1
FORM 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
JUNE 30, 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 AUGUST 12, 1998, THE COMPANY HAD 68,772,713 SHARES OF COMMON
STOCK, PAR VALUE $1 PER SHARE, OUTSTANDING.
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CABOT CORPORATION
INDEX
Part I. Financial Information Page
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Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Income
Nine Months Ended June 30, 1998 and 1997 4
Consolidated Balance Sheets
June 30, 1998 and September 30, 1997 5
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 1998 and 1997
(Amounts in millions, except per share amounts)
UNAUDITED
1998 1997
------ ------
Revenues:
Net sales and other operating revenues $376.3 $398.6
Interest and dividend income 1.0 1.9
------ ------
Total revenues 377.3 400.5
------ ------
Costs and Expense:
Cost of sales 244.8 274.2
Selling and administrative expenses 62.5 53.5
Research and technical service 20.1 20.4
Interest expense 10.7 11.4
Special charges and impairments (Note D) 85.0 -
Gain on sale of equity securities (Note E) (90.3) -
Other charges, net 0.5 3.3
------ ------
Total costs and expenses 333.3 362.8
------ ------
Income before income taxes 44.0 37.7
Provision for income taxes (15.8) (13.6)
Equity in net income of affiliated companies 6.1 5.2
Minority interest in income (1.0) (0.6)
------ ------
Net income 33.3 28.7
Dividends on preferred stock,
net of tax benefit of $0.5 and $0.5 (0.8) (0.8)
------ ------
Income available to common shares $ 32.5 $ 27.9
====== ======
Weighted average common shares outstanding (Note F):
Basic 66.4 67.7
Diluted 74.5 76.1
Income per common share (Note F):
Basic $ 0.49 $ 0.41
====== ======
Diluted $ 0.44 $ 0.37
====== ======
Dividends per common share $ 0.11 $ 0.10
====== ======
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended June 30, 1998 and 1997
(Amounts in millions, except per share amounts)
UNAUDITED
1998 1997
-------- --------
Revenues:
Net sales and other operating revenues $1,268.7 $1,229.4
Interest and dividend income 4.3 5.2
-------- --------
Total revenues 1,273.0 1,234.6
-------- --------
Costs and expenses:
Cost of sales 854.7 859.5
Selling and administrative expenses 178.1 160.3
Research and technical service 59.6 63.8
Interest expense 33.2 31.6
Special charges and impairments (Note D) 85.0 -
Gain on sale of equity securities (Note E) (90.3) -
Other charges, net 9.7 7.0
-------- --------
Total costs and expenses 1,130.0 1,122.2
-------- --------
Income before income taxes 143.0 112.4
Provision for income taxes (51.5) (40.5)
Equity in net income of affiliated companies 13.1 13.1
Minority interest in income (2.4) (1.8)
-------- --------
Net income 102.2 83.2
Dividends on preferred stock,
net of tax benefit of $1.5 and $1.6 (2.4) (2.4)
-------- --------
Income available to common shares $ 99.8 $ 80.8
======== ========
Weighted average common shares outstanding (Note F):
Basic 66.6 68.5
Diluted 74.6 76.9
Income per common share (Note F):
Basic $ 1.50 $ 1.18
======== ========
Diluted $ 1.35 $ 1.06
======== ========
Dividends per common share $ 0.31 $ 0.30
======== ========
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and September 30, 1997
(Amounts in millions, except share amounts)
ASSETS
June 30 September 30
1998 1997
-------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 70.8 $ 39.2
Accounts and notes receivable
(net of reserve for doubtful
accounts of $4.6 and $5.1) 289.4 288.6
Inventories:
Raw materials 67.7 81.1
Work in process 60.4 59.8
Finished goods 74.0 64.1
Other 43.2 41.9
-------- --------
Total inventories 245.3 246.9
Prepaid expenses (Note D) 15.6 21.3
Deferred income taxes 12.5 15.2
-------- --------
Total current assets 633.6 611.2
-------- --------
Investments:
Equity 83.8 86.1
Other (Note E) 72.6 146.6
-------- --------
Total investments 156.4 232.7
-------- --------
Property, plant and equipment 1,817.1 1,759.8
