilities can be
affected by the availability of new information, changes in the assumptions on which the
accruals are based, unanticipated government enforcement action or changes in applicable
government laws and regulations, which could result in higher or lower costs.
As of March 31, 2006, we also had $18 million accrued for respirator liability claims. Our
current estimate of the cost of our share of existing and future respirator liability claims
is based on facts and circumstances existing at this time. Developments that could affect our
estimate 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) significant
changes in the legal costs of defending these claims, (iv) changes in the nature of claims
received, (v) changes in the law and procedure applicable to these claims, (vi) the financial
viability of other parties who contribute to the settlement of respirator claims, and (vii) a
determination that our interpretation of the contractual obligations on which we have
estimated our share of liability is inaccurate. While we believe the current best estimate is
recorded, we cannot determine the impact of these potential developments on our current
estimate of our share of liability for these existing and future claims. Accordingly, the
actual amount of these liabilities for existing and future claims could be different than the
reserved amount.
Income Taxes
We estimate our income taxes in each jurisdiction in which we are subject to tax. This
process involves estimating the tax exposure for differences between actual results and
estimated results and recording the amount of income taxes payable for the current year and
deferred tax assets and liabilities for future tax consequences. A valuation allowance is
established when it is more likely than not that all or a portion of a deferred tax asset
will not be realized. We evaluate the realizability of our net deferred tax assets quarterly
and valuation allowances are provided as required. In making this assessment, we are required
to consider all available positive and negative evidence to determine whether, based on such
evidence, it is more likely than not that some portion or all of our net deferred assets will
be realized in future periods. This assessment requires significant judgment. In addition,
we have made significant estimates involving current and deferred income taxes. We analyze
our tax positions and do not recognize current and future tax benefits until it is deemed
probable that the tax positions will be sustained in the respective tax jurisdiction.
25
We have filed our tax returns in accordance with our interpretations of each jurisdictions
tax laws and have established reserves for potential differences in interpretation of those
laws. In the event that actual results are significantly different from these estimates, our
provision for income taxes could be significantly impacted. A 1% change in the effective tax
rate would change income tax expense for the six month period ended March 31, 2006 by
approximately $1 million.
Significant Accounting Policies
We have other significant accounting policies that are discussed in Note B of the Notes to
our Consolidated Financial Statements in our fiscal 2005 Form 10-K. Certain of these policies
include the use of estimates, but do not meet the definition of critical because they
generally do not require estimates or judgments that are as difficult or subjective to
measure. However, these policies are important to an understanding of our consolidated
financial statements.
II. Results of Operations
As noted in our 2005 Form 10-K, management changed its segment reporting structure to better
reflect the way we manage and think about our businesses. Under the revised reporting
structure, we are organized into four reportable segments: the Carbon Black Business, the
Metal Oxides Business, the Supermetals Business, and the Specialty Fluids Business. The
Carbon Black Business is comprised of the rubber blacks, performance products and inkjet
colorants product lines as well as the business development activities of Superior
MicroPowders. The Metal Oxides Business is comprised of the fumed metal oxides and aerogel
product lines. Discussions of prior period results reflect the new segment structure.
The discussion of our results includes information on diluted earnings per share, segment and
product line sales, and segment operating profit before taxes (PBT). We use segment PBT to
measure our consolidated operating results and assess segment performance. This discussion
has been prepared on a basis consistent with segment reporting as outlined in Note K of the
Consolidated Financial Statements.
Overview
During the
second quarter and first six months of fiscal year 2006, we continued to experience
high raw material costs which dramatically affected
our Carbon Black Business.
Also, higher natural gas costs negatively impacted our results of the
Carbon Black and Metal Oxides Businesses. While we have
pricing mechanisms in place to offset higher raw material costs in
the contracted portion of the Carbon Black Business, we were unable to fully offset raw material cost
increases with
price increases. The higher sales volume and
the higher selling prices along with the increases in raw
material costs put pressure on our working capital in both periods of
fiscal 2006. However, reduction in inventory levels in the Carbon
Black and Supermetals Businesses offset the increases in working
capital but also negatively impacted our profitability with higher
per unit costs.
The continued transition in the Supermetals Business from long-term fixed price and
fixed volume contracts to market-based pricing negatively impacted the second quarter
and the first six months of fiscal 2006 in the form of lower prices when compared to the
same periods of fiscal 2005. Higher ore costs under our new supply agreement with the
Sons of Gwalia, effective as of January 1, 2006, affected the Supermetals Business in both
the second quarter and first six months of fiscal 2006 due to our LIFO accounting
methodology for raw materials.
In connection with the settlement of the
dispute with the Sons of Gwalia over the price to be paid for
tantalum ore under a then existing supply agreement, we made a $27 million
lump-sum settlement payment to terminate the then existing supply and other related agreements. This negatively impacted our profitability during
the second quarter of fiscal 2006. We have recorded this settlement payment as an expense
and it has been included as component of cost of goods sold during the period ended March 31,
2006.
On November 8, 2005 we acquired our joint venture partner, Showa Denko K.K.s, 50% interest
in Showa Cabot K.K., which we subsequently renamed Cabot Japan K.K (CJKK). We have
benefited in fiscal 2006 from the consolidation of CJKK into our results.
26
Second Quarter and First Six Months Fiscal Year 2006 versus Second Quarter and First Six
Months Fiscal Year 2005 Consolidated
Net Sales and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, |
|
March 31, |
(Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net Sales |
|
$ |
627 |
|
|
$ |
527 |
|
|
$ |
1,214 |
|
|
$ |
1,022 |
|
Gross Profit |
|
$ |
85 |
|
|
$ |
130 |
|
|
$ |
191 |
|
|
$ |
247 |
|
The increase in net sales for the second quarter of fiscal 2006 when compared to the second
quarter of fiscal 2005 was primarily due to increased volumes ($9 million), higher prices,
principally in rubber blacks and performance products ($78 million), and the consolidation of
CJKK into our results ($31 million) partially offset by lower prices in the Supermetals
Business ($17 million). For the first six months of fiscal 2006, the increase in net sales
when compared to the first six months of fiscal 2005 was driven by
increased volumes ($6
million), higher prices ($116 million) and the consolidation of CJKK into our results ($50
million).
Gross
profit was 14% in the second quarter of fiscal 2006 compared to 25% in the same quarter
of fiscal 2005. For the first six months of fiscal 2006 gross margin was 16% compared to 24%
for the same period a year ago. Overall gross profit decreased by $45 million and $56
million in the second quarter and first six months of fiscal 2006, respectively, compared to
the same periods last year. The decrease in the gross profit
percentages is a result of the $27 million settlement payment to
the Sons of Gwalia and an increase in the raw materials costs of the
business as further described in the results by segment.
Selling and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, |
|
March 31, |
(Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Selling and Administrative Expense |
|
$ |
59 |
|
|
$ |
56 |
|
|
$ |
117 |
|
|
$ |
110 |
|
The increase in selling and administrative expense for the second quarter of fiscal 2006 when
compared to the same period of fiscal 2005 was primarily the result of costs associated with
our business process excellence (BPE) initiative. For the first six months of fiscal 2006,
the increase in selling and administrative expense was due to costs associated with our BPE
initiative and the result of recording a bad debt reserve ($2 million) related to a European
Carbon Black Business customer who filed for bankruptcy protection in the first quarter of
fiscal 2006.
