1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
MARCH 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 1-5667
CABOT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2271897
(State of Incorporation) (I.R.S. Employer Identification No.)
75 STATE STREET 02109-1806
BOSTON, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 345-0100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
AS OF MARCH 31, 1998, THE COMPANY HAD 67,883,446 SHARES OF COMMON
STOCK, PAR VALUE $1 PER SHARE, OUTSTANDING.
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CABOT CORPORATION
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended March 31, 1998 and 1997 3
Consolidated Statements of Income
Six Months Ended March 31, 1998 and 1997 4
Consolidated Balance Sheets
March 31, 1998 and September 30, 1997 5
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 1998 and 1997
(Amounts in millions, except per share amounts)
UNAUDITED
1998 1997
------ ------
Revenues:
Net sales and other operating revenues $457.0 $432.0
Interest and dividend income 1.7 1.6
------ ------
Total revenues 458.7 433.6
------ ------
Costs and expenses:
Cost of sales 309.8 305.6
Selling and administrative expenses 58.9 53.1
Research and technical service 20.5 22.5
Interest expense 11.1 10.6
Other charges, net 4.8 1.8
------ ------
Total costs and expenses 405.1 393.6
------ ------
Income before income taxes 53.6 40.0
Provision for income taxes (19.3) (14.4)
Equity in net income of affiliated companies 4.0 3.9
Minority interest in income (0.8) (0.1)
------ ------
Net income 37.5 29.4
Dividends on preferred stock,
net of tax benefit of $0.5 and $0.5 (0.8) (0.8)
------ ------
Income available to common shares $ 36.7 $ 28.6
====== ======
Weighted average common shares outstanding (Note D):
Basic 65.6 67.8
Diluted 74.6 77.0
Income per common share (Note D):
Basic $ 0.56 $ 0.42
====== ======
Diluted $ 0.50 $ 0.38
====== ======
Dividends per common share $ 0.10 $ 0.10
====== ======
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended March 31, 1998 and 1997
(Amounts in millions, except per share amounts)
UNAUDITED
1998 1997
------ ------
Revenues:
Net sales and other operating revenues $892.4 $830.8
Interest and dividend income 3.3 3.3
------ ------
Total revenues 895.7 834.1
------ ------
Costs and expenses:
Cost of sales 609.9 585.3
Selling and administrative expenses 115.6 106.8
Research and technical service 39.6 43.4
Interest expense 22.5 20.3
Other charges, net 9.2 3.6
------ ------
Total costs and expenses 796.8 759.4
------ ------
Income before income taxes 98.9 74.7
Provision for income taxes (35.6) (26.9)
Equity in net income of affiliated companies 7.0 7.9
Minority interest in income (1.4) (1.2)
------ ------
Net income 68.9 54.5
Dividends on preferred stock,
net of tax benefit of $1.0 and $1.0 (1.6) (1.6)
------ ------
Income available to common shares $ 67.3 $ 52.9
====== ======
Weighted average common shares outstanding (Note D):
Basic 65.9 68.3
Diluted 74.9 77.5
Income per common share (Note D):
Basic $ 1.02 $ 0.77
====== ======
Diluted $ 0.91 $ 0.69
====== ======
Dividends per common share $ 0.20 $ 0.20
====== ======
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and September 30, 1997
(Amounts in millions, except share amounts)
ASSETS
March 31 September 30
1998 1997
----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 39.1 $ 39.2
Accounts and notes receivable
(net of reserve for doubtful
accounts of $5.1 and $5.6) 335.9 288.6
Inventories:
Raw materials 64.7 81.1
Work in process 59.1 59.8
Finished goods 70.9 64.1
Other 43.2 41.9
-------- --------
Total inventories 237.9 246.9
Prepaid expenses 37.7 21.3
Deferred income taxes 18.4 15.2
-------- --------
Total current assets 669.0 611.2
-------- --------
Investments:
Equity 79.9 86.1
Other 193.8 146.6
-------- --------
Total investments 273.7 232.7
-------- --------
Property, plant and equipment 1,813.5 1,759.8
Accumulated depreciation and amortization (874.6) (837.5)
-------- --------
Net property, plant and equipment 938.9 922.3
-------- --------
Other assets:
Intangible assets, net of amortization 48.8 39.1
Deferred income taxes 5.2 4.2
Other assets 20.0 14.1