Accumulated depreciation and amortization (896.6) (837.5)
-------- --------
Net property, plant and equipment (Note D) 920.5 922.3
-------- --------
Other assets:
Intangible assets, net of amortization (Note D) 22.8 39.1
Deferred income taxes 4.8 4.2
Other assets 20.8 14.1
-------- --------
Total other assets 48.4 57.4
-------- --------
Total assets $1,758.9 $1,823.6
======== ========
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and September 30, 1997
(Amounts in millions, except share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY
June 30 September 30
1998 1997
-------- ------------
(Unaudited)
Current liabilities:
Notes payable to banks $ 272.4 $ 200.8
Current portion of long-term debt 10.8 115.0
Accounts payable and accrued liabilities 201.2 223.9
U.S. and foreign income taxes payable 2.2 0.7
Deferred income taxes 1.1 1.0
-------- --------
Total current liabilities 487.7 541.4
-------- --------
Long-term debt 322.5 285.5
Deferred income taxes 80.6 99.2
Other liabilities 144.2 146.9
Commitments and contingencies (Note C) - -
Minority interest 24.4 22.8
Stockholders' Equity (Note G):
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 $67.6 and $69.4) 75.3 75.3
Less cost of preferred treasury stock (12.9) (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 39.0 39.3
Retained earnings 1,317.0 1,238.2
Less cost of common treasury stock
(including unearned compensation amounts of $8.1 and $18.3) (769.3) (723.7)
Deferred employee benefits (61.1) (62.5)
Unrealized gain on available-for-sale securities 15.6 53.9
Foreign currency translation adjustments (39.6) (18.8)
-------- --------
Total stockholders' equity 699.5 727.8
-------- --------
Total liabilities and stockholders' equity $1,758.9 $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
Nine Months Ended June 30, 1998 and 1997
(Amounts in millions)
UNAUDITED
1998 1997
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 102.2 $ 83.2
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 82.0 81.2
Deferred tax provision (benefit) 4.0 (1.6)
Equity in net income of affiliated companies,
net of dividends received (7.6) (4.5)
Special charges and impairments 85.0 -
Gain on sale of equity securities (90.3) -
Other, net 8.1 7.6
Changes in assets and liabilities, net of the effect of acquisitions
and the consolidation of equity affiliates:
Increase in accounts receivable (8.7) (38.0)
Increase in inventory (4.9) (2.5)
Decrease in accounts payable and accruals (29.4) (15.5)
Increase in prepayments and intangible assets (7.2) (0.5)
Increase (decrease) in income taxes payable 2.0 (17.4)
Other, net 2.2 2.0
------- -------
Cash provided by operating activities 137.4 94.0
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (115.0) (131.9)
Proceeds on sale of business - 35.0
Investments and acquisitions, excluding cash acquired (30.3) (21.4)
Purchase of available-for-sale securities (20.2) (11.3)
Proceeds from sale of available-for-sale securities 129.5 -
Cash from consolidation of equity affiliates and other 2.3 -
Proceeds from sale of property, plant and equipment 5.0 -
Other - 0.6
------- -------
Cash used by investing activities (30.7) (129.0)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 63.1 90.0
Repayments of long-term debt (128.4) (16.1)
Net increase in short-term debt 71.3 48.2
Purchases of treasury stock (65.3) (72.9)
Sales and issuances of treasury stock 8.5 4.2
Cash dividends paid to stockholders (23.4) (23.5)
------- -------
Cash provided (used) by financing activities (74.2) 29.9
------- -------
Effect of exchange rate changes on cash (0.9) (1.6)
------- -------
Increase (decrease) in cash and cash equivalents 31.6 (6.7)
Cash and cash equivalents at beginning of period 39.2 58.1
------- -------
Cash and cash equivalents at end of period $ 70.8 $ 51.4
======= =======
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 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.