Research and Technical Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, |
|
March 31, |
(Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Research and Technical Expense |
|
$ |
14 |
|
|
$ |
15 |
|
|
$ |
27 |
|
|
$ |
30 |
|
Research and technical expense for the second quarter of fiscal 2006 was relatively flat as
compared to the second quarter of fiscal 2005. For the first six months of fiscal year 2006
the decrease in research and technical expense compared to the same period last year was
mainly the result of reduced costs in the Supermetals Business.
27
Interest and Dividend Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
March 31, |
|
March 31, |
(Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Interest and Dividend Income |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
3 |
|
Interest and dividend income was unchanged for both the second quarter and first six months
of fiscal 2006 when compared to the same periods last year. The effect of higher interest
rates has been offset by lower average invested balance.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
March 31, |
|
March 31, |
(Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Interest Expense |
|
$ |
7 |
|
|
$ |
8 |
|
|
$ |
13 |
|
|
$ |
16 |
|
Interest expense for the second quarter of fiscal year 2006 decreased nominally by $1 million
compared to the second quarter of fiscal 2005. For the first six months of fiscal 2006 the
decrease of $3 million in interest expense when compared to the first six months of fiscal
2005 was due to the capitalization of interest related to the construction of our new
facilities in China and the expansion of our existing facility in Brazil.
Other Income/(Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
March 31, |
|
March 31, |
(Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Income/(Expense)
|
|
$ |
6 |
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
5 |
|
The change in the other income / (expense) balance in the second quarter of fiscal year 2006
compared to the second quarter of fiscal 2005 was primarily due to the receipt of insurance
proceeds. For the first six months of fiscal year 2006 the change in other income /
(expense) was due to the receipt of insurance proceeds when compared to the same period a
year ago.
Effective Tax Rate
Income tax expense in the second quarter of fiscal 2006 was $1 million, as compared to $13
million for the second quarter of fiscal 2005. Our effective tax rate from net income was 6% for the second quarter of fiscal
2006 as compared to an effective tax rate from net income of negative 36% for the second
quarter of fiscal 2005. The tax rate for the second quarter of 2006 was significantly
impacted by the $27 million settlement payment to the Sons of Gwalia, which reduced tax
expense by $9 million during the quarter. Excluding the settlement charge, the tax rate on
continuing operations for the second quarter of fiscal 2006 would have been 26%. The tax rate for the
second quarter of 2005 was primarily impacted by the $90 million write-off of goodwill, which
was nondeductible for tax purposes. Excluding the goodwill write-off and a tax benefit
related to the liquidation of a subsidiary during the second quarter, the tax rate on
continuing operations for the second quarter of fiscal 2005 would have been 26%. Income tax expense for
the first six months of fiscal year 2006 was $5 million as compared to $22 million in the
first six months of fiscal year 2005.
We are in the final stages of a settlement with the Internal Revenue Service regarding an audit for tax
years 2000-2002. While the IRS adjustments with respect to the years under examination are
still uncertain, the resolution of these issues could provide net tax benefits of between $5 million and $7 million in
continuing operations and between $2 million and $3 million
in discontinued operations. These tax benefits could be
recorded as early as the third quarter of fiscal 2006. The net cash cost of the settlement is expected to be approximately $12 million.
28
In addition, we are under audit in a number of jurisdictions outside of the US. It is
possible that some of these audits will be resolved in fiscal 2006 which may impact our
effective tax rate in the periods during which these settlements occur. We expect our
effective tax rate for continuing operations for fiscal 2006 to be between 24% and 26%
exclusive of the impact of the fiscal year 2000-2002 settlement described above and any
further audit settlements.
Equity in Net Income of Affiliates
Our share of earnings from equity affiliates was $4 million and $2 million in second quarters
of fiscal years 2006 and 2005, respectively. The increase of $2 million in the second quarter
of fiscal year 2006 as compared to the same period in fiscal year 2005 was due to improved
operating results in our affiliates in Mexico and Venezuela. Our share of earnings
from equity affiliates was $7 million and $4 million for the first six months of fiscal years
2006 and 2005, respectively. The increase of $3 million in the first six months of fiscal
year 2006 compared to the same period last year was driven by improved operating results in
our affiliates in Mexico and Venezuela.
Net Income
We reported net income for the second quarter of fiscal 2006 of $12 million ($0.17 per
diluted common share) compared to a net loss of $50 million (net loss of $0.84 per common
share) for the second quarter of fiscal 2005. Results for the second quarter of fiscal 2006
include $20 million of charges ($0.29 per diluted common share) for
certain items. The second quarter of 2005 results contained $93 million of charges ($1.46 per
common share) for certain items. For the first six months of fiscal 2006 we
reported net income of $36 million ($0.52 per diluted common share) compared to a net loss of
$15 million (net loss of $0.26 per common share) for the first six months of fiscal 2005.
Results for the first six months of fiscal 2006 include $19 million of charges ($0.27 per
diluted common share) for certain items. The first six months of 2005 results
contained $93 million of charges ($1.39 per common share) for certain items.
Details of the certain items for the second quarter of fiscal 2006 compared to the second
quarter of fiscal 2005 and the first six months of fiscal 2006 and fiscal 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
(Dollars in millions, pre-tax) |
|
March 31, |
|
|
March 31, |
|
(Unaudited) |
|
2006 |
|
2005 |
|
|
2006 |
|
2005 |
|
Net income (loss) |
|
$ |
12 |
|
|
$ |
(50 |
) |
|
$ |
36 |
|
|
$ |
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring initiatives |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(8 |
) |
Cost reduction initiatives |
|
|
(2 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
Sons of Gwalia settlement payment |
|
|
(27 |
) |
|
|
|
|
|
|
(27 |
) |
|
|
|
|
Goodwill impairment |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
Subtotal of certain items |
|
|
(31 |
) |
|
|
(94 |
) |
|
|
(33 |
) |
|
|
(98 |
) |
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Total certain items and cumulative
effect of accounting change, pre-tax |
|
|
(31 |
) |
|
|
(94 |
) |
|
|
(29 |
) |
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact of certain items and
cumulative effect of accounting
change |
|
|
11 |
|
|
|
1 |
|
|
|
10 |
|
|
|
5 |
|
|
|
|
|
|
Total certain items and cumulative
effects of accounting change after
tax |
|
$ |
(20 |
) |
|
$ |
(93 |
) |
|
$ |
(19 |
) |
|
$ |
(93 |
) |
|
|
|
|
|
29
The
pre-tax effect of the certain items described in the preceding table is recorded in the
consolidated statements of income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, |
|
March 31, |
(Dollars
in millions, pre-tax) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Statement of
operations line item: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
(29 |
) |
|
|
(3 |
) |
|
|
(29 |
) |
|
|
(7 |
) |
Selling and administrative expenses |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
Goodwill asset impairment |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
Total certain items, pre-tax |
|
$ |
(31 |
) |
|
$ |
(94 |
) |
|
|
(33 |
) |
|
$ |
(98 |
) |
|
|
|
|
|
|
|
|
|
|
Second Quarter and First Six Months Fiscal Year 2006 versus Second Quarter and First Six
Months Fiscal Year 2005 By Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, |
|
March 31, |
(Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Income from continuing operations |
|
$ |
12 |
|
|
$ |
(35 |
) |
|
$ |
39 |
|
|
$ |
9 |
|
Certain and other unallocated items |
|
|
(35 |
) |
|
|
(101 |
) |
|
|
(46 |
) |
|
|
(111 |
) |
Total segment PBT |
|
|
47 |
|
|
|
66 |
|
|
|
85 |
|
|
|
120 |
|
Income from continuing operations is reported before taxes. The details of certain and other
unallocated items are described in Note K of our consolidated financial statements. These
items are not included in total segment PBT.
