UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x                              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                                                For the fiscal year ended September 30, 2006

or

o                                 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)

Delaware

 

04-2271897

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

Two Seaport Lane, Suite 1300

 

 

Boston, Massachusetts

 

02210

(Address of Principal Executive Offices)

 

(Zip Code)

 

(617) 345-0100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

 

Name of Each Exchange on Which Registered

Common stock, $1.00 par value per share

 

Boston Stock Exchange

 

 

New York Stock Exchange

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x   No  o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o   No   x

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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No    o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

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.

Large accelerated filer  x      Accelerated filer  o      Non-accelerated filer  o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No x

As of the last business day of the Registrant’s most recently completed second fiscal quarter (March 31, 2006), the aggregate market value of the Registrant’s common stock held by non-affiliates was approximately $2,092,490,000. As of December 5, 2006, there were 64,096,052 shares of the Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for its 2007 Annual Meeting of Shareholders are incorporated by reference in Part III of this annual report on Form 10-K.

 




TABLE OF CONTENTS

PART I

ITEM 1.

 

Business

 

1

ITEM 1A.

 

Risk Factors

 

13

ITEM 1B.

 

Unresolved Staff Comments

 

17

ITEM 2.

 

Properties

 

18

ITEM 3.

 

Legal Proceedings

 

20

ITEM 4.

 

Submission of Matters to a Vote of Security Holders

 

25

PART II

ITEM 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

27

ITEM 6.

 

Selected Financial Data

 

28

ITEM 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30

ITEM 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

55

ITEM 8.

 

Financial Statements and Supplementary Data

 

57

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

117

ITEM 9A.

 

Controls and Procedures

 

117

ITEM 9B.

 

Other Information

 

118

PART III

ITEM 10.

 

Directors and Executive Officers of the Registrant

 

119

ITEM 11.

 

Executive Compensation

 

119

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

119

ITEM 13.

 

Certain Relationships and Related Transactions

 

119

ITEM 14.

 

Principal Accounting Fees and Services

 

119

PART IV

ITEM 15.

 

Exhibits and Financial Statement Schedules

 

120

Signatures

 

125

Exhibit Index

 

 

 

 

 




Information Relating to Forward-Looking Statements

This report on Form 10-K contains “forward-looking statements” under the Federal securities laws. These forward-looking statements include statements relating to our future business performance and overall prospects; demand for our products; utilization of new carbon black capacity in China and the timing of commercial approvals of product produced at our new rubber blacks unit in Maua, Brazil; growth in the inkjet colorants product line; capacity utilization at our fumed metal oxides plants; development of our aerogel product line; profitability of the Supermetals Business and our ability to continue to realize benefits from our efforts to reduce the cost structure in this Business; growth of our Specialty Fluids Business outside of the North Sea; anticipated capital spending; cost reduction initiatives; cash requirements and uses of available cash; exposure to interest rate and foreign exchange risk; our expected tax rate for fiscal 2007; environmental matters; and the possible outcome of legal proceedings. From time to time, we also provide forward-looking statements in other materials we release to the public and in oral statements made by authorized officers.

Forward-looking statements are based on our current expectations, assumptions, estimates and projections about Cabot’s 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. Important factors that could cause our actual results to differ materially from those expressed in our forward-looking statements are described in Item 1A in this Annual Report.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures we make on related subjects in our 10-Q and 8-K reports filed with the Securities and Exchange Commission (the “SEC”).

PART I

Item 1.                        Business

General

Cabot’s business was founded in 1882 and incorporated in the State of Delaware in 1960. Cabot is a global specialty chemicals and performance materials company headquartered in Boston, Massachusetts. Our principal products are rubber blacks, performance products, inkjet colorants, fumed metal oxides, aerogels, tantalum and related products, and cesium formate drilling fluids. Cabot and its affiliates have manufacturing facilities in the United States and more than 20 other countries. The terms “Cabot”, “Company”, “we”, and “our” as used in this Report refer to Cabot Corporation and its consolidated subsidiaries.

Our business strategy is based on two key principles: optimizing our core businesses and product lines (rubber blacks, performance products, fumed metal oxides and tantalum) and investing the cash and intellectual resources they generate in new businesses and product lines (inkjet colorants, cesium formate, aerogel and Superior MicroPowders).

Our new products and new businesses are generally based on technical innovation in one or more of our three core competencies: making and handling very fine particles; modifying the surfaces of very fine particles to alter their functionality; and designing particles to impart specific properties to a composite. We focus on creating particles with the composition, morphology, surface functionalities and formulations to support existing and emerging applications that improve a product’s performance.

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We are organized into four reportable segments: the Carbon Black Business, the Metal Oxides Business, the Supermetals Business and the Specialty Fluids Business. These businesses are discussed in more detail later in this section. In addition, we also manage our businesses on a regional basis and are organized into five business regions:   North America, South America, Europe, Asia Pacific, and China. Financial information about our business segments and geographic areas appears in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below (“MD&A”), and in Note U of the Notes to our Consolidated Financial Statements in Item 8 below. We adopted our current segment reporting structure in fiscal 2005. Financial information prior to fiscal 2005 has been conformed to reflect our current segment reporting structure.

Our internet address is www.cabot-corp.com. We make available free of charge on or through our internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC.

Carbon Black Business

Carbon black is a form of elemental carbon, which is manufactured in a highly controlled process to produce particles and aggregates of varied structure and surface chemistry, resulting in many different performance characteristics for a wide variety of applications. Carbon black is widely used to enhance the physical, electrical and optical properties of the systems and applications in which it is incorporated. Manufactured to match customer needs and performance requirements, carbon black is sold to diverse markets, including the automotive, building materials, agricultural, coatings, toners, plastics, inkjet printing and electronics markets. The Carbon Black Business is primarily comprised of the rubber blacks, performance products and inkjet colorants product lines. The Carbon Black Business also encompasses the business development activities of Cabot Superior MicroPowders (“CSMP”).

Product Lines

Our rubber blacks products are used in tires and industrial products. Rubber blacks have traditionally been used in the tire industry as a rubber reinforcing agent and are also used as a performance additive. In industrial products such as hoses, belts, extruded profiles and molded goods, rubber blacks are used to improve the physical performance of the product. In addition to the carbon black we make using conventional carbon black manufacturing methods, we are developing elastomer composite products (referred to as Cabot Elastomer Composites or “CEC”) that are compounds of natural rubber and carbon black made by a patented liquid phase process. Our CEC products are targeted primarily for tire and industrial rubber applications because we believe these compounds improve wear resistance, reduce fatigue and reduce rolling resistance compared to natural rubber/carbon black compounds made by conventional methods.

Our performance products are specialized grades of carbon blacks that are used to enhance conductivity and static charge control, to provide UV protection, to enhance mechanical properties, to provide chemical flexibility through surface treatment and as pigments. These products are used in a wide variety of industries such as inks, coatings, cables, pipes, toners and electronics. Our performance products include black and white thermoplastic concentrates and specialty compounds that are marketed to the plastics industry.

Our inkjet colorants are high-quality pigment-based black and other colorant dispersions we manufacture by surface treating special grades of carbon black and other pigments. Our black colorants have been used in several inkjet printing systems introduced to the market since 1998, and the expansion of our surface modification technology (small molecule attachment) to other pigments permitted

2




commercialization of color pigment dispersions during fiscal year 2002. The dispersions are used in aqueous inkjet inks to impart color (optical density or chroma) with improved durability (waterfastness, lightfastness, rub resistance) while maintaining high printhead reliability. Cabot’s inkjet colorants are produced for various inkjet printing markets, including small office and home office, high-speed, wide format, and commercial and industrial printing applications.

CSMP is a research and development enterprise with multiple technology platforms and core competencies in advanced powder manufacturing across a wide range of materials and the related materials chemistries. Its principal areas of commercial focus are in developing advanced materials for security applications (anti-counterfeiting materials), fuel cell applications (portable, stationary and automotive), catalysts, and for other fine particle markets. We also expect CSMP to provide our other businesses with technology support to develop new technologies that complement existing markets and provide opportunities for new business growth.

Sales, Customers and Seasonality

Sales of rubber blacks, performance products and inkjet colorants are made by Cabot employees and through distributors and sales representatives. The amount of sales for each product line and CSMP for each of the last three fiscal years is set forth in the following table:

 

 

Years Ended September 30

 

 

 

2006

 

2005

 

2004

 

 

 

(In millions)

 

Rubber blacks

 

$

1,378

 

$

976

 

$

863

 

Performance products

 

488

 

469

 

427

 

Inkjet colorants

 

47

 

39

 

31

 

CSMP

 

4

 

6

 

4

 

Total Carbon Black Business Sales

 

$

1,917

 

$

1,490

 

$

1,325

 

 

Sales to three major tire customers represent a material portion of the Carbon Black Business’s total net sales and operating revenues. The loss of any of these customers could have a material adverse effect on the Carbon Black Business. In fiscal 2006, sales to The Goodyear Tire and Rubber Company (“Goodyear”) amounted to 14% of Cabot’s consolidated revenues. We did not have sales during the fiscal year to any other customer in an amount equal to or greater than 10% of Cabot’s consolidated revenues for the year.

Much of the carbon black we sell is used in automotive products and, therefore, our financial results may be affected by the cyclical nature of the automotive industry. However, a large portion of the market for our products is in replacement tires and other parts that are less subject to automotive industry cycles.

Under appropriate circumstances, we have pursued a strategy of entering into annual and long-term supply contracts (those with an initial term longer than one year) with certain customers. These contracts are designed to provide our customers with a secure supply of carbon black and help us reduce the volatility in our carbon black volumes and margins. Many of these contracts provide for quarterly sales price adjustments to account for changes in feedstock costs and, in some cases, changes in other relevant costs. We currently have global long-term rubber blacks supply contracts with two major tire customers. A portion of the supply arrangements with one of these customers expires by its terms at the end of calendar year 2006. Negotiations for a new supply arrangement with this customer, which began in 2005, continue. In fiscal year 2006, approximately 54% of the volume of rubber blacks sold by Cabot was sold under long-term contracts in effect during the fiscal year, and approximately 13% was sold under annual contracts in effect during the fiscal year. We currently sell performance products to seven customers pursuant to long-

3




term supply contracts. During fiscal year 2006, sales under long-term contracts accounted for approximately 20% of the volume of performance products we sold.

Sales of inkjet colorants are made to inkjet printer manufacturers and to suppliers of inkjet inks in the inkjet cartridge aftermarket.

Competition

We are one of the leading manufacturers of rubber blacks and performance products in the world, with an estimated one-quarter of the aggregate worldwide production capacity for these products combined. Cabot is also one of the five leading producers of thermoplastic concentrates in Europe. We compete in the manufacture of rubber blacks and performance products primarily with Columbian Chemicals Company and Degussa AG (both of which have a global presence), and with at least 20 other companies in various regional markets in which we operate, including the Aditya Birla Group of companies and China Synthetic Rubber Corporation.

Our inkjet colorants are designed to replace traditional pigment dispersions and dyes used in inkjet printing applications. Competitive products for inkjet colorants are organic dyes and other dispersed pigments manufactured and marketed by large chemical companies and small independent producers.

Competition for products within the Carbon Black Business is based on price, service, quality, product performance and technical innovation. With respect to our rubber blacks and performance products product lines, competition is also based upon the proximity of our manufacturing operations to those of our customers.

Raw Materials

The principal raw material used in the manufacture of carbon black is a portion of the residual heavy oils derived from petroleum refining operations and from the distillation of coal tars and the production of ethylene throughout the world. Natural gas is also used in the production of carbon black. While the lack of availability of raw materials has not been a significant factor for our rubber blacks or performance products product lines, we may experience some difficulty obtaining low sulfur feedstock at an acceptable cost for our European operations in the event the proposed Best Available Techniques Reference Documents, which are commonly referred to as “BREF Notes,” are adopted. The proposed BREF Note for the European carbon black industry, which is described more fully under “Safety, Health and Environment” below, calls for an annual average sulfur content in carbon black feedstock in a range of 0.5% to 1.5%. Raw material costs generally are influenced by the availability of various types of carbon black feedstock and natural gas, and related transportation costs.

Other than carbon black feedstock, the primary materials used for thermoplastic concentrates are titanium dioxide, thermoplastic resins and mineral fillers. Raw materials for these concentrates are, in general, readily available.

Raw materials for inkjet colorants include carbon black sourced from our carbon black plants, organic pigments and other treating agents available from various sources. We believe that all raw materials to produce inkjet colorants are in adequate supply.

Operations

We own (or have a controlling interest in) and operate plants that produce rubber blacks and/or performance products grades of carbon black in Argentina, Brazil, Canada, China, Colombia, the Czech Republic, the United Kingdom, France, India, Indonesia, Italy, Japan, The Netherlands, and the United States. Our affiliates own carbon black plants in Malaysia, Mexico and Venezuela. Our thermoplastic concentrates and specialty compounds are produced in facilities in Belgium, Italy, the United Kingdom

4




and China (Hong Kong). Inkjet colorants are manufactured in the United States. Some of our plants are built on leased land (see “Properties” below).

In October 2005, we ceased manufacturing operations at our Altona, Australia plant. The decision to close the plant was based on the decline in Australia’s domestic carbon black market and the loss of our feedstock supply in Australia.

Until November 2005, we had a 50:50 joint venture arrangement with Showa Denko K.K. for the manufacture and supply of carbon black in Japan through an entity called Showa Cabot K.K. On November 8, 2005, we acquired Showa Denko K.K.’s 50% joint venture interest in Showa Cabot K.K. and renamed the entity Cabot Japan K.K.

