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
DECEMBER 31, 2001
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.)
TWO SEAPORT LANE 02210-2019
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
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Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
AS OF JANUARY 31, 2002, THE COMPANY HAD 62,209,229 SHARES OF COMMON
STOCK, PAR VALUE $1 PER SHARE, OUTSTANDING.
CABOT CORPORATION
INDEX
Part I. Financial Information Page
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Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended December 31, 2001 and 2000 3
Consolidated Balance Sheets
December 31, 2001 and September 30, 2001 4
Consolidated Statements of Cash Flows
Three Months Ended December 31, 2001 and 2000 6
Consolidated Statement of Changes in Stockholders'
Equity Three Months Ended December 31, 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31,
(In millions, except per share amounts)
UNAUDITED
2001 2000
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Revenues:
Net sales and other operating revenues $ 377 $ 395
Interest and dividend income 3 11
------ ------
Total revenues 380 406
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Costs and expenses:
Cost of sales 260 305
Selling and administrative expenses 48 45
Research and technical service 11 11
Interest expense 8 8
Other charges, net 1 --
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Total costs and expenses 328 369
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Income before income taxes 52 37
Provision for income taxes (15) (11)
Equity in net income of affiliated companies 2 4
Minority interest in net income (1) (2)
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Net income 38 28
Dividends on preferred stock, net of tax benefit (1) (1)
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Net income available to common shares $ 37 $ 27
====== ======
Weighted-average common shares outstanding:
Basic 59 64
====== ======
Diluted 72 77
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Income per common share:
Basic $ 0.63 $ 0.43
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Diluted $ 0.53 $ 0.37
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Dividends per common share $ 0.13 $ 0.11
====== ======
The accompanying notes are an integral part of these financial statements.
3
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and September 30, 2001
(In millions)
ASSETS
December 31, September 30,
2001 2001
------------ -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 294 $ 364
Accounts and notes receivable, net of
reserve for doubtful accounts of $4 and $4 288 267
Inventories:
Raw materials 78 76
Work in process 72 70
Finished goods 111 106
Other 34 33
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Total inventories 295 285
Prepaid expenses 30 33
Deferred income taxes 17 19
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Total current assets 924 968
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Investments:
Equity 78 76
Other 45 29
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Total investments 123 105
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Property, plant and equipment 1,878 1,856
Accumulated depreciation and amortization (1,066) (1,049)
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Net property, plant and equipment 812 807
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Other assets:
Goodwill 23 19
Other intangible assets, net of accumulated
amortization of $4 and $4 2 2
Deferred income taxes 2 2
Other assets 17 16
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Total other assets 44 39
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Total assets $ 1,903 $ 1,919
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The accompanying notes are an integral part of these financial statements.
4
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and September 30, 2001
(In millions, except for share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY
December 31, September 30,
2001 2001
------------ -------------
(Unaudited)
Current liabilities:
Notes payable to banks $ 23 $ 13
Current portion of long-term debt 26 30
Accounts payable and accrued liabilities 192 243
Deferred income taxes 4 5
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Total current liabilities 245 291
------- -------
Long-term debt 412 419
Deferred income taxes 96 94
Other liabilities 147 138
Commitments and contingencies (Note F)
Minority interest 33 27
Stockholders' equity:
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, outstanding: 58,652 and 59,148 shares 75 75
(aggregate redemption value of $59 and $59)
Less cost of shares of preferred treasury stock (36) (33)
Common stock:
Authorized: 200,000,000 shares of $1 par value
Issued and outstanding: 62,183,708 and 62,633,252 shares 62 63
Additional paid-in capital -- 9
Retained earnings 1,102 1,078
Unearned compensation (35) (40)
Deferred employee benefits (53) (54)
Notes receivable for restricted stock (23) (23)
Accumulated other comprehensive loss (Note H) (122) (125)
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Total stockholders' equity 970 950
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Total liabilities and stockholders' equity $ 1,903 $ 1,919
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The accompanying notes are an integral part of these financial statements.