The decrease in total segment PBT in both periods relates primarily to raw material and
natural gas costs in excess of price increases ($20 million for
the second quarter and $27 million for the first six months of fiscal 2006) and lower prices in the Supermetals Business
($17 million for the second quarter and $23 million for the first six months of fiscal 2006).
These decreases were partially offset by higher volumes ($12 million and $36 million
respectively) and the inclusion of CJKK ($5 million for the
second quarter and $7 million for the first six months of fiscal 2006).
Carbon Black Business
Segment sales and PBT for the Carbon Black Business for the second quarters and first six
months ending March 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, |
|
March 31, |
(Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Segment Sales
|
|
$ |
476 |
|
|
$ |
369 |
|
|
$ |
895 |
|
|
$ |
714 |
|
Segment PBT
|
|
|
26 |
|
|
|
41 |
|
|
|
47 |
|
|
|
71 |
|
The increase in sales in the Carbon Black Business in both periods was primarily due to
higher prices ($78 million and $121 million respectively),
change in volumes ($5 million and
$(2) million respectively) and the impact of consolidating the
results of CJKK which
was previously a 50% owned equity affiliate ($31 million for the second quarter and $50
million for the first six months of fiscal 2006).
Carbon Black Business segment PBT decreased in the second quarter of fiscal 2006 as compared
to the second quarter of fiscal 2005 due principally to raw material
cost increases in excess of price
increases ($15 million) and the effect of higher per unit cost
of production ($7 million) which were principally offset by
volume increases and CJKK.
For the first six months of fiscal 2006, the decrease in segment PBT when compared to the
first six months of fiscal 2005 was driven by raw material cost
increases in excess of price increases
($20 million) and the effect of higher per unit cost of
production ($8 million) as we reduced
inventory levels.
30
Several capital projects in the Carbon Black Business continued during the second quarter and
first six months of 2006 aimed at adding capacity to our rubber blacks, performance products
and inkjet colorants product lines. In fiscal year 2005, with our
joint venture partner Shanghai Coking & Chemical Company, we began construction of a new carbon black plant in
Tianjin, China that will produce both rubber blacks and performance products. Construction
of the two rubber blacks units at this new facility continues, with anticipated startups
during the third quarter of fiscal 2006. The start-up of operations of the performance
products unit, which was expected to become operational in the second half of 2006, will be
delayed principally because of environmental permitting matters. There also continues to be a
delay in the start-up of operations of our new carbon black manufacturing unit in Maua,
Brazil as a result of environmental permitting matters. We continue to expect this unit to be
operational by the end of this calendar year, although the timing of obtaining environmental
permits can be uncertain. Our capital expansion plans in the inkjet colorants product line
remain on track. The new inkjet colorants unit achieved mechanical completion during the second quarter of
fiscal 2006 and production testing is expected to continue well into the second half of 2006.
This capacity is intended to serve the high-speed inkjet market which is expected to have commercial launches in the beginning of calendar year 2007.
In February 2006, the International Agency for Research on Cancer (IARC) reviewed its
classification of carbon black regarding carcinogenicity. Following its review, IARC
maintained its previous classification of carbon black as a Group 2B (known animal
carcinogen, possible human carcinogen).
Product Line Sales Summary
The following table sets forth sales by product line for the Carbon Black Business for the
second quarters and first six months ending March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rubber blacks |
|
$ |
346 |
|
|
$ |
235 |
|
|
$ |
644 |
|
|
$ |
460 |
|
Performance products |
|
|
117 |
|
|
|
123 |
|
|
|
226 |
|
|
|
233 |
|
Inkjet colorants |
|
|
12 |
|
|
|
9 |
|
|
|
23 |
|
|
|
18 |
|
Superior MicroPowders |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Carbon Black Sales |
|
$ |
476 |
|
|
$ |
369 |
|
|
$ |
895 |
|
|
$ |
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rubber blacks
During both periods, sales increased in the rubber blacks product line as a result of higher
volumes, feedstock related price increases and the inclusion of CJKK. The
profitability of the product line for both the second quarter and first six months of fiscal
2006 was negatively impacted by increases in raw material costs
as well as by increases in other energy costs, mainly natural gas in
Europe, and the effect of
higher per unit cost of production as we continue to reduce inventory levels.
Historically
we have been able to recover increased feedstock costs and, therefore, maintain
margins through the operation of pricing formulas in our annual and long-term supply
contracts. Most of our contracts provide for a price adjustment on the first day of each
quarter to account for changes in feedstock costs and, in some cases, changes in other
relevant costs. The feedstock adjustments are calculated in the month prior to the beginning
of the three-month period in which the price change is effective, and typically are based
upon the average of a relevant index over the prior three-month period. Because of this time
lag, the increase in our actual feedstock costs was greater than the cost adjustment
resulting from the formulas for which we used the relevant index averages during the months of
September through November 2005. Over time, if feedstock costs stabilize or decline, the
current negative financial impact of this lag on our results should be mitigated.
Performance products
Revenues for performance products were lower in both periods due to a decline in volumes and
the unfavorable effect of foreign currency. The decline in volumes was concentrated in our
lower margin, non-contracted business and resulted from price increases implemented to
respond to the escalation of raw material costs. Price increases have more than offset the
decline in volumes, but only partially offset the foreign exchange impact. For both the
second quarter and first six months of fiscal 2006 the profitability of the product line was negatively impacted by a decrease in margins due to higher feedstock and natural gas
costs, unfavorable foreign currency and to a lesser extent, lower volumes.
31
Inkjet colorants
Inkjet colorants reported 48% and 43% increases in volume for the second quarter and first
six months of fiscal 2006, respectively, when compared to the same periods in fiscal 2005.
The volume increases were driven by the OEM segment of the business. For both the second
quarter and first six months of fiscal 2006, the favorable volume impact on revenue was
partially offset by a decrease in our average selling price, which decreased because of
changes in product mix and the continued shift from experimental-stage pricing levels to
prices more consistent with commercial sales. Profitability of the inkjet colorants product
line increased solidly in both the second quarter and first six months of fiscal 2006 as
compared to the same periods in fiscal 2005 due to the strong volume growth.
Metal Oxides Business
Segment sales and PBT for the Metal Oxides Business for the second quarters and first six
months ending March 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Sales |
|
$ |
62 |
|
|
$ |
58 |
|
|
$ |
119 |
|
|
$ |
118 |
|
Segment PBT |
|
|
5 |
|
|
|
5 |
|
|
|
7 |
|
|
|
11 |
|
Sales for both the second quarter and first six months of fiscal 2006 increased slightly due
to higher volumes in the fumed metal oxides product line ($6 million and $2 million,
respectively) partially offset by lower average selling prices due to unfavorable foreign
currency effects ($2 million) for the three months ended
March 31, 2006 when compared to the comparable periods of fiscal 2005.