Many of our rubber blacks and performance products customers have been moving their manufacturing operations to emerging, lower cost regions. To remain competitive, we have been expanding our operations in those regions, particularly in China. In fiscal 2004, we completed expansion of a rubber blacks plant in Shanghai operated by Shanghai Cabot Chemical Company Ltd. (“SCCCL”), our joint venture with Shanghai Coking & Chemical Company (“Shanghai Coking”). We own 70% of SCCCL. In fiscal 2005, we expanded our relationship with Shanghai Coking by entering into two joint ventures for the construction and operation of a new plant in Tianjin, China with units that will produce both rubber blacks and performance products. We own 70% of the rubber blacks joint venture and 90% of the performance products joint venture. The Tianjin plant currently includes two completed rubber blacks production units, which began producing product for customers in the third quarter of 2006. Construction of the performance products unit continues to be delayed because of permitting issues. In addition to our expansion in China, a new rubber blacks manufacturing unit at our plant in Maua, Brazil became operational in the first quarter of fiscal 2007.

In fiscal 2006, we completed construction of our new inkjet colorants manufacturing unit in Haverhill, Massachusetts, and in the fourth quarter product manufactured at the new unit was qualified for commercial use by one of our key customers. This capacity is intended to serve the high-speed inkjet market, which is expected to have commercial launches in the spring of 2007.

The headquarters for our rubber blacks and performance products product lines is located in Boston, Massachusetts; the headquarters for the inkjet colorants product line is located in Billerica, Massachusetts; and the headquarters for CSMP is in Albuquerque, New Mexico. Rubber blacks and performance products also have regional headquarters in Alpharetta, Georgia (North America), São Paulo, Brazil (South America), Leuven, Belgium (Europe), Kuala Lumpur, Malaysia (Asia Pacific) and Shanghai, China (China).

Metal Oxides Business

The Metal Oxides Business is comprised of the fumed metal oxides (including fumed silica and fumed alumina and dispersions thereof) and aerogel product lines.

Product Lines

Fumed silica is an ultra-fine, high-purity particle used as a reinforcing, thickening, abrasive, thixotropic, suspending or anti-caking agent in a wide variety of products produced for the automotive, construction, microelectronics, and consumer products industries. These products include adhesives, sealants, cosmetics, inks, toners, silicone rubber, coatings, polishing slurries and pharmaceuticals. Fumed alumina, also an ultra-fine, high purity particle, is used as an abrasive, absorbant or barrier agent in a variety of products, such as inkjet media, lighting, coatings and cosmetics.

5




Cabot’s aerogels are nano-structured high surface area hydrophobic silica particles with potential uses in a variety of thermal and acoustic insulation applications. Cabot’s aerogels are marketed under the Nanogel® trademark. The first commercial shipment of Cabot’s Nanogel® product occurred in December 2002. To date, the product has been incorporated into the skylight, window and wall system products of several manufacturers of panels for use in the daylighting segment of the construction industry. We continue to focus on application and market development activities for use of aerogels in other commercial areas, and in fiscal 2006, began working with several potential customers to qualify our aerogels products for oil and gas pipeline insulation applications. Because our aerogel products are new, there is a significant risk that products targeted for new applications or markets will not gain market acceptance or that there will not be sufficient market size to support this product.

Sales and Customers

Sales of fumed metal oxides and aerogels are made by Cabot employees and through distributors and sales representatives. The amount of sales for each product line for each of the last three fiscal years is set forth in the following table:

 

 

Years Ended September 30

 

 

 

   2006   

 

   2005   

 

   2004   

 

 

 

(In millions)

 

Fumed metal oxides

 

 

$

253

 

 

 

$

231

 

 

 

$

221

 

 

Aerogel

 

 

1

 

 

 

 

 

 

 

 

Total Metal Oxides Business Sales

 

 

$

254

 

 

 

$

231

 

 

 

$

221

 

 

 

Sales to one silicones customer and one microelectronics customer represent a material portion of the Metal Oxides Business. The loss of either of these customers would have a material adverse effect on the Metal Oxides Business. We currently supply fumed metal oxides to both of these customers pursuant to long-term contracts. These contracts accounted for approximately 56% of the volume of fumed metal oxides sold by Cabot in fiscal year 2006.

Competition

We believe we are the leading producer and seller of fumed silica in the United States and second worldwide. We compete in the manufacture of fumed silica primarily with Degussa AG, Wacker-Chemie GmbH and Tokuyama Corporation, all of which have a global presence, and with at least four other companies in various regional markets in which we operate.

Although the manufacturing processes used are different, in premium insulation markets, our aerogel products compete principally with aerogel products manufactured by Aspen Aerogel, Inc. and other manufacturers of non-aerogel insulation products.

Competition for products within our Metal Oxides Business is based on price, service, quality, product performance and technical innovation. For our fumed metal oxides product line, competition is also based upon the proximity of our manufacturing operations to those of our customers.

Raw Materials

Raw materials for the production of fumed silica are various chlorosilane feedstocks. The feedstocks are either purchased or converted to product on a fee-basis (so called “toll conversion”) for owners of the feedstock. We also purchase aluminum chloride as feedstock for the production of fumed alumina. We have long-term procurement contracts or arrangements in place for the purchase of feedstock for this business, which we believe will enable us to meet our raw material requirements for the foreseeable future. In addition, we buy some raw materials in the spot market to help ensure flexibility and minimize costs.

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The principal raw materials for the production of aerogels are silica sol or sodium silicate and trimethyl-chloro-silane, which we believe are in adequate supply.

Operations

We own two fumed metal oxide manufacturing plants in North America; one in Tuscola, Illinois and one in Midland, Michigan. We also own manufacturing plants in the United Kingdom and Germany and have a 50% joint venture interest in an Indian entity that owns a plant in India. As part of our market development and capacity expansion plans in China, we entered into a joint venture in February 2004 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., which completed construction of a fumed silica manufacturing plant near Nanchang, in Jiangxi Province in 2006. The plant began producing product for customers in the third quarter of fiscal 2006.

In 2002, we completed construction of a new semi-works facility in Frankfurt, Germany for the manufacture of aerogels. Since then, we have been refining the unique and patented manufacturing process at the semi-works facility to improve production rates and quality yield to permit manufacturing at the facility’s intended capacity. The manufacture of aerogels uses a new chemical process and achieving the expected capacity output at the semi-works facility has taken longer than we anticipated. Although we continue to make progress in our ability to operate the semi-works facility at higher capacity levels and over a more sustained period of time, there continues to be a risk that designed capacity output may not be achieved or that future full-scale manufacturing is not possible.

The headquarters for the Metal Oxides Business is located in Billerica, Massachusetts. We also have regional headquarters in Alpharetta, Georgia (North America), São Paulo, Brazil (South America), Leuven, Belgium (Europe), Kuala Lumpur, Malaysia (Asia Pacific) and Shanghai, China (China).

Supermetals Business

Products

We produce tantalum, niobium (columbium) and their alloys. Tantalum, which accounts for substantially all of this Business’s sales, is produced in various forms. Electronics is the largest market for tantalum powder and wire, which are used to make capacitors for computers, networking devices, wireless phones, electronics for automobiles and other devices. Tantalum, niobium and their alloys are also produced in wrought form for other applications such as the production of superalloys and chemical process equipment and for various other industrial and aerospace applications.

In addition, we sell tantalum products for the manufacture of tantalum sputtering targets used in thin film applications, including semiconductors, inkjet heads, magnetics and flat panel displays. Supermetals has provided the starting metals (high-purity grade tantalum powders, plates and ingots) used to manufacture finished tantalum sputtering targets and has also manufactured finished tantalum sputtering targets. In the fourth quarter of fiscal 2005, we decided to stop manufacturing and selling finished tantalum sputtering targets for end users in the semiconductor industry and to focus our efforts on the sale of tantalum plate and ingot to sputtering target manufacturers. In January 2006 we sold the property, plant and equipment assets related to our direct finished tantalum sputtering target business to Tosoh SMD, a division of Tosoh Corporation.

Sales and Customers

Sales in the United States are made by Cabot employees, in Europe by Cabot employees and a sales representative, and in Japan and other parts of Asia primarily through Cabot employees.

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Sales to four capacitor materials customers represent a material portion of the total net sales and operating revenues of the Supermetals Business. The loss of any one or more of these customers could have a material adverse effect on the Supermetals Business.

Many of our tantalum products are used in products for the electronics industry, which is cyclical in nature. During the last five years, a material portion of the sales of tantalum powder and wire by the Supermetals Business have been under fixed price and fixed volume contracts with four customers. These contracts were designed to provide our customers with a secure supply of tantalum powder and wire products and to mitigate volatility in our tantalum volumes caused by cycles in the electronics industry. In fiscal year 2006 these contracts accounted for approximately 29% of the volume of finished powder and wire sold by the Supermetals Business. The fixed-price and fixed-volume portions of these contracts are expiring and by the end of calendar 2006, sales will be substantially at market prices for variable volumes.

Competition

We currently have two principal competitors in our tantalum business, H.C. Starck and Ningxia Non-ferrous Metals (Group) Co., Ltd. We believe that we are the leading producer of electronic grade tantalum powder products, with competitors having greater production in some other product lines. Competition in this business is based on price, service, quality, product performance and technical innovation.

Raw Materials

We obtain the majority of our raw materials in the form of tantalum ore from the mine we own in Manitoba, Canada, from a mine in Australia owned by the Sons of Gwalia, and from the spot market. In February 2006, in connection with the settlement of an arbitration proceeding between Cabot and the Sons of Gwalia over the price at which the Sons of Gwalia would supply tantalum ore to us under our then current supply agreement, we entered into a new tantalum ore supply agreement that expires in December 2008. Since 1996, Cabot has relied on long-term supply contracts to secure the majority of its raw material requirements. We are currently evaluating long-term supply options to meet our raw materials needs beyond 2008. While we believe there is sufficient tantalum to meet global demand, our ability to contract for significant amounts of tantalum ore beyond 2008 is uncertain.

Operations

We operate manufacturing facilities for this business in Boyertown, Pennsylvania and Kawahigashi-machi, Fukushima-ken, Japan. The headquarters for the Supermetals Business is located in Boston, Massachusetts.

Specialty Fluids Business

Products

Our Specialty Fluids Business produces and markets cesium formate as a drilling and completion fluid for use primarily in high pressure and high temperature oil and gas well operations. Cesium formate products are solids-free, high-density fluids that have a low viscosity, permitting them to flow readily in oil and gas wells. The fluid is resistant to high temperatures, minimizes damage to producing reservoirs and is readily biodegradable. Cesium formate is blended and sold with other formates or products in a majority of applications. To date, cesium formate has been used successfully in over 120 oil and gas well completions and drill-in applications.

Sales and Customers

Sales of our cesium formate products are made by Cabot employees and sales representatives directly to oil and gas operating companies and through oil field service companies. We generally rent cesium

8




formate to our customers for use in drilling operations on a short-term basis. After completion of a job, the customer returns the fluid to Cabot, and it is reprocessed for use in subsequent well operations. Any of the fluid that is lost during use and not returned to Cabot is paid for by the customer. The rates to be charged to the customer for the daily rental of the product and for the product that is lost are negotiated and agreed to prior to the beginning of the job. Ordinarily, approximately 15% of the cesium formate used in an operation is lost.

In 2003, we entered into an agreement with a major energy service company to provide a supply of  cesium formate-based fluids for both reservoir drilling and completion activities on two large gas and condensate field projects in the Norwegian Continental Shelf being developed and operated by Statoil. The loss of this customer would have a material adverse effect on the Specialty Fluids Business. We are currently negotiating an extension of this agreement through 2008.

Our fluids have been used principally for drilling and completion of wells in the North Sea. In the fourth quarter of fiscal 2006 our fluids were used in the drilling of one appraisal well in Argentina, allowing the customer to assess cesium formate’s impact on “formation damage.”

Competition

Formate fluids, which were introduced to the market in the mid-1990s, are a relatively small but growing part of the fluids market and compete mainly with traditional drilling fluid technologies. Competition in the well fluids business is based on price, service, quality, product performance, technical innovation and proximity of inventory to customers’ drilling operations.

Raw Materials

The principal raw material used in this business is pollucite ore, which we obtain from our mine in Manitoba, Canada. We have an adequate supply of this cesium-rich pollucite ore, owning a substantial portion of the world’s known pollucite reserves. Pollucite ore, however, is a finite resource. At current production rates and our currently estimated reserve levels, we expect our supply in the mine to last approximately 10-15 years. The process of estimating mineral reserves is inherently uncertain and requires making subjective engineering, geological, geophysical and economic assumptions. Accordingly, there is likely to be variability in the estimated reserve life of the ore body over time. Further, our estimate of known reserves does not include low grade ore that will require different, although well-established, recovery techniques than we currently use, or our existing inventory of finished product.

Most jobs for which cesium formate is used require a large volume of the product. Accordingly, the Specialty Fluids Business carries a large supply of fluid.

Operations

We have a mine and a cesium formate manufacturing facility in Manitoba, Canada. Cabot has fluid blending and reclamation facilities in Aberdeen, Scotland and in Bergen and Kristiansund, Norway. In addition, fluid is being warehoused at various locations around the world to support existing and potential new operations. The Specialty Fluids Business has its headquarters in Aberdeen, Scotland.

Patents and Trademarks

We own and are a licensee of various patents, which expire at different times, covering many of our products, as well as processes and product uses. Although the products made and sold under these patents and licenses are important to Cabot, the loss of any particular patent or license would not materially affect our business, taken as a whole. We sell our products under a variety of trademarks, the loss of any one of which would not materially affect our business, taken as a whole.