-------- --------
Total other assets 74.0 57.4
-------- --------
Total assets $1,955.6 $1,823.6
======== ========
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and September 30, 1997
(Amounts in millions, except share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY
March 31 September 30
1998 1997
----------- ------------
(Unaudited)
Current liabilities:
Notes payable to banks $ 338.6 $ 200.8
Current portion of long-term debt 10.7 115.0
Accounts payable and accrued liabilities 227.4 223.9
U.S. and foreign income taxes payable 10.7 0.7
Deferred income taxes 1.2 1.0
-------- --------
Total current liabilities 588.6 541.4
-------- --------
Long-term debt 329.2 285.5
Deferred income taxes 120.3 99.2
Other liabilities 145.6 146.9
Commitments and contingencies (Note C) - -
Minority interest 23.7 22.8
Stockholders' Equity (Note E):
Preferred Stock:
Authorized: 2,000,000 shares of $1 par value
Series A Junior Participating Preferred Stock
Issued and outstanding: none
Series B ESOP Convertible Preferred Stock 7.75% Cumulative
Issued: 75,336 shares (aggregate redemption value
of $68.1 and $69.4) 75.3 75.3
Less cost of preferred treasury stock (11.3) (9.4)
Common stock:
Authorized: 200,000,000 shares of $1 par value
Issued: 135,549,936 shares 135.5 135.5
Additional paid-in capital 38.1 39.3
Retained earnings 1,292.0 1,238.2
Less cost of common treasury stock
(including unearned compensation amounts of $10.9 and $18.3) (761.6) (723.7)
Deferred employee benefits (61.6) (62.5)
Unrealized gain on available-for-sale securities 79.3 53.9
Foreign currency translation adjustments (37.5) (18.8)
-------- --------
Total stockholders' equity 748.2 727.8
-------- --------
Total liabilities and stockholders' equity $1,955.6 $1,823.6
======== ========
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 1998 and 1997
(Amounts in millions)
UNAUDITED
1998 1997
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68.9 $ 54.5
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 57.6 53.2
Deferred tax provision (benefit) (0.6) 1.3
Equity in net income of affiliated companies,
net of dividends received (4.2) (1.6)
Other, net 7.6 4.0
Changes in assets and liabilities, net of the effect of
acquisitions and the consolidation of equity affiliates:
Increase in accounts receivable (50.3) (39.0)
Decrease in inventory 7.9 6.9
Increase (decrease) in accounts payable and accruals 4.7 (28.2)
Increase in prepayments and intangible assets (22.8) (5.9)
Increase (decrease) in income taxes payable 10.5 (2.3)
Other, net (1.3) (1.2)
------- -------
Cash provided by operating activities 78.0 41.7
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (70.6) (101.5)
Proceeds on sale of business - 35.0
Investments and acquisitions (27.3) (16.3)
Other 2.4 0.4
------- -------
Cash used by investing activities (95.5) (82.4)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 63.1 90.0
Repayments of long-term debt (121.8) (13.9)
Increase in short-term debt 137.7 15.8
Purchases of treasury stock (50.1) (47.6)
Sales and issuances of treasury stock 3.6 2.7
Cash dividends paid to stockholders (15.1) (15.7)
------- -------
Cash provided by financing activities 17.4 31.3
------- -------
Effect of exchange rate changes on cash (0.0) (0.1)
------- -------
Decrease in cash and cash equivalents (0.1) (9.5)
Cash and cash equivalents at beginning of period 39.2 58.2
------- -------
Cash and cash equivalents at end of period $ 39.1 $ 48.7
======= =======
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
A. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Cabot
Corporation and majority-owned and controlled U.S. and non-U.S.
subsidiaries (the "Company"). Investments in majority-owned affiliates
where control does not exist and investments in 20 percent to 50
percent-owned affiliates are accounted for on the equity method.
Intercompany transactions have been eliminated.
The financial statements have been prepared in accordance with the
requirements of Form 10-Q and consequently do not include all
disclosures required by Form 10-K. Additional information may be
obtained by referring to the Company's Form 10-K for the year ended
September 30, 1997.