For the second quarter of fiscal 2006 the positive impact on PBT of higher sales ($4 million)
was offset by increased hydrogen and natural gas costs ($3 million). When comparing the
first six months of fiscal 2006 to the first six months of fiscal 2005, the decline in PBT
resulted primarily from increased hydrogen and natural gas costs ($4 million).
Product Line Sales Summary
The following table sets forth sales by product line for the Metal Oxides Business for the
second quarters and first six months ending March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fumed metal oxides |
|
$ |
62 |
|
|
$ |
58 |
|
|
$ |
119 |
|
|
$ |
118 |
|
Aerogel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Metal Oxides Sales |
|
$ |
62 |
|
|
$ |
58 |
|
|
$ |
119 |
|
|
$ |
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fumed metal oxides
During the second quarter of fiscal 2006, sales increased in the fumed metal oxides product
line as a result of an increase in overall volumes driven by higher demand from the
electronics market and niche segments of the business. Volume growth was partially offset by
a reduction in average selling price resulting from unfavorable product mix. For the first
six months of fiscal 2006 volumes in the fumed metal oxides product line increased compared
to the first six months of fiscal 2005 driven by growth in the niche portions of the
business, offsetting reduced demand in the traditional silicones and electronics markets.
Stronger volumes were, however, offset by a lower average selling price resulting from
unfavorable product mix.
The profitability of the fumed metal oxides product line in the second quarter of fiscal 2006
was flat when compared to the second quarter of fiscal 2005 as the increase in sales was
offset by higher hydrogen and natural gas costs. For the first six months of fiscal year
2006 the profitability of the fumed metal oxides product line was lower when compared to the
first six months of fiscal 2005 principally due to higher hydrogen and natural gas costs.
32
The hydrogen gas supply to our plant in Tuscola, Illinois returned to normal during the
second quarter of fiscal 2006 after a significant equipment failure at a suppliers hydrogen
gas facility. Additional costs incurred from the disruption were
$1 million for both the
second quarter and first six months of fiscal 2006, net of insurance recovery. We believe
that most of the costs related to the incident will be recovered over the next twelve months.
As part of
our market development and capacity construction plans in China, in February 2004
we entered into a joint venture with Bluestar New Chemical Materials Co., Ltd. to manufacture
fumed silica in China. We own 90% of the venture, called Cabot Bluestar Chemical (Jiangxi)
Co., Ltd. Construction of the plant reached mechanical completion during the second quarter of
fiscal 2006 and we anticipate that the plant will become operational during the second half
of fiscal 2006.
Aerogel
Over the course of the first six months of fiscal 2006, the aerogel product line continued to
make progress in its ability to operate its semi-works manufacturing plant in Frankfurt,
Germany at higher capacity levels and over a more sustained period of time. The product line
continues to market its products for translucent panels in architectural applications and to
develop other commercial applications.
Supermetals Business
Segment sales and PBT for the Supermetals Business for the second quarters and first six
months ending March 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Sales |
|
$ |
67 |
|
|
$ |
86 |
|
|
$ |
160 |
|
|
$ |
163 |
|
Segment PBT(1) |
|
|
12 |
|
|
|
16 |
|
|
|
23 |
|
|
|
32 |
|
|
|
|
(1) |
|
Segment results exclude the impact of the $27 million settlement payment
to the Sons of Gwalia in fiscal 2006 and $90 million of goodwill
impairment charges in fiscal 2005 |
The decrease in sales during the second quarter of fiscal 2006 when compared to the
second quarter of fiscal 2005 was mainly the result of lower prices
($17 million) driven by
the continued transition from fixed price, fixed volume contracts to market-based pricing
arrangements. During the second quarter of fiscal 2006 we experienced growth in
non-contracted volumes of tantalum powder but this growth was more than offset by a reduction
in contracted volume. For the first six months of fiscal 2006, the decrease in sales
compared to the first six months of fiscal 2005 was the result of
lower prices ($23 million)
as the continued transition to market based pricing arrangements from fixed price, fixed
volume contracts more than offset higher volumes in the segment ($19 million). We
continue to believe that over the course of the fiscal year we will be able to replace lost
contract volumes with open market volumes, but at lower prices, which will negatively impact
our profitability.
The decrease in PBT during the second quarter of fiscal 2006 as compared to the second
quarter of fiscal 2005 was primarily due to the continued transition of sales from our fixed
price contracts to lower market prices ($17 million) coupled with higher raw material costs
under our new ore supply agreement with the Sons of Gwalia ($4 million). This was partially
offset by lower manufacturing and administrative costs consistently resulting from previous
cost reduction initiatives ($18 million). For the first six months of fiscal 2006, the decrease in PBT when
compared to the first six months of fiscal 2005 was driven by lower
prices ($23 million),
higher ore costs ($5 million), and higher fixed costs per pound resulting from a reduction of
inventory in the business ($7 million). These were partially
offset by higher volumes ($8
million) and reductions in manufacturing and administrative costs ($16 million) during the
period.
On February 8, 2006, we reached a settlement with the Sons of Gwalia on the dispute over the
price we were to pay for tantalum ore under a then existing supply agreement. Under the terms
of this settlement, we made a lump sum payment of $27 million to terminate the then existing
supply and other related agreements with the Sons of Gwalia. The companies have entered
into a new three-year tantalum ore supply agreement that incorporates a significantly reduced
annual volume commitment. Under the new agreement, which is denominated in Australian
dollars, we will pay higher prices for ore than under the prior agreement. The $27 million
lump sum payment has been recorded as an expense for the period ended March 31, 2006 and has
been included as a component of cost of goods sold in the
consolidated statement of operations. Excluding the $27 million lump sum
payment,
33
the new agreement is expected to result in an annual increase in tantalum ore cost of
approximately $13 million. Due to our LIFO accounting methodology, these higher ore costs
are reflected throughout the fiscal year.
On January 31, 2006, we sold the property, plant and equipment related to our direct finished
tantalum sputtering target business to Tosoh SMD, a division of Tosoh Corporation. These
assets were recorded at their fair value and classified as assets held for sale at December
31, 2005. There was no gain or loss recognized in connection with the sale.
Specialty Fluids Business
Segment sales and PBT for the Specialty Fluids Business for the second quarters and first six
months ending March 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
March 31, |
|
March 31, |
(Dollars in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Segment Sales |
|
$ |
11 |
|
|
$ |
8 |
|
|
$ |
21 |
|
|
$ |
15 |
|
Segment PBT |
|
|
4 |
|
|
|
4 |
|
|
|
8 |
|
|
|
6 |
|
Sales for the second quarter and first six months of fiscal year 2006 were driven mainly by
an increase in the volume of fluid sold during the period. Although the number of jobs
decreased from six to four in the second quarter and from twelve to eleven in the first six
months compared to the fiscal year 2005 periods, the sizes and types of jobs during 2006 led
to more fluid being sold as compared to the same periods in 2005. This increase in the
volume of fluid sold was partially offset during the second quarter by lower rental revenues.