9




Backlog

Cabot’s businesses are generally not seasonal in nature, although they typically experience some decline in European and North American sales in the fourth fiscal quarter due to summer plant shutdowns and in sales in Asia Pacific and China in the second fiscal quarter because of the New Year holidays in those regions. In general, no significant lead-time between order and delivery exists in any of our business segments and management does not use backlog information in managing our business. As a result, we do not consider that the dollar amount of backlog orders believed to be firm as of any particular date is material for an understanding of our business.

Employees

As of September 30, 2006, we had approximately 4,300 employees. Some of our employees in the United States and abroad are covered by collective bargaining or similar agreements, several of which are subject to renegotiation in the coming year. We believe that our relations with our employees are generally satisfactory.

Research and Development

Cabot develops new and improved products and higher efficiency processes through Company-sponsored research and technical service activities, including those initiated in response to customer requests. Our expenditures for such activities generally are spread among our businesses and are shown in the consolidated statements of operations.

Safety, Health and Environment

The Company has been named as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (the “Superfund law”) and comparable state statutes with respect to several sites primarily associated with our divested businesses. (See “Legal Proceedings” below.) During the next several years, as remediation of various environmental sites is carried out, we expect to spend a significant portion of our $13 million environmental reserve for costs associated with such remediation. We anticipate that the expenditures at these sites will be made over a number of years. Adjustments are made to the reserve based on our continuing analysis of our share of costs likely to be incurred at each site. Inherent uncertainties exist in these estimates due to unknown conditions at the various sites, changing governmental regulations and legal standards regarding liability, and changing technologies for handling site investigation and remediation. While the reserve represents our best estimate of the costs we expect to incur, no assurance can be given that the actual costs to investigate and remediate these sites will not exceed the amounts accrued in the environmental reserve. While it is always possible that an unusual event may occur with respect to a given site and have a material adverse effect on the results of operations in a particular period, in light of the environmental reserve, we do not believe that the costs relating to these sites, in the aggregate, are likely to have a material adverse effect on our financial condition. It is possible that we may also incur future costs relating to sites that are not currently known to us or as to which it is currently not possible to make an estimate.

The Company’s ongoing operations are subject to extensive federal, state, local, and foreign laws, regulations, rules, and ordinances relating to safety, health, and environmental matters (“SH&E Requirements”). We have expended considerable sums to construct, maintain, operate, and improve facilities for safety, health and environmental protection and to comply with SH&E Requirements. We spent approximately $14 million in environmentally related capital expenditures at existing facilities in fiscal year 2006 and anticipate spending approximately $16 million for such costs in fiscal year 2007.

10




In recognition of the importance of SH&E Requirements to the Company, in February 1990, our Board of Directors established a Safety, Health, and Environmental Affairs Committee. The Committee, which is comprised of seven non-employee directors, generally meets three times a year and provides oversight and guidance in respect of the Company’s safety, health and environmental management programs and performance. In particular, the Committee reviews the Company’s environmental reserve, risk assessment and management processes, environmental and safety audit reports, performance metrics, performance as benchmarked against industry peer groups, assessed fines or penalties, site security and safety issues, health and environmental training initiatives, and SH&E budget and capital expenditures, and consults with the Company’s outside and internal advisors regarding management of the Company’s safety, health and environmental programs.

In 1996, the International Agency for Research on Cancer (“IARC”) revised its evaluation of carbon black from Group 3 (insufficient evidence to make a determination regarding carcinogenicity) to Group 2B (known animal carcinogen, possible human carcinogen). We have communicated IARC’s classification of carbon black to our customers and employees and have included that information in our material safety data sheets and elsewhere, as appropriate. IARC reviewed its classification of carbon black regarding carcinogenicity in February 2006 and decided to maintain the classification of carbon black as a Group 2B substance. We continue to believe that the available evidence, taken as a whole, indicates that carbon black is not carcinogenic to humans, and does not present a health hazard when handled in accordance with good housekeeping and safe workplace practices as described in our material safety data sheets.

In October 1999, the California Office of Environmental Health Hazard Assessment (“OEHHA”) published a Notice of Intent to add “carbon black (airborne particles of respirable size)” to its list of chemicals known to the State to cause cancer promulgated pursuant to the California Safe Drinking Water and Toxic Enforcement Act, commonly referred to as Proposition 65. OEHHA stated it was taking this action in light of IARC’s 1996 reclassification of carbon black. Proposition 65 requires businesses to give warnings to individuals before they knowingly or intentionally expose them to chemicals subject to its requirements, and it prohibits businesses from knowingly discharging or releasing the chemicals into water or onto land where they could contaminate drinking water. In February 2003, OEHHA published a notice adding “carbon black (airborne, unbound particles of respirable size)” to the Proposition 65 list. We worked with the International Carbon Black Association (“ICBA”), as well as various customers and carbon black user groups, to ensure compliance with the requirements associated with the Proposition 65 listing of carbon black, which became effective in February 2004.

In April 2002, The Netherlands published the “Dutch Notes on BAT for the Carbon Black Industry” to support the identification of Best Available Techniques (“BAT”) for the European carbon black industry pursuant to European Union (“EU”) Directive 96/61/EEC. BAT Reference Documents, so-called BREF Notes, are being prepared by various EU member countries under the supervision of the Integrated Pollution Prevention and Control Bureau (the “IPPC Bureau”). The currently proposed IPPC Bureau draft BAT guidance for large volume inorganic chemicals for the carbon black industry calls for an annual average sulfur content in carbon black feedstock in the range of 0.5% to 1.5% to control sulfur dioxide emissions. Depending on the final guidance adopted, this could have significant financial effects on the carbon black industry, including the Company, and could cause the Company to experience difficulty obtaining low sulfur feedstock at an acceptable cost for its European operations. We are not able to predict whether this regulatory development in the EU will affect our earnings in a materially adverse manner.

Since October 2003, the European Commission (“EC”) has been developing a new EU regulatory framework for chemicals. The proposed new system called REACH (Registration, Evaluation and Authorization of Chemicals) would apply to all existing and new chemical substances produced or imported into the EU in quantities greater than one ton a year. Manufacturers or importers of these chemical substances would be obligated to register the substance with a central agency by submitting

11




specified health, safety, risk and use information about the substance. On November 17, 2005, REACH was adopted by the European Parliament in the first reading of the draft legislation. On June 22, 2006, a common position was adopted by the EU Council with a view to passage of an amended REACH legislation. The common position was approved by the European Parliament in December 2006. REACH is expected to be effective in June 2007. As we are committed to continuing to supply our EU customers, we continue to implement plans to respond to the upcoming requirements of REACH.

The EC has been working with the European tire industry on a proposal to restrict the marketing and use of certain polycyclic aromatic hydrocarbons (“PAHs”) in extender oils and tires. This proposal to amend European Union Directive 76/769/EC would prohibit the use of extender oils containing high levels of eight PAHs classified as carcinogenic according to the EC in tires beginning January 1, 2009. The proposal’s objective is to reduce the emission of tire debris that contains carcinogens into the environment to an acceptable level. The EC is now considering whether to extend this proposal to all potential sources of PAHs in tires. In non-adsorbed forms, some PAHs have been found to be carcinogens in animal studies. PAHs adsorbed to carbon blacks, however, have been shown by scientific studies dating back to the mid-1980’s to be tightly bound to the carbon black particle surface.

On May 15, 2002, the United States Environmental Protection Agency (“EPA”) signed the final rule amending the Generic Maximum Achievable Control Technology (“MACT”) standards to add National Emissions Standards for Hazardous Air Pollutants (“NESHAP”) for the carbon black production source category (“Carbon Black MACT”) as required under Title III of the Clean Air Act Amendments of 1990. This new rule was published in the Federal Register on July 12, 2002 and became effective for carbon black plants located in the United States on July 12, 2005. EPA has identified hazardous air pollutants (“HAPs”) associated with the production of carbon black. The Carbon Black MACT requires 98% elimination of HAPs emissions from process vents on facility main unit filters. This is generally accomplished by combusting the tail gas vented from these filters. We were granted a one-year extension by the West Virginia Department of Environmental Protection’s Division of Air Quality (“DAQ”) to comply with the new Carbon Black MACT at our Ohio River facility in Waverly, West Virginia. The December 2004 Consent Order between the Company and DAQ provided that the Ohio River facility would install the necessary controls to comply with the Carbon Black MACT by July 12, 2006 and Cabot satisfactorily complied with that extension.

We are experiencing increased interest by environmental regulatory agencies worldwide in the air emissions associated with our manufacturing operations, particularly our carbon black plants. This increased scrutiny by regulatory bodies indicates a trend toward more restrictive air emission limits globally. In addition, global interest in the reduction of greenhouse gas emissions will likely have some impact on the carbon black industry. In December 2005, the EC published a new directive that includes carbon black manufacturing in the combustion sector and includes carbon black manufacturing in Phase II of the Emission Trading Scheme for the period 2008 to 2012. Various member states have included carbon black facilities in their draft national allocation plans, including the U.K. and the Netherlands. At the present time, we are in negotiations with the various member states to achieve adequate allocations.

Since the terrorist attacks in the U.S. on September 11, 2001, various U.S. agencies and international bodies have adopted new requirements that impose increased security requirements on certain manufacturing and industrial facilities and locations. These security-related requirements involve the preparation of security assessments and security plans in some cases, and in other cases the registration of certain facilities with specified governmental authorities. We are closely monitoring all security related regulatory developments and believe we are in compliance with all existing requirements. Compliance with such requirements is not expected to have a material adverse effect on our operations.

12




Financial Information About Segments, Foreign and Domestic Operations and Export Sales

Segment financial data are set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7, and in Note U of the Notes to the Company’s Consolidated Financial Statements, which appears in Item 8 of this annual report on Form 10-K for the fiscal year ended September 30, 2006. A significant portion of our revenues and operating profits is derived from overseas operations. The profitability of our segments is affected by fluctuations in the value of the U.S. dollar relative to foreign currencies. (See the Geographic Information portion of Note U for further information relating to sales and long-lived assets by geographic area and Management’s Discussion and Analysis of Financial Condition and Results of Operations.) Currency fluctuations and nationalization and expropriation of assets are risks inherent in international operations. We have taken steps we deem prudent in our international operations to diversify and otherwise to protect against these risks, including the use of foreign currency financial instruments to reduce the risk associated with changes in the value of certain foreign currencies compared to the U.S. dollar. (See the Risk Management discussion contained in “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A below, and Note T of the Notes to the Company’s Consolidated Financial Statements, which appears in Item 8).

Item 1A.                Risk Factors

In addition to factors described elsewhere in this report, the following are important factors that could cause our actual results to differ materially from those expressed in our forward-looking statements. It is not possible, however, to predict or identify all such factors. Accordingly, investors should not consider the following to be a complete discussion of all potential risks or uncertainties.

Changes in supply-demand balance at our plants and the industries in which we operate may adversely affect our financial results.

Our key customers in mature carbon black markets such as North America and Western Europe continue to shift their manufacturing capacity from those regions to developing regions such as Asia, South America and Eastern Europe. Although we are responding to meet these market demand conditions, we cannot be certain that we will be successful in expanding capacity in developing regions (which depends in part on economic and political conditions in these regions and, in some cases, on our ability to acquire or form strategic business alliances) or in reducing capacity in mature regions commensurate with industry demand. Similarly, demand for our customers’ products and our competitors’ reactions to market conditions could affect our results.

In addition, our rubber blacks, performance products and fumed metal oxides product lines are sensitive to changes in industry capacity utilization. As a result, pricing tends to decrease when capacity utilization in these product lines decreases, which could affect our financial performance.

We depend on a group of key customers for a significant portion of our sales. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition.

Our success in strengthening relationships and growing business with our largest customers and retaining their business over extended time periods could affect our future results. Three major tire customers, one silicones customer, four capacitor materials customers and one microelectronics customer represent a material portion of our total net sales and operating revenues. In fiscal year 2006, sales to The Goodyear Tire and Rubber Company by our rubber blacks product line accounted for approximately 14% of our consolidated revenues. The loss of any one or more of our important customers, or a reduction in volumes sold to them because of a work stoppage or other disruption, could materially adversely affect our results of operations until such business is replaced or the disruption ends. Any deterioration of the

13




financial condition of any of our customers that impairs their ability to make payments to us also could affect our future results and financial condition.

In addition, a material portion of our sales are made to customers under long-term and annual contracts. The loss or expiration of any of these customer contracts could increase the volatility of our business results.

Increases in the price of raw materials or their reduced availability could increase our cost of goods and decrease our profitability.

The cost, availability and quality of raw materials affect our results. Dramatic increases in such costs or decreases in the availability of raw materials at acceptable costs could have an adverse effect on our results of operations. For example, if proposed environmental regulations applicable to the European carbon black industry that call for a reduction in the annual average sulfur content in carbon black feedstock are adopted, we may experience some difficulty obtaining low sulfur feedstock at an acceptable cost for our European operations. Moreover, although our long-term and some of our annual carbon black supply contracts provide for a price adjustment to account for changes in feedstock costs, there is a lag between the time when feedstock costs are incurred by us and the time when prices are adjusted under the contracts. Accordingly, we may not be able to pass increased costs along to our customers during the quarter in which they occur, which can have a significant negative impact in a given quarter. For non-contract sales, we may not be able to increase prices at all or in an amount sufficient to compensate for higher feedstock costs. In addition, it is possible that a supply contract with a price adjustment mechanism could expire by its terms before we are able to recapture fully our raw material cost increases.

Fluctuations in foreign currency exchange and interest rates could affect our financial results.

We earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar. In 2006, we used 15 functional currencies in addition to the U.S. dollar and derived a substantial amount of our revenues in 2006 from sales outside the United States. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses as well as assets and liabilities into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against other major currencies will affect our net revenues, operating income and the value of balance sheet items denominated in foreign currencies. Because of the geographic diversity of our operations, weaknesses in some currencies might be offset by strengths in others over time. In addition, we are exposed to adverse changes in interest rates. We manage these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments as well as foreign currency debt. We cannot be certain, however, that our financial risk management program will be successful in reducing the risks inherent in exposures to foreign currency and interest rate fluctuations.

We are exposed to political or country risk inherent in doing business in some countries.

These risks may include nationalization and expropriation of assets or other actions of governments, importing and exporting issues, contract loss and asset abandonment.

Plant capacity expansions may be delayed and not achieve the expected benefits.

Our ability to complete capacity expansions as planned may be delayed or interrupted by the need to obtain environmental and other regulatory approvals, availability of labor and materials, unforeseen hazards such as weather conditions, and other risks customarily associated with construction projects. Moreover, capacity expansion in our rubber blacks, performance products, fumed metal oxides and inkjet

14




colorants product lines could have a negative impact on the product line’s business performance until capacity utilization is sufficient to absorb the incremental costs associated with the expansion.

Our efforts to maintain or increase our margins may not be successful.

We have undertaken and will continue to undertake cost reduction initiatives and organizational restructurings to improve operating efficiencies and generate cost savings. We cannot be certain that we will be able to complete these initiatives as planned or that the estimated operating efficiencies or cost savings from such activities will be realized.

In addition to cost reduction initiatives, we try to maintain or improve margins on our non-contracted sales through price increases. However, such increases may not be accepted by our customers, may not be sufficient to compensate for increased raw material and energy costs, or may decrease demand for our products and our volume of sales.

We spend a significant amount of money developing new businesses.

Our strategic focus includes optimizing our core businesses and investing the cash and intellectual resources they generate in developing new businesses. We cannot be certain that the costs we incur investing in these new businesses will result in a proportional increase in revenues or profits. In addition, the timely commercialization of products that we are developing may be disrupted or delayed by manufacturing or other technical difficulties, market acceptance or insufficient market size to support a new product, competitors’ new products, and difficulties in moving from the experimental stage to the production stage. These delays could affect our future results.

Any failure to realize benefits from joint ventures, acquisitions or alliances could adversely affect future financial results.

As part of our strategies for growth and improved profitability, we have made and may continue to make acquisitions and investments and enter into joint ventures. The success of acquisitions of new technologies, companies and products, or arrangements with third parties is not predictable and we may not be successful in realizing our objectives as anticipated.

We may be required to impair or write-off certain assets if our assumptions about future sales and profitability prove incorrect.

In our analysis of the recoverability of certain assets, namely inventory, property, plant and equipment, intangible assets and deferred tax assets, we have made assumptions about future sales (pricing, volume and region of sale), costs, cash generation and the ultimate profitability of the business and/or tax jurisdiction. These assumptions were based on management’s best estimates and if the actual results differ significantly from these assumptions, we may not be able to realize the value of the assets recorded as of September 30, 2006, which could lead to an impairment or write-off of certain of these assets in the future.

Our operations involve the handling of hazardous materials, and we are subject to extensive safety, health and environmental requirements, which could increase our costs and/or reduce our revenues.

Our ongoing operations are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to safety, health and environmental matters (“SH&E Requirements”), many of which provide for substantial monetary fines and criminal sanctions for violations.  In addition, the operation of a chemical manufacturing business as well as the sale and distribution of chemical products involve safety, health and environmental risks. For example, the production and/or processing of carbon black, fumed metal oxides, tantalum, niobium, aerogels and other chemicals involve the handling,

15




transportation, manufacture or use of certain substances or components that may be considered toxic or hazardous within the meaning of applicable SH&E Requirements. The transportation of chemical products and other activities associated with the manufacturing process have the potential to cause environmental or other damage as well as injury or death to employees or third parties.

We could incur significant expenditures in connection with such operational risks. We believe that our ongoing operations comply with current SH&E Requirements in a manner that should not materially affect our earnings or cash flow in an adverse manner. We can not be certain,  however, that significant costs or liabilities will not be incurred with respect to SH&E Requirements and our operations. Moreover, we are not able to predict whether future changes or developments in SH&E Requirements will affect our earnings or cash flow in a materially adverse manner.

Litigation or legal proceedings could expose us to significant liabilities and thus negatively affect our financial results.

As more fully described in “Item 3—Legal Proceedings,” we are a party to or the subject of lawsuits, claims, and proceedings, including those involving contract, environmental, antitrust, and health and safety matters as well as product liability and personal injury claims relating to asbestosis, silicosis and berylliosis, and exposure to various chemicals. Adverse rulings, judgments or settlements in pending or future litigation (including carbon black antitrust claims and liabilities associated with respirator claims) could cause our results to differ materially from those expressed or forecasted in any forward-looking statements.

The continued protection of our patents and other proprietary intellectual property rights are important to our success.

Our patent and other intellectual property rights are important to our success and competitive position. We own various patents and other intellectual property rights in the United States and other countries covering many of our products, as well as processes and product uses. In addition, we are a licensee of various patents and intellectual property rights belonging to others in the United States and other countries. Because the laws and enforcement mechanisms of some countries may not allow us to protect our proprietary rights to the same extent as we are able to in the United States, the strength of our intellectual property rights will vary from country to country.

Irrespective of our proprietary intellectual property rights, we may be subject to claims that our products, processes or product uses infringe the intellectual property rights of others. These claims, even if they are without merit, could be expensive and time consuming to defend and if we were to lose such claims, we could be subject to injunctions and/or damages, or be required to enter into licensing agreements requiring royalty payments and/or use restrictions. Licensing agreements may not be available to Cabot, and if available, may not be available on acceptable terms.

Changes in our effective tax rate may have an adverse effect on our results of operations.

Our future effective tax rates may be adversely affected by a number of factors including the jurisdictions in which profits are determined to be earned and taxed; the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes; adjustments to estimated taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions; changes in available tax credits; changes in share-based compensation expense; changes in the estimated realization of our deferred tax assets and liabilities; changes in tax laws or the interpretation of such tax laws; and the resolution of issues arising from tax audits with various tax authorities. Any significant increase in our future effective tax rates could adversely affect net income for future periods.

16




Natural disasters could affect our operations and financial results.

We operate facilities in areas of the world that are exposed to natural hazards, such as hurricanes and earthquakes. Such events could disrupt our supply of raw materials or otherwise affect production, transportation and delivery of our products or affect demand for our products.

Our business is subject to other general business risks.

In addition to the factors described above, the following other factors, among others, could affect our future performance and cause our actual results to differ materially from those expressed or implied by any forward-looking statements: changes in the rate of economic growth in the United States and other international economies; changes in trade, monetary and fiscal policies throughout the world; stock market conditions; acts of war and terrorist activities; and the impact of global health, safety and environmental concerns on economic conditions and market opportunities.

Item 1B.               Unresolved Staff Comments

None.

17




Item 2.                        Properties

Cabot’s corporate headquarters are in leased office space in Boston, Massachusetts. We also own or lease office, manufacturing, storage, distribution, marketing and research and development facilities in the United States and in foreign countries. As of December 6, 2006, the locations of our principal manufacturing and/or administrative facilities are set forth in the table below. Unless otherwise indicated, all the properties are owned.

 

 

Segment Using Facility

 

Location by Cabot Business Region

 

 

 

Carbon
Black

 

Metal
Oxides

 

Supermetals

 

Specialty
Fluids

 

North America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alpharetta, GA*(1)

 

 

X

 

 

 

X

 

 

 

X

 

 

 

 

 

 

Tuscola, IL

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

Centerville, LA

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ville Platte, LA

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Billerica, MA

 

 

X

 

 

 

X

 

 

 

X

 

 

 

 

 

 

Haverhill, MA

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Midland, MI

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

Albuquerque, NM*

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boyertown, PA

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

Pampa, TX

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Woodlands, TX*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

Waverly, WV

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lac du Bonnet, Manitoba**

 

 

 

 

 

 

 

 

 

 

X

 

 

 

X

 

 

Sarnia, Ontario

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loncin, Belgium

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leuven, Belgium*(1)

 

 

X

 

 

 

X

 

 

 

 

 

 

 

X

 

 

Pepinster, Belgium

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valmez, Czech Republic**

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dukinfield, England

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stanlow, England

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Berre, France

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Port Jerome, France**

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Suresnes, France*

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Frankfurt, Germany*

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

Hanau, Germany

 

 

X

 

 

 

X

 

 

 

 

 

 

 

 

 

 

Rheinfelden, Germany

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

Grigno, Italy

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ravenna, Italy

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bergen, Norway*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

Aberdeen, Scotland*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

Botlek, The Netherlands**

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barry, Wales*

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 


(1)          Regional Shared Service Center

*                    Leased premises

**             Building(s) owned by Cabot on leased land

18




 

 

 

Segment Using Facility

 

Location by Cabot Business Region

 

 

 

Carbon
Black

 

Metal
Oxides

 


Supermetals

 

Specialty
Fluids

 

China

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jiangxi Province, China**

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

Tianjin, China**

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Shanghai, China*(1)

 

 

X

 

 

 

X

 

 

 

 

 

 

 

 

Shanghai, China** (plant)

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hong Kong, China**

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Maharashtra, India**

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Mumbai, India*

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Cilegon, Indonesia**

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Jarkarta, Indonesia*

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Merak, Indonesia

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Kawahigashi-machi, Japan**

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

Ichihara, Japan

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Shimonoseki, Japan**

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Tokyo, Japan*

 

 

X

 

 

 

X

 

 

 

X

 

 

 

 

Kuala Lumpur, Malaysia*(1)

 

 

X

 

 

 

X

 

 

 

 

 

 

 

 

South America

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Campana, Argentina

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Maua, Brazil

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

Sao Paulo, Brazil*(1)

 

 

X

 

 

 

X

 

 

 

 

 

 

 

 

Cartagena, Colombia

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 


(1)          Regional Shared Service Center

*                    Leased premises

**             Building(s) owned by Cabot on leased land

Cabot holds a 50% interest in a joint venture that manufacturers fumed silica at a facility in Mettur Dam, India and has a sales office in Chennai, India. Cabot also holds the ownership interests set forth below in carbon black manufacturing facilities at the following locations:

Location

 

 

 

Percentage
Interest

 

Port Dickson, Malaysia

 

 

49%

 

 

Valencia, Venezuela

 

 

47.5%

 

 

Tampico, Mexico

 

 

40%

 

 

 

Cabot conducts research and development for its various businesses primarily at facilities in Billerica, MA; Albuquerque, NM; Boyertown, PA; Pampa, TX; Pepinster, Belgium; Frankfurt and Rheinfelden, Germany; Kawahigashi-machi, Japan; and Port Dickson, Malaysia.

Cabot’s existing manufacturing plants, together with announced capacity expansion plans, will generally have sufficient production capacity to meet our current requirements and expected near-term growth. These plants are generally well maintained, in good operating condition and suitable and adequate for their use. Cabot’s administrative offices and other facilities are generally suitable and adequate for their intended purposes.

19




Item 3.                        Legal Proceedings

The Company is a defendant in various lawsuits and environmental proceedings wherein substantial amounts are claimed. The following is a description of the significant proceedings pending as of September 30, 2006, unless otherwise specified.

Environmental Proceedings

During the summer of 1998, Cabot joined a group of companies in forming the Ashtabula River Cooperative Group (“ARCG”), which collectively agreed on an allocation for funding private party shares of a public/private partnership (the Ashtabula River Partnership (the “ARP”)), established to conduct navigational dredging and environmental restoration of the Ashtabula River (the “River”) in Ashtabula, Ohio. The ARP expects to obtain additional funding from the federal government for the project under the Great Lakes Legacy Act (“GLLA”) and the Water Resources Development Act (“WRDA”). In December 2005, the EPA announced the approval of a project to dredge the upstream portion of the river under GLLA, with a 50% cost sharing by the federal government. The remaining downstream portion is expected to be approved under WRDA, and all of the dredging costs and 90% of the disposal costs for the downstream portion of the project are eligible for federal funding under WRDA. The State of Ohio has pledged a contribution of $7 million to the project, which will reduce the cost to be borne by the non-federal participants. The ARCG has agreed to bear a substantial percentage of the remaining costs, of which Cabot expects to have a significant share. Dredging of the upstream portion of the River began in 2006 and is scheduled to be completed in late 2007. In addition, the ARCG has received a notice of claim from the Ashtabula River Natural Resources Trustees for natural resource damages related to the River and the amount of that claim remains to be negotiated. The restoration project under GLLA and WRDA should substantially reduce the magnitude of the natural resources damages claim.

In 1986, Cabot sold a manufacturing facility in Reading, Pennsylvania to NGK Metals, Inc. (“NGK”). In doing so, Cabot agreed to share with NGK the costs of certain environmental remediation of the Reading plant site. After the sale, the EPA issued an order to NGK requiring it to address soil and groundwater contamination at the site. Remediation activities at the Reading property are ongoing and we are contributing to the costs associated with certain of those activities pursuant to the cost-sharing agreement with NGK.

Cabot is the holder of a Nuclear Regulatory Commission (“NRC”) license for certain slag waste material deposited on industrial property in Reading, Pennsylvania in the late 1960s by a predecessor of Cabot that had leased a portion of the site to process tin slags. The slag material contains low levels of uranium and thorium, thus subjecting it to NRC jurisdiction. We have prepared a site decommissioning plan for the slag material which concludes that the levels of radioactivity in the slag are low enough that the material can be safely left in place and still meet NRC requirements for license termination without restrictions. Our decommissioning plan proposing this in-place remedy was filed with the NRC in August 1998. The City of Reading and the Reading Redevelopment Authority (the “RRA”) filed requests for a hearing with the NRC concerning Cabot’s decommissioning plan, alleging various deficiencies with the plan. In October 2000, we reached an agreement with the City of Reading and the RRA to settle their claims. In July 2002, the Pennsylvania Department of Environmental Protection submitted comments to the NRC opposing our proposed decommissioning plan. We continue to work with the NRC to obtain approval of the decommissioning plan.