The financial information submitted herewith is unaudited and reflects
all adjustments which are, in the opinion of management, necessary to
provide a fair presentation of the results for the interim periods ended
March 31, 1998 and 1997. All such adjustments are of a normal recurring
nature. The results for interim periods are not necessarily indicative
of the results to be expected for the fiscal year.
B. ACQUISITIONS
Effective October 1, 1997 the Company acquired the remaining interest in
its fumed silica joint venture in Rheinfelden, Germany for approximately
$20 million. The acquisition was accounted for using the purchase method
of accounting. Accordingly, a portion of the purchase price was
allocated to the net assets acquired based on their estimated fair
values. The balance of the purchase price, approximately $11 million,
was recorded as excess of purchase price over fair value of net assets
acquired (goodwill), and is being amortized over 15 years on a
straight-line basis.
C. COMMITMENTS AND CONTINGENCIES
The Company has various lawsuits, claims and contingent liabilities. In
the opinion of the Company, although final disposition of all of its
suits and claims may impact the Company's financial statements in a
particular period, they should not, in the aggregate, have a material
adverse effect on the Company's financial position.
During 1997, the Company entered into an agreement to reprocess valuable
tantalum ore. The Company's estimates of the recovery yield, related
costs and the net realizable value continue to be updated with limited
actual experience. The estimated cost of the project has increased
approximately $10 million; whether this will result in a charge to
earnings will depend on the amount of tantalum actually recovered. The
Company expects the project to be completed in the second half of the
year.
D. EARNINGS PER SHARE (EPS)
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (SFAS 128). As a result, primary and fully
diluted earnings per share have been replaced by basic and diluted
earnings per share. Amounts related to prior periods have been restated
to reflect the new requirement.
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1998
UNAUDITED
D. EARNINGS PER SHARE (CONTINUED)
Reconciliation of Income and Shares
Three Months Ended March 31, 1998 and 1997
(Amounts in millions, except per share amounts)
1998 1997
----- -----
BASIC EPS COMPUTATION
Net Income (Numerator) $37.5 $29.4
Less: Dividends on preferred stock (0.8) (0.8)
----- -----
INCOME AVAILABLE TO COMMON SHARES $36.7 $28.6
===== =====
Shares of common stock at January 1 (Denominator) 67.8 70.1
Net weighted shares of treasury stock purchased - (0.2)
Contingently issuable shares (2.2) (2.1)
----- -----
WEIGHTED AVERAGE SHARES 65.6 67.8
===== =====
BASIC EPS $0.56 $0.42
===== =====
DILUTED EPS CALCULATION
Income available to common shares (Numerator) $36.7 $28.6
Plus: Dividends on preferred stock 0.8 0.8
Income impact of assumed conversion of
preferred stock (0.5) (0.5)
----- -----
INCOME AVAILABLE TO COMMON SHARES + ASSUMED CONVERSIONS $37.0 $28.9
===== =====
Shares of common stock at January 1 (Denominator) 67.8 70.1
Net weighted shares of treasury stock purchased - (0.2)
Convertible preferred stock 6.0 6.1
Equity incentive awards 0.8 1.0
----- -----
ADJUSTED WEIGHTED AVERAGE SHARES 74.6 77.0
===== =====
DILUTED EPS $0.50 $0.38
===== =====
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1998
UNAUDITED
D. EARNINGS PER SHARE (CONTINUED)
Reconciliation of Income and Shares
Six Months Ended March 31, 1998 and 1997
(Amounts in millions, except per share amounts)
1998 1997
----- -----
BASIC EPS COMPUTATION
Net Income (Numerator) $68.9 $54.5
Less: Dividends on preferred stock (1.6) (1.6)
----- -----
INCOME AVAILABLE TO COMMON SHARES $67.3 $52.9
===== =====
Shares of common stock at October 1 (Denominator) 69.5 71.6
Net weighted shares of treasury stock purchased (1.4) (1.2)
Contingently issuable shares (2.2) (2.1)
----- -----
WEIGHTED AVERAGE SHARES 65.9 68.3
===== =====
BASIC EPS $1.02 $0.77
===== =====
DILUTED EPS CALCULATION
Income available to common shares (Numerator) $67.3 $52.9
Plus: Dividends on preferred stock 1.6 1.6
Income impact of assumed conversion of
preferred stock (0.8) (0.9)
----- -----
INCOME AVAILABLE TO COMMON SHARES + ASSUMED CONVERSIONS $68.1 $53.6
===== =====
Shares of common stock at October 1 (Denominator) 69.5 71.6
Net weighted shares of treasury stock purchased (1.4) (1.2)
Convertible preferred stock 6.0 6.1
Equity incentive awards 0.8 1.0
----- -----
ADJUSTED WEIGHTED AVERAGE SHARES 74.9 77.5
===== =====
DILUTED EPS $0.91 $0.69
===== =====
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1998
UNAUDITED
E. STOCKHOLDERS' EQUITY
The following table summarizes the changes in stockholders' equity for the
six months ended March 31, 1998.