5
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31,
(In millions)
UNAUDITED
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38 $ 28
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 27 29
Deferred tax provision (benefit) 1 (1)
Equity in income of affiliated companies,
net of dividends received (1) (4)
Non-cash compensation 5 6
Other, net (1) 2
Changes in assets and liabilities:
Increase in accounts receivable (25) (18)
Increase in inventory (11) (51)
Decrease in accounts payable and accruals (50) (47)
Increase in prepayments and other assets (10) (2)
Increase (decrease) in income taxes payable 14 (156)
Increase (decrease) in other liabilities 6 (1)
Other, net 1 1
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Cash used in operating activities (6) (214)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (36) (13)
Proceeds from sales of property, plant and equipment 1 1
Purchase of investments (9) (4)
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Cash used in investing activities (44) (16)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 129
Repayments of long-term debt (5) (63)
Increase in short-term debt 11 --
Purchases of preferred and common stock (19) (38)
Sales and issuances of preferred and common stock 1 --
Cash dividends paid to stockholders (9) (8)
Employee loan repayments 1 2
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Cash provided by (used in) financing activities (20) 22
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Effect of exchange rate changes on cash -- 1
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Decrease in cash and cash equivalents (70) (207)
Cash and cash equivalents at beginning of period 364 638
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Cash and cash equivalents at end of period $ 294 $ 431
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The accompanying notes are an integral part of these financial statements.
6
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended December 31, 2001
(In millions)
UNAUDITED
Accumulated Notes
Other Receivable Total
Preferred Additional Compre- Unearned Deferred for Stock- Total
Preferred Treasury Common Paid-in Retained hensive Compen- Employee Restricted holder Comprehensive
Stock Stock Stock Capital Earnings Loss sation Benefits Stock Equity Income
-------------------------------------------------------------------------------------------------------------
Balance at
September 30, 2001 $ 75 $ (33) $ 63 $ 9 $1,078 $(125) $(40) $(54) $(23) $ 950
---- ----- ---- --- ------ ----- ---- ---- ---- -----
Net income 38 $ 38
Foreign currency
translation
adjustments (1) (1)
Change in unrealized
gain on available-
for-sale securities 4 4
----
Total comprehensive
income $ 41
====
Common dividends
paid (8)
Issuance of stock
under employee
compensation plans,
net of tax benefit 1
Purchase and
retirement of
common stock (1) (10) (5)
Purchase of treasury
stock - preferred (3)
Preferred dividends
paid to Employee
Stock Ownership Plan,
net of tax (1)
Principal payment by
Employee Stock
Ownership Plan under
guaranteed loan 1
Amortization of
unearned compensation 5
---- ----- ---- ---- ------- ------ ----- ----- ----- -----
Balance at December
31, 2001 $ 75 $ (36) $ 62 $ -- $ 1,102 $ (122) $(35) $ (53) $ (23) $ 970
==== ===== ==== ==== ======= ====== ===== ===== ===== =====
The accompanying notes are an integral part of these financial statements.
7
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
UNAUDITED
A. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cabot
Corporation and majority-owned and controlled U.S. and non-U.S.
subsidiaries ("Cabot"). Investments in 20 to 50 percent owned
affiliates are accounted for on the equity method. Intercompany
transactions have been eliminated.
The unaudited consolidated financial statements have been prepared in
accordance with the requirements of Form 10-Q and consequently do not
include all disclosures required by Form 10-K. Additional information
may be obtained by referring to Cabot's Form 10-K for the year ended
September 30, 2001.
The financial information submitted herewith is unaudited and reflects
all adjustments which are, in the opinion of management, necessary to
provide a fair statement of the results for the interim periods ended
December 31, 2001 and 2000. 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. SPECIAL ITEMS
During fiscal 2000, Cabot approved plans to close two plants. In
relation to the plant closings, Cabot recorded an $18 million charge in
the fourth quarter of fiscal 2000. Included in the charge were accruals
of $2 million for severance and termination benefits for approximately
38 employees of the Chemical and Performance Materials Businesses, $7
million for facility closing costs, and a $9 million charge for the
impairment of long-lived assets. One of the plant closures was
completed during fiscal 2001, and the second plant closure was
completed during the second quarter of fiscal 2002. At December 31,
2001, $3 million remains in the accrual.
C. SUBSEQUENT EVENT
On February 8, 2002, Cabot Corporation purchased the remaining 50% of
the shares in Showa Cabot Supermetals KK (SCSM) in Japan, from its
joint venture partner, Showa Denko KK. SCSM is a supplier of tantalum
powders and metal products to the global electronics, aerospace, and
chemical processing industries. The purchase price was approximately
$100 million, along with the assumption of approximately $100 million
of debt. SCSM is currently accounted for under the equity method.