The EPA has completed an investigation of certain areas surrounding Cabot’s Boyertown, Pennsylvania facility. The investigation was prompted by media reports of complaints by area farmers of health impacts and damage to livestock and crops allegedly associated with emissions from the Boyertown facility. In a report dated November 2000, the EPA stated that increased concentrations of some elements in environmental media at locations near the Boyertown site did not pose a health threat to the broad

20




community necessitating a cleanup action by the EPA. The EPA report concluded that it could find no relationship between industrial emissions and reported poor farm production and animal health concerns. Two neighboring farmers brought an action against Cabot in September 2001 in a state court in Pennsylvania alleging damage to their farms over a multi-year period. Cabot removed the suit to federal court, the Eastern District of Pennsylvania, and moved for summary judgment on statute of limitations grounds. In May 2004, the Court granted the motion and dismissed all of the farmers’ claims to the extent they arose from Cabot’s activities prior to November 10, 1998. The farmers unilaterally dismissed their remaining claims in November 2004. The farmers filed an appeal of the limitations decision to the Third Circuit Court of Appeals in November 2004 and oral arguments were heard in October 2005. In May 2006, the Third Circuit Court of Appeals reversed the district court and remanded the case to district court for a trial of the pre-1998 claims. The trial is scheduled for April 2007.

Cabot has several environmental-related lawsuits pending in Campana, Argentina related to our carbon black plant in Campana. Those lawsuits were filed between 2003 and 2006 by several residential neighbors living near the industrial area where Cabot’s plant is located. The lawsuits also name other industrial companies operating in the Campana area. The plaintiffs seek monetary damages for property damage and other injury allegedly caused by emissions from neighboring industrial facilities. We believe the claims relative to Cabot are without merit.

Cabot has received various requests for information and notifications that it may be a PRP at several other Superfund sites.

As of September 30, 2006, approximately $13 million was reserved for environmental matters by the Company. The operational and maintenance component of this reserve includes $4 million on a net present value basis or $6 million on an undiscounted basis. This amount represents our current best estimate of costs likely to be incurred for remediation based on our analysis of the extent of cleanup required, alternative cleanup methods available, abilities of other responsible parties to contribute and our interpretation of laws and regulations applicable to each site described above.

Other 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 purchase transaction. The subsidiary manufactured respirators under the AO brand and disposed of that business in July 1995. In connection with its acquisition of the business, the subsidiary agreed, in certain circumstances, to assume a portion of AO’s liabilities, including costs of legal fees together with amounts paid in settlements and judgments, allocable to AO respiratory products used prior to the 1990 purchase by the Cabot subsidiary. In exchange for the subsidiary’s assumption of certain of AO’s respirator liabilities, AO agreed to provide to the subsidiary the benefits of: (1) AO’s insurance coverage for the period prior to the 1990 acquisition, and (2) a former owner’s indemnity of AO holding it harmless from any liability allocable to AO respiratory products used prior to May 1982. Generally, these respirator liabilities involve claims for personal injury, including asbestosis and silicosis, allegedly resulting from the use of respirators that are claimed to have been negligently designed or labeled.

Neither Cabot, nor its past or present subsidiaries, at any time manufactured asbestos or asbestos-containing products. Moreover, not every person with exposure to asbestos giving rise to an asbestos claim used a form of respiratory protection. At no time did this respiratory product line represent a significant portion of the respirator market. In addition, other parties, including AO, AO’s insurers, and another former owner and its insurers (collectively, the “Payor Group”), are responsible for significant portions of the costs of these liabilities, leaving Cabot’s subsidiary with a portion of the liability in only some of the pending cases.

21




The subsidiary disposed of the business in July 1995 by transferring it to a newly-formed joint venture called Aearo Corporation (“Aearo”) and retained an equity interest in Aearo. Cabot agreed to have the subsidiary retain liabilities allocable to respirators used prior to the 1995 transaction so long as Aearo pays Cabot an annual fee of $400,000. Aearo can discontinue payment of the fee at any time, in which case it will assume the responsibility for and indemnify us against the liabilities allocable to respirators manufactured and used prior to the 1995 transaction. We have no liability in connection with any products manufactured by Aearo after 1995. Between July 1995 and September 30, 2001, our total costs and payments in connection with these respirator liabilities did not exceed the total amounts received from Aearo. Since September 30, 2001, our total costs and payments in connection with these liabilities have exceeded the amount we have received from Aearo because of the significant increase in claims filed against AO beginning in calendar year 2001. In August 2003, Cabot and its subsidiary sold all of the subsidiary’s equity interest in Aearo for approximately $35 million. This sale did not alter the arrangements described above.

As of December 31, 2002, there were approximately 50,000 claimants in pending cases asserting claims against AO in connection with respiratory products. As of September 30, 2003, 2004, 2005 and 2006 there were approximately 87,000, 91,000, 92,000 and 63,000 claimants, respectively. A large portion of the claims asserted during 2003 were filed in Mississippi and appear to have been prompted by changes in Mississippi’s state procedural laws, which caused claimants to file their claims prior to the effective date of these changes. In 2005, a federal judge ruled that many of the “diagnoses” presented in a broad silicosis class action were unreliable. As a consequence of this ruling, silica and non-malignant asbestos claims filed throughout the country have dropped significantly for AO and for defendants in general in non-malignant asbestos and silica cases. In addition, many of the claims filed against AO during 2003, 2004 and 2005, which were pending as of September 30, 2005, have been dismissed without payment. It is not clear at this time whether this reduction in silica and non-malignant asbestos claims will continue or stabilize or whether the number of these claims will rebound.

Cabot has contributed to the Payor Group’s defense and settlement costs with respect to a percentage of pending claims depending on several factors, including the period of alleged product use. In order to quantify our estimated share of liability for pending and future respirator liability claims, we engaged through counsel the assistance of Hamilton, Rabinovitz & Alschuler, Inc. (“HR&A”), a leading consulting firm in the field of tort liability valuation. The methodology developed by HR&A addresses the complexities surrounding our potential liability by making assumptions about future claimants with respect to periods of asbestos exposure and respirator use. Using those and other assumptions, HR&A estimated the number of future claims that would be filed and the related costs that would be incurred in resolving those claims. On this basis, HR&A then estimated the net present value of the share of these liabilities that reflected our period of direct manufacture and our actual contractual obligations assuming that all other members of the Payor Group meet their obligations. Based on the HR&A estimates, we have recorded on a net present value basis an $18 million reserve ($28 million on an undiscounted basis) to cover our estimated share of liability for pending and future respirator 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) a continuation in the recent trend of dismissals without payment of pending silica and non-malignant asbestos claims that began this year, (iii) significant changes in the average cost of resolving claims, (iv) significant changes in the legal costs of defending these claims, (v) changes in the nature of claims received, (vi) changes in the law and procedure applicable to these claims, (vii) the financial viability of members of the Payor Group, and (viii) a determination that our interpretation of the contractual obligations on which we have estimated our share of liability is inaccurate. We cannot determine the impact of these potential developments on our

22




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.

Carbon Black Antitrust Litigation

During fiscal year 2003, the Company, Phelps Dodge Corporation, Columbian Chemicals Co., Degussa Engineered Carbons, LP, Degussa AG, and Degussa Corporation (referred to collectively as the “Defendants”), were named in fifteen antitrust lawsuits filed in several federal district courts, one of which was dismissed. The complaints were filed by the plaintiffs on their own behalf and on behalf of all individuals or entities who purchased carbon black in the United States directly from the Defendants from approximately 1999 until the present (the “Period”) and allege that the Defendants conspired to fix, raise, maintain or stabilize prices for carbon black sold in the United States during the Period. In their complaint, the plaintiffs seek treble damages in an unspecified amount and attorneys’ fees. Liability for damages in antitrust cases is joint and several among the defendants. In August 2003, the pending federal cases were consolidated by a multi-jurisdictional panel and transferred to the federal court for the District of Massachusetts. In the second quarter of fiscal 2005, the Defendants were named in an antitrust lawsuit filed in federal district court in New York. This action was consolidated with the other pending federal cases. In June 2006, the Defendants filed a motion for summary judgment. Arguments on the motion were heard in October 2006. In November 2006, the plaintiffs filed a pleading seeking the court’s approval of a $4 million settlement with the Degussa defendants. In the pleading, the plaintiffs estimated their total damages (subject to trebling) to be approximately $100 million. We believe we have valid defenses to all of these claims, and will continue to assert them vigorously.

During fiscal years 2003 and 2004, the Company and the Defendants were named in nine actions filed in Superior Court of the State of California on behalf of a purported class of indirect purchasers of carbon black in the state of California from as early as November 1998 to the present. During fiscal years 2004 and 2005, the Company and the above Defendants were named in actions filed in state courts in the states of Florida, Kansas, Tennessee, South Dakota, North Carolina and New Jersey on behalf of all indirect purchasers of carbon black in these respective states. Each of these complaints asserts violations under the applicable state laws for conduct that is similar to what is alleged in the federal cases described above. The plaintiffs in the state actions also seek treble damages in an unspecified amount and attorneys’ fees. All nine pending California actions have been consolidated in the Superior Court in the State of California (City and County of San Francisco). We believe we have valid defenses to all of these claims, and will continue to assert them vigorously.

Beryllium Claims

Cabot is a party to several pending actions in connection with its discontinued beryllium operations. Cabot entered the beryllium industry through an acquisition in 1978. We ceased manufacturing beryllium products at one of the acquired facilities in 1979, and the balance of our former beryllium business was sold to NGK Metals, Inc. in 1986. During the last several years, several individuals who have resided or worked for many years in the immediate vicinity of our former beryllium facility located in Reading, Pennsylvania have brought suits against Cabot and NGK for personal injury allegedly caused by beryllium particle emissions produced at that facility. Nine personal injury claims against Cabot are pending in state court in Pennsylvania. One of the claims was filed during the fourth quarter of fiscal 2006. Discovery is ongoing in these cases.

23




Since October 2003, approximately 50 individuals have asserted claims for medical monitoring now pending in numerous Pennsylvania state court actions. The plaintiffs allege contact with beryllium in various ways, including residence or employment in the area surrounding the Reading facility, employment at the Reading facility or contact with individuals who worked at the Reading facility. Discovery is underway in these cases. In June 2006, summary judgment was granted to Cabot in connection with the medical monitoring claims of three of these individuals. The plaintiffs filed an appeal in July 2006.

There are also six beryllium product liability cases pending in state courts, five of which are pending in California and one of which is pending in Washington. Four California cases are stayed by court order pending the testing of the plaintiffs for beryllium exposure, and discovery is underway in the fifth California case. The Washington case is not active at this time. In August 2006, a case pending in Florida was voluntarily dismissed with prejudice by the plaintiffs.

In September 2006, Cabot was one of several named defendants in Anthony v. Small Tube Manufacturing Corp. et al., a class action complaint filed in the United States District Court for the Eastern District of Pennsylvania on behalf of certain present and former employees of the U.S. Gauge Inc. facility in Sellersville, Pennsylvania. U.S. Gauge is a company alleged to have purchased the beryllium-containing products from Cabot. The class action alleges that the present and former employees were exposed to beryllium dust and fumes during the machining of beryllium-containing products purchased from Cabot and that they are therefore entitled to receive medical monitoring. There are three other companies named as defendants in the case. Cabot has filed an answer, cross-claims and third-party counterclaims. Discovery in the case has not yet begun.

In December 2006, Cabot was one of several named defendants in Sheridan et al. v. NGK North America, Inc., et al., a class action complaint filed in the Pennsylvania Court of Common Pleas of Philadelphia County on behalf of persons who resided within a one mile radius of the Reading facility for a period of at least six months between 1950 and 2000. The class action alleges that these persons were exposed to emissions of beryllium from the Reading plant and are, therefore, entitled to receive medical monitoring. Cabot has not yet responded to the complaint and discovery in the case has not yet begun.

We believe that we have valid defenses to all of these beryllium actions and will assert them vigorously in the various venues in which claims have been asserted. In addition, there is a contractual indemnification obligation running from NGK to Cabot in connection with many of these matters.

Other Matters

On July 29, 2002, AVX Corporation commenced an action against us in the United States District Court for the District of Massachusetts. The complaint involved a tantalum supply agreement between Cabot and AVX, one of our tantalum supply customers, and alleged unfair and deceptive trade practices, breach of contract and other related matters. This action was dismissed during fiscal year 2003. In connection with the dismissal, we filed an action against AVX in the Business Litigation Section of the Superior Court of Massachusetts seeking declaratory judgment as to the validity of the supply agreement, as well as a declaration that we are not in breach of an alleged prior agreement, that Cabot did not engage in unfair and deceptive trade practices and other related matters. In October 2003, we filed a motion for summary judgment as to all but one claim in dispute. In June 2004, the Court granted our partial summary judgment motion regarding these matters, leaving as the only remaining dispute whether some of the product supplied by Cabot under the supply agreement with AVX was in conformity with contract specifications. During the fourth quarter of fiscal 2005, AVX dismissed the remaining claims regarding product conformity without prejudice. In October 2005, AVX filed an appeal of the Court’s June 2004 decision granting Cabot partial summary judgment. Oral argument on the appeal is currently scheduled to be held in January 2007.