(Amounts in millions, except share amounts)
Preferred Stock Preferred Common Stock
--------------- Treasury Stock ------------------- Additional
Shares ----------------- Shares Paid-in Retained
Issued Value Shares Cost Issued Value Capital Earnings
------ ----- ------ ------- ----------- ------ ---------- --------
Balance at September 30, 1997 75,336 $75.3 6,956 $ (9.4) 135,549,936 $135.5 $39.3 $1,238.2
Net income 68.9
Common stock dividends paid (13.5)
Issuance of treasury stock under
employee compensation plans (1.9)
Purchase of treasury stock - common
Purchase of treasury stock -
preferred 789 (1.9)
Sale of treasury stock to Cabot
Retirement Incentive Savings Plan 0.7
Preferred stock dividends paid to
Employee Stock Ownership Plan,
net of tax (1.6)
Principal payment by Employee Stock
Ownership Plan under guaranteed loan
Amortization of unearned compensation
Unrealized gain, net of deferred tax
Foreign currency translation
adjustments
------ ----- ----- ------ ----------- ------ ----- --------
Balance at March 31, 1998 75,336 $75.3 7,745 $(11.3) 135,549,936 $135.5 $38.1 $1,292.0
====== ===== ===== ====== =========== ====== ===== ========
Common Unrealized Foreign
Treasury Stock Deferred Gain On Currency Total
--------------------- Unearned Employee Available For Translation Stockholders'
Shares Cost Compensation Benefits Sale Securities Adjustments Equity
---------- -------- ------------ -------- --------------- ----------- -------------
Balance at September 30, 1997 66,067,426 $(705.4) $(18.3) $(62.5) $53.9 $(18.8) $727.8
Net income 68.9
Common stock dividends paid (13.5)
Issuance of treasury stock under
employee compensation plans (214,066) 2.4 1.9 2.4
Purchase of treasury stock - common 1,856,333 (48.2) (48.2)
Purchase of treasury stock -
preferred (1.9)
Sale of treasury stock to Cabot
Retirement Incentive Savings Plan (43,203) 0.5 1.2
Preferred stock dividends paid to
Employee Stock Ownership Plan,
net of tax (1.6)
Principal payment by Employee Stock
Ownership Plan under guaranteed loan 0.9 0.9
Amortization of unearned compensation 5.5 5.5
Unrealized gain, net of deferred tax 25.4 25.4
Foreign currency translation
adjustments (18.7) (18.7)
---------- ------- ------ ------ ----- ------ ------
Balance at March 31, 1998 67,666,490 $(750.7) $(10.9) $(61.6) $79.3 $(37.5) $748.2
========== ======= ====== ====== ===== ====== ======
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CABOT CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales and operating profit by industry segment are shown in the accompanying
table on page 16.
THREE MONTHS ENDED MARCH 31, 1998 VERSUS
THREE MONTHS ENDED MARCH 31, 1997
Net income for the second quarter of fiscal year 1998 was $37.5 million ($0.50
per diluted common share), compared with $29.4 million ($0.38 per diluted common
share) in the same quarter a year ago. Net sales and other operating revenues
increased 6% to $457.0 million from last year's $432.0 million. Operating profit
was $73.4 million for the quarter compared to $57.6 million in the same quarter
a year ago. The increase in earnings is primarily due to greater volumes in each
of the Company's chemical businesses and greater firm sales commitments in the
Company's liquefied natural gas (LNG) business.