D. SPECIAL CHARGES AND IMPAIRMENTS
The Company acquired an 80% ownership interest in P.T. Continental
Carbon Indonesia ("PTCCI"), an Indonesian carbon black plant located in
Merak, Indonesia, during 1996. The recent financial and economic crisis
in Indonesia has resulted in a significant decline in demand for carbon
black in the region. As a result, management decided to temporarily
halt production at this plant. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets, the Company recognized an impairment
loss of $60 million for the difference between the carrying value of
PTCCI's long-lived assets of $77 million and the estimated fair value.
The charge to the Specialty Chemicals and Materials Group consisted of
$34 million for property, plant and equipment and other assets and $26
million for goodwill and other intangible assets.
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1998
D. SPECIAL CHARGES AND IMPAIRMENTS (CONTINUED)
During 1997, the Company entered into an agreement to process tantalum
ore residues from the Company's past production of tantalum. The
Company expected that the process would produce economic recoveries of
tantalum and recognized prepaid expenses of approximately $25 million
of costs associated with the agreement through the third quarter of
1998. However, the tantalum recovery rate to date has been
substantially lower than expected. Therefore, in the third quarter of
1998, management discontinued the project which resulted in a charge of
$25 million to operations of the Specialty Chemicals and Materials
Group.
E. INVESTMENTS
During the third quarter the Company sold 2.3 million shares of its
investment in K N Energy, Inc. The Company received cash proceeds of
$129.5 million and recorded a gain of $90.3 million related to the
sale.
F. EARNINGS PER SHARE (EPS)
The Company has adopted SFAS No. 128, Earnings Per Share. 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)
June 30, 1998
UNAUDITED
F. EARNINGS PER SHARE (CONTINUED)
Reconciliation of Income and Shares
Three Months Ended June 30, 1998 and 1997
(Amounts in millions, except per share amounts)
1998 1997
----- -----
BASIC EPS COMPUTATION
Net Income (Numerator) $33.3 $28.7
Less: Dividends on preferred stock (0.8) (0.8)
----- -----
INCOME AVAILABLE TO COMMON SHARES $32.5 $27.9
===== =====
Shares of common stock at April 1 (Denominator) 67.9 69.8
Net weighted shares of treasury stock purchased - (0.6)
Contingently issuable shares (1.5) (1.5)
----- -----
WEIGHTED AVERAGE SHARES 66.4 67.7
===== =====
BASIC EPS $0.49 $0.41
===== =====
DILUTED EPS CALCULATION
Income available to common shares (Numerator) $32.5 $27.9
Plus: Dividends on preferred stock 0.8 0.8
Income impact of assumed conversion of
preferred stock (0.4) (0.4)
----- -----
INCOME AVAILABLE TO COMMON SHARES + ASSUMED CONVERSIONS $32.9 $28.3
===== =====
Shares of common stock at April 1 (Denominator) 67.9 69.8
Net weighted shares of treasury stock purchased - (0.6)
Convertible preferred stock 5.9 6.0
Equity incentive awards 0.7 0.9
----- -----
ADJUSTED WEIGHTED AVERAGE SHARES 74.5 76.1
===== =====
DILUTED EPS $0.44 $0.37
===== =====
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1998
UNAUDITED
F. EARNINGS PER SHARE (CONTINUED)
Reconciliation of Income and Shares
Nine Months Ended June 30, 1998 and 1997
(Amounts in millions, except per share amounts)
1998 1997
------ -----
BASIC EPS COMPUTATION
Net Income (Numerator) $102.2 $83.2
Less: Dividends on preferred stock (2.4) (2.4)
------ -----
INCOME AVAILABLE TO COMMON SHARES $ 99.8 $80.8
====== =====
Shares of common stock at October 1 (Denominator) 69.5 71.6
Net weighted shares of treasury stock purchased (1.4) (1.6)
Contingently issuable shares (1.5) (1.5)
------ -----
WEIGHTED AVERAGE SHARES 66.6 68.5
====== =====
BASIC EPS $ 1.50 $1.18
====== =====
DILUTED EPS CALCULATION
Income available to common shares (Numerator) $ 99.8 $80.8
Plus: Dividends on preferred stock 2.4 2.4
Income impact of assumed conversion of
preferred stock (1.3) (1.3)
------ -----