24




On March 8, 2004, AVX filed another action against us in the United States District Court for the District of Massachusetts. This complaint alleged that we violated the federal antitrust laws in connection with the tantalum supply agreement between Cabot and AVX by tying the purchase of one type of tantalum product by AVX to the purchase of other types. In November 2004, the District Court granted Cabot’s motion to dismiss this complaint on procedural grounds. During the fourth quarter of fiscal 2005, the First Circuit Court of Appeals reversed the District Court’s dismissal and remanded the matter back to District Court. In March 2006, Cabot again sought dismissal of this action on procedural grounds. The motion was denied by the District Court in July 2006. Discovery is proceeding in this matter.

On September 6, 2005, AVX filed a lawsuit in the Superior Court of Massachusetts for Suffolk County alleging that we have improperly administered our tantalum supply agreement with them. In particular, AVX claims that we have not provided all of the price relief due to them pursuant to “most favored nation” (“MFN”) pricing provisions in the agreement. AVX is seeking a declaration of the rights of the parties to the agreement, an accounting of monies paid, due or owing under the MFN provisions, and an award of any sums not paid that should have been. We have filed an answer and a counterclaim against AVX asserting that AVX has not paid the full amounts for product in accordance with a proper construction of the MFN provisions. This action was moved to the Business Litigation Section of the Superior Court of Massachusetts in November 2005. During all of the litigation described above, AVX has continued to purchase product under its contract.

We believe we have valid defenses to all of AVX’s claims against us and will continue to assert them vigorously.

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.

Item 4.                        Submission of Matters to a Vote of Security Holders

None.

Executive Officers of the Registrant

Set forth below is certain information about Cabot’s executive officers. Ages are as of December 6, 2006.

Kennett F. Burnes, age 63, is Cabot’s Chairman of the Board, President and Chief Executive Officer. Mr. Burnes joined Cabot in 1987 as Vice President and General Counsel. He was appointed Executive Vice President in October 1988, a position he held until 1995. Mr. Burnes was appointed President of Cabot in 1995 and Chairman of the Board and Chief Executive Officer in 2001. Mr. Burnes also served as Chief Operating Officer from March 1996 until 2001.

Dirk L. Blevi, age 58, is Executive Vice President and General Manager of the European region and a director of the Company. Mr. Blevi also has management oversight responsibilities for the aerogel product line and the Specialty Fluids Business. Mr. Blevi joined Cabot in 1975 as Product Manager for Cabot’s then plastics business, which is now part of our performance products product line. From 1975 to 1993, Mr. Blevi held a variety of management positions in the plastics business and in March 1993 became its General Manager. He was appointed Vice President of Cabot in February 1994, and Executive Vice President and a director in September 2004. Mr. Blevi has held his current position of General Manager of the European region since January 2000.  He has exercised management oversight responsibilities for the aerogel product line since early 2003 and for the Specialty Fluids Business since July 2006.

25




William J. Brady, age 45, is Executive Vice President and General Manager of Cabot’s Carbon Black Business. Mr. Brady joined Cabot in 1986 as a salesperson for the special blacks product line, which is now part of performance products. From 1989 until 1997, Mr. Brady held a variety of special blacks-related management positions. In March 1997, he was named General Manager of special blacks, a position he held until January 2000. Mr. Brady was also appointed Vice President of Cabot in March 1997. From January 2000 to July 2003, Mr. Brady served as General Manager of the fumed metal oxides product line. Mr. Brady was appointed Executive Vice President in March 2003, named General Manager of Cabot’s Carbon Black Business in July 2003, and also served as General Manager of inkjet colorants from July 2004 to November 2005.

Jonathan P. Mason, age 48, is Executive Vice President and Chief Financial Officer. Mr. Mason joined Cabot as Chief Financial Officer in January 2006 and was appointed Executive Vice President in March 2006. Prior to joining Cabot, Mr. Mason had served since March 2005 as Vice President of Finance and Treasurer of International Paper, a global forest products, paper and packaging company. From 2000 to March 2005, he was Chief Financial Officer of Carter Holt Harvey, a global paper company in Auckland, New Zealand, which was partially owned by International Paper during those years. Before joining International Paper, Mr. Mason worked for ExxonMobil between 1985 and 1990 in various roles in its Treasury Department.

Brian A. Berube, age 44, is Vice President and General Counsel. Mr. Berube joined Cabot in 1994 as an attorney in Cabot’s law department and became Deputy General Counsel in June 2001. Mr. Berube was appointed Vice President in March 2002 at which time he was also named Business General Counsel. Mr. Berube has been General Counsel since March 2003.

Eduardo E. Cordeiro, age 39, is Vice President and General Manager of Cabot’s Supermetals Business. Mr. Cordeiro also co-manages CSMP. Mr. Cordeiro joined Cabot in 1998 as Manager of Corporate Planning and served in that position until January 2000. Mr. Cordeiro was Director of Finance and Investor Relations from January 2000 to March 2002, Corporate Controller from March 2002 to July 2003, and General Manager of the fumed metal oxides product line from July 2003 to January 2005. Mr. Cordeiro was appointed Vice President in March 2003 and General Manager of the Supermetals Business in January 2005.

Ravijit Paintal, age 45, is Vice President and General Manager of the Metal Oxides Business. Mr. Paintal joined Cabot in January 2003 as a member of Cabot’s Corporate Planning group and became General Manager of the aerogel product line in August 2003. Mr. Paintal was appointed General Manager of fumed metal oxides in January 2005 and Vice President in March 2005. Before joining Cabot, Mr. Paintal worked with the Boston Consulting Group as a management consultant and with Schlumberger Oilfield Services in various international positions.

26




PART II

Item 5.                        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Cabot’s Common Stock is listed for trading (symbol CBT) on the New York and Boston exchanges. As of December 5, 2006, there were approximately 1,250 holders of record of Cabot’s Common Stock. The price range in which the stock has traded, as reported on the composite tape, and the quarterly cash dividends for the past two years are shown below.

Stock Price and Dividend Data

 

 

December

 

March

 

June

 

September

 

Fiscal 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

 

 

$

0.16

 

 

$

0.16

 

$

0.16

 

 

$

0.16

 

 

Price range of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

$

36.88

 

 

$

39.50

 

$

36.55

 

 

$

37.34

 

 

Low

 

 

$

30.42

 

 

$

33.26

 

$

31.48

 

 

$

30.50

 

 

 

 

 

December

 

March

 

June

 

September

 

Fiscal 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

 

 

$

0.16

 

 

$

0.16

 

$

0.16

 

 

$

0.16

 

 

Price range of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

$

39.27

 

 

$

39.20

 

$

33.63

 

 

$

36.64

 

 

Low

 

 

$

32.46

 

 

$

32.80

 

$

27.66

 

 

$

30.95

 

 

 

Issuer Purchases of Equity Securities

The table below sets forth information regarding the Company’s purchases of its equity securities during the quarter ended September 30, 2006:

Period

 

 

 

Total Number
of Shares
Purchased(1)

 

Average
Price
Paid per
Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

 

Maximum Number
(or Approximate
Dollar Value) of
Shares that may yet
be Purchased Under
the Plans or Program

 

July 1, 2006 – July 31, 2006

 

 

21,571

 

 

 

$

18.37

 

 

 

8,337

 

 

 

2,646,502

 

 

August 1, 2006 – August 31, 2006

 

 

1,002,260

 

 

 

$

31.53

 

 

 

1,000,860

 

 

 

1,645,642

 

 

September 1, 2006 – September 30, 2006

 

 

26,834

 

 

 

$

9.48

 

 

 

334

 

 

 

1,645,308

 

 

Total

 

 

1,050,665

 

 

 

 

 

 

 

1,009,531

 

 

 

 

 

 


(1)          On May 14, 2004, the Company announced publicly that the Board of Directors had authorized the repurchase of up to five million shares of the Company’s 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  under the Company’s equity incentive plans. During the fourth fiscal quarter, of the 1,009,531 shares repurchased pursuant to this authorization, 999,943 shares were repurchased on the open market and 9,588 shares were repurchased from employees to satisfy tax withholding obligations. From time to time, the Company also repurchases shares of unvested purchase restricted stock from employees whose employment is terminated before such shares vest. These shares are repurchased pursuant to the terms of the Company’s equity incentive plans and are not included in the shares repurchased under the May 2004 Board authorization. The purchase price for these shares is the employee’s original purchase price for such stock, which under the terms of the Company’s long term incentive compensation program since 1999 has been an amount equal to 30% of the fair market value of such shares on the date of the grant. During the fourth fiscal quarter, the Company repurchased 41,134 shares pursuant to the terms of its equity incentive plans. The average price per share paid for those shares was $8.93.

27




Item 6.                        Selected Financial Data

 

 

Years Ended September 30

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

(Dollars in millions, except per share amounts and ratios)

 

Consolidated Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

Net sales and other operating revenues

 

$

2,543

 

$

2,125

 

$

1,934

 

$

1,795

 

$

1,557

 

Gross profit

 

419

 

433

 

477

 

422

 

429

 

Selling and administrative expenses

 

235

 

240

 

217

 

251

 

233

 

Research and technical expense

 

58

 

59

 

53

 

64

 

48

 

Goodwill and long-lived asset impairment charge

 

 

211

 

 

 

 

Income (loss) from operations(a)

 

126

 

(77

)

207

 

107

 

148

 

Net interest expense and other income and charges(b)

 

(29

)

(16

)

(43

)

(13

)

(14

)

Income (loss) from continuing operations

 

97

 

(93

)

164

 

94

 

134

 

Benefit (provision) for income taxes(c)

 

(9

)

45

 

(39

)

(17

)

(30

)

Equity in net income of affiliated companies

 

12

 

12

 

6

 

5

 

5

 

Minority interest

 

(12

)

(12

)

(9

)

(7

)

(4

)

Income from operations of discontinued businesses(d)

 

2

 

 

2

 

5

 

1

 

Charges from cumulative effect of changes in accounting principles

 

(2

)

 

 

 

 

Net income (loss)

 

$

88

 

$

(48

)

$

124

 

$

80

 

$

106

 

Common Share Data

 

 

 

 

 

 

 

 

 

 

 

Diluted Net income (loss):

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.28

 

$

(0.84

)

$

1.79

 

$

1.08

 

$

1.48

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income from operations of discontinued businesses

 

0.03

 

 

0.03

 

0.06

 

0.02

 

Loss from cumulative effect of changes in accounting principles

 

(0.03

)

 

 

 

 

Net income (loss)

 

$

1.28

 

$

(0.84

)

$

1.82

 

$

1.14

 

$

1.50

 

Dividends

 

$

0.64

 

$

0.64

 

$

0.60

 

$

0.54

 

$

0.52

 

Closing prices

 

$

37.20

 

$

33.01

 

$

38.57

 

$

28.51

 

$

21.00

 

Average diluted shares outstanding—millions(e)

 

68

 

60

 

68

 

70

 

71

 

Shares outstanding at year end—millions

 

64

 

63

 

63

 

62

 

62

 

Consolidated Financial Position

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

$

1,255

 

$

1,246

 

$

1,171

 

$

1,108

 

$

931

 

Net property, plant and equipment

 

964

 

834

 

920

 

916

 

890

 

Other assets

 

315

 

294

 

335

 

301

 

277

 

Total assets

 

$

2,534

 

$

2,374

 

$

2,426

 

$

2,325

 

$

2,098

 

Total current liabilities

 

$

505

 

$

433

 

$

372

 

$

376

 

$

295

 

Long-term debt

 

459

 

463

 

506

 

516

 

495

 

Other long-term liabilities and minority interest

 

374

 

379

 

357

 

354

 

331

 

Stockholders’ equity

 

1,196

 

1,099

 

1,191

 

1,079

 

977

 

Total liabilities and stockholders’ equity

 

$

2,534

 

$

2,374

 

$

2,426

 

$

2,325

 

$

2,098

 

Working capital

 

$

750

 

$

813

 

$

799

 

$

732

 

$

636

 

Selected Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations as a percentage of sales

 

3

%

(2

)%

6

%

4

%

7

%

Return on average stockholders’ equity

 

7

%

(4

)%

11

%

7

%

11

%

Net debt to capitalization ratio

 

22

%

24

%

24

%

22

%

27

%

Earnings to fixed charges ratio

 

4

x

(1

)x

6

x

4

x

5

x

Return on investment(f)

 

7

%

(1

)%

10

%

7

%

10

%

 

28





(a)           Income (loss) from operations for 2006 includes charges of $10 million for global restructuring, $11 million of charges related to the closure of our Altona facility, $3 million of cost reduction initiatives and a $27 million payment to Sons of Gwalia. Income (loss) from operations for 2005 includes charges of $16 million for restructuring and $15 million of charges for cost reduction initiatives in the Supermetals Business. Income from operations for 2004 includes a charge of $6 million for restructuring, income of $2 million for a reduction of the respirator reserve and income of $1 million for other recoveries. Income from operations for 2003 includes charges of $51 million for restructuring, $14 million for acquired in-process research and development, $20 million for a reserve for respirator claims, $4 million for asset impairments and proceeds of $4 million for insurance recoveries. Income from operations for 2002 includes a $5 million charge for the respirator claims liability, a $5 million asset impairment, a $3 million charge to increase the environmental reserve, an $8 million charge related to the cancellation of an energy project, a $1 million charge for severance and the benefit of $8 million for insurance recoveries.

(b)          Net interest expense and other (charges) and income for 2006 includes a $8 million charge related to foreign currency translation adjustment write-off due to the substantial liquidation of our Altona entity. Other (charges) income for 2005 includes $2 million of insurance recoveries and $2 million of income related to foreign currency translation adjustments. Other (charges) income for 2004 includes charges of $12 million for an investment impairment and $3 million for currency translation adjustments. Other (charges) income for 2003 includes a $22 million charge for the impairment of two investments and proceeds of $35 million for the sale of an equity interest in an investment. Other (charges) income for 2002 includes $2 million of costs related to a currency translation adjustment at a closed plant and a $1 million charge for non-capitalizable currency transaction costs related to the acquisition of Cabot Supermetals Japan.