During both the second quarter and first six months of fiscal 2006 we achieved a 14%
utilization of our total available fluid inventory, as compared to 14% and 11% utilization in
the second quarter and first six months of fiscal 2005, respectively. Our fluids have been
used principally for drilling and completion of wells in the North Sea, which remains a
stable market for our business. We continue to market our fluid outside of the North Sea,
but the drilling industry continues to be slow to adopt the fluid outside of this geographic
area.
III. Cash Flow and Liquidity
Overview
Our cash balance decreased by $78 million in the first six months of fiscal 2006, from $181
million as of September 30, 2005 to $103 million on March 31, 2006. There were four major
uses of cash during this period: increases in working capital driven by rising raw material
costs and receivables, the acquisition of the remaining 50% of our
carbon black joint venture in Japan and repayment of the assumed debt, the
$27 million settlement payment to the Sons of Gwalia in our Supermetals Business, and increased capital
spending to expand capacity in emerging markets and to comply with environmental
requirements. During the same period of fiscal 2005, the cash balance declined by $3
million, from $159 million on September 30, 2004 to $156 million as of March 31, 2005. The
following descriptions of the reasons for these changes in our cash balances refer to the
various sections of our Consolidated Statements of Cash Flows, which appears in Item 1 of
this quarterly report on Form 10-Q for the six months ended March 31, 2006.
Cash Flows from Operating Activities
Cash generated by operating activities, which consists of net income adjusted for the various
non-cash items included in income, changes in working capital and changes in certain other
balance sheet accounts, totaled $24 million in the first six months of fiscal 2006 compared
to $73 million in the same period of fiscal 2005. Cash generated from net income excluding
depreciation was $48 million less in the first six months of fiscal 2006 versus the same
period last year, excluding the $90 million of goodwill impairment recorded in fiscal
2005. Changes in working capital explain most of the remainder of the change in cash flows
from operating activities. Changes in accounts receivable, inventory and accounts payable and
accrued liabilities consumed $62 million during the first two quarters of fiscal 2006, which
was $22 million more than the same period of fiscal 2005. Accounts receivable increased due
to higher selling prices. Accounts payable and accrued liabilities
decreased due to the timing of certain
payments and our efforts to reduce outstanding balances. Inventories
declined slightly during the first two quarters of fiscal 2006 driven
by reductions in the Supermetals segment, but these were offset by an increase in Carbon
Black inventories due to escalating feedstock prices. During the
first two quarters of fiscal 2005, inventories had increased
significantly in an effort to plan for future customer demand and to
plan for potential fluctuation in plant operations.
34
Cash Flows from Investing Activities
Cash used in investing activities totaled $78 million in the first six months of fiscal 2006
versus $36 million in the same period of fiscal 2005. This change in fiscal 2006 was
primarily driven by capital spending on property, plant and equipment, where we spent $101
million and $69 million for the first six months of fiscal 2006 and 2005 respectively. These
capital expenditures were mostly for the new rubber blacks, performance products and fumed
metal oxides facilities in China, capacity expansion in our inkjet colorants product line and
expansion of the carbon black facility in Brazil. Capital expenditures for fiscal 2006 are
expected to be in excess of $250 million and include the acquisition of Showa Cabot K.K.
(SCK), facility improvements and plant expansions, and the continuation of projects started
in fiscal year 2005. We purchased from our 50:50 joint venture partner Showa Denko K.K. its
50% interest in the shares in SCK in Japan for $19 million in cash and renamed the entity
Cabot Japan K.K. Finally, during the first six months of fiscal 2006 and 2005 we had net
proceeds of $37 million and $35 million, respectively, from net sales of marketable
securities.
Cash Flows from Financing Activities
Cash flows from financing activities, which primarily include changes in debt in the first
six months of fiscal year 2006, resulted in a use of cash of $20 million, versus a use of $39 million
in the same period of fiscal year 2005. In fiscal year 2006, the repayment of maturing debt
totaling $31 million, primarily in the U.S., was mostly offset by $26 million of proceeds in
long term debt to finance expansion in China. We borrowed $20 million from our $400 million
revolving credit facility for working capital needs in the second quarter of fiscal 2006. In
connection with the SCK acquisition we assumed $26 million of
debt, of which we repaid $18
million as of March 31, 2006. The remaining assumed debt of $8 million is included in the
investing activities under cash paid for acquisition as part of the acquisition price.
Dividends paid for the first six months of fiscal 2006 and 2005 were $21 million in both
years. We did not repurchase any Cabot common stock in the open market in fiscal 2006, but
repurchased $11 million in the same period of fiscal 2005.
Financing
At March 31, 2006, our long-term debt obligations totaled $505 million, of which $54 million
will mature in the next twelve months. Included in the current portion of long-term debt is a
1.5 billion yen ($13 million) bank loan, which was repaid in April 2006, $8 million of
assumed debt in Japan maturing throughout the next twelve months, and $30 million of medium
term notes maturing in February 2007.
During fiscal 2006, majority owned joint-ventures operating in China
entered into new long-term bank agreements in Chinese Renminbi (RMB)
totaling 205 million RMB (26 million USD). The financing will
be used to fund capital expenditures at the Tianjin and Bluestar joint ventures and overall
working capital needs. These loans mature at various dates between
2007 and 2011 and bear
interest at rates ranging from 5.2% to 5.3%.
During January 2006, Cabot entered into a fixed-to-variable interest rate swap to swap the
fixed interest rate of 7.18% on a $30 million medium-term note maturing in February 2009 to a
variable interest rate. The variable rate of interest is calculated based on the 6-month
London Interbank Offer Rate (LIBOR) plus an agreed upon spread. The LIBOR rate will be reset
each June 15 and December 15 until the maturity date. The notional value of the swap is $30
million. This swap has been designated as a fair value hedge under FAS No. 133, Accounting
for Derivative Instruments and Hedging Activities and related interpretations, to offset
changes in the fair value of the underlying debt. The fair value of the derivative
instrument was less than negative $1 million as of March 31, 2006. The fair value interest
rate swap is determined to be highly effective and no amount of ineffectiveness was recorded
in earnings during the three months ended March 31, 2006.
We expect cash on hand, cash from operations and present financing arrangements, including
unused portions of Cabots committed credit facilities, to be sufficient to meet our
additional cash requirements for the next twelve months and the foreseeable future.
Reserves
Cabot has a $15 million reserve for environmental matters as of March 31, 2006 for
remediation costs at various environmental sites. These sites are primarily associated with
businesses divested in prior years. We have made a payment for $2 million during the second
quarter of fiscal 2006 and we anticipate making additional payments of $4 million during the
second half of fiscal 2006. We do not expect remaining expenditures to be materially
concentrated in any one year. Additionally, we have recorded an $18 million reserve for
respirator claims as of March 31, 2006 and we expect to pay
35
approximately $11 million over the next five years. We have other litigation costs associated
with lawsuits arising in the ordinary course of business including claims filed against the
Company in connection with certain discontinued operations.
Restructuring
In October 2004, we initiated a plan to shut down our Altona, Australia carbon black
manufacturing facility due to our raw materials suppliers indication that it would cease
supply in September 2005, as well as the decline of the carbon black business in Australia.