In the Specialty Chemicals and Materials Group, sales for the three month period
ended March 31, 1998 increased 4% to $372.5 million from $359.2 million last
year, on 13% greater volumes. The Company's chemical businesses all achieved
significant volume increases. Carbon black and fumed silica volumes for the
quarter were up 7% and 8%, respectively, from the same quarter last year. The
Cabot Performance Materials (tantalum) business's revenues increased 41% from
the prior year's second quarter, reflecting a recovery in the U.S. electronics
market over the last year. Also, the Company's plastics business achieved 6%
greater volumes for the second quarter, compared with last year's second
quarter. The revenue effect of greater chemical volumes was somewhat offset by
lower year-to-year carbon black selling prices, which were down 4% on average,
and the effects of a stronger U.S. dollar.
Operating profit for the Specialty Chemicals and Materials Group increased 27%
to $62.0 million from $48.8 million in the same quarter last year. The fumed
silica, carbon black, tantalum and microelectronics materials businesses each
experienced increased operating earnings. The inkjet colorants and plastics
businesses each reported flat year-to-year earnings comparisons for the second
quarter.
The carbon black business reported a modest earnings increase despite lower
year-to-year variable margins and a $2 million negative effect from the
strengthened U.S. dollar. The Company experienced lower year-to-year carbon
black margins because selling price concessions during 1997 exceeded the
combined effect of subsequent price increases and feedstock price decreases.
Greater year-to-year volumes, lower plant operating costs and lower development
costs resulted in an earnings increase in the Company's carbon black business.
In general, the effects of weaker Asian markets were more than offset by
stronger volumes in North America and Europe.
The fumed silica business experienced an 8% increase in global volumes in the
second quarter versus the second quarter of 1997. Year-to-year, the fumed silica
business reported greater volumes and higher prices. Additionally, the Company's
purchase of its former partner's interest in the Rheinfelden, Germany fumed
silica plant contributed positively to operating earnings in the second quarter.
As a result, the fumed silica business reported a significant earnings
improvement for the second quarter.
The Cabot Performance Materials business (CPM), which manufactures high grade
tantalum products, experienced a 41% revenue increase in the second quarter
compared to the same quarter a year ago. CPM's margins increased primarily from
the effect of substantially higher volumes. CPM contributed an incremental
$0.03 per share to the Company's earnings in the second quarter, compared with
last year's second quarter. During the second half of fiscal 1996 and the first
half of 1997, CPM's volumes were weak due to a slowdown in the U.S. electronics
market and inventory surpluses downstream in the tantalum supply
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CABOT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
RESULTS OF OPERATIONS (CONTINUED)
chain. Therefore, the favorable year-to-year comparison for the second quarter
of 1998 was anticipated. For the remainder of fiscal year 1998, year-to-year
quarterly volume comparisons will no longer reflect prior year market weakness.
Research and development and marketing costs associated with new products was
$28.1 million for the second quarter of 1998 versus $27.1 million for the second
quarter of 1997. The Company continues to pursue and is encouraged by progress
being made in several of its new product and new business initiatives. The
Company's objective of developing higher value, differentiated products and
creating new businesses is central to its strategy for generating earnings
growth.
In the Company's Energy Group, which is comprised of the liquefied natural gas
importation and distribution operations, sales for the second quarter increased
16% to $84.5 million from $72.8 million for the same quarter a year ago. The
Group's operating profit was $11.4 million, compared with $8.8 million in the
second quarter of 1997. The increase in earnings is attributable to greater
contribution from firm sales commitments. Since the Company entered fiscal 1998
with a more ample and assured supply of LNG than in recent years, management was
able to contract firm sales commitments for a greater amount of LNG during the
winter season. Customers pay a premium over the commodity natural gas price in
order to secure firm commitments for delivery. The greater amount of firm sales
commitments resulted in increased margins during the second quarter, compared
with the second quarter of 1997.
SIX MONTHS ENDED MARCH 31, 1998 VERSUS
SIX MONTHS ENDED MARCH 31, 1997
Net income for the six months ended March 31, 1998 was $68.9 million compared
with $54.5 million for the first half of fiscal 1997. Operating earnings
increased 26% to $136.3 million from $108.1 million.