D. GOODWILL AND OTHER INTANGIBLE ASSETS
Cabot adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("FAS No. 142") on October 1,
2001. Under FAS No. 142, all goodwill amortization ceased for Cabot on
October 1, 2001. Upon adoption, the goodwill attributable to each of
our reporting units was tested for impairment by comparing the fair
value of each reporting unit to its carrying value. The fair value of a
reporting unit was determined by estimating the present value of
expected future cash flows. No impairments existed upon adoption of FAS
No. 142. On an ongoing basis, impairment tests under FAS No. 142 will
be performed at least annually.
8
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001
(In millions, except per share amounts)
UNAUDITED
At December 31, 2001 and September 30, 2001, Cabot had goodwill
balances of $23 million and $19 million, respectively. During the
quarter, Cabot acquired the shares of certain minority interest
shareholders in the Chemical Businesses, resulting in $5 million of
additional goodwill. The carrying amount of goodwill attributable to
each reportable operating segment with goodwill balances and the
changes in those balances during the three months ended December 31,
2001 are as follows:
Chemical Performance
Businesses Materials Total
---------- ----------- -----
Balance at September 30, 2001 $16 $ 3 $19
Goodwill acquired during period 5 -- 5
Foreign exchange translation adjustment (1) -- (1)
--- --- ---
Balance at December 31, 2001 $20 $ 3 $23
=== === ===
Cabot does not have any indefinitely-lived intangible assets. Cabot had
finite-lived intangible assets of $2 million at both December 31, 2001
and September 30, 2001. Intangible assets are amortized over their
estimated useful lives, which range from five to fifteen years.
Estimated amortization expense is expected to be nominal in each of the
next five years.
If FAS No. 142 had been adopted in the prior period Cabot's pro forma
net income and pro forma net income per common share for the three
months ended December 31, 2000 would have been:
2000
-----
Net Income - as reported $ 28
Goodwill amortization, net of tax
benefit 1
-----
Net Income - pro forma 29
=====
Net income per common share - pro forma:
Basic $0.44
Diluted $0.37
E. FINANCIAL INSTRUMENTS
Derivative financial instruments are used by Cabot to manage some of
its foreign currency exposures. Cabot may also use financial
instruments to manage other exposures, such as commodity prices, share
repurchases and interest rates. Cabot does not enter into financial
instruments for speculative purposes. Derivative financial instruments
are accounted for in accordance with Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
Cabot has formally documented the relationships between hedging
instruments and hedged items, as well as its risk management objective.
All derivative instruments are recognized on the balance sheet at fair
value. Hedge accounting is followed for derivatives that have been
designated and qualify as fair-value hedges. Changes in the fair value
of a highly effective derivative, along with changes in the fair value
of the hedged liability that are attributable to the hedged risk, are
recorded in current period earnings.
9
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001
UNAUDITED
By using derivative instruments, Cabot can expose itself to credit and
market risk. If a counterparty fails to fulfill its performance
obligations under a derivative contract, Cabot's credit risk will equal
the fair-value gain on the derivative. Generally, when the fair value
of a derivative contract is positive, the counterparty owes Cabot, thus
creating a repayment risk for Cabot. When the fair value of a
derivative contract is negative, Cabot owes the counterparty and,
therefore, assumes no repayment risk. Cabot minimizes the credit (or
repayment) risk in derivative instruments by entering into transactions
with high-quality counterparties that are reviewed periodically by
Cabot.
In October 2001, Cabot entered into four interest rate swaps in an
aggregate notional amount of $97 million. The swaps are derivative
instruments as defined by FAS No. 133 and have been designated as fair
value hedges. The swaps hedge the change in the fair value of $97
million of Cabot's fixed rate medium term notes due to changes in the
LIBOR interest rate. The interest rate swaps, as well as the medium
term notes they hedge, mature on various dates through February 2007. A
derivative liability and a corresponding reduction to long term debt of
$1 million were recorded for the fair market value of the swaps at
December 31, 2001. The interest rate swaps were determined to be highly
effective and no amount of ineffectiveness needed to be recorded in
earnings during the period ended December 31, 2001.