INCOME AVAILABLE TO COMMON SHARES + ASSUMED CONVERSIONS $100.9 $81.9
====== =====
Shares of common stock at October 1 (Denominator) 69.5 71.6
Net weighted shares of treasury stock purchased (1.4) (1.6)
Convertible preferred stock 5.9 6.0
Equity incentive awards 0.6 0.9
------ -----
ADJUSTED WEIGHTED AVERAGE SHARES 74.6 76.9
====== =====
DILUTED EPS $ 1.35 $1.06
====== =====
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1998
UNAUDITED
G. STOCKHOLDERS' EQUITY
The following table summarizes the changes in stockholders' equity for
the nine months ended June 30, 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 102.2
Common stock dividends paid (21.0)
Issuance of treasury stock under
employee compensation plans (1.6)
Purchase of treasury stock - common
Purchase of treasury stock - preferred 1,302 (3.5)
Sale of treasury stock to Cabot
Retirement Incentive Savings Plan 1.3
Preferred stock dividends paid to Employee
Stock Ownership Plan, net of tax (2.4)
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 June 30, 1998 75,336 $75.3 8,258 $(12.9) 135,549,936 $135.5 $39.0 $1,317.0
====== ===== ===== ====== =========== ====== ===== ========
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 102.2
Common stock dividends paid (21.0)
Issuance of treasury stock under
employee compensation plans (473,870) 5.2 2.8 6.4
Purchase of treasury stock - common 2,254,624 (61.8) (61.8)
Purchase of treasury stock - preferred (3.5)
Sale of treasury stock to Cabot
Retirement Incentive
Savings Plan (74,829) 0.8 2.1
Preferred stock dividends paid to Employee
Stock Ownership Plan, net of tax (2.4)
Principal payment by Employee Stock
Ownership Plan under guaranteed loan 1.4 1.4
Amortization of unearned compensation 7.4 7.4
Unrealized gain, net of deferred tax (38.3) (38.3)
Foreign currency translation adjustments (20.8) (20.8)
---------- ------- ------ ------ ----- ------ ------
Balance at June 30, 1998 67,773,351 $(761.2) $(8.1) $(61.1) $15.6 $(39.6) $699.5
========== ======= ===== ====== ===== ====== ======
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CABOT CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Sales and operating profit by industry segment are shown in the accompanying
table on page 17.
THREE MONTHS ENDED JUNE 30, 1998 VERSUS
THREE MONTHS ENDED JUNE 30, 1997
Net income for the third quarter of fiscal year 1998 was $33.3 million ($0.44
per diluted common share), compared to $28.7 million ($0.37 per diluted common
share) in the same quarter a year ago. The quarter just ended included $0.04 per
diluted share of contribution from special items. Excluding those items to form
a comparative basis, the third quarter's earnings were $0.40, compared with
$0.37 per share for the third quarter last year.
The third quarter's earnings included the effects of three special items. During
the quarter, the Company sold 2.3 million shares of its investment in K N
Energy, Inc., generating a $90.3 million gain. The Company also recorded charges
of $60 million for an asset impairment related to an Indonesian carbon black
plant, and $25 million related to a tantalum ore recovery project. These special
items contributed a net $0.04 per diluted share of contribution to the Company's
third quarter earnings, but have been excluded from the amounts in the following
discussion of third quarter and nine month operating results.
Net sales and other operating revenues were $376.3 million for the quarter
compared to $398.6 million in the same quarter a year ago. Operating profit for
the quarter increased 5% to $58.6 million from last year's $55.9 million. The
increase in operating profit was achieved despite the negative effects of
significantly weaker Asian market conditions, the effect of a stronger U.S.
dollar and weak summer prices in the Company's liquefied natural gas market.
In the Specialty Chemicals and Materials Group, sales for the three month period
ended June 30, 1998 decreased 5% to $354.0 million from $372.4 million in the
same quarter last year. The lower revenues reflected 3% lower chemical volumes.
