1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS of Results of Operations
and Financial Condition
In 1994 Cabot's strong global position enabled it to take advantage of
recovering economies in several areas of the world. In addition, the Company
continued its strategic emphasis on more differentiated business sectors and
on cost management. As a result, Cabot reported record earnings from
continuing operations of $78.7 million ($1.96 per common share). The Company
benefitted from the beginning of economic recovery in Europe, continued
economic growth in North America, and robust growth in South America. Cabot's
ability to capitalize on these positive trends was reflected in strong growth
in the Company's sales, particularly in the Specialty Chemicals and Materials
Group, where sales were up 14% in the fourth quarter of 1994 compared to
1993. Volume growth was the main contributor to the 11% increase in operating
profit in fiscal 1994 versus fiscal 1993 before restructuring charges.
Cabot's sales were enhanced by the early results of the Company's
strategy to differentiate its products, as sales of such products, including
several new products, increased in 1994. Sales growth was generally stronger in
the Company's more specialized, higher margin sectors. Cabot's operating profit
performance in 1994 was also aided by continued attention to cost and capacity
management. The Company's European cost structure was significantly lower in
1994 versus 1993 as a result of the reductions in higher-cost capacity
implemented in connection with the fiscal 1993 year-end restructuring. Most of
the Company's businesses also reduced operating and administrative costs to
offset inflationary increases.
The following analysis of operating results and financial condition
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes.
Results of Operations
- --------------------------------------------------------------------------------
Net sales and other operating revenues increased 4% in both 1994 and 1993 with
improvement coming from both the Specialty Chemicals and Materials and Energy
Groups. In 1994, the Company's Specialty Chemicals and Materials Group
benefitted from improving economies in several parts of the world, particularly
in North and South America, and the resulting improvement in the tire and
automotive industries. In addition, recovery in the European economy during the
second half of the year resulted in a 7% sales gain in European Specialty
Chemicals compared to the second half of 1993. Many of the businesses also had
an improved sales mix towards higher valued products. In the Energy Group,
revenue gains in 1994 were mostly due to the Company's LNG business, which
benefitted from an unusually cold winter in the Northeastern United States,
prompting higher natural gas prices and increased demand.
The 4% increase in the Company's net sales in 1993 versus 1992 was
largely due to stronger business performance in the Company's North American
Specialty Chemicals operations driven by improvements in the automotive and
tire industries.
In 1994, 40% of Cabot's consolidated sales and 54% of consolidated
Specialty Chemical Sales originated outside the United States. This compares to
41% and 56% in 1993, and 45% and 59% in 1992.
The Company is encouraged by business improvement in the United States
and Europe and is confident that its Specialty Chemicals and Materials
businesses are positioned to participate in further economic recovery in those
regions. In the Energy Group, the Cabot LNG business anticipates a reduction in
supplies of LNG over the next year or so due to the previously announced
refurbishment of its Algerian supplier's liquefaction facility. The effect on
the Company will depend on the number and timing of LNG shipments to the
Company. The Company anticipates that near-term results from Cabot LNG will be
adversely affected by reduced supply.
Cost of sales as a percentage of net sales improved in 1994 to 73% from
75% in 1993 and 74% in 1992. The decrease in 1994 is partly a result of higher
capacity utilization and lower material costs in many of the Company's
Specialty Chemicals and Materials businesses. In addition, the Company
benefitted from a lower cost structure associated with the restructuring
efforts begun in late 1993. The cost of sales increase in 1993 was a result of
lower capacity utilization, particularly in higher cost European operations.
RESEARCH AND DEVELOPMENT SPENDING
Specialty Chemicals and Materials Group
[BAR GRAPH SHOWING THE FOLLOWING NUMBERS]
- -------------------------------------------------------------------
$ millions Spending Percent of Sales
- -------------------------------------------------------------------
90 $35.6 3.2%
91 $37.7 3.3%
92 $37.5 3.2%
93 $45.7 3.8%
94 $48.7 3.9%
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Selling, research and administrative expenses increased 8%, or $20.3
million in 1994 versus an increase of 1%, or $2.8 million, in 1993 over 1992.
The most significant increases in expenses included: continued strategic
investment in systems and marketing development, incentive compensation,
additional research and development expenses directed toward the Company's
product differentiation strategy, and investment in the Company's
Trinidad/Tobago LNG project. In 1993, expenses increased 1% over 1992,
reflecting increased research and development costs partially offset by
progress in the Company's ability to reduce net costs and the positive effect
of foreign currency exchange.
OPERATING PROFIT Operating profit was $184.3 million in 1994, $118.4 million
in 1993, and $173.2 million in 1992. Operating profit in 1993 included a $47.4
million restructuring charge to rationalize European production capacity.
Operating margins as a percent of sales were 11% in 1994, 10%, before
restructuring charges in 1993, and 11% in 1992.
Operating profit increased 11% in 1994 over 1993 before restructuring
charges. The improvement came from both the Specialty Chemicals and Materials
and Energy Groups and reflects volume growth in all Specialty Chemicals
business segments. In addition, lower raw material costs, compared to 1993,
boosted margins in some of the Specialty Chemicals businesses. The most
significant improvements in 1994 operating profit were realized in the
Company's European Specialty Chemicals businesses, reflecting the positive
results of the business restructuring in that region which, together with
improved economic conditions, significantly improved capacity utilization. In
the Energy Group, the strong performance of the Company's LNG business during
the second quarter of the 1994 fiscal year offset operating profit declines
during the rest of the year.
In 1993, the Company recorded a $47.4 million ($31.1 million after-tax)
restructuring charge to rationalize European capacity. During 1994, the Company
actually incurred $17.9 million of these costs accrued for in 1993, for
employee separation and facility closing costs to restructure its European
Specialty Chemicals businesses. Included in 1994 operating profit is a $4.0
million reversal of the 1993 Specialty Chemicals and Materials Group
restructuring charge based on the lower actual costs incurred during the
closing of a carbon black plant in Europe. The Company will continue to
evaluate its remaining reserves as new data become available, primarily
relating to the final disposition of assets at the closed plant. Also during
1994, a $6.2 million charge was taken to write off the Company's investment in
its Japanese carbon black affiliate as a result of significant ongoing losses
which are expected to continue.
SALES AND OPERATING PROFIT FISCAL YEARS 1992, 1993, 1994
$ millions Sales Operating Profit
[BAR GRAPH SHOWING THE FOLLOWING NUMBERS]
- -------------------------------------------------------------------------------
SPECIALTY CHEMICALS
- -------------------------------------------------------------------------------
92 $1,181.0 $155.0
93 $1,191.8 $149.1*
94 $1,241.1 $165.9
[BAR GRAPH SHOWING THE FOLLOWING NUMBERS]
- -------------------------------------------------------------------------------
ENERGY
- -------------------------------------------------------------------------------
92 $ 376.0 $ 18.2
93 $ 422.5 $ 16.7
94 $ 438.7 $ 18.4
* Operating profit excludes a $47.4 million restructuring charge in 1993.
In 1993, operating profit, before restructuring charges, declined 4%
from 1992. The decrease resulted from disappointing European results, and a
slow first half in both the Specialty Chemicals and Materials and Energy
Groups. Second half improvement in 1993 in the Company's North and South
American Specialty Chemicals operations, and volume and pricing improvement in
the Energy Group, offset some of the earlier declines.
OTHER EXPENSES Interest expense for 1994, 1993 and 1992 was $41.7 million,
$44.0 million and $41.7 million, respectively. The 5% decrease in 1994 is
primarily attributable to lower average debt than in 1993. The Company expects
to further reduce interest expense in the coming year by lowering total debt,
and by replacing some of the current portion of long-term debt with short-term
floating-rate debt expected to be at lower interest rates. The increase in 1993
from 1992 was due to lower capitalized interest resulting from the completion
of new manufacturing facilities in 1992, mitigated somewhat by declining
interest rates.