In the Specialty Chemicals and Materials Group, revenues increased 5% to $735.1
million, from $699.4 million. The effects of greater volumes were somewhat
offset by the effects of lower year-to-year prices and a strengthened U.S.
dollar. Operating profits increased 20% to $113.5 million, from $94.8 million.
Each of the Company's chemical businesses experienced significant physical
volume increases. In the Company's carbon black business, the effects of greater
volumes and stable margins in the North American, European and South American
markets more than offset the effects of Asian market weaknesses and a
strengthened U.S. dollar. The Company's fumed silica business continued to
experience strong market conditions. This business experienced greater volumes
and higher selling prices during the first half of fiscal 1998. CPM contributed
an incremental $0.06 per share to the Company's earnings, primarily due to
significant year-to-year volume increases.
The Company's Energy Group achieved revenue and operating profit increases of
20% and 71%, respectively, despite a warmer than normal winter in New England,
the Energy Group's primary market. An increased supply of gas entering fiscal
1998 allowed the Company to take advantage of higher year-to-year gas prices in
the first fiscal quarter, and to increase its firm sales commitments in the six
month period.
The Company expects the volume levels in its carbon black, fumed silica and
plastics markets to remain strong during the remainder of fiscal 1998, with the
exception of certain Asian markets. During the first
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14
CABOT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
RESULTS OF OPERATIONS (CONTINUED)
two quarters of fiscal 1998 the Company's results have been negatively impacted
by recent economic events in Asia and related currency devaluations. The primary
impact has been on the performance of the Company's Indonesian carbon black
business which reported a $1.7 million operating loss and a $4.2 million
currency devaluation for the first half of the year. The Company expects
continued weak demand in fiscal 1998 and will continue to monitor conditions in
its Asian markets. The Company is presently evaluating its Indonesian carbon
black operations and related outlook under various operating scenarios. In CPM,
management has seen some initial signs of softening demand in the Company's end
markets, primarily computers and electronics.
CASH FLOWS AND LIQUIDITY
During the first six months of the year the Company's operations provided
$78 million of cash compared to $42 million last year.
Capital spending for the first six months of the year was $98 million. The
Company plans to make approximately $250 million of capital expenditures during
the fiscal year. The major components of the 1998 capital program include new
business expansion, the Company's equity share of a natural gas liquefaction
project in Trinidad, refurbishment of the Company's LNG tanker, capacity
expansion in the Company's fumed silica business, and normal plant operating
capital projects.
During the first six months of the year, the Company purchased approximately
1.8 million shares of the Company's common stock. At March 31, 1998, there were
approximately 1.6 million shares remaining under an outstanding repurchase
authorization.
On October 21, 1997, the Company issued $50 million of notes maturing as
follows: $25 million matures in 30 years; and $25 million matures in 30 years
with a one-time put option 7 years from issuance. The notes have a weighted
average interest rate of 7.1%. Proceeds from the issuance were used to reduce
short-term debt. The Company's ratio of total debt (including short-term debt
net of cash) to capital increased from 43% at September 30, 1997 to 45% at the
end of the second quarter.
Subsequent to March 31, 1998, the Company sold 1.5 million shares of K N Energy,
Inc. common stock. The sale of these shares resulted in an pre-tax gain of
approximately $62 million. The net proceeds from these sales were used to reduce
short-term debt.
The Company maintains a credit agreement under which the Company may borrow up
to $300 million at floating rates. The facility is available through January 3,
2002. Management expects cash from operations and present financing
arrangements, including the Company's unused line of credit, to be sufficient to
meet the Company's cash requirements for the foreseeable future. The Company had
no borrowings outstanding under this line at March 31, 1998.
COMPANY PREPARES FOR YEAR 2000
Many computer systems and other automated systems will experience problems
handling dates beyond the year 1999. All automated systems and technology need
review for year 2000 compliance. Some software and hardware will need to be
modified or replaced prior to the year 2000 in order to remain functional. The
Company is assessing the readiness of all its automated systems to handle the
year 2000 issue. The Company expects to successfully implement the systems and
programming changes necessary to address year 2000 issues, and does not believe
that the cost of such actions will have a material effect on the Company's
results of operations or financial condition. There can be no assurance that
there will not be a
-14-
15
CABOT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
COMPANY PREPARES FOR YEAR 2000 (CONTINUED)
delay in, or increased costs associated with, the implementation of such
changes. Additionally, there is the possibility that the Company's inability to
implement such changes could have an adverse effect on future results of
operations. Furthermore, it is not possible for the Company to estimate the
effects, if any, on the Company from year 2000 disruptions experienced by its
vendors, customers, other parties with which the Company deals or more distant
parties who deal, directly or indirectly, with any of the foregoing.