Volumes for the Company's fumed silica and carbon black businesses were roughly
flat for the quarter. Lower demand in the electronics markets, caused in part by
weak Asian conditions, resulted in 13% lower tantalum volumes compared with the
same quarter last year. Volume in the Company's plastics business decreased 19%
for the third quarter, compared with last year's third quarter.
Operating profit for the Specialty Chemicals and Materials Group increased 9% to
$64.0 million for the third quarter, compared to $58.7 million for the third
quarter of 1997. The increase in operating profit was primarily due to higher
year-to-year earnings in the Company's fumed silica business. The Company's
microelectronics materials business also reported higher operating results,
driven by 41% volume growth and greater contribution from new products. The
inkjet colorants and plastics businesses each reported slightly lower operating
results from last year's third quarter results.
The carbon black business reported a modest increase in operating profit despite
a $4 million decrease in the Pacific Asia region's earnings and a $2 million
negative effect from the strengthened U.S. dollar. Greater carbon black volumes
in North America offset the effects of 24% lower Pacific Asia volumes. The
carbon black business continued to experience lower year-to-year margins, the
effect of passing through a substantial portion of lower carbon black feedstock
costs for some commodity grades.
The fumed silica business reported greater operating profit during the third
quarter, compared with the year-ago quarter. Higher prices and lower material
costs contributed to the favorable earnings comparison. Year-to-year volumes
were flat. Additionally, the Company's purchase of its former partner's 50%
interest in the Rheinfelden, Germany fumed silica plant contributed positively
to operating results in the third quarter.
13
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CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
The Company's performance materials business (CPM), which manufactures high
grade tantalum products, reported slightly lower operating profits for the third
quarter compared to the same quarter a year ago. CPM experienced 13% lower
volumes in the third quarter compared to a strong third quarter a year ago due
to lower demand in electronics markets. The effects of lower tantalum volumes
and increased spending on research and development in the Company's barium
titanate and niobium flake initiatives were offset by improved margins.
Selling and administrative expenses increased to $62.5 million for the third
quarter of 1998 from $53.5 million in the same quarter a year ago. The increase
is primarily attributable to increased development spending in the Company's new
product and new business initiatives, and increases in reorganization and legal
expenses.
Research and technical expenses and related marketing costs associated with new
products were $27.3 million for the third quarter of 1998 versus $25.5 million
for the third 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 comprises the liquefied natural gas (LNG)
importation and distribution operations, sales for the third quarter of 1998
decreased 15% to $22.3 million from $26.2 million for the same quarter in 1997.
A $5.4 million operating loss was reported, compared with an operating loss of
$2.8 million in the third quarter of 1997. The LNG business has historically
reported losses in the third quarter due to the seasonal nature of its business.
This year, however, operating results were further affected by lower than usual
summer gas prices and a weak summer liquid refill market due to an unusually
warm winter.
NINE MONTHS ENDED JUNE 30, 1998 VERSUS
NINE MONTHS ENDED JUNE 30, 1997
For the nine months ended June 30, 1998, net income was $102.2 million ($1.35
per diluted common share) compared to $83.2 million ($1.06 per diluted common
share) in the same period a year ago. Net sales increased 3% to $1,268.7 million
from $1,229.4 million last year. Excluding special items, operating profit
increased $31 million or 19% to $194.9 million from $163.9 million in the same
quarter a year ago.
In the Specialty Chemicals and Materials Group, net sales for the nine month
period ended June 30, 1998 increased 2% to $1,089.1 million from $1,071.8
million in the same period a year ago. Chemical sales volumes were favorable
year-to-year, particularly during the first half of the fiscal year. Operating
profit for the Specialty Chemicals and Materials Group increased 16% to $177.5
million from $153.5 million last year. Each of the Company's chemical businesses
reported increased operating profit for the nine month period. The effect of
greater chemical volumes was somewhat offset by weak demand in Asian markets,
lower year-to-year carbon black selling prices and the effects of a stronger
U.S. dollar.
In the Energy Group, revenues increased 14% to $179.6 million from $157.6
million and operating profit grew 67% to $17.4 million from $10.4 million in the
same period a year ago. Operating results improved largely due to greater
availability of liquefied natural gas entering fiscal 1998, allowing the Company
to take advantage of higher year-to-year gas prices and to increase its firm
sales commitments during the first half of the year.