Unallocated corporate expenses rose in 1994 to $23.4 million from $20.7
million in 1993 and $14.9 million in 1992. Except for the items noted below,
unallocated corporate expenses have been relatively flat from 1992 to 1994.
Interest and dividend income was $2.5 million more in 1994 than in 1993.
Included in 1993 expenses were a $4.5 million gain on an insurance settlement
and a $2.8 million gain on the sale of miscellaneous securities. 1992 expenses
included gains totaling $12.4 million, consisting of a $5.5 million gain
associated with the sale of The Maple Gas Corporation securities, a $3.6
million gain from receipt of a third-party payment in connection with a
voluntary site cleanup, and a $3.3 million gain from the sale of American Oil
and Gas Corporation securities. In 1994, "Adjustments of reserves related to
divested businesses" includes an $11.0 million charge for environmental
matters. The additional environmental reserve is based on the Company's
continuing analysis of costs likely to be incurred at each site. Also in 1994,
the Company reversed $10.2 million of energy reserves based on the settlement
of a significant case during the year. This compares to a $14.2 million
reversal of energy reserves in 1993.
PROVISION FOR INCOME TAXES The effective tax rates on income from continuing
operations were 38% in 1994, 44% in 1993 and 46%
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SELECTED FINANCIAL DATA by Industry Segment
Years ended September 30
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in millions 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------------
NET SALES AND OTHER OPERATING REVENUES
Specialty Chemicals and Materials. . . . . . . . . . . . . . . . $1,241.1 $1,191.8 $1,181.0 $1,128.6 $1,106.5
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438.7 422.5 376.0 353.5 441.4
-----------------------------------------------------------
Net sales and other operating revenues . . . . . . . . . . . $1,679.8 $1,614.3 $1,557.0 $1,482.1 $1,547.9
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT (LOSS)
Specialty Chemicals and Materials (a). . . . . . . . . . . . . . $ 165.9 $ 101.7 $ 155.0 $ 103.2 $ 147.3
Energy (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.4 16.7 18.2 9.5 (2.5)
-----------------------------------------------------------
Total operating profit . . . . . . . . . . . . . . . . . . . 184.3 118.4 173.2 112.7 144.8
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 41.7 44.0 41.7 38.6 41.1
Unallocated corporate expenses, net (c). . . . . . . . . . . . . 23.4 20.7 14.9 11.7 39.7
Adjustment of reserves related to
divested businesses . . . . . . . . . . . . . . . . . . . . 0.8 (14.2) -- -- --
-----------------------------------------------------------
Income from continuing
operations before income taxes. . . . . . . . . . . . . . . $ 118.4 $ 67.9 $ 116.6 $ 62.4 $ 64.0
- ---------------------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Specialty Chemicals and Materials . . . . . . . . . . . . . . . $ 83.3 $ 81.5 $ 80.5 $ 70.8 $ 55.5
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 2.8 2.7 17.9 29.3
General corporate . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.2 0.9 0.5 0.7
-----------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86.3 $ 84.5 $ 84.1 $ 89.2 $ 85.5
- ---------------------------------------------------------------------------------------------------------------------------------
FIXED ASSET ADDITIONS
Specialty Chemicals and Materials . . . . . . . . . . . . . . . $ 70.7 $ 63.9 $ 76.5 $ 138.0 $ 122.2
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 0.7 1.3 59.4 51.8
General corporate . . . . . . . . . . . . . . . . . . . . . . . -- 0.4 0.3 0.6 0.4
-----------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73.6 $ 65.0 $ 78.1 $ 198.0 $ 174.4
- ---------------------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Specialty Chemicals and Materials . . . . . . . . . . . . . . . $1,172.2 $1,117.4 $1,191.2 $1,059.6 $1,099.5
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127.4 116.1 132.6 159.4 398.6
General corporate (d) . . . . . . . . . . . . . . . . . . . . . 231.0 89.3 79.9 83.5 89.5
Equity in affiliates -- Specialty
Chemicals and Materials . . . . . . . . . . . . . . . . . . 86.2 103.1 91.0 100.1 86.4
Equity in affiliates -- Energy. . . . . . . . . . . . . . . . . -- 63.6 59.8 59.8 57.9
-----------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,616.8 $1,489.5 $1,554.5 $1,462.4 $1,731.9
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Includes a $47.4 restructuring charge in 1993.
(b) Energy operating profit includes losses from restructuring of the Energy Group of $25.8 in 1990.
(c) Unallocated corporate expenses, net, include corporate management costs reduced by investment income.
(d) General corporate assets include cash, temporary cash investments, investments other than equity basis, income taxes
receivable, deferred taxes and headquarters' assets.
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in 1992. The improved tax rate primarily reflects a reduction of unbenefitted
foreign losses. The Company was able to implement certain tax planning
strategies which produced additional reductions. A more detailed analysis of
income taxes is presented in Note K to the Consolidated Financial Statements.
INCOME BEFORE ACCOUNTING CHANGES Reported income before accounting changes was
$78.7 million ($1.96 per common share) in 1994, compared to $37.4 million ($0.90
per common share) before accounting changes in 1993, and $62.2 million ($1.59
per common share) in 1992. Income in 1994 includes a $10.2 million ($0.16 per
common share) gain due to the reversal of energy reserves and an $11.0 million
($0.18 per common share) expense due to an increase in environmental reserves.
Income in 1993 included a $47.4 million before-tax ($31.1 million after-tax)
restructuring charge and a $14.2 million before-tax favorable energy accrual
adjustment. Without these one-time adjustments, income from operations would
have been $79.2 million ($1.98 per common share) in 1994 and $59.8 million
($1.50 per common share) in 1993.
NET INCOME APPLICABLE TO COMMON SHARES Net income applicable to common shares
was $75.1 million ($1.96 per share) in 1994, compared with $7.7 million ($0.20
per share) in 1993, and $58.5 million ($1.59 per share) in 1992. Net income
in 1994 and 1993 includes the one-time adjustments mentioned above. In addition,
net income applicable to common shares in 1993 includes a $26.1 million ($0.70
per share) after-tax charge for required accounting changes.
INCOME AND EARNINGS PER SHARE FROM CONTINUING OPERATIONS
Before restructuring charges
[BAR GRAPH SHOWING THE FOLLOWING NUMBERS]
- --------------------------------------------------------------------
INCOME ($ millions)
- --------------------------------------------------------------------
90 $54.9
91 $39.8
92 $62.2
93 $68.5
94 $78.7
[BAR GRAPH SHOWING THE FOLLOWING NUMBERS]
- --------------------------------------------------------------------
EARNINGS PER SHARE (dollars)
- --------------------------------------------------------------------
90 $1.04
91 $0.85
92 $1.59
93 $1.73
94 $1.96
<FN>
Excludes after-tax restructuring charges of $13.0 million in 1990 and $31.1
million in 1993.
SPECIALTY CHEMICALS AND MATERIALS GROUP The Specialty Chemicals and Materials
Group includes the Company's global specialty chemicals operations. These
operations manufacture carbon black, a very fine black powder used as a
reinforcing agent in tires and most other rubber products, and also widely used
as an agent in many specialty applications such as inks, plastics, cables and
coatings; fumed silica, a specialty chemical used as a thickening, dispersing
and reinforcing agent in hundreds of products such as silicone rubber and
polyester resins; thermoplastic concentrates and specialty compounds; tantalum
capacitor materials and other metals and alloys for the electronic, medical,
defense and aerospace markets; and personal protection safety products and
energy absorbing industrial materials.