(c)           The Company’s effective tax rate for 2006 was a charge of 9%, which includes a $18 million tax benefit from the settlement of various tax audits during the year. The Company’s effective tax rate for 2005 was a benefit of 48%, which includes the effect of a $23 million tax settlement benefit. For fiscal years 2004, 2003 and 2002, the Company’s effective tax rate was 24%, 18% and 22%, respectively.

(d)          Discontinued operations for fiscal 2006 include amounts related to a favorable tax settlement recognized during the period related to our discontinued liquified natural gas (“LNG”) business. Discontinued operations include the LNG and Cabot Microelectronics businesses as well as other discontinued businesses.

(e)           The weighted average common shares outstanding for the year ending September 30, 2005 excludes approximately 8 million shares as those shares would have had an antidilutive effect due to the Company’s net loss position.

(f)             Return on investment is calculated using net income excluding net interest income and (expense) divided by, the average total debt and stockholders’ equity less the average cash and marketable securities during the periods presented.

29




Item 7.                        Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Cabot’s strategy focuses on optimizing our core businesses and product lines (rubber blacks, performance products, fumed metal oxides and tantalum) and investing the cash and intellectual resources they generate in new businesses and product lines (inkjet colorants, cesium formate, aerogel and Superior MicroPowders).

Over the past several years, drivers of demand and profitability for the Company have differed by business and product line. Demand for carbon black is driven primarily by vehicle miles driven and general economic conditions which influence the consumption of products that are produced using carbon black. Rubber blacks’ and performance products’ results have been driven by changes in raw material costs, by our ability to obtain sales price increases for our products commensurate with increases in raw material costs and by global and regional capacity utilization. Inkjet colorants’ demand and results have been driven by the use of our pigments by an increasing number of original equipment inkjet printer manufacturers (“OEM”), by more printer launches using our pigments at both new and existing OEM customers and by growth in the inkjet printer cartridge aftermarket. Demand for fumed metal oxides is largely driven by the construction, automotive and electronics industries as well as by general consumer product growth. Fumed metal oxides results have been driven by our traditional silicones and electronics market segments, by growth in developing regions of the world and by global fumed silica capacity utilization. Demand for tantalum is largely driven by the number of electronic devices being produced using tantalum capacitors versus competing materials. Since 2004, sales in the Supermetals Business have been transitioning from principally those under fixed-price, fixed-volume contracts to market-based arrangements. In 2006, sales under these fixed-price contracts accounted for approximately 30% of sales in the Supermetals Business. Profitability for the Business has largely been determined by the terms of these supply contracts, by the cost of ore under our long-term raw materials contracts and by our ability to implement cost reduction initiatives. Cesium formate demand is primarily driven by the level of drilling of high pressure oil and gas wells and by the petroleum industry’s acceptance of our product as a drilling and completion fluid for this application. Results in the Specialty Fluids Business have been driven by the size and type of jobs and by the percentage of our total available fluid being utilized in any given period in our principal North Sea market. Aerogel and Superior MicroPowders are both in their early formative stages and do not currently generate material revenue.

In response to the movement of tire manufacturing from the developed regions of North America and Western Europe to emerging regions of the world, we are concentrating our expansion in these emerging regions to support our customers. As a direct result of these market conditions and general economic growth in emerging regions we commissioned a new carbon black manufacturing facility in China and expanded our carbon black manufacturing capacity in Brazil during 2006. Additionally, we expanded our fumed silica business in emerging regions by commissioning new capacity in China during 2006.

During 2006, we experienced strong demand for all of our principal products. The Carbon Black Business experienced strong volume growth in rubber blacks and inkjet colorants. However, results for this Business were unfavorably impacted by significant increases in raw material costs in rubber blacks and performance products, particularly in the first half of the year, and by lower volumes in performance products due to price increases we implemented in response to these rising raw material costs. In the first quarter, we purchased Showa Denko K.K.’s 50% joint venture interest in Showa Cabot K.K. The rubber blacks product line benefited from the consolidation of the results of that entity during the fiscal year. During the fourth quarter, we announced a number of cost reduction initiatives, including the elimination of approximately 130 positions in sales, manufacturing, technical service and certain functional groups, aimed at reducing the overall costs in the Company, particularly in the carbon black product lines. In the Metal Oxides Business there was a shift in sales volumes within the fumed metal oxides product line, with

30




decreases in sales to the silicones segment being more than offset by increases in sales to the electronics and niche market segments. Volume growth and high plant utilization in the fumed metal oxides product line more than offset increases in hydrogen and natural gas costs and the continued unfavorable earnings impact of business development efforts in the aerogel product line. The Supermetals Business was unfavorably impacted by lower prices and volumes during the year due to the continuing shift in sales from our long-term fixed-price, fixed-volume contracts to market-based arrangements. During the year, this Business substantially reduced its inventory, in part by curtailing production. While this reduction in inventory was part of our working capital initiative, it led to higher per-unit production costs, which reduced the Business’s earnings. In the second quarter, we entered into a new three-year tantalum ore supply agreement with the Sons of Gwalia that has a higher price for ore than we paid under our prior agreement, but at a significantly reduced annual volume commitment. These negative impacts were partially offset by benefits achieved from previously initiated efforts to reduce the cost structure of the Business. In the Specialty Fluids Business, reduced drilling activity in the North Sea resulted in lower fluid utilization and slightly reduced profitability.

Our consolidated working capital decreased during the year, which increased our operating cash flow. We focused our efforts on improving our overall working capital position in the face of higher raw material costs in the carbon black product lines. As a result of these efforts, we reduced raw material and finished goods inventory levels in rubber blacks and performance products and in the Supermetals Business. Working capital and operating cash flow are discussed in more detail in the cash flow and liquidity section below.

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) 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, 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 represents 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

31




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. 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.

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. As of September 30, 2006 and 2005, we had less than $1 million and $1 million, respectively, of deferred revenue related to these supply agreements, representing the difference between the billed price and the estimated average selling price. The deferred revenue is expected to be recognized as customers purchase the contracted minimum volumes through the first quarter of fiscal 2007.

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.

Our trade receivables are recorded at the invoiced amount and do not bear interest. Certain receivables in China may be settled with bank issued non-interest bearing notes. We periodically sell a portion of these notes receivables in China at a discount. These transactions are accounted for as sales and 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.

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 a historical and prospective basis. Additionally, we estimate sales returns based on historical trends in our customers’ product returns. While bad debt write-offs and product returns have not been significant historically, if there is a deterioration of a major customer’s credit-worthiness, 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 to us and our sales would be adversely affected.

Inventory Valuation

The cost of most raw materials, work in process 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 $76 million and $73 million higher as of September 30, 2006 and 2005, respectively. The cost of other U.S. and all non-U.S. inventories is determined using the average cost method or the FIFO method.

We review inventory for potential obsolescence recoverability periodically. 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 unsaleable 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 adjusted and,

32




therefore, the financial results for 2006 are not necessarily comparable to the same period in prior years. However, the impact to the prior periods would have been immaterial. 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 dividends expected to be paid on shares and the number of share-based awards that may be forfeited.

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 management’s 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 that 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 asset’s 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 determined by the excess of the asset’s carrying value over its fair value. Our estimated cash flows reflect management’s assumptions about selling prices, production and sales volume, costs and market conditions over an estimate of the remaining useful life of the asset.

33




The fair values of long-term investments are dependent on the financial performance of the entities in which the Company invests 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.

Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, short-term and long-term debt, and derivative instruments. The carrying values of our financial instruments approximate fair value with the exception of certain long-term debt. The fair values of our long-term debt and our derivative instruments are based on quoted market prices. We use derivative financial instruments primarily for purposes of hedging exposures to fluctuations in interest rates and foreign currency exchange rates, which exist as part of our on-going business operations. We do not enter into contracts for speculative purposes, nor do we hold or issue any financial instruments for trading purposes. All derivatives are recognized on the balance sheet at fair value. The changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The gains or losses on derivative instruments reported in other comprehensive income are reclassified to earnings in the period in which earnings are affected by the underlying hedged item. The ineffective portion of all hedges is recognized in earnings in the current period. In accordance with our risk management strategy, we may enter into certain derivative instruments that may not be designated as hedges for hedge accounting purposes. Although these derivatives are not designated as hedges, we believe that such instruments are closely correlated with the underlying exposure, thus managing the associated risk. We record in earnings the gains or losses from changes in the fair value of derivative instruments that are not designated as hedges.

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 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. After consultation with counsel, as appropriate, 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.

34




The most significant reserves that we have established are for environmental remediation and respirator litigation claims. As of September 30, 2006, we had $13 million reserved for various environmental matters. 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 September 30, 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) a continuation in the recent trend of dismissals without payment of pending silica and non-malignant asbestos claims that began this year, (iii) significant changes in the average cost of resolving claims, (iv) significant changes in the legal costs of defending these claims, (v) changes in the nature of claims received, (vi) changes in the law and procedure applicable to these claims, (vii) the financial viability of other parties who contribute to the settlement of respirator claims, and (viii) 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 on a quarterly basis 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 jurisdictions.

We have filed our tax returns in accordance with our interpretations of each jurisdiction’s 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 fiscal year ended September 30, 2006 by approximately $1 million.

Significant Accounting Policies

We have other significant accounting policies that are discussed in Note A of the Notes to our Consolidated Financial Statements in Item 8 below. 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

35




are as difficult or subjective to measure. However, these policies are important to an understanding of the consolidated financial statements.

Results of Operations

Cabot is organized into four reportable segments: the Carbon Black Business, the Metal Oxides Business, the Supermetals Business (“CSM”), and the Specialty Fluids Business (“CSF”). 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 Cabot Superior MicroPowders (“CSMP”). The Metal Oxides Business is comprised of the fumed metal oxides and aerogel product lines.

Our analysis of financial condition and operating results should be read in conjunction with our Consolidated Financial Statements and accompanying notes. Unless a calendar year is specified, all references to years in this discussion are to our fiscal years ended September 30.

Fiscal Year 2006 compared with Fiscal Years 2005 and 2004—Consolidated

Net Sales and Gross Profit

 

 

Years Ended September 30

 

 

 

2006

 

2005

 

2004

 

 

 

(Dollars in millions)

 

Net Sales

 

$

2,543

 

$

2,125

 

$

1,934

 

Gross Profit

 

$

419

 

$

433

 

$

477

 

 

The $418 million increase in sales in 2006 was primarily due to higher volumes ($38 million), higher pricing ($246 million) and the favorable impact of consolidating the results of Cabot Japan ($83 million). These factors were partially offset by the negative impact of foreign currency translation adjustments ($2 million). In 2005, the $191 million increase in sales when compared to fiscal 2004 was due to higher volumes ($104 million), higher pricing ($36 million) and the positive impact of foreign currency translation adjustments ($47 million).

Gross margin was 16% in 2006, 20% in 2005 and 25% in 2004. Gross profit decreased in 2006 primarily due to higher raw material costs in the rubber blacks and performance products product lines of the Carbon Black Business, lower prices and higher ore costs in the Supermetals Business, and a $27 million payment made to the Sons of Gwalia to terminate the then existing supply and other related agreements. These factors were partially offset by higher prices from feedstock related price increases in rubber blacks and performance products. The decrease in gross profit in 2005, when compared to 2004, primarily resulted from higher raw material costs in rubber blacks and performance products and lower prices in the Supermetals Business. These factors were partially offset by higher prices from feedstock related price increases in rubber blacks and performance products.

Selling and Administrative Expense

 

 

Years Ended September 30

 

 

 

  2006  

 

  2005  

 

  2004  

 

 

 

(Dollars in millions)

 

Selling and Administrative Expense

 

 

$

235

 

 

 

$

240

 

 

 

$

217

 

 

 

The $5 million decrease in expense in 2006 compared to 2005 was primarily due to lower administrative costs ($11 million), principally in the Supermetals Business, including savings associated with our shared services initiative. Additionally, we experienced a reduction of costs associated with the implementation of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 ($3 million). These savings were partially offset by increased spending on our business process excellence (“BPE”) and shared

36




services initiatives, which are aimed at standardizing our transactional processes and administering certain functional activities through a shared services model ($9 million). The $23 million increase in 2005 compared to 2004 was primarily due to planned increases in personnel costs ($2 million), incremental costs associated with a labor dispute at our Supermetals facility in Boyertown, Pennsylvania ($8 million), an increase in costs related to the implementation of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 ($5 million) and an increase in spending related to the Company’s BPE initiative ($3 million).

Research and Technical Expense

 

 

Years Ended September 30

 

 

 

  2006  

 

  2005  

 

  2004  

 

 

 

(Dollars in millions)

 

Research and Technical Expense

 

 

$

58

 

 

 

$

59

 

 

 

$

53

 

 

 

The $1 million decrease in 2006 compared to 2005 was primarily due to reduced research and technical spending in the Supermetals Business partially offset by increased spending in the development activities of CSMP. The $6 million increase in 2005 compared to 2004 was principally due to increased spending in the development activities of CSMP.

Interest and Dividend Income

 

 

Years Ended September 30

 

 

 

  2006  

 

  2005  

 

  2004  

 

 

 

(Dollars in millions)

 

Interest and Dividend Income

 

 

$

5

 

 

 

$

6

 

 

 

$

6

 

 

 

Interest and dividend income decreased by $1 million in 2006 due to lower cash available for interest earning investments, primarily in the first half, and the liquidation of marketable securities in the first quarter of 2006.