F. COMMITMENTS AND CONTINGENCIES
Cabot is a defendant, or potentially responsible party, in various
lawsuits and environmental proceedings wherein substantial amounts are
claimed or at issue.
The Company has exposure to a safety respiratory products business that
it acquired in April 1990. It disposed of that business in July 1995.
In connection with its acquisition of the business, the Company agreed,
after an initial period during which responsibility was shared, to
indemnify the seller, American Optical Corporation, for costs,
including legal costs, settlements and judgments, in connection with a
number of lawsuits and claims relating to the respirators (in exchange
for which the Company received the benefits of the seller's insurance
and other indemnities). These lawsuits and claims typically involve
allegations that the plaintiffs suffer from asbestosis or silicosis as
a result, in part, from respirators that were negligently designed or
labeled. The defendants in these lawsuits are often numerous and
include, in addition to respirator manufacturers, the plaintiffs'
employers and makers of asbestos and sand used in sand blasting.
When the Company disposed of the business in 1995 to Aearo Corporation
("Aearo"), it agreed with Aearo that for an annual fee of $400,000 the
Company would retain responsibility for, and indemnify Aearo against,
claims asserted after July 11, 1995 to the extent they are alleged to
arise out of the use of respirators before that date. Aearo can
discontinue payment of the fee at any time, in which case it will
assume the responsibility for and indemnify the Company with respect to
these claims. Since the divestiture and until 2001, the Company had
never spent more than the $400,000 that it collects from Aearo each
year, and in 2001, the amount spent in excess of $400,000 was not
material. Neither the Company, 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
the business for which the Company is financially responsible for legal
costs represent a significant portion of the respirator market. In
addition, as a result of the arrangements involving these lawsuits and
claims, the Company has only a portion of the liability in any given
case.
10
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001
UNAUDITED
The overall number of new cases filed increased last year, but the rate
of new case filings substantially decreased during the latter half of
the year. However, due to the inherent uncertainty of these matters, it
is difficult to predict the scope and number of claims which might be
asserted in future years. Accordingly, there is a remote possibility
that this litigation could result in future charges that could have a
material adverse impact on the Company's financial condition or results
of operations. While there is always the possibility of an unusual
result in any case, it is management's opinion, taking into account
currently available information, past experience, contractual
obligations and insurance coverage which may be applicable, that
the pending suits and claims should not result in final judgments or
settlements that, in the aggregate, would have a material effect on the
Company's financial condition or results of operations.
As of December 31, 2001, Cabot has approximately $29 million reserved
for environmental matters, primarily related to divested businesses.
The amount represents Cabot's current best estimate of its share of
costs likely to be incurred at those sites where costs are reasonably
estimable based on its analysis of the extent of cleanup required,
alternative cleanup methods available, abilities of other responsible
parties to contribute, and its interpretation of applicable laws and
regulations at each site. Cabot reviews the adequacy of this reserve as
circumstances change at individual sites. Cabot is unable to reasonably
estimate the amount of possible loss in excess of the accrued amount.
In the opinion of Cabot, although final disposition of these suits and
claims may impact Cabot's financial statements in a particular period,
they will not, in the aggregate, have a material adverse effect on
Cabot's financial position.