Sales for the Specialty Chemicals and Materials Group were up 4% in 1994
and 1% in 1993. All businesses in this Group reported higher sales in 1994. The
Plastics business began to recover in 1994 with a small improvement in revenues,
excluding revenues from the scaled back recycling business, following a 4%
decline in the prior year. Sales growth in all businesses was primarily driven
by volume improvement. Volume growth was seen in each of the Company's Specialty
Chemicals businesses, as well as in each of the four major geographic regions
(see pie charts). Of particular note were gains in the Company's more
differentiated product lines, including Special Blacks, Industrial Rubber Blacks
and Cab-O-Sil, illustrating some early success in Cabot's long-term corporate
strategy of product differentiation. The 1% sales growth in 1993 reflected a
strengthening North American economy, dampened by the recessionary environment
in Europe.
Including 100% of affiliate sales and allocating North American exports
to destination regions, 60% of Specialty Chemicals sales were made outside North
America in 1994 compared to 62% in 1993.
Operating profit for the Specialty Chemicals and Materials Group grew
63%, or $64.2 million, in 1994 from 1993, compared to a decrease of 34% in 1993
from 1992. Operating profit in 1993 included a restructuring charge of $47.4
million. Before these restructuring charges, operating profit grew 11%, or $16.8
million, in 1994 from 1993. Most of the 1994 improvement in operating profit is
a result of volume growth and improved product mix in the businesses. Also
contributing to the growth in operating profit were improved margins related to
favorable raw material costs and better capacity utilization, particularly in
Europe. The decline in 1993 was due to a reduction in higher margin European
business, the performance of three new plants started up in 1992 which were not
fully utilized or profitable, and a sales shift towards lower margin products in
the Company's Safety business.
The Company is the world's only global manufacturer of carbon black. In
1994, 65% of total carbon black volumes, including 100% of affiliate volumes,
were sold to customers outside North
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SPECIALTY CHEMICALS REVENUES BY GEOGRAPHIC REGION
- --------------------------------------------------------------------
1993 Region Percent
- --------------------------------------------------------------------
[Pie chart] Pacific Asia 18%
South America 7%
North America 38%
Europe 37%
1994
- --------------------------------------------------------------------
[Pie chart] Pacific Asia 17%
South America 8%
North America 40%
Europe 35%
- --------------------------------------------------------------------
<FN>
Revenues include 100% of equity affiliate sales.
Region reflects destination point.
America. Carbon black is manufactured on five continents in 25 plants in 19
countries. In 1994, production began at Cabot's new affiliated carbon black
plant in the Czech Republic. Many carbon black facilities are wholly-owned by
Cabot Corporation, while others are affiliates, jointly managed and operated
with local partners in the specific regions. The Carbon Black Divisions serve
three main market sectors, and each is affected in varying degrees by
fluctuating economic conditions. Sales to tire manufacturers represent the
largest percentage of carbon black sold by volume and weight. This sector is
dependent on both new automobile tire sales and, to a greater degree, the
replacement tire business. The makers of industrial rubber products such as
hoses and gaskets represent a second market for carbon black. The third market
is made up of manufacturers of inks and other special applications who use very
high grade, higher margin carbon blacks. Sales by the Industrial Rubber Blacks
and Special Blacks sectors reduce the Company's dependence on the tire industry.
The Company's long-term strategy of product differentiation is aimed at building
the less cyclical businesses and further reducing the Company's dependence on
economic cycles.
Financial results from affiliate plants are reported in the income
statement as Equity in Net Income of Affiliated Companies. In 1994, Equity in
Net Income of Affiliates grew substantially, reflecting improvement in Cabot's
South American and Mexican carbon black affiliates, and some improvement in its
Pacific Asia affiliates. Performance in Japan continues to be adversely affected
by recession and high costs in that region and the Company does not believe that
these conditions are likely to improve soon. Therefore, the Company wrote off
its remaining $6.2 million investment in its Japanese carbon black affiliate.
Since April 1, 1994, any losses incurred by the Japanese affiliate no longer
impact Cabot's financial statements. The performance of the Company's Japanese
special blacks subsidiary will continue to be reflected in Cabot's financial
statements.
In Carbon Black, total sales for 1994 increased moderately, compared to
minor increases in both 1993 and 1992. Continued strength in the North and South
American tire and automotive industries contributed to the growth along with the
beginning of a recovery in the European economy during the second half of the
year. Carbon black operating profit improved in 1994 due to higher volumes,
especially in the Industrial Rubber and Special Blacks sectors. Margins were
moderately better during the first half of the year, caused by lower raw
material costs. Including 100% of affiliate volumes, 65% of the carbon black was
sold to customers outside North America versus 67% in 1993.
CARBON BLACK SALES VOLUMES BY GEOGRAPHIC REGION
- --------------------------------------------------------------------
1993 Region Percent
- --------------------------------------------------------------------
[Pie chart] Pacific Asia 24%
South America 13%
North America 33%
Europe 30%
1994
- --------------------------------------------------------------------
[Pie chart] Pacific Asia 22%
South America 13%
North America 35%
Europe 30%
- --------------------------------------------------------------------
<FN>
Volumes include 100% of equity affiliate sales volumes.
Region reflects destination point.
In 1993, the moderate increase in Carbon Black sales was due to the
improved Tire and Industrial Rubber Blacks business in North America. Before
restructuring charges, 1993 operating profit dropped due to lost European
volumes and the effect of lower plant capacity utilization on profits. Some
improvement in other regions helped to offset the shortfall.
The Cab-O-Sil Division reported volume and sales gains of over 15% from
1993, with improvement coming from both North America and Europe. Operating
profit also improved dramatically from weak 1993 levels due to higher capacity
utilization and cost management together with the strong volume growth. The
Company expects the strong performance in the fumed silica business to continue
into 1995. In 1993, the Division's profitability growth was stalled by a
combination of the weakness of the European economies and the
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costs associated with expanded capacity.
In the Plastics Division, core business revenue grew moderately in 1994,
compared to a moderate decline in 1993. The Division returned to profitability
in 1994 as a result of the cost cutting and restructuring initiatives undertaken
in 1993 as well as improving economic conditions in Europe late in the fiscal
year. Market conditions which began to improve in late 1994 are expected to
continue improving. In 1993, revenues in the Plastics Division were down
compared to 1992 due to lower volumes and prices caused by the Division's
European exposure and the strategic elimination of low margin products.
Cabot Performance Materials reported small sales gains in 1994. However,
profitability was negatively impacted by operating problems, primarily yield and
throughput issues. The Company expects to make significant investments in this
business over the next couple of years to improve operating efficiency. In 1993,
performance in the Division was boosted by higher sales and capacity
utilization.
Cabot Safety Corporation showed modest sales and margin growth in 1994.
However, continued costs associated with marketing programs and one-time
expenses caused a slight decrease in profitability. Cost management improved
during the second half of the year and is expected to improve further in 1995.
In 1993, sales remained at 1992 levels, however, profitability was reduced by
price pressure and a continuing customer shift to lower margin products. Cabot
is considering a variety of transactions which would result in Cabot Safety
being deconsolidated.
THE ENERGY GROUP The Energy Group includes two operating subsidiaries: Cabot
LNG, a liquefied natural gas importing and terminalling operation, and TUCO,
a coal fuel services business.
The Company also owned a 34.4% interest in American Oil and Gas
Corporation (AOG), whose operating results were reflected in Cabot's Equity in
Net Income of Affiliated Companies until July 13, 1994, when AOG was merged into
a subsidiary of K N Energy, Inc. (KNE). On completion of the merger, Cabot
became the largest stockholder of KNE with 15.2% of the outstanding common
stock, and warrants to acquire an additional 1.9%. Cabot's investment in KNE is
accounted for in accordance with SFAS 115. Dividends from the investment are now
included in interest and dividend income.