Production at this facility ceased on October 3, 2005. As of March 31, 2006, we expect the
restructuring initiatives to result in a pre-tax charge to earnings
of approximately $25 million. As of March 31, 2006, we have recorded $17 million of restructuring charges and
expect to record an additional $8 million over the next six months. The estimated charge of
$25 million includes $7 million of foreign currency translation adjustments that will be
realized as a non-cash charge upon substantial liquidation of our legal entity in Altona,
Australia which we expect will occur upon completion of the closing activities during fiscal
2006.
In fiscal 2003, we initiated a European restructuring plan to reduce costs, enhance customer
service and create a stronger and more competitive organization. The European restructuring
initiatives have been primarily related to the Carbon Black Business and included the closure
of our carbon black manufacturing facility in Zierbena, Spain, the consolidation of
administrative services for all European businesses in one shared service center, the
implementation of a consistent staffing model for all manufacturing facilities in Europe, and
the discontinuance of two energy projects. As of March 31, 2006, we have recorded $55 million
of European restructuring charges, of which $2 million remain to be paid out over the next
three to six months.
At March 31, 2006, $6 million of restructuring costs remain in accrued expenses in the
consolidated balance sheet. We made cash payments of $9 million in the first six months of
fiscal 2006 and $5 million in the first six months of fiscal 2005 related to restructuring
costs and expect to make cash payments of $7 million throughout the remainder of fiscal 2006
related to severance and employee benefits charges and site remediation costs.
Contractual Obligations
Information about additional contractual obligations for the period ended March 31, 2006 does
not differ materially from that discussed under Cash Flow and Liquidity in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations of our
fiscal 2005 Form 10-K, except as discussed below.
Cabot has entered into long-term purchase agreements for various key raw materials in the
Carbon Black, Metal Oxides and Supermetals Businesses. On February 8, 2006, we settled our
dispute with the Sons of Gwalia over the price to be paid by Cabot for tantalum ore under a
then existing supply agreement. As part of the settlement, the companies terminated the then
existing agreement and other related agreements and entered into a new three-year tantalum
ore supply agreement that incorporates a significantly reduced annual volume commitment.
Under the new agreement, which is denominated in Australian dollars, we will pay higher
prices for ore than under the prior agreement.
The table
below includes all of the Companys long-term purchase
commitments, including those under the
new tantalum ore agreement.
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
2006 |
|
$ |
139 |
|
2007 |
|
|
120 |
|
2008 |
|
|
115 |
|
2009 |
|
|
55 |
|
2010 |
|
|
44 |
|
Thereafter |
|
|
536 |
|
|
|
|
|
Total future purchase commitments |
|
$ |
1,009 |
|
|
|
|
|
To mitigate the foreign currency exposure associated with the future settlement of the
Australian dollar denominated payables under the new agreement with
the Sons of Gwalia, during April 2006 we entered
into option contracts with a total notional amount of $136 million Australian dollars (97
million US dollars). These contracts provide us with the right, but not the obligation, to
purchase Australian dollars at agreed strike prices through January 2009. Certain of these
option contracts have been designated as foreign currency cash flow hedges under FAS No. 133,
Accounting for Derivative Instruments and Hedging
36
Activities and related interpretations. Thus, the effective portion of gains and losses for
those options will be deferred as a component of accumulated other comprehensive income and
will be recognized in cost of goods sold when the hedged item affects cost of goods sold.
The changes in fair value of the options contracts that have not been designated as a hedge
under FAS No. 133 will be marked to market through earnings.
Cautionary
Factors That May Affect Future Results:
This report on Form 10-Q contains
forward-looking statements under the Federal securities laws. These forward-looking
statements include statements relating to our future business performance; our ability to
recover feedstock costs under our annual and long-term rubber blacks supply contracts;
feedstock and energy costs; when we expect to start operating our new rubber blacks and
performance products units at our new carbon black facility in Tianjin, China; when we expect
to obtain environmental permits necessary to operate our newly constructed rubber blacks
manufacturing unit in Maua, Brazil; capital expansion plans for our inkjet colorants product
line; when we expect to start operating the new fumed silica plant
in China; anticipated capital expenditures for the fiscal year; sales expectations for the Supermetals Business; our expected effective tax rate for
fiscal 2006; the outcome of tax audits; the amount of charges and payments
associated with restructuring initiatives; the amount and timing of payments associated for
environmental remediation and for respirator claims; our ability to
recover costs associated with the disruption of the hydrogen supply
to our facility in Tuscola, Illinois; and the outcome of pending litigation.
Forward-looking statements are based on our current expectations, assumptions, estimates and
projections about Cabots businesses and strategies, market trends and conditions, economic
conditions and other factors. These statements are not guarantees of future performance and
are subject to risks, uncertainties, potentially inaccurate assumptions and other factors,
some of which are beyond our control and difficult to predict. If known or unknown risks
materialize, or should underlying assumptions prove inaccurate, our actual results could
differ materially from past results and from those expressed in the forward-looking
statements.
In addition to factors described elsewhere in this report, the following are some of the
factors that could cause Cabots actual results to differ materially from those expressed in
our forward-looking statements: domestic and global economic conditions; a continuing rise in
feedstock costs and a higher than expected increase in natural gas prices; lower than
expected demand for our products; changes in our competitors capacity utilization;
fluctuations in currency exchange rates; unforeseen delays in obtaining environmental
permits; the outcome of tax audits; our ability to implement restructuring initiatives as
planned; the occurrence of unexpected environmental costs for sites that are not known to us
or as to which it is currently not possible to make an estimate; the accuracy of assumptions
used in establishing a reserve for our share of liability for respirator claims; and the
outcome of pending litigation. A detailed description of the factors and risks that could
affect Cabots actual results are discussed in our 2005 10-K.
IV. Recent Accounting Pronouncements
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations (FIN 47), which clarifies certain terminology contained in FAS No.
143, Accounting for Asset Retirement Obligations. The interpretation will result in (i)
more consistent recognition of liabilities relating to asset retirement obligations, (ii)
more information about expected future cash outflows associated with those obligations and
(iii) more information about investments in long-lived assets because additional asset
retirement costs will be recognized as part of the carrying amounts of the assets. The
guidance is effective for the Company no later than the fourth quarter of fiscal 2006,
although earlier adoption is permitted. Cabot is in the process of
evaluating the impact of FIN 47 on its consolidated financial
statements which could have a material impact to earnings upon
adoption.
In October 2004, the American Jobs Creation Act of 2004 (AJCA) was signed into law. The
AJCA replaces an export incentive with a deduction from domestic manufacturing income. Cabot
is both an exporter and a domestic manufacturer.