The Company expects a more challenging operating environment for the remainder
of its fiscal year. Asian conditions are not expected to improve significantly
over the next few months. The slowdown in the world's personal electronics
market is affecting the Company's tantalum business, and is expected to last
through much of 1998 before returning to a pattern of normal growth early next
year. A warmer than normal winter in New England,
14
15
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
which is the Energy Group's primary market, has caused lower summer gas prices
and a weak summer refill market, and is expected to negatively affect the
Company's LNG business in the second half of the fiscal year.
The Company's effective tax rate for the quarters ended June 30, 1998 and 1997
was 36%.
FINANCIAL CONDITION
CASH FLOWS AND LIQUIDITY
During the first nine months of the year the Company's operations provided
$137.4 million of cash compared to $94.0 million last year.
Capital spending on investments, acquisitions, equity securities and property,
plant and equipment for the first nine months of the year was $167.5 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 spending, 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 nine months of the year, the Company repurchased approximately
2.3 million shares of the Company's common stock, which includes 1.9 million
shares under a Board authorized repurchase program. At June 30, 1998, there were
approximately 1.5 million shares remaining under the outstanding repurchase
authorization.
On October 21, 1997, the Company issued $50 million of notes maturing as
follows: $25 million maturing in 30 years; and $25 million maturing 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.
During the quarter the Company sold 2.3 million shares of K N Energy, Inc. and
recognized a $90.3 million gain from the sale of those securities. Proceeds from
the sale were used to repay short-term debt. Cabot continues to own
approximately 650,000 shares of K N Energy, Inc. common stock.
The Company's ratio of total debt (including short-term debt net of cash) to
capital was 43% at June 30, 1998 and September 30, 1997.
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. The Company had no borrowings outstanding under this line at June 30,
1998. 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.
SPECIAL CHARGES AND IMPAIRMENTS
The Company acquired an 80% ownership interest in P.T. Continental Carbon
Indonesia ("PTCCI"), an Indonesian carbon black plant located in Merak,
Indonesia, during 1996. The recent financial and economic crisis in Indonesia
has resulted in a significant decline in demand for carbon black in the region.
As a result, management decided to temporarily halt production at this plant. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets, the Company recognized an
impairment loss of $60 million for the difference between the carrying value of
PTCCI's long-lived assets of $77 million and the estimated fair value.
15
16
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
SPECIAL CHARGES AND IMPAIRMENTS (CONTINUED)
The charge to the Specialty Chemicals and Materials Group consisted of $34
million for property, plant and equipment and other assets and $26 million for
goodwill and other intangible assets.
During 1997, the Company entered into an agreement to process tantalum ore
residues from the Company's past production of tantalum. The Company expected
that the process would produce economic recoveries of tantalum and capitalized
approximately $25 million of costs associated with the agreement through the
third quarter of 1998. However, the tantalum recovery rate to date has been
substantially lower than expected. Therefore, in the third quarter of 1998,
management discontinued the project which resulted in a charge of $25 million to
operations of the Specialty Chemicals and Materials Group.
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 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. The Company does not believe that it is in a
position to assess reliably the year 2000 readiness of its vendors, customers or
other parties with which the Company deals, or more distant parties who deal,
directly or indirectly, with any of the foregoing. The Company cannot predict
reliably the source, nature or extent of any year 2000 disruptions that may be
experienced in the U.S. or other countries where it operates and, therefore,
cannot predict reliably the effect any such disruptions may have on the Company,
its operations or financial condition. The Company does not believe it is
practicable to insulate itself from all possible year 2000 disruptions in the
U.S. or other countries where it operates.
NEW ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company is currently evaluating the effect, if any, of
implementing SFAS 133.