11
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001
(Preferred shares in thousands and common shares in millions)
UNAUDITED
G. STOCKHOLDERS' EQUITY
The following table summarizes the changes in shares of stock for the
three months ended December 31:
2001
----
PREFERRED STOCK
Balance at September 30, 2001 75
---
Balance at December 31, 2001 75
===
PREFERRED TREASURY STOCK
Balance at September 30, 2001 33
Purchased preferred treasury stock 3
---
Balance at December 31, 2001 36
===
COMMON STOCK
Balance at September 30, 2001 63
Purchased and retired common stock (1)
---
Balance at December 31, 2001 62
===
12
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001
(In millions)
UNAUDITED
H. COMPREHENSIVE INCOME
The pre-tax, tax, and after-tax effects of the components of other
comprehensive income (loss) for the three months ended December 31 are
shown below:
Pre-tax Tax After-tax
------- ---- ---------
2001
Foreign currency translation adjustments $ (1) $ -- $ (1)
Unrealized holding gain arising during period on
marketable equity securities 6 (2) 4
---- ---- ---
Other comprehensive income (loss) $ 5 $ (2) $ 3
==== ==== ===
Pre-tax Tax After-tax
------- ---- ---------
2000
Foreign currency translation adjustments $ 1 $ -- $ 1
Unrealized holding gain arising during period on
marketable equity securities 3 (1) 2
--- ---- ---
Other comprehensive income (loss) $ 4 $ (1) $ 3
=== ==== ===
The balance of related after-tax components comprising accumulated
other comprehensive loss as of December 31 and September 30 is
summarized below:
December 31, September 30,
2001 2001
------------ -------------
Foreign currency translation adjustments $ (132) $ (131)
Unrealized holding gain on marketable equity securities 10 6
------ ------
Accumulated other comprehensive loss $ (122) $ (125)
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13
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001
(In millions, except per share amounts)
UNAUDITED
I. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") were calculated for the
three months ended December 31 as follows:
2001 2000
------ ------
BASIC EPS
INCOME available to common shares (numerator) $ 37 $ 27
====== ======
Weighted-average common shares outstanding 62 67
Less: Contingently issuable shares(1) (3) (3)
------ ------
Adjusted weighted-average shares (denominator) 59 64
====== ======
Basic EPS $ 0.63 $ 0.43
====== ======
DILUTED EPS
Income available to common shares $ 37 $ 27
Dividends on preferred stock 1 1
Less: Income effect of assumed conversion of preferred stock -- --
------ ------
Income available to common shares plus assumed conversions (numerator) $ 38 $ 28
====== ======
Weighted-average common shares outstanding 62 67
Effect of dilutive securities:
Conversion of preferred stock 9 9
Conversion of incentive stock options 1 1
------ ------
Adjusted weighted-average shares (denominator) 72 77
====== ======
Diluted EPS $ 0.53 $ 0.37
====== ======
(1) Represents restricted stock issued under Cabot Equity Incentive Plans.
14
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001
(In millions)
UNAUDITED
J. FINANCIAL INFORMATION BY SEGMENT
The framework for segment reporting is intended to give analysts and other
financial statement users a view of Cabot "through the eyes of management".
It designates Cabot's internal management reporting structure as the basis
for determining Cabot's reportable segments, as well as the basis for
determining the information to be disclosed for those segments. The
following table provides financial information by segment for the three
months ended December 31:
CHEMICAL PERFORMANCE SPECIALTY SEGMENT UNALLOCATED CONSOLIDATED
BUSINESSES MATERIALS FLUIDS TOTAL AND OTHER TOTAL
---------- ----------- -------- ------ ---------- -----------
2001
Net sales and other operating
revenues(1)(2) $ 293 $ 82 $ 9 $ 384 $ (7) $ 377
Profit (loss) before taxes(3) $ 27 $ 31 $ 1 $ 59 $ (7) $ 52
2000
Net sales and other operating
revenues(1)(2) $ 334 $ 56 $ 7 $ 397 $ (2) $ 395
Profit (loss) before taxes(3) $ 41 $ (3) $ 1 $ 39 $ (2) $ 37
Unallocated and other net sales and other operating revenues
includes the following:
2001 2000
------ ------
Equity affiliate sales $(15) $(15)
Royalties paid by equity affiliates 1 2
Interoperating segment revenues (2) (1)
Shipping and handling fees 9 12
------ ------
Total $ (7) $ (2)
====== ======
Unallocated and Other profit (loss) before taxes includes the
following:
2001 2000
------ ------
Interest expense $ (8) $ (8)
General unallocated income (expense)(4) 3 10
Equity in net income of affiliated
companies (2) (4)
------ ------
Total $ (7) $ (2)
====== ======
(1) Segment sales for certain operating segments include 100% of equity
affiliate sales and transfers of materials at cost and at market-based
prices.
(2) Unallocated and other reflects an adjustment for equity affiliate sales,
interoperating segment revenues, offset by royalties paid by equity
affiliates and external shipping and handling fees.
(3) Segment profit is a measure used by Cabot's chief operating decision-
makers to measure consolidated operating results and assess segment
performance. It includes equity in net income of affiliated companies,
royalties paid by equity affiliates, minority interest, and corporate
governance costs, and excludes special items, interest expense, foreign
currency transaction gains (losses), interest income, and dividend income.
(4) General unallocated income (expense) includes foreign currency
transaction gains (losses), interest income and dividend income.