-15-
16
CABOT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
(Amounts in millions, except per share amounts)
UNAUDITED
Three Months Ended Six Months Ended
------------------ -----------------
3/31/98 3/31/97 3/31/98 3/31/97
------- ------- ------- -------
INDUSTRY SEGMENT DATA
Net Sales:
Specialty chemicals and materials $372.5 $359.2 $735.1 $699.4
Energy 84.5 72.8 157.3 131.4
------ ------ ------ ------
Net sales $457.0 $432.0 $892.4 $830.8
====== ====== ====== ======
Operating profit:
Specialty chemicals and materials $ 62.0 $ 48.8 $113.5 $ 94.8
Energy 11.4 8.8 22.8 13.3
------ ------ ------ ------
Total operating profit 73.4 57.6 136.3 108.1
Interest expense (11.1) (10.6) (22.5) (20.3)
General corporate/other expenses (8.7) (7.0) (14.9) (13.1)
------ ------ ------ ------
Income before income taxes 53.6 40.0 98.9 74.7
Provision for income taxes (19.3) (14.4) (35.6) (26.9)
Equity in net income of affiliated companies 4.0 3.9 7.0 7.9
Minority interest in income (0.8) (0.1) (1.4) (1.2)
------ ------ ------ ------
Net income 37.5 29.4 68.9 54.5
Dividends on preferred stock (0.8) (0.8) (1.6) (1.6)
------ ------ ------ ------
Income applicable to common shares $ 36.7 $ 28.6 $ 67.3 $ 52.9
====== ====== ====== ======
Income per common share:
Basic $ 0.56 $ 0.42 $ 1.02 $ 0.77
====== ====== ====== ======
Diluted $ 0.50 $ 0.38 $ 0.91 $ 0.69
====== ====== ====== ======
FORWARD LOOKING INFORMATION: Management's Discussion and Analysis above contains
forward-looking remarks. Actual results may differ materially from the results
anticipated in the statements included herein due to a variety of factors
including market supply and demand conditions, currency exchange rates, costs of
raw materials, demand for our customers' products, and competitors' reactions to
market conditions. Timely commercialization of products under development by the
Company may be disrupted or delayed by technical difficulties, market
acceptance, competitors' new products as well as difficulties in moving from the
experimental stage to the production stage.
-16-
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1994, Cabot Corporation ("Cabot") and the State of Florida agreed to a
settlement of a 1983 state court lawsuit requiring Cabot to pay the State
$650,000 in past costs associated with a site in Gainesville, Florida. Cabot
also resolved claims of the United States Environmental Protection Agency
("EPA") for the site by paying a fine of $416,000. The site included a parcel of
land on which Cabot previously owned and operated a pine tar distillation plant.
Cabot has completed the implementation of a soil and groundwater remedy at the
site in accordance with requirements of EPA and is currently operating and
maintaining the groundwater collection system at the site, monitoring site
conditions and conducting a search for water wells on the property. Recent
monitoring of the groundwater collection system revealed slightly elevated
levels of certain contaminants, and Cabot is undertaking additional maintenance
activities on the collection system in an effort to address this condition. In
1995, Cabot filed a cost recovery suit against other responsible parties at the
site seeking reimbursement of their share of Cabot's response costs. Settlements
have now been reached with all of the defendants in that suit and definitive
settlement agreements are in preparation.
In 1986, Cabot sold a manufacturing facility in Reading, Pennsylvania to NGK
Metals, Inc. ("NGK"). In doing so, Cabot agreed to share on an equal basis with
NGK the costs of certain environmental remediation of the Reading plant site.