Energy Group sales were $438.7 million in 1994, $422.5 million in 1993,
and $376.0 million in 1992. The 4% increase in 1994 revenues can be primarily
attributed to the Company's LNG business, where an unusually cold winter in the
Northeastern United States boosted demand and resulted in higher natural gas
prices. Operating profits grew 10% in 1994 versus 1993. The entire increase was
realized during the second quarter with higher volumes and margins in the
Company's LNG business. The gains made during the peak winter quarter more than
offset LNG shortfalls in the remaining three quarters, and lower profits in the
Company's TUCO business. During 1994, TUCO's profit was lower as a result of
disruptions in coal transportation which significantly reduced inventories of
coal in 1993 and 1994. Reduced inventories, in turn, reduced TUCO's service
margins under a contractual formula.
Energy Group results in 1993 reflected a slow first half in Cabot LNG
caused by unseasonably warm weather, and lower gas prices, offset by rebounding
prices and volumes in the second half. TUCO's revenue in 1993 was up 9% from
1992 due to increased demand for electricity, brought about by a relatively
hotter summer in Texas.
The Company anticipates that near-term results from Cabot LNG will be
adversely affected by constraints on supplies of LNG due to refurbishment at the
supplier's Algerian liquefaction facilities. The effect on the Company will
depend on the number and timing of LNG shipments received. Other gas supply
opportunities are being explored. The Company cannot predict, at this time,
what, if any, impact the political instability in Algeria may have on the
deliveries of LNG to Cabot from its supplier.
CASH FLOW AND LIQUIDITY Cash generated in 1994 from the Company's operating
activities decreased 24% to $143.8 million from $189.1 million in 1993. The
decrease reflects some rebuilding of inventories by the Company's TUCO and LNG
businesses, and a decrease in accounts payable and accrued expenses due to the
settlement of the last significant, and previously reserved for, take-or-pay
case. These decreases were partially offset by the increase in net income
during 1994.
Capital spending on property, plant and equipment was $73.6 million in
1994, $65.0 million in 1993 and $78.1 million in 1992. In 1994, spending was
used to improve and enhance existing business facilities. Spending on
investments and acquisitions was $0.4 million in 1994, $40.9 million in 1993 and
$13.7 million in 1992. In 1993, the Company invested $17.8 million in the
acquisition of the remaining interest of its Brazilian subsidiary and smaller
amounts in its Czech Republic, Mexican and Indonesian carbon black affiliates,
and to purchase the remaining interest in a Canadian affiliate.
SOURCES AND USES OF CASH FISCAL YEARS 1993, 1994
[BAR GRAPH SHOWING THE FOLLOWING NUMBERS]
Sales of
$ millions Operations Assets
- ------------------------------------------------------------------------
SOURCES OF CASH
- ------------------------------------------------------------------------
93 $189.1 $3.5
94 $143.8 $0.5
[BAR GRAPH SHOWING THE FOLLOWING NUMBERS]
Capital
Expenditures and Financing
$ millions Investments Dividends & Other
- -------------------------------------------------------------------------------
USES OF CASH
- -------------------------------------------------------------------------------
93 $105.9 $22.9 $54.2
94 $ 74.0 $23.6 $ 6.0
22
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The Company expects capital spending to increase significantly in 1995,
primarily to improve and maintain existing facilities and equipment, especially
in the Company's Performance Materials business. Over the next three years, the
Company expects to have at least $30 million of capital expenditures associated
with Clean Air Act compliance. In addition, over the next several years, as the
remediation for various environmental sites is carried out, the Company expects
to spend a significant portion of its $44 million reserve for costs associated
with such remediation. These sites are primarily associated with divested
businesses. Also, the Company may refurbish its LNG tanker within the next year
or two for approximately $20 million.
Cabot decreased its borrowings by $15 million and increased cash by $41
million in 1994. The Company has $150 million of 9.875% coupon debt due in
December 1994. The Company plans to pay a portion of this debt out of cash and
to replace the remainder with floating rate loans, which are expected to be at
more favorable short-term rates. Primarily due to the Company's strong operating
performance in 1994, its ratio of total debt (including short-term debt net of
cash) to capital decreased to 42.1% at the end of 1994 from 50.4% at the end of
1993. The Company is not anticipating significant debt reductions in 1995 due to
its planned capital investments.
Management expects cash from operations and present financing
arrangements, including the Company's unused line of credit of $250 million, to
be sufficient to meet the Company's cash requirements for the foreseeable
future.
COMMON STOCK In 1994, the Company announced a two-for-one stock split and an
approximately 8% increase in its quarterly dividend. The stock split was
effected August 17, 1994, by the distribution of one additional share of
common stock for each share of common stock held by stockholders of record on
August 9, 1994. As a result of this transaction, all common share data and per
share data has been restated to reflect the split, where appropriate.
SHAREHOLDER RETURN
Cabot versus the Standard and Poor's (S&P) 500
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994
- --------------------------------------------------------------------------------
CABOT $100.00 $72.82 $102.98 $153.81 $181.99 $182.30
S & P 500 $100.00 $90.76 $119.04 $132.20 $149.38 $154.89
$200
- -------------------------------------------------------------------------------
$150
- -------------------------------------------------------------------------------
$100
- -------------------------------------------------------------------------------
$50
- -------------------------------------------------------------------------------
<FN>
[Line graph showing performance of Cabot versus S & P 500 reflecting data points shown above.]
Graph assumes $100 was invested on October 1, 1989 in Cabot common stock and
the S&P 500 index. The comparison assumes that all dividends are reinvested. (A
graph showing the comparison with certain other indices is shown in the
Company's proxy statement.)
In October 1994, the Board of Directors authorized the Company to
purchase up to 1,500,000 shares of the Company's common stock, superseding a
previous authorization. The Company presently intends to use the authorization
to purchase from time to time approximately the same number of shares as it
issues under its incentive programs subject to its evaluation of market
conditions and other relevant factors.
During the 1994 fiscal year, the Company paid cash dividends of $0.53
per share reflecting a quarterly dividend of $0.13 for the first three quarters
of the year, and $0.14 in the fourth quarter. The book value per share of Cabot
stock increased 25% to $14.81 at September 30, 1994.
QUARTERLY STOCK PRICE AND DIVIDEND DATA
- --------------------------------------------------------------
FISCAL 1993 Dec Mar Jun Sep Year
- --------------------------------------------------------------
Cash dividends
per share . . . . . . $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.52
Price range of
common stock
High. . . . . . . . . 24.81 21.94 24.38 28.13 28.13
Low . . . . . . . . . 20.56 18.63 19.81 23.31 18.63
Close . . . . . . . . 21.69 21.25 24.38 27.75 27.75
- --------------------------------------------------------------
FISCAL 1994 Dec Mar Jun Sep Year
- --------------------------------------------------------------
Cash dividends
per share . . . . . . $ 0.13 $ 0.13 $ 0.13 $ 0.14 $ 0.53
Price range of
common stock
High. . . . . . . . . 29.19 28.00 26.63 28.38 29.19
Low . . . . . . . . . 26.13 25.56 24.44 25.13 24.44
Close . . . . . . . . 26.94 27.00 25.56 27.25 27.25
- --------------------------------------------------------------
NEW ACCOUNTING STANDARDS At September 30, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Upon
adoption, the Company recorded an unrealized gain on marketable securities
available for sale of $46 million. The gain was recorded as a separate
component of stockholders' equity, net of a deferred tax liability of $17
million.