15
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 2001
UNAUDITED
K. RECENT ACCOUNTING DEVELOPMENTS
The FASB issued Statement No. 143, "Accounting for Obligations Associated with
the Retirement of Long-Lived Assets" ("FAS No. 143"), in June 2001. The
objective of FAS No. 143 is to establish an accounting standard for the
recognition and measurement of an asset retirement obligation on certain
long-lived assets. The retirement obligation must be one that results from the
acquisition, construction or normal operation of a long-lived asset. FAS No. 143
requires the legal obligation associated with the retirement of a tangible
long-lived asset to be recognized at fair value as a liability when incurred,
and the cost to be capitalized by increasing the carrying amount of the related
long-lived asset. FAS No. 143 will be effective for Cabot on October 1, 2002.
Cabot is currently evaluating the effect of implementing FAS No. 143.
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS No.
144"), which supersedes FAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of" and provisions of
APB Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB No. 30"), for the disposal
of segments of a business. The statement creates one accounting model, based on
the framework established in FAS No. 121, to be applied to all long-lived assets
including discontinued operations. FAS No. 144 will be effective for Cabot on
October 1, 2002. Cabot is currently evaluating the effect of implementing FAS
No. 144.
16
CABOT CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
I. RESULTS OF OPERATIONS
Net sales and operating profit before taxes by segment are shown in Note J of
the Consolidated Financial Statements.
THREE MONTHS ENDED DECEMBER 31, 2001 VERSUS
THREE MONTHS ENDED DECEMBER 31, 2000
Net income for the first quarter of fiscal 2002 was $38 million ($0.53 per
diluted common share) compared to $28 million ($0.37 per diluted common share)
in the same quarter a year ago. Sales decreased $18 million from $395 million
last year to $377 million this year. However, operating profit before taxes
increased 41% from $37 million in the first quarter of fiscal 2001 to $52
million in the first quarter of fiscal 2002.
Sales for the Chemical Businesses decreased 12%, from $334 million in the first
quarter of fiscal 2001 to $293 million in the first quarter of fiscal 2002.
Operating profit decreased 34%, from $41 million to $27 million which included a
$2 million impact related to unfavorable currency trends.
For the first quarter of fiscal 2002, carbon black volumes declined
significantly compared to the first quarter of fiscal 2001. Overall, global
carbon black volumes decreased 11% this quarter versus the first quarter of last
year. Sales volumes decreased 9% and 17%, respectively, in North America and
Europe as a result of lower demand for carbon black. European volumes were also
negatively impacted by pressure due to imports from outside the region. The
energy crisis in Brazil and the economic situation in Argentina led to unstable
business environments and reduced demand for rubber blacks which led to a 7%
decline in volumes in South America. Relatively stable demand in Asia Pacific
resulted in a modest 3% reduction in volumes in that region. In addition to
volume declines, foreign exchange was unfavorable by $2 million for the global
carbon black business. Lower volumes and unfavorable foreign exchange were,
however, somewhat offset by a significant reduction in oil-based feedstock and
natural gas costs. Carbon black further benefited from a shift in product mix to
higher margin products. During the quarter the Company negotiated and extended
a long-term carbon black supply agreement with one of its tire customers.
The fumed metal oxides business also experienced a sharp decline in volumes.
Sales volumes decreased 15% in the first fiscal quarter of 2002 compared to the
same quarter of 2001. In particular, fumed metal oxides' electronics and fiber
optics markets experienced a significant decline in demand. Its traditional
silicone rubber, composites and adhesives markets experienced relatively flat
volumes year over year. Lower operating costs and favorable feedstock costs did,
however, offset the impact of the volume decline.
Cabot's inkjet colorants business continues to make progress with the growth of
its existing commercial products and the development of new products. However,
increased research and development costs and a 24% decline in volumes resulted
in a $1 million decrease in operating profit in the first quarter of fiscal 2002
versus the first fiscal quarter of 2001.
Volumes for the Chemical Businesses were very weak in the first fiscal quarter
of 2002. It is not clear whether this signifies a trend or was a one-time
occurrence related to business uncertainty and general market weakness.
Therefore, the Company is cautious about the outlook for the Chemical Businesses
segment for the rest of fiscal 2002.