After the sale, EPA issued an order to NGK requiring it to address soil and
groundwater contamination at the site. In 1996 and 1997, NGK's contractor
completed the soil remediation component of the work. In August 1997, after
completion of the soil cleanup project, the contractor notified NGK that it had
incurred substantial additional costs over the base contract for the work and
that NGK was responsible for those extra costs. NGK, with support from Cabot,
has disputed this claim. In addition, in late 1996, NGK discovered an additional
area of contamination at the Reading plant site which it claims is subject to
the cost sharing provisions of its agreement with Cabot. Cabot has contested
this claim. The groundwater remediation component of the work is currently being
designed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Cabot Corporation was held on March 12,
1998. An election of Directors was held at which Mr. Charles P. Siess, Jr. was
nominated and elected to the class of Directors whose terms expire in 1999, and
Messrs. Kennett F. Burnes, John G.L. Cabot, John S. Clarkeson, Robert P.
Henderson, Roderick C.G. MacLeod and John F. O'Brien were nominated and elected
to the class of Directors whose terms expire in 2001. The following votes were
cast for or withheld with respect to each of the nominees:
Director In Favor Of Withheld
-------- ----------- --------
Kennett F. Burnes 66,048,179 952,437
John G.L. Cabot 66,210,940 789,676
John S. Clarkeson 66,164,064 836,552
Robert P. Henderson 66,211,399 789,217
Roderick C.G. MacLeod 66,208,622 791,994
John F. O'Brien 66,186,575 814,041
Charles P. Siess, Jr. 66,208,609 792,007
Other Directors whose terms of office as Directors continued after the meeting
are:
Director Term Of Office Expires
-------- ----------------------
Samuel W. Bodman 1999
Jane C. Bradley 1999
Arthur L. Goldstein 1999
Arnold S. Hiatt 2000
John H. McArthur 1999
David V. Ragone 2000
-17-
18
Morris Tanenbaum 2000
Lydia W. Thomas 2000
Mark S. Wrighton 2000
-18-
19
PART II. OTHER INFORMATION
(CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibit numbers in the following list correspond to the
number assigned to such exhibits in the Exhibit Table of
Item 601 of Regulation S-K:
Exhibit
Number Description
------ -----------
12 Statement Regarding Computation of Ratio of
Earnings to Fixed Charges, filed herewith.
27 Financial Data Schedule, filed herewith. (Not
included with printed copy of the Form 10-Q.)
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the
three months ended March 31, 1998.
-19-
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABOT CORPORATION
Date: May 14, 1998 /s/ Robert L. Culver
----------------------------
Robert L. Culver
Executive Vice President and
Chief Financial Officer
Date: May 14, 1998 /s/ William T. Anderson
----------------------------
William T. Anderson
Controller
(Chief Accounting Officer)
-20-
1
EXHIBIT 12
CABOT CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in millions, except ratios)
Six Months Years ended September 30
ended --------------------------------------------------
March 31, 1998 1997 1996 1995 1994 1993
-------------- ------ ------ ------ ------ ------
Earnings:
Pre-tax income from continuing operations $ 98.9 $117.0 $279.8 $256.0 $118.3 $ 67.9
Distributed income of affiliated companies 2.8 10.4 11.2 11.7 5.6 6.0
Add fixed charges:
Interest on indebtedness 22.5 43.2 41.7 35.6 41.7 44.0
Portion of rents representative of
the interest factor 2.5 4.9 4.8 5.5 5.9 4.9
------ ------ ------ ------ ------ ------
Income as adjusted $126.7 $175.5 $337.5 $308.8 $171.5 $122.8
Fixed charges:
Interest on indebtedness $ 22.5 $ 43.2 $ 41.7 $ 35.6 $ 41.7 $ 44.0
Capitalized interest - - - - - -
Portion of rents representative of
the interest factor 2.5 4.9 4.8 5.5 5.9 4.9
------ ------ ------ ------ ------ ------
Total fixed charges $ 25.0 $ 48.1 $ 46.5 $ 41.1 $ 47.6 $ 48.9
Ratio of earnings to fixed charges 5.1 3.6 7.3 7.5 3.6 2.5
====== ====== ====== ====== ====== ======
5
1,000,000
3-MOS
DEC-31-1998
MAR-31-1998
39
0
341
5
238
669
1,813
875
1,956
589
329
0
75
135
1,330
1,956
892
896
610
610
49
0
23
99
36
69
0
0
0
69
1.02
0.91