37
The Companys loss of the export incentive tax benefit is expected to materially exceed the
tax benefit it should receive from the domestic manufacturing deduction. The AJCA also allows
U.S. companies to repatriate up to $500 million of earnings from their foreign subsidiaries
in 2005 or 2006 at an effective tax rate of 5.25%. The Company does not expect to take
advantage of this opportunity, nor does it expect that there is a material benefit available,
given our particular circumstances and the various requirements under the law. The Company,
however, will continue to study the impact and opportunities of the AJCA. The FASB has issued
Staff Position (FSP) Nos. 109-1 and 109-2, which outline accounting treatment for the
impacts of AJCA. The FSPs state that (i) any benefit that companies may have from the
domestic manufacturing deduction be treated as a special deduction and accordingly any
benefit would be reported in the year in which the income is earned and (ii) regarding the
impact resulting from the repatriation of unremitted earnings in the period in which the
enacted tax law was passed, companies may wait until they have the information necessary to
determine the amount of the earnings they intend to repatriate.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information about additional market risks for the period ended March 31, 2006 does not differ
materially from that discussed under Item 7A of our fiscal 2005 Form 10-K, except as follows:
Foreign Currency
Cabots international operations are subject to certain risks, including currency
fluctuations and government actions. Our Treasury function, under the guidance of the
Financial Risk Management Committee, continuously monitors foreign exchange exposures, so
that we can respond to changing economic and political environments. Exposures primarily
relate to assets and liabilities denominated in foreign currencies as well as the risk that
currency fluctuations could affect the dollar value of future cash flows generated in foreign
currencies. Accordingly, we use option contracts and short-term forward contracts to minimize
the exposure to foreign currency risk. In 2006, 2005 and 2004, none of Cabots forward
contracts were designated as hedging instruments under FAS No. 133. Cabots option contracts
and forward foreign exchange contracts are denominated primarily in the Euro, Japanese yen,
British pound sterling, Canadian dollar, Australian dollar and Indonesian rupiah.
In February 2006, Cabot entered into a new three-year tantalum ore supply agreement with the
Sons of Gwalia, under which the price to be paid for ore is denominated in Australian
dollars. To mitigate the foreign currency exposure associated with the future settlement of
the Australian dollar denominated payables under the new agreement, during April 2006 Cabot
entered into option contracts with a total notional amount of $136 million Australian dollars
(97 million US dollars). These contracts provide Cabot with the right, but not the
obligation, to purchase Australian dollars at a future date. Certain of these option
contracts have been designated as foreign currency cash flow hedges under FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities and related interpretations.
Thus, the effective portion of gains and losses for those options will be deferred as a
component of accumulated other comprehensive loss and will be recognized in cost of goods
sold when the hedged item affects cost of goods sold. The changes in fair value of the
options contracts that have not been designated as a hedge under FAS No. 133 will be marked
to market through earnings.
Interest Rates
Cabot enters into interest rate swaps as a hedge of underlying debt instruments to
effectively change the characteristics of the interest rate without actually changing the
debt instrument. For fixed rate debt, interest rate changes affect the fair market value,
but do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate
changes generally do not affect the fair market value, but do impact future earnings and cash
flows, assuming the other factors are held constant.
During January 2006, Cabot entered into a fixed-to-variable interest rate swap to swap the
fixed interest rate of 7.18% on a $30 million medium-term note maturing in February 2009 to a
variable interest rate. The variable rate of interest is calculated based on the 6-month
London Interbank Offer Rate (LIBOR) plus an agreed upon spread. The LIBOR rate will be reset
each June 15 and December 15 until the maturity date. The notional value of the swap is $30
million. This swap has been designated as a fair value hedge under FAS No. 133, Accounting
for Derivative Instruments and Hedging Activities and related interpretations, to offset
changes in the fair value of the underlying debt. The fair value of the derivative
instrument was less than negative $1 million as of March 31, 2006. The fair value interest
rate swap is determined to be highly effective and no amount of ineffectiveness was recorded
in earnings during the period ended March 31, 2006.
38
Item 4. Controls and Procedures
As of March 31, 2006, the Company carried out an evaluation, under the supervision and with
the participation of the Companys management, including the Companys Chairman of the Board,
President and Chief Executive Officer and its Executive Vice President and Chief Financial
Officer, of the effectiveness of the Companys disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based
upon that evaluation, the Companys Chairman of the Board, President and Chief Executive
Officer and its Executive Vice President and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as of that date.
There were no changes in the Companys internal control over financial reporting that
occurred during the Companys fiscal quarter ending March 31, 2006 that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
Respirator Liabilities
We have exposure in connection with a safety respiratory products business that a subsidiary
acquired from American Optical Corporation (AO) in an April 1990 asset transaction. As more
fully described in our fiscal 2005 Form 10-K, Cabots respirator liabilities involve claims
for personal injury, including asbestosis and silicosis, allegedly resulting from the use of
AO respirators that are alleged to have been negligently designed or labeled. As of March 31,
2006, there were approximately 82,000 claimants in pending cases asserting claims against AO
in connection with respiratory products. In the third quarter of fiscal year 2003, we
recorded a reserve to cover our expected share of liability for existing and future
respirator liability claims. The book value of the reserve is being accreted up to the
undiscounted liability through interest expense over the expected cash flow period, and, at
March 31, 2006, is approximately $18 million (or $31 million on an undiscounted basis).
Other
In July 2004, Sons of Gwalia Ltd. filed a Request for Arbitration with the London Court of
International Arbitration seeking arbitration between the Sons of Gwalia and Cabot to
determine the price at which Cabot would purchase tantalum ore under a then existing
long-term supply agreement between the parties. In August 2003, we exercised our option to
extend this contract for a five year period commencing January 1, 2006. Although the contract
contained provisions for determining the price at which Cabot would purchase ore during the
period of extension, Cabot and Sons of Gwalia were not in agreement as to the application of
those provisions and the Sons of Gwalia filed the Request for Arbitration pursuant to the
terms of the contract. Arbitration hearings took place in September and October 2005. On
February 8, 2006, we settled our dispute with the Sons of Gwalia. Under the settlement, Cabot
paid Sons of Gwalia a lump sum of US $27 million to terminate the then existing supply
agreement and other related agreements with Sons of Gwalia, and we entered into a new
three-year tantalum ore supply agreement.
We have various other lawsuits, claims and contingent liabilities arising in the ordinary
course of our business, including a number of claims asserting premises liability for
asbestos exposure, and in respect of our divested businesses. In our opinion, although final
disposition of some or all of these other suits and claims may impact our financial
statements in a particular period, they should not, in the aggregate, have a material adverse
effect on our financial position.
39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below sets forth information regarding the Companys purchases of its equity
securities during the second quarter ended March 31, 2006.