16
17
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
(Amounts in millions, except per share amounts)
UNAUDITED
Three Months Ended Nine Months Ended
------------------ ---------------------
6/30/98 6/30/97 6/30/98 6/30/97
------- ------- -------- --------
Industry Segment Data
- ---------------------
Net Sales:
Specialty chemicals and materials $354.0 $372.4 $1,089.1 $1,071.8
Energy 22.3 26.2 179.6 157.6
------ ------ -------- --------
Net sales $376.3 $398.6 $1,268.7 $1,229.4
====== ====== ======== ========
Operating profit:
Specialty chemicals and materials - before special items $ 64.0 $ 58.7 $ 177.5 $ 153.5
Energy (5.4) (2.8) 17.4 10.4
------ ------ -------- --------
Total operating profit - before special items 58.6 55.9 194.9 163.9
Specialty chemicals and materials - special items (85.0) - (85.0) -
------ ------ -------- --------
$(26.4) $ 55.9 $ 109.9 $ 163.9
------ ------ -------- --------
Interest expense (10.7) (11.4) (33.2) (31.6)
Gain on sale of equity securities 90.3 - 90.3 -
General corporate/other expenses (9.2) (6.8) (24.0) (19.9)
------ ------ -------- --------
Income before income taxes 44.0 37.7 143.0 112.4
Provision for income taxes (15.8) (13.6) (51.5) (40.5)
Equity in net income of affiliated companies 6.1 5.2 13.1 13.1
Minority interest in income (1.0) (0.6) (2.4) (1.8)
------ ------ -------- --------
Net income 33.3 28.7 102.2 83.2
Dividends on preferred stock (0.8) (0.8) (2.4) (2.4)
------ ------ -------- --------
Income applicable to common shares $ 32.5 $ 27.9 $ 99.8 $ 80.8
====== ====== ======== ========
Income per common share:
Basic $ 0.49 $ 0.41 $ 1.50 $ 1.18
====== ====== ======== ========
Diluted $ 0.44 $ 0.37 $ 1.35 $ 1.06
====== ====== ======== ========
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 the Company's 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 or competitors' new products, as well as
difficulties in moving from the experimental stage to the production stage.
-17-
18
PART II. OTHER INFORMATION
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 June 30, 1998.
-18-
19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABOT CORPORATION
Date: August 14, 1998 /s/ Robert L. Culver
-------------------------------
Robert L. Culver
Executive Vice President and
Chief Financial Officer
Date: August 14, 1998 /s/ William T. Anderson
-------------------------------
William T. Anderson
Controller
(Chief Accounting Officer)
-19-
1
EXHIBIT 12
CABOT CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in millions, except ratios)
Nine Months Years ended September 30
ended -------------------------------------------------------
June 30, 1998 1997 1996 1995 1994 1993
------------- ------ ------ ------ ------ ------
Earnings:
Pre-tax income from continuing $143.0 $117.0 $279.8 $256.0 $118.3 $ 67.9
operations
Distributed income of affiliated 5.4 10.4 11.2 11.7 5.6 6.0
companies
Add fixed charges:
Interest on indebtedness 33.2 43.2 41.7 35.6 41.7 44.0
Portion of rents representative of
the interest factor 3.7 4.9 4.8 5.5 5.9 4.9
------ ------ ------ ------ ------ ------
Income as adjusted $185.3 $175.5 $337.5 $308.8 $171.5 $122.8
Fixed charges:
Interest on indebtedness $ 33.2 $ 43.2 $ 41.7 $ 35.6 $ 41.7 $ 44.0
Capitalized interest - - - - - -
Portion of rents representative of
the interest factor 3.7 4.9 4.8 5.5 5.9 4.9
------ ------ ------ ------ ------ ------
Total fixed charges $ 36.9 $ 48.1 $ 46.5 $ 41.1 $ 47.6 $ 48.9
Ratio of earnings to fixed charges 5.0 3.6 7.3 7.5 3.6 2.5
====== ====== ====== ====== ====== ======
5
1,000,000,000
U.S. DOLLARS
9-MOS
SEP-30-1998
OCT-01-1997
JUN-30-1998
1
71
0
294
5
245
634
1,817
897
1,759
488
322
0
75
135
1,356
1,759
1,269
1,273
855
855
64
0
33
143
51
102
0
0
0
102
1.50
1.35