The Company adopted two new accounting principles during 1993, effective
as of the beginning of fiscal 1993: SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and SFAS Statement No. 109,
"Accounting for Income Taxes."
SFAS 106 mandates the accrual of certain postretirement health care and
life insurance benefits on an "as-earned" basis. The Company recognized the
entire accumulated benefit obligation in 1993 and, as a result, recorded a $43.2
million after-tax charge for the cumulative effect of the change in accounting
for postretirement health care and life insurance benefits.
SFAS 109 requires an asset and liability approach for financial
accounting and reporting of income taxes. The Company recognized a $17.1 million
benefit in 1993 as the cumulative effect of adoption of SFAS 109.
23
8
Cabot Corporation CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share amounts 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Net sales and other operating revenues . . . . . . . . . . . . . . . . . $1,679,819 $1,614,315 $1,556,986
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . 6,742 4,225 5,217
---------------------------------------------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 1,686,561 1,618,540 1,562,203
- ----------------------------------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,234,272 1,211,655 1,151,063
Selling and administrative expenses. . . . . . . . . . . . . . . . . . . 222,069 204,804 210,213
Research and technical service . . . . . . . . . . . . . . . . . . . . . 48,701 45,651 37,470
Interest expense (Note G). . . . . . . . . . . . . . . . . . . . . . . . 41,668 44,043 41,714
Specialty Chemicals and Materials Group restructuring (Note B) . . . . . (4,000) 47,400 --
Gain on resolution of matters from divested energy businesses (Note B) . (10,210) (14,177) --
Other charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,736 11,264 5,144
---------------------------------------------
Total costs and expenses. . . . . . . . . . . . . . . . . . . . . . 1,568,236 1,550,640 1,445,604
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 118,325 67,900 116,599
Provision for income taxes (Note K). . . . . . . . . . . . . . . . . . . . . (44,963) (30,699) (54,549)
Equity in net income of affiliated companies (Note D). . . . . . . . . . . . 5,329 209 173
---------------------------------------------
Income before cumulative effect of accounting changes. . . . . . . . . . . . 78,691 37,410 62,223
---------------------------------------------
Cumulative effect of accounting changes (Notes I and K). . . . . . . . . . . -- (26,109) --
---------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,691 11,301 62,223
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends on preferred stock, net of tax
benefit of $1,929, $1,934 and $1,910 . . . . . . . . . . . . . . . . . . (3,583) (3,632) (3,709)
---------------------------------------------
Income applicable to common shares . . . . . . . . . . . . . . . . $ 75,108 $ 7,669 $ 58,514
- ----------------------------------------------------------------------------------------------------------------------------------
Income per common share (Note A and H):
Primary
Continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.96 $ 0.90 $ 1.59
Cumulative effect of accounting changes. . . . . . . . . . . . . . . . . -- (0.70) --
---------------------------------------------
Income per share . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.96 $ 0.20 $ 1.59
Fully diluted
Continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.84 $ 0.90 $ 1.49
Cumulative effect of accounting changes. . . . . . . . . . . . . . . . . -- (0.70) --
---------------------------------------------
Income per share . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.84 $ 0.20 $ 1.49
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
9
Cabot Corporation CONSOLIDATED BALANCE SHEETS
September 30
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,917 $ 40,267
Accounts and notes receivable (net of reserve for
doubtful accounts of $7,697 and $6,321) . . . . . . . . . . . . . . . . . . . . . . . . . 272,787 258,057
Inventories (Note C). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,882 195,350
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,293 8,771
Deferred income taxes (Note K). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,509 41,761
--------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 606,388 544,206
--------------------------
Investments:
Equity (Notes B and D). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,164 166,669
Other (Notes D and H) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,768 7,911
--------------------------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,932 174,580
--------------------------
Property, plant and equipment (Note E). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,381,576 1,250,228
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . (687,068) (603,708)
--------------------------
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 694,508 646,520
--------------------------
Other assets:
Intangible assets (net of accumulated amortization
of $34,534 and $26,926) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,089 78,873
Deferred income taxes (Note K). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,722 5,752
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,117 39,542
--------------------------
Total other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,928 124,167
--------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,616,756 $1,489,473
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
10
Cabot Corporation CONSOLIDATED BALANCE SHEETS
September 30
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,480 $ 1,501
Current portion of long-term debt (Note G) . . . . . . . . . . . . . . . . . . . . . . . . 159,724 29,205
Accounts payable and accrued liabilities (Note F). . . . . . . . . . . . . . . . . . . . . 281,342 297,201
U.S. and foreign income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,626 25,029
Deferred income taxes (Note K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,943 1,285
--------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475,115 354,221
--------------------------
Long-term debt (Note G). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,828 459,275
Deferred income taxes (Note K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,286 86,344
Other liabilities (Note I) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,038 147,360
Commitments and contingencies (Note L)
Stockholders' equity (Notes D, G, H, I and J):
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 $73,577 and $74,982). . . . . . 75,336 75,336
Less cost of shares of preferred treasury stock. . . . . . . . . . . . . . . . . . . . . . . . (4,003) (3,003)
Common stock:
Authorized: 80,000,000 shares of $1 par value
Issued: 67,774,968 and 33,887,484 shares . . . . . . . . . . . . . . . . . . . . . . . . . 67,775 33,887
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,783 33,621
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 916,942 861,803
Less cost of common treasury stock
(including unearned amounts of $7,884 and $7,321). . . . . . . . . . . . . . . . . . . . . (475,055) (483,184)
Deferred employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (67,403) (68,781)
Unrealized gain on marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,787 --
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,327 (7,406)
--------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 562,489 442,273
--------------------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . $1,616,756 $1,489,473
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
11
Cabot Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30
- --------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,691 $ 11,301 $ 62,223
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 86,265 84,476 84,128
Deferred tax provision . . . . . . . . . . . . . . . . . . . . . . . . . 27,084 (12,176) 22,920
Gain on sales of investments . . . . . . . . . . . . . . . . . . . . . . -- (2,841) (12,790)
Effects of accounting changes. . . . . . . . . . . . . . . . . . . . . . -- 26,109 --
Equity in income of affiliated companies, net
of dividends received. . . . . . . . . . . . . . . . . . . . . . . . 309 5,779 5,593
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,750 3,391 5,491
Changes in assets and liabilities:
Increase in accounts receivable. . . . . . . . . . . . . . . . . . . . . (3,042) (17,332) (14,246)
(Increase) decrease in inventories . . . . . . . . . . . . . . . . . . . (13,688) 17,412 (27,181)
(Decrease) increase in accounts payable and accruals . . . . . . . . . (27,862) 38,555 (26,693)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,740) 34,469 3,889
-------------------------------------------
Cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . 143,767 189,143 103,334
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . . . . . . . . . . . . . . (73,555) (65,009) (78,070)
Investments and acquisitions (excluding cash acquired) . . . . . . . . . . . . (371) (40,905) (13,745)
Sales of property, plant and equipment, and investments. . . . . . . . . . . . 545 3,506 26,033
-------------------------------------------
Cash used by investing activities. . . . . . . . . . . . . . . . . . . . . . . (73,381) (102,408) (65,782)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 1,189 9,259 118,778
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (41,584) (7,076) (31,521)
Net increase (decrease) in short-term debt . . . . . . . . . . . . . . . . . . 24,979 (66,700) (106,998)
Issuances of treasury stock, net . . . . . . . . . . . . . . . . . . . . . . . 7,703 12,647 3,185
Cash dividends paid to stockholders. . . . . . . . . . . . . . . . . . . . . . (23,552) (22,920) (22,694)
-------------------------------------------
Cash used by financing activities. . . . . . . . . . . . . . . . . . . . . . . (31,265) (74,790) (39,250)
- --------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . 1,529 (2,334) (6,683)
-------------------------------------------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . 40,650 9,611 (8,381)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . 40,267 30,656 39,037
-------------------------------------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . $ 80,917 $ 40,267 $ 30,656
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
12
Cabot Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The Consolidated Financial Statements have been prepared in conformity with
generally accepted accounting principles. The significant accounting policies of
the Company are described below.
PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the
accounts of Cabot Corporation and majority-owned and controlled domestic and
foreign subsidiaries. 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.
CASH EQUIVALENTS For purposes of the statements of cash flows, the Company
considers all time deposits and short-term investments with a maturity of
three months or less at time of purchase to be cash equivalents.
FOREIGN CURRENCY TRANSLATION Substantially all assets and liabilities of the
Company's foreign operations are translated at year-end exchange rates. Revenues
and expenses are translated at the weighted average rate during the year.
Foreign currency gains and losses arising from transactions are reflected in net
income. Balance sheet translation gains and losses are reflected as a separate
component of stockholders' equity.
INVENTORIES Inventories are stated at the lower of cost or market. The cost of
most domestic inventories is determined using the last-in, first-out (LIFO)
method. The cost of other domestic and all foreign inventories is determined
using the average cost method or the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at
cost. For financial reporting purposes, depreciation of property, plant and
equipment is calculated using primarily the straight-line method based on
estimated economic lives of 3 to 25 years.
EARNINGS PER SHARE Earnings per share is computed on the basis of weighted
average shares outstanding during each year. Fully diluted earnings per share
considers conversion of the Company's Series B ESOP Convertible Preferred Stock
held by the Company's Employee Stock Ownership Plan (Note H) and shares issuable
under the Company's incentive compensation plans (Note J).
INCOME TAXES In the fourth quarter of 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
retroactive to October 1, 1992. Under SFAS No. 109, deferred income taxes are
provided based on the estimated future tax effects of differences between
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Provisions are made for the U.S. income tax liability and
additional foreign taxes on the undistributed earnings of foreign subsidiaries,
except for amounts the Company has designated to be permanently reinvested.
INTANGIBLE ASSETS Intangible assets are comprised of the cost of business
acquisitions in excess of the fair value assigned to the net tangible assets
acquired and the costs of technology, licenses and patents purchased in business
acquisitions. The excess of cost over the fair value of net assets acquired is
amortized on the straight-line basis over either 40 years or an estimated useful
life, whichever is shorter. Other intangibles are amortized over their estimated
useful lives. Included in Other Charges is amortization expense of $7,661,000,
$6,884,000 and $7,360,000 in 1994, 1993 and 1992, respectively.
INTEREST RATE SWAP AGREEMENTS The Company entered into interest rate swap
agreements during 1993 to convert a portion of its fixed-rate obligations into
floating-rate borrowings. The interest rate differential to be received or paid
is recognized over the lives of the agreements as an adjustment to interest
expense. There are no open contracts as of September 30, 1994.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS Forward foreign currency exchange
contracts are purchased to reduce the impact of foreign currency fluctuations on
operating results. Realized and unrealized gains and losses on these contracts
are recorded in net income currently, with the exception of gains or losses on
contracts designated to hedge a net investment, which are recorded as
translation adjustments. Included in Other Charges are foreign exchange losses
of $1,713,000, $1,977,000 and $3,021,000 in 1994, 1993 and 1992, respectively.
RECLASSIFICATION Certain amounts in 1993 and 1992 have been reclassified to
conform to the 1994 presentation.
28
13
B. RESTRUCTURING
- --------------------------------------------------------------------------------
SPECIALTY CHEMICALS AND MATERIALS During 1993, the Company recognized a
$47,400,000 charge for the restructuring of certain Specialty Chemicals and
Materials businesses including a carbon black plant closing in Europe, the
scaling back of the Company's Plastics recycling business and the closing of
certain Specialty Chemicals production lines.
During 1994, the Company incurred $17,890,000 of cost accrued for in
1993 for employee separation and facility closing expenses. Also, the Company
revised its restructuring reserve based on the actual costs incurred during the
closing of a carbon black plant in Europe. The Company will continue to evaluate
its remaining reserve as new data become available, primarily relating to the
final disposition of assets at the closed plant. A $4,000,000 benefit from the
revision of the reserve was recorded in 1994.
During 1994, the Company recorded, in Other Charges, a $6,150,000 charge
to write off its investment in its Japanese carbon black equity affiliate due to
significant ongoing losses which are expected to continue.
ENERGY During 1994 and 1993, the Company recognized gains of $10,210,000 and
$14,177,000, respectively, on the favorable resolution of certain matters
related to divested energy businesses, which included the settlement of the
Company's last significant take-or-pay case in 1994.
C. INVENTORIES
- --------------------------------------------------------------------------------
Inventories were as follows:
September 30
- ---------------------------------------------------------------------
Dollars in thousands 1994 1993
- ---------------------------------------------------------------------
Raw materials . . . . . . . . . . . . . . $ 52,564 $ 45,589
Work in process . . . . . . . . . . . . . 33,139 36,923
Finished goods. . . . . . . . . . . . . . 94,363 77,747
Other . . . . . . . . . . . . . . . . . . 36,816 35,091
----------------------
Total . . . . . . . . . . . . . . . . $216,882 $195,350
- ---------------------------------------------------------------------
Inventories valued under the LIFO method comprised approximately 26 percent and
23 percent of 1994 and 1993 totals, respectively. The estimated current cost of
these inventories exceeded their stated valuation determined on the LIFO basis
by $32,666,000 and $26,958,000 at September 30, 1994 and 1993, respectively.
D. INVESTMENTS
- --------------------------------------------------------------------------------
Investments in net assets of affiliated companies accounted for under the equity
method amounted to $86,164,000 and $166,669,000 at September 30, 1994 and 1993,
respectively. The combined results of operations and financial position of the
Company's equity-basis affiliates are summarized below:
Years ended September 30
- ------------------------------------------------------------------------
Dollars in thousands 1994 1993
- ------------------------------------------------------------------------
CONDENSED INCOME STATEMENT INFORMATION
Net sales. . . . . . . . . . . . . . . . . . $335,346 $860,535
Gross margin . . . . . . . . . . . . . . . . 84,281 151,502
Income before accounting changes . . . . . . 5,064 5,259
Net income . . . . . . . . . . . . . . . . . 5,064 6,080
CONDENSED BALANCE SHEET INFORMATION
Current assets . . . . . . . . . . . . . . . $199,920 $306,749
Non-current assets . . . . . . . . . . . . . 317,666 618,890
Current liabilities. . . . . . . . . . . . . 242,452 313,196
Non-current liabilities. . . . . . . . . . . 105,599 234,387
Net worth. . . . . . . . . . . . . . . . . . 169,535 378,056
- ------------------------------------------------------------------------
On July 13, 1994, American Oil and Gas Corporation (AOG) was merged into
a subsidiary of K N Energy, Inc. (KNE). As a result of the merger, each
outstanding share of AOG held by the Company was converted into 0.47 of a share
of KNE common stock. On the completion of the merger, the Company owned
approximately 15% of the outstanding KNE common stock and has accounted for its
investment in accordance with the provisions of SFAS No. 115. Prior to the
merger, the Company owned a 34% interest in AOG and accounted for its investment
on the equity method.
During 1994, the Company's investment in its Indonesian affiliate was
accounted for on an equity basis. Effective September 30, 1994, the balance
sheet of the Indonesian affiliate was fully consolidated reflecting the
Company's ongoing controlling interest.