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number (or |
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Approximate Dollar |
|
|
Total Number |
|
Average |
|
as Part of Publicly |
|
Value) of Shares that May |
|
|
of Shares |
|
Price Paid |
|
Announced Plans |
|
Yet Be Purchased Under |
Period |
|
Purchased (1) |
|
per Share |
|
or Programs |
|
the Plans or Programs |
January 1, 2006 January 31, 2006 |
|
|
69,000 |
|
|
$ |
34.40 |
|
|
|
|
|
|
|
2,685,113 |
|
February 1, 2006 February 28, 2006 |
|
|
5,737 |
|
|
$ |
37.02 |
|
|
|
5,737 |
|
|
|
2,679,376 |
|
March 1, 2006 March 31, 2006 |
|
|
1,579 |
|
|
$ |
35.84 |
|
|
|
1,579 |
|
|
|
2,677,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
76,316 |
|
|
|
|
|
|
|
7,316 |
|
|
|
|
|
|
|
|
(1) |
|
On May 14, 2004, the Company announced publicly that the Board of Directors
authorized the Company to repurchase five million shares of the Companys common stock
in the open market or in privately negotiated transactions. This authority does not
have a set expiration date. Included in the shares repurchased from time to time by
Cabot under this authorization are shares of common stock repurchased from employees to
satisfy tax withholding obligations that arise on the vesting of shares of restricted
stock or the exercise of stock options issued under the Companys equity incentive
plans. During the second fiscal quarter, of the 7,316 shares repurchased pursuant to
this authorization, none were repurchased on the open market. All 7,316 shares were
repurchased from employees to satisfy tax withholding obligations. From time to time,
the Company also repurchases shares of unvested restricted stock from employees whose
employment is terminated before such shares vest. These shares are repurchased pursuant
to the terms of the Companys equity incentive plans and are not included in the shares
repurchased under the May 2004 Board authorization. During the second fiscal quarter,
the Company repurchased 69,000 shares pursuant to the terms of its equity incentive
plans. |
Item 4. Submission of Matters to a Vote of Security Holders
Cabot held its Annual Meeting of Stockholders on March 9, 2006. There was no solicitation in
opposition to managements nominees as listed in Cabots proxy statement and all such
nominees were elected to the class of directors whose terms expire in 2009. In addition, the
stockholders ratified the appointment of PricewaterhouseCoopers LLP as Cabots independent
registered public accounting firm for the fiscal year ending September 30, 2006, approved
Cabots 2006 Long-Term Incentive Plan, and approved Cabots Non-Employee Directors Stock
Compensation Plan. The results of the votes for each of these proposals were as follows:
1. Election of Directors Whose Terms Expire in 2009:
|
|
|
|
|
|
|
|
|
|
|
For |
|
Withheld |
Dirk L. Blevi |
|
|
59,840,138 |
|
|
|
2,055,060 |
|
John F. OBrien |
|
|
59,928,720 |
|
|
|
1,966,478 |
|
Lydia W. Thomas |
|
|
60,033,705 |
|
|
|
1,861,493 |
|
Mark S. Wrighton |
|
|
58,741,865 |
|
|
|
3,153,333 |
|
40
2. Proposal to Ratify the Appointment of PricewaterhouseCoopers LLP
|
|
|
|
|
For: |
|
|
61,336,973 |
|
Against: |
|
|
488,721 |
|
Abstain: |
|
|
69,504 |
|
Broker Non-Votes: |
|
|
|
|
3. Proposal to Approve Cabots 2006 Long-Term Incentive Plan
|
|
|
|
|
For: |
|
|
43,389,004 |
|
Against: |
|
|
11,526,523 |
|
Abstain: |
|
|
634,607 |
|
Broker Non-Votes: |
|
|
6,345,064 |
|
4. Proposal to Approve Cabots Non-Employee Directors Stock Compensation Plan
|
|
|
|
|
For: |
|
|
48,455,689 |
|
Against: |
|
|
6,511,728 |
|
Abstain: |
|
|
582,717 |
|
Broker Non-Votes: |
|
|
6,345,064 |
|
41
Item 6. Exhibits
|
|
|
Exhibit 10.1 - |
|
Cabot Corporation 2006 Long-Term Incentive Plan (incorporated by reference
to Appendix B of Cabot Corporations Proxy Statement on Schedule 14A relating to the
2006 Annual Meeting of Stockholders, File No. 1-5667, filed with the Commission on
January 30, 2006). |
|
|
|
Exhibit 10.2 - |
|
Cabot Corporation Non-Employee Directors Stock Compensation Plan
(incorporated by reference to Appendix C of Cabot Corporations Proxy Statement on
Schedule 14A relating to the 2006 Annual Meeting of Stockholders, File No. 1-5667,
filed with the Commission on January 30, 2006). |
|
|
|
Exhibit 31.1* - |
|
Certification of Principal Executive Officer required by Rule 13a-14(a) or
Rule15d-14(a) of the Exchange Act. |
|
|
|
Exhibit 31.2* - |
|
Certification of Principal Financial Officer required by Rule 13a-14(a) or
Rule 15d-14(a) of the Exchange Act. |
|
|
|
Exhibit 32* - |
|
Certifications of the Principal Executive Officer and the Principal
Financial Officer pursuant to 18 U.S.C. Section 1350. |
42
SIGNATURES
Pursuant to the requirements 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.
|
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|
|
|
CABOT CORPORATION
|
|
|
By: |
/s/ Jonathan P. Mason
|
|
|
|
Jonathan P. Mason |
|
|
|
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer) |
|
|
Date: May 9, 2006
|
|
|
|
|
|
|
|
|
By: |
/s/ James P. Kelly
|
|
|
|
James P. Kelly |
|
|
|
Controller
(Chief Accounting Officer) |
|
|
Date: May 9, 2006
43
Exhibit Index
|
|
|
Exhibit No. |
|
Description |
|
|
|
Exhibit 10.1 -
|
|
Cabot Corporation 2006 Long-Term Incentive Plan (incorporated by
reference to Appendix B of Cabot Corporations Proxy Statement on Schedule 14A
relating to the 2006 Annual Meeting of Stockholders, File No. 1-5667, filed with
the Commission on January 30, 2006). |
|
|
|
Exhibit 10.2 -
|
|
Cabot Corporation Non-Employee Directors Stock Compensation Plan
(incorporated by reference to Appendix C of Cabot Corporations Proxy Statement
on Schedule 14A relating to the 2006 Annual Meeting of Stockholders, File No.
1-5667, filed with the Commission on January 30, 2006). |
|
|
|
Exhibit 31.1*
|
|
Certification of Principal Executive Officer required by Rule 13a-14(a)
or Rule15d-14(a) of the Exchange Act. |
|
|
|
Exhibit 31.2*
|
|
Certification of Principal Financial Officer required by Rule 13a-14(a)
or Rule 15d-14(a) of the Exchange Act. |
|
|
|
Exhibit 32*
|
|
Certifications of the Principal Executive Officer and the Principal
Financial Officer pursuant to 18 U.S.C. Section 1350. |
44
exv31w1
EXHIBIT 31.1
Principal Executive Officer Certification
I, Kennett F. Burnes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cabot Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors
and the audit committee of the registrants board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
|
|
Date: May 9, 2006 |
/s/ Kennett F. Burnes
|
|
|
Kennett F. Burnes |
|
|
Chairman of the Board, President
and Chief Executive Officer |
|
exv31w2
EXHIBIT 31.2
Principal Financial Officer Certification
I, Jonathan P. Mason, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cabot Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors
and the audit committee of the registrants board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
|
|
|
/s/ Jonathan P. Mason
|
|
Date: May 9, 2006 |
Jonathan P. Mason |
|
|
Executive Vice President and
Chief Financial Officer |
|
exv32
EXHIBIT 32
Certifications Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006 (the Report) by Cabot Corporation (the Company), each of the undersigned
hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
1. |
|
The Report fully complies with the requirements of section 13 (a) or 15 (d) of
the Securities Exchange Act of 1934, as amended; and |
|
2. |
|
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
|
|
|
|
|
|
|
|
|
/s/ Kennett F. Burnes
|
|
|
Kennett F. Burnes |
|
|
Chairman of the Board, President
and Chief Executive Officer
May 9, 2006 |
|
|
|
|
|
|
|
|
|
|
|
/s/ Jonathan P. Mason
|
|
|
Jonathan P. Mason |
|
|
Executive Vice President and
Chief Financial Officer
May 9, 2006 |
|
|