Performance Materials sales increased 46% from $56 million in the first quarter
of fiscal 2001 to $82 million in the first quarter of fiscal 2002. Although the
segment experienced an 8% decline in volume, operating profit for the segment
increased $34 million versus the same quarter in 2001. The increase in
profitability was due to higher average selling prices resulting from customer
contracts effective in January 2001 and lower raw material costs. On average,
prices were 57% higher and average total costs were approximately 10% lower,
year over year. However, demand for tantalum products has weakened considerably
over the last nine months. Although the Company is encouraged that the downturn
in the industry may have reached a low, there remains a significant amount of
inventory in the supply chain because the downturn has been so severe. Cabot has
contracts with its
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customers that provide for fixed annual volumes on a calendar basis. However,
given the distressed condition of the industry and the inventory levels in the
supply chain, some customers have indicated their intention to satisfy their
contracted obligations by taking their contracted volumes in the fourth calendar
quarter. Cabot does not believe that this is a fair reading of the contracts;
however, as a result the Company may elect to build inventory over the next
several quarters while this matter is resolved. Therefore, the Company remains
very cautious about the outlook for the fiscal year for this Business. Since the
discussions with Cabot's customers continue, there is a broad range of possible
outcomes, one of which approximates last year's profits for this Business.
Specialty Fluids sales in the first quarter were $9 million versus $7 million
last year. The segment reported flat operating profit of $1 million for the same
period. During the first quarter of fiscal 2002, Specialty Fluids began work on
two additional completion jobs. To date, cesium formate has been successfully
used in a total of 47 completion and drill-in applications involving challenging
high pressure, high temperature wells in the North Sea. In the fourth quarter of
fiscal 2001, several of the drill-ins underwent preliminary production flow rate
tests. These initial flow test results indicated improvements from expected flow
rates of two to five times. In the first quarter of fiscal 2002, actual flow
results received were consistent with the initial flow tests. These results
indicate that cesium formate is delivering the value in use that the Company
anticipated.
Research and technical service spending remained flat at $11 million for the
first quarter of 2002 versus the first quarter of last year. Selling and
administrative expenses were $48 million for the first quarter of fiscal 2002, a
7% increase from $45 million spent last year. The increase is primarily
attributed to higher administrative costs.
Interest income in the first quarter was $8 million less than in the same
quarter last year due to a decrease in Cabot's cash position. Lower interest
rates further negatively impacted interest income.
During 2000, Cabot approved plans to close two plants. In relation to these
plant closings, Cabot recorded an $18 million charge in the fourth quarter of
fiscal 2000. Included in the charge were accruals of $2 million for severance
and termination benefits for approximately 38 employees of the Chemical and
Performance Materials Businesses, $7 million for facility closing costs, and a
$9 million charge for the impairment of long-lived assets. One of the plant
closures was completed during fiscal 2001 and the second plant closure was
completed during the second quarter of fiscal 2002. At December 31, 2001, $3
million remains in the accrual.
II. CASH FLOW AND LIQUIDITY
During the first three months of the fiscal year, cash used by operating
activities totaled $6 million as compared to cash used by operating activities
of $214 million for the same period last year. The uses of cash during the first
quarter of 2002 were related to decreases in working capital and principally due
to an increase in accounts receivable and a decrease in accounts payable. The
uses of cash during the first quarter of 2001 were much higher than 2002 due to
a tax payment related to the September 2000 disposition of Cabot's Liquefied
Natural Gas Business.
Capital spending for the first three months of the year was $45 million. The
majority of capital spending related to maintaining existing assets and the
construction of a semi-works facility for the Nanogel(TM) business. Capital
expenditures for 2002 are expected to be approximately $280-$300 million and
include $100 million for the buyout of Cabot's partner in the Showa Cabot
Supermetals Joint Venture. Capital expenditures for 2002 also include
replacement projects, plant expansions, and the completion of projects started
in fiscal 2001.
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Cash used by financing activities was $20 million in the first quarter of fiscal
2002 as compared to $22 million provided by financing activities for the same
period last year. In the first quarter of 2002, the Company primarily used cash
for the repurchase of $16 million of its common stock and $3 million of its
preferred stock and a $9 million payment of cash dividends to shareholders.
These uses of cash were somewhat offset by an increase in short-term debt. In
the first quarter of 2001, cash provided by financing activities included the
issuance of a 3-year EURO note for $129 million, the repayment of $63 million in
long-term debt, and the repurchase of $36 million of common stock and $2 million
of preferred stock.