Condensed income statement and balance sheet information for the
Company's investment in KNE common stock and the Indonesian affiliate have been
excluded from the above 1994 combined results of operations and financial
position.
Effective September 30, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Equity securities with readily determinable fair values
have been reflected on the balance sheet at their fair values as of September
30, 1994. A $28,787,000 unrealized gain, net of a $17,644,000 deferred tax
liability, has been reflected as a separate component of stockholders' equity
(Note H).
29
14
E. PROPERTY, PLANT & EQUIPMENT
- --------------------------------------------------------------------------------
The cost of property, plant and equipment, by industry segment, was as follows:
September 30
- --------------------------------------------------------------------------
Dollars in thousands 1994 1993
- --------------------------------------------------------------------------
Specialty Chemicals and Materials. . . . . $1,288,647 $1,156,692
Energy . . . . . . . . . . . . . . . . . . 91,295 91,566
General corporate assets . . . . . . . . . 1,634 1,970
--------------------------
Total. . . . . . . . . . . . . . . . . $1,381,576 $1,250,228
- --------------------------------------------------------------------------
F. ACCOUNTS PAYABLE & ACCRUED LIABILITIES
- --------------------------------------------------------------------------------
Accounts payable and accrued liabilities consisted of the following:
September 30
- ------------------------------------------------------------------------
Dollars in thousands 1994 1993
- ------------------------------------------------------------------------
Accounts payable . . . . . . . . . . . . $101,934 $ 85,893
Accrued employee compensation. . . . . . 25,024 20,224
Restructuring liabilities. . . . . . . . 19,474 41,364
Other accrued liabilities. . . . . . . . 134,910 149,720
------------------------
Total. . . . . . . . . . . . . . . . $281,342 $297,201
- ------------------------------------------------------------------------
G. DEBT
- --------------------------------------------------------------------------------
Long-term debt consisted of the following:
September 30
- ------------------------------------------------------------------------
Dollars in thousands 1994 1993
- ------------------------------------------------------------------------
Notes due 1994, 9.875% . . . . . . . . . . . $ 150,000 $150,000
Notes due 2002-2022, 8.07% . . . . . . . . . 105,000 105,000
Notes due 1997, 10.25% . . . . . . . . . . . 100,000 100,000
Guarantee of ESOP notes
due 2013, 8.29%. . . . . . . . . . . . . 67,403 68,781
Overseas Private Investment Corpo-
ration due 2002, floating rate, 6.5%
at September 30, 1994. . . . . . . . . . 15,000 --
French franc-denominated notes
due 1995-1997, 8.37%-15.12% 357 16,419
Notes due 1993, 7.40%. . . . . . . . . . . . -- 14,998
Australian dollar-denominated
notes due 1995, 12.90% . . . . . . . . . 1,665 4,352
Industrial Revenue Bonds due
1997-2014, 9.35%-14.00%. . . . . . . . . 5,000 6,000
Other, including foreign term loans. . . . . 23,127 22,930
------------------------
467,552 488,480
Less: current portion of
long-term debt . . . . . . . . . . . . . (159,724) (29,205)
------------------------
Total. . . . . . . . . . . . . . . . . $ 307,828 $459,275
- ------------------------------------------------------------------------
During fiscal 1989, the Company's Employee Stock Ownership Plan (ESOP)
borrowed $75,000,000 from an institutional lender in order to finance its
purchase of 75,000 shares of the Company's Series B ESOP Convertible Preferred
Stock. This debt bears interest at 8.29% per annum, and is to be repaid in equal
quarterly installments through December 31, 2013. The Company, as guarantor, has
reflected the outstanding balance of $67,403,000 as a liability on the Company's
consolidated balance sheet at September 30, 1994. An equal amount, representing
deferred employee benefits, has been recorded as a reduction of stockholders'
equity (Note H).
In June 1992, the Company filed a $300 million debt shelf registration
statement with the Securities and Exchange Commission. Subsequently, $105
million of notes payable were refinanced with notes of a weighted average
maturity of 19 years and a weighted average interest rate of 8.07%. The notes
were issued at par and provide for principal to be repaid at maturity.
During 1994, the Company replaced its revolving credit and term loan
facility. Under the new credit agreement, the Company may borrow up to
$250,000,000 at floating rates. The agreement contains provisions regarding
minimum net worth requirements and certain indebtedness limitations which could
limit the amount available for future borrowings. Commitment fees are paid based
on the used and unused portions of the facility. The facility is available
through January 13, 1997. No amounts were outstanding under this credit
agreement at September 30, 1994.
The aggregate principal amounts of long-term debt due in each of the
five fiscal years 1995 through 1999 are $159,724,000, $12,121,000, $6,854,000,
$105,987,000 and $6,238,000, respectively.
Cash paid for interest during 1994, 1993 and 1992 totalled $41,663,000,
$41,970,000 and $44,347,000, respectively. The Company capitalized no interest
in 1994 or 1993, and $3,963,000 in 1992.
Based primarily on dealer quotes, the fair value of long-term borrowings
was approximately $478,000,000 and $555,000,000 at September 30, 1994 and 1993,
respectively.
30
15
H. STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
The following table summarizes the changes in stockholders' equity for each of the three years in the period ended
September 30, 1994:
Years ended September 30
- -------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . $ 75,336 $ 75,336 $ 75,336
-----------------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,336 $ 75,336 $ 75,336
-----------------------------------------
PREFERRED TREASURY STOCK
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . $ (3,003) $ (2,693) $ (2,393)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . (1,000) (310) (300)
-----------------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,003) $ (3,003) $ (2,693)
-----------------------------------------
COMMON STOCK
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . $ 33,887 $ 33,887 $ 33,887
Two-for-one stock split. . . . . . . . . . . . . . . . . . . . . . 33,888 -- --
-----------------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,775 $ 33,887 $ 33,887
-----------------------------------------
ADDITIONAL PAID-IN CAPITAL
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . $ 33,621 $ 30,324 $ 26,597
Sale of treasury stock to the Profit Sharing and Savings Plan. . . 633 861 (50)
Issuance of treasury stock under employee compensation plans . . . 3,417 2,436 3,777
Two-for-one stock split. . . . . . . . . . . . . . . . . . . . . . (33,888) -- --
-----------------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,783 $ 33,621 $ 30,324
-----------------------------------------
RETAINED EARNINGS
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . $ 861,803 $ 873,422 $ 833,893
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,691 11,301 62,223
Common dividends paid ($0.53, $0.52, $0.52 per share). . . . . . . (19,969) (19,288) (18,985)
Preferred dividends paid to ESOP, net of tax benefit . . . . . . . (3,583) (3,632) (3,709)
-----------------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 916,942 $ 861,803 $ 873,422
-----------------------------------------
COMMON TREASURY STOCK
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . $(475,863) $(490,132) $(493,584)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . -- (57) (1,678)
Sale of treasury stock to the Profit Sharing and Savings Plan. . . 625 1,896 502
Issuance of treasury stock under employee compensation plans . . . 8,067 12,430 4,628
-----------------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $(467,171) $(475,863) $(490,132)
-----------------------------------------
UNEARNED COMPENSATION
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . $ (7,321) $ (4,692) $ (1,415)
Issuance of treasury stock under employee compensation plans . . . (4,039) (4,609) (3,693)
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,476 1,980 416
-----------------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,884) $ (7,321) $ (4,692)
-----------------------------------------
DEFERRED EMPLOYEE BENEFITS
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . $ (68,781) $ (70,050) $ (71,220)
Principal payment by ESOP under guaranteed loan. . . . . . . . . . 1,378 1,269 1,170
-----------------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (67,403) $ (68,781) $ (70,050)
-----------------------------------------
UNREALIZED GAIN ON MARKETABLE SECURITIES
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ --
Unrealized gain (Note D) . . . . . . . . . . . . . . . . . . . . . 28,787 -- --