Interest Expense

 

 

Years Ended September 30

 

 

 

  2006  

 

  2005  

 

  2004  

 

 

 

(Dollars in millions)

 

Interest Expense

 

 

$

27

 

 

 

$

29

 

 

 

$

30

 

 

 

The $2 million decrease in interest expense in 2006 compared to 2005 was due to the repayment of debt in the U.S., which matured in December 2005, and to the capitalization of interest related to the construction of our new facilities in China and the expansion of our existing carbon black facility in Brazil. The decrease in 2005 when compared to 2004 was primarily due to the capitalization of interest related to the construction of our new carbon black facility in China and the expansion of our existing facility in Brazil, which was partially offset by increases in interest expense due to increases in our average debt outstanding year over year.

Other Income/(Expense)

 

 

Years Ended September 30

 

 

 

  2006  

 

  2005  

 

  2004  

 

 

 

(Dollars in millions)

 

Income (Expense)

 

 

$

(7

)

 

 

$

7

 

 

 

$

(19

)

 

 

37




The $14 million decrease in other income in 2006 was primarily due to foreign currency transaction gains and losses, including a charge of $8 million for the recognition of cumulative foreign currency translation adjustments related to the substantial liquidation of the legal entity through which we conducted carbon black operations in Altona, Australia.

The $26 million increase in other income in 2005, when compared to 2004, was primarily due to the inclusion of $15 million of expense related to certain items in 2004. These certain items included $12 million related to the write-down of our investment in the Sons of Gwalia as well as $3 million of charges related to currency translation adjustments in 2004. Also contributing to the increase in 2005 was $2 million of income related to insurance recoveries and $2 million of income related to foreign currency translation adjustments during 2005.

Effective Tax Rate

 

 

Years Ended September 30

 

 

 

  2006  

 

  2005  

 

  2004  

 

 

 

(Dollars in millions)

 

(Provision) Benefit for Income Taxes

 

 

$

(9

)

 

 

$

45

 

 

 

$

(39

)

 

Effective Tax Rate on Income (Loss) from Continuing Operations

 

 

9

%

 

 

(48

)%

 

 

24

%

 

 

The provision for income taxes was $9 million for fiscal 2006, resulting in a 9% effective tax rate on income from continuing operations. Excluding $18 million in tax benefits resulting from the settlement of various tax audits during the year, the permanent reinvestment of prior year earnings of a non-U.S. subsidiary, which reduced tax expense by $3 million in the third quarter, and a $8 million translation charge for the substantial liquidation of our Australian entity during the fourth quarter that was not tax benefited, the effective tax rate would have been approximately 29% for fiscal 2006.

The benefit for income taxes  was $45 million for fiscal 2005, resulting in a 48% effective tax rate on loss from continuing operations. Excluding the $23 million tax settlement in the fourth quarter and the $90 million goodwill impairment and $121 million long-lived asset impairment charges related to the Supermetals Business in the second and fourth quarters, respectively, the effective tax rate would have been approximately 19% for fiscal 2005.

The provision for income taxes  was $39 million for fiscal 2004, resulting in a 24% effective tax rate on income from continuing operations. The income tax rate reflects the U.S. statutory rate of 35% increased by a charge for a valuation allowance on the Sons of Gwalia investment loss and reduced for earnings in non-U.S. jurisdictions that were taxed at rates lower than the U.S. rate, benefits from extraterritorial income exclusion, benefits from U.S. research and experimentation credits, and the benefit from a tax audit filing resolved in 2004.

The increase in the effective tax rate in 2006 from 2005 was principally the result of the expiration of the U.S. research and experimentation credit, the phase out of the extraterritorial income exclusion and an increase in foreign losses for which a current tax benefit was not available.

In the normal course of business, the tax filings of Cabot and its subsidiaries are examined by various tax authorities, including the Internal Revenue Service (“IRS”). In September 2006, the IRS concluded its examination of the 2000 to 2002 tax years. The settlement of this audit resulted in the recording of a tax benefit of $12 million for continuing operations and $2 million for discontinued operations, recorded in the fourth quarter of fiscal year 2006. Additionally, during fiscal 2006, there was a tax benefit of $4 million from the settlement of foreign tax audits. The tax benefits were related to the reversal of previously recorded reserves. The IRS is currently auditing the 2003 and 2004 fiscal years.

38




Cabot has filed its tax returns in accordance with the tax laws in each jurisdiction and maintains tax reserves for differences between tax expense as finally determined and estimated tax expense for exposures that can be reasonably estimated. In the event that actual results are significantly different from these estimates, Cabot’s provision for income taxes could be significantly impacted.

In addition, we are under audit in a number of jurisdictions outside of the U.S. It is possible that some of these audits will be resolved in fiscal 2007 which may impact our effective tax rate in the periods during which these settlements occur.

We have deferred tax assets in the U.S. of $99 million that we believe are more likely than not recoverable through expected future taxable operating income in the U.S. However, recovery is dependent on achieving our forecast of future taxable operating income over an extended period of time. As of September 30, 2006, we would need to generate approximately $284 million in cumulative future U.S. taxable operating income at various times over approximately 20 years to realize all of our net U.S. deferred tax assets. We review our forecast in relation to actual results and expected trends on a quarterly basis. Failure to achieve our operating income targets may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our U.S. deferred tax assets. Any increase in a valuation allowance would result in additional income tax expense, lower stockholders’ equity and could have a significant impact on our earnings in future periods.

We expect our effective tax rate for fiscal 2007 to be between 28% and 31%, before the results of several on-going audits.

Equity in Net Income of Affiliates

Our share of earnings from equity affiliates was $12 million in 2006 and 2005 and $6 million in 2004. In November 2005 we began consolidating the results of Cabot Japan as a wholly owned entity as a result of acquiring our joint venture partner’s, Showa Denko K.K.’s, 50% interest in that entity. The increase in 2005 compared to 2004 was due to improved operating results in our affiliates in Mexico, Malaysia, Venezuela and Japan.

Discontinued Operations

During 2006 we recorded income from discontinued operations of $2 million ($0.03 per diluted common share) relating to the favorable settlement of a tax audit recognized during the fourth quarter from our discontinued liquified natural gas business. We did not record income or charges related to discontinued operations in 2005. In 2004, we recorded income of $2 million ($0.03 per diluted common share) related to previously divested businesses. This amount consisted of $1 million related to insurance proceeds and $1 million from the reversal of tax reserves related to previously divested businesses.

39




Net Income (Loss)

We reported net income for 2006 of $88 million ($1.28 per diluted common share) compared to a net loss of $48 million (a loss of $0.84 per common share) in 2005 and net income of $124 million ($1.82 per diluted common share) in 2004. The following earnings summary highlights the after-tax impact of certain items and income from discontinued operations:

 

 

Years Ended September 30

 

 

 

2006

 

2005

 

2004

 

Amounts per Diluted Common Share

 

 

 

 

 

 

 

Net income (loss)

 

$

1.28

 

$

(0.84

)

$

1.82

 

Certain items and discontinued operations

 

 

 

 

 

 

 

Certain items after-tax

 

$

(0.54

)

$

(2.95

)

$

(0.23

)

Cumulative effect of changes in accounting principles

 

$

(0.03

)

 

 

Discontinued operations after-tax

 

$

0.03

 

 

$

0.03

 

 

Fiscal Year 2006 compared to Fiscal Years 2005 and 2004—By Business Segment

The following 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 to assess segment performance. This discussion has been prepared on a basis consistent with segment reporting as outlined in Note U of the Consolidated Financial Statements. (Refer to Note U of the Consolidated Financial Statements for a definition of segment PBT and additional segment information.)  We use the term “Inventory Change” to measure the impact on per-unit fixed and variable costs associated with increasing or decreasing inventory levels relative to such increases or decreases in the comparative period. The fixed and variable costs associated with changes in inventory are excluded from “Raw Material Costs” and “Fixed Costs” as presented in the tables below. “Fixed Costs” as presented in the tables below refers to fixed manufacturing costs, including utilities. “Selling Price Mix” as presented in the discussion of fumed metal oxides refers to the impact on profitability of changes in the mix of products sold and their prices in comparative periods.

Total segment PBT, the aggregate of certain items and other unallocated items, and income from continuing operations before income taxes for fiscal years 2006, 2005 and 2004 are set forth in the table below. The details of certain items and other unallocated items are shown below and in Note U of our Consolidated Financial Statements. These items are not included in segment PBT.

 

 

Years Ended September 30

 

 

 

  2006  

 

  2005  

 

  2004  

 

 

 

(Dollars in millions)

 

Total segment PBT

 

 

$

180

 

 

 

$

179

 

 

 

$

215

 

 

Certain items

 

 

(51

)

 

 

(242

)

 

 

(18

)

 

Other unallocated items

 

 

(32

)

 

 

(30

)

 

 

(33

)

 

Income from continuing operations before income taxes

 

 

$

97

 

 

 

$

(93

)

 

 

$

164

 

 

 

40




Details of the certain items for fiscal years 2006, 2005 and 2004 are as follows:

 

 

Years Ended September 30

 

 

 

  2006  

 

  2005  

 

  2004  

 

 

 

(Dollars in millions, pre-tax)

 

Gwalia settlement payment

 

 

$

(27

)

 

 

$

 

 

 

$

 

 

Restructuring initiatives

 

 

(21

)

 

 

(16

)

 

 

(6

)

 

Cost reduction initiatives

 

 

(3

)

 

 

(15

)

 

 

 

 

Goodwill impairment charges

 

 

 

 

 

(90

)

 

 

 

 

Long-lived asset impairment charges

 

 

 

 

 

(121

)

 

 

 

 

Reserve for respirator claims

 

 

 

 

 

 

 

 

2

 

 

Investment impairment charges

 

 

 

 

 

 

 

 

(12

)

 

Other non-operating items

 

 

 

 

 

 

 

 

(2

)

 

Total certain items, pre-tax

 

 

$

(51

)

 

 

$

(242

)

 

 

$

(18

)

 

 

Certain items for fiscal year 2006, 2005 and 2004 are recorded in the consolidated statements of operations as follows:

 

 

Years Ended September 30

 

 

 

  2006  

 

  2005  

 

  2004  

 

 

 

(Dollars in millions, pre-tax)

 

Statement of operations line item:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales and other operating revenues

 

 

$

1

 

 

 

$

 

 

 

$

 

 

Cost of sales

 

 

(35

)

 

 

(26

)

 

 

(5

)

 

Selling and administrative expenses

 

 

(9

)

 

 

(3

)

 

 

2

 

 

Research and technical expenses

 

 

 

 

 

(2

)

 

 

 

 

Goodwill impairment charge

 

 

 

 

 

(90

)

 

 

 

 

Long-lived asset impairment charge

 

 

 

 

 

(121

)

 

 

 

 

Other income (expense)

 

 

(8

)

 

 

 

 

 

(15

)

 

Total certain items, pre-tax

 

 

$

(51

)

 

 

$

(242

)

 

 

$

(18

)

 

 

Details of other unallocated items for fiscal years 2006, 2005 and 2004 are as follows:

 

 

Years Ended September 30

 

 

 

2006

 

2005

 

2004

 

 

 

(Dollars in millions)

 

Interest expense

 

$

(27

)

$

(29

)

$

(30

)

Equity in net income of affiliated companies

 

(12

)

(12

)

(6

)

Foreign currency transaction gains (losses)

 

(2

)

2

 

(2

)

Other unallocated income

 

9

 

9

 

5

 

Total other unallocated items

 

$

(32

)

$

(30

)

$

(33

)

 

The impact of various factors on total segment PBT for 2006 when compared to 2005, and for 2005 when compared to 2004, are as follows:

 

 

2006 vs. 2005

 

2005 vs. 2004

 

 

 

(Dollars in millions)

 

Raw Material Costs

 

 

$

(284

)

 

 

$

(70

)

 

Selling Prices

 

 

210

 

 

 

33

 

 

Fixed Costs

 

 

28

 

 

 

 

 

Volumes

 

 

18

 

 

 

62

 

 

Acquisition of Cabot Japan

 

 

12

 

 

 

 

 

Selling, Technical and Administrative Costs

 

 

10

 

 

 

(12

)

 

Foreign Currency Translation Adjustments

 

 

1

 

 

 

4

 

 

Inventory Change and Other Inventory Charges

 

 

(1

)

 

 

(53

)

 

 

41




The $1 million increase in total segment PBT in 2006 when compared to 2005 primarily relates to continued strong demand and higher volumes in our principal businesses, lower manufacturing and administrative costs in the Supermetals Business and the favorable impact of our acquisition and consolidation of the results of Cabot Japan. These factors were partially offset by lower prices and higher ore costs in the Supermetals Business and higher raw material costs in rubber blacks and performance products. The $36 million decrease in total segment PBT in 2005 when compared to 2004 principally related to higher raw material costs, higher per unit costs of production due to lower production rates resulting from inventory drawdowns, and higher selling and administrative costs. These factors were partially offset by higher volumes, higher pricing and the positive impact of foreign currency translation adjustments.

Carbon Black Business

Segment sales and PBT for the Carbon Black Business for fiscal years 2006, 2005 and 2004 are as follows:

 

 

Years Ended September 30

 

 

 

2006

 

2005

 

2004

 

 

 

(Dollars in millions)

 

Segment Sales

 

$

1,917

 

$

1,490

 

$

1,325

 

Segment PBT

 

$

105

 

$

94

 

$

114

 

 

The impact of various factors on segment sales in the Carbon Black Business for 2006 when compared to 2005, and for 2005 when compared to 2004, are as follows:

 

 

2006 vs. 2005

 

2005 vs. 2004

 

 

 

(Dollars in millions)

 

Selling Prices

 

 

$

284

 

 

 

$

60

 

 

Acquisition of Cabot Japan

 

 

83