On September 8, 2000, Cabot's Board of Directors authorized the repurchase of up
to 10 million shares of Cabot's common stock, superseding prior authorizations.
As of December 31, 2001, approximately 7 million shares have been purchased
under this new authorization.
As a result of the operating and financing activities during the quarter,
Cabot's ratio of total debt (including short-term debt net of cash) to capital
increased from 9% at September 30, 2001 to 14% at December 31, 2001.
In July 2001, Cabot replaced its revolving credit facility with a new agreement.
Under the new agreement, Cabot may, under certain conditions, borrow up to $250
million at floating rates. The new facility is available through July 13, 2006.
As of December 31, 2001, Cabot had no borrowings outstanding under this
arrangement. Management expects cash on hand, cash from operations and present
financing arrangements, including Cabot's unused line of credit and shelf
registration for debt securities, to be sufficient to meet Cabot's cash
requirements for the foreseeable future.
III. RECENT ACCOUNTING DEVELOPMENTS
Cabot is assessing the impact of the following new accounting pronouncements:
The FASB issued Statement No. 143, "Accounting for Obligations Associated with
the Retirement of Long-Lived Assets" ("FAS No. 143"), in June 2001. The
objective of FAS No. 143 is to establish an accounting standard for the
recognition and measurement of an asset retirement obligation on certain
long-lived assets. The retirement obligation must be one that results from the
acquisition, construction or normal operation of a long-lived asset. FAS No.
143 requires the legal obligation associated with the retirement of a tangible
long-lived asset to be recognized at fair value as a liability when incurred,
and the cost to be capitalized by increasing the carrying amount of the related
long-lived asset. FAS No. 143 will be effective for Cabot on October 1, 2002.
Cabot is currently evaluating the effect of implementing FAS No. 143.
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS No.
144"), which supersedes FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-lived Assets to be Disposed of" and provisions of
APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB No. 30"), for the
disposal of segments of a business. The statement creates one accounting model,
based on the framework established in FAS No. 121, to be applied to all
long-lived assets including discontinued operations. FAS No. 144 will be
effective for Cabot on October 1, 2002. Cabot is currently evaluating the effect
of implementing FAS No. 144.
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FORWARD-LOOKING INFORMATION: Included herein are statements relating to
management's projections of future profits, the possible achievement of Cabot's
financial goals and objectives, and management's expectations for Cabot's
product development program. Actual results may differ materially from the
results anticipated in the statements included herein due to a variety of
factors, including but not limited to the following: market supply and demand
conditions, fluctuations in currency exchange rates, changes in the rate of
economic growth in the United States and other major international economies,
changes in regulatory environments, changes in trade, monetary and fiscal
policies throughout the world, acts of war and terrorist activities, pending and
future litigation, cost of raw materials, patent rights of Cabot and others,
demand for Cabot's customers' products, and competitors' reactions to market
conditions. Timely commercialization of products under development by Cabot 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. The risk management discussion and
the estimated amounts generated from the analyses are forward-looking statements
of market risk, assuming certain adverse market conditions occur. Actual results
in the future may differ materially from these projected results due to actual
developments in the global financial markets. The methods used by Cabot to
assess and mitigate risks should not be considered projections of future events
or losses. The Company undertakes no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the disclosures
presented in Cabot's Form 10-K for the year ended September 30, 2001.
In October 2001, Cabot entered into four interest rate swaps in an aggregate
notional amount of $97 million. The swaps are derivative instruments as defined
by FAS No. 133 and have been designated as fair value hedges. The swaps hedge
the change in the fair value of $97 million of Cabot's fixed rate medium term
notes due to changes in the LIBOR interest rate. The interest rate swaps, as
well as the medium term notes they hedge, mature on various dates through
February 2007.
The variable interest rates on the swaps are set for a six-month period and will
reset in June 2002. Based on the LIBOR rate used to set the swaps of 2.4%, a 10%
change in interest rates would not cause interest expense to change by a
material amount.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three
months ended December 31, 2001.
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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: February 13, 2002 /s/ John A. Shaw
---------------------------------
John A. Shaw
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
Date: February 13, 2002 /s/ Martin L. Coffee
---------------------------------
Martin L. Coffee
Assistant Controller
(Chief Accounting Officer)
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