-----------------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,787 $ -- $ --
-----------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . $ (7,406) $ 47,553 $ 25,762
Foreign currency translation adjustments . . . . . . . . . . . . . 23,733 (54,959) 21,791
-----------------------------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,327 $ (7,406) $ 47,553
-----------------------------------------
TOTAL STOCKHOLDERS' EQUITY, END OF YEAR. . . . . . . . . . . . . . . . $ 562,489 $ 442,273 $ 492,955
- -------------------------------------------------------------------------------------------------------------------------
31
16
SHARES OF STOCK September 30
- --------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------
PREFERRED STOCK
Beginning of year. . . . 75,336 75,336 75,336
----------------------------------------
End of year. . . . . 75,336 75,336 75,336
- --------------------------------------------------------------------
PREFERRED TREASURY STOCK
Beginning of year. . . . 3,686 3,230 2,559
Purchased. . . . . . . . 818 456 671
----------------------------------------
End of year. . . . . 4,504 3,686 3,230
- --------------------------------------------------------------------
COMMON STOCK
Beginning of year. . . . 33,887,484 33,887,484 33,887,484
Two-for-one stock split. 33,887,484 -- --
----------------------------------------
End of year. . . . . 67,774,968 33,887,484 33,887,484
- --------------------------------------------------------------------
COMMON TREASURY STOCK
Beginning of year. . . . 15,161,103 15,560,213 15,688,415
Purchased. . . . . . . . -- 1,300 34,617
Issued . . . . . . . . . (278,550) (400,410) (162,819)
Two-for-one stock split. 14,901,169 -- --
----------------------------------------
End of year. . . . . 29,783,722 15,161,103 15,560,213
- --------------------------------------------------------------------
In November 1986, the Company declared a dividend of one Preferred Stock
Purchase Right (Right) for each outstanding share of Cabot common stock. In
August 1988, the Company amended the terms of the Rights. The Rights are not
presently exercisable. Each Right entitles the holder, upon the occurrence of
certain specified events, to purchase from Cabot a unit consisting of one
one-hundredth of a share of Series A Junior Participating Preferred Stock at a
purchase price of $100 per unit. The Rights further provide that each Right will
entitle the holder, upon the occurrence of certain other specified events, to
purchase from Cabot, Cabot common stock having a value of twice the exercise
price of the Right or, upon the occurrence of certain other specified events, to
purchase from another person into which Cabot was merged or which acquired 50%
or more of Cabot's assets or earnings power, common stock of such other person
having a value of twice the exercise price of the Right. The Rights may be
generally redeemed by Cabot at a price of $0.05 per Right. The Rights expire on
December 3, 1996.
During fiscal 1989, the Company placed 75,336 shares of its Series B
ESOP Convertible Preferred Stock with the Company's Employee Stock Ownership
Plan (ESOP) for cash at a price of $1,000 per share. Each share of the Series B
ESOP Convertible Preferred Stock is convertible into 43.735 shares of the
Company's common stock subject to certain events and anti-dilution adjustment
provisions, and carries voting rights on an "as converted" basis. The trustee
for the ESOP has the right to cause the Company to redeem shares sufficient to
provide for periodic distributions to plan participants. Such shares shall be
redeemed at their fair market value, and may be redeemed by the Company for
cash, shares of the Company's common stock, or a combination thereof at the
Company's option. Each share is redeemable at the option of the Company at a
price of $1,038.75. The redemption price declines annually until it becomes
$1,000 on and after November 19, 1998, plus accrued but unpaid dividends to the
redemption date.
The issued shares of Series B ESOP Convertible Preferred Stock are
entitled to receive preferential and cumulative quarterly dividends, and rank as
to dividends and liquidation prior to the Company's Series A Junior
Participating Preferred Stock and common stock. At September 30, 1994, 3,098,000
shares of the Company's common stock were reserved for conversion of the Series
B ESOP Convertible Preferred Stock.
On July 27, 1994, a two-for-one stock split in the form of a stock
dividend was authorized, payable to stockholders of record on August 9, 1994. A
total of 33,887,484 shares were issued in connection with the split. Also,
$33,887,484 was reclassified from additional paid-in-capital to common stock.
All common share and per share amounts in these financial statements have been
restated to reflect the split where appropriate.
In October 1994, the Company's Board of Directors authorized the
purchase of up to 1,500,000 of the Company's common shares and withdrew the
previous authorization.
32
17
I. PENSION PLANS & POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------------------------------------------------------
PENSION PLANS Net periodic pension cost was comprised of the following elements:
Years ended September 30
- --------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Current year service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,090 $ 9,254 $ 7,768
Interest accrued on pension obligations . . . . . . . . . . . . . . . . . . . . 11,675 9,964 9,995
Actual return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . (11,431) (12,357) (10,760)
Net amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,062) (1,580) (2,549)
----------------------------------------
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . $ 6,272 $ 5,281 $ 4,454
- --------------------------------------------------------------------------------------------------------------------------------
The following table sets forth the funded status of pension plans:
September 30
- --------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of projected benefit obligations . . . . . . . . . . . . . . . . . . . . $155,253 $144,254
Plan assets at fair value (primarily fixed-income and equity securities) . . . . . . . . . . . . 163,651 150,659
------------------------
Excess of plan assets over projected benefit obligations . . . . . . . . . . . . . . . . . . . . 8,398 6,405
Unrecognized net gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,084) (14,767)
Unrecognized prior service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,066 (3,261)
Unrecognized net asset being amortized over 16 years . . . . . . . . . . . . . . . . . . . . . . (6,906) (8,798)
------------------------
Net deferred pension credit (included in other deferred liabilities) . . . . . . . . . . $(19,526) $(20,421)
- --------------------------------------------------------------------------------------------------------------------------------
The Company has trusteed, non-contributory pension plans covering most
employees in the United States and certain foreign subsidiaries. Benefits
provided under the Company's defined benefit pension plans are primarily based
on years of service and the employee's compensation. The Company's funding
policy is to contribute annually amounts based upon actuarial and economic
assumptions designed to achieve adequate funding of projected benefit
obligations.
Pension benefits accrue under several benefit plans, including the
following two plans: the Cash Balance Plan (CBP), a defined benefit pension
plan, and the Employee Stock Ownership Plan (ESOP). In November 1988, the ESOP
was funded with the Company's newly issued Series B ESOP Convertible Preferred
Stock, which was acquired with $75,000,000 borrowed by the ESOP (Notes G and H).
At September 30, 1994 and 1993, the projected benefit obligations
included accumulated benefit obligations of $132,823,000 and $122,065,000,
respectively, of which $123,694,000 and $111,240,000 were vested, respectively.
The following weighted average rates were used in the calculations:
Years Ended September 30
- --------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------
Discount rate . . . . . . . . . . . . . . 8.0% 7.2%
Expected rate of return on plan
assets. . . . . . . . . . . . . . . . 9.0% 7.9%
Assumed rate of increase in
compensation. . . . . . . . . . . . . 5.5% 5.3%
- --------------------------------------------------------------------
POSTRETIREMENT BENEFITS The Company has defined benefit postretirement plans
that provide certain health care and life insurance benefits for retired
employees. Substantially all U.S. employees become eligible for these benefits
if they have met certain age and service requirements at retirement. The Company
funds the plans as claims or insurance premiums are incurred.
Effective October 1, 1992, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires
accrual of these benefits during the years an employee provides service. Prior
to October 1, 1992, the expense for these benefits was recognized as actual
claims or insurance premiums
33
18
were incurred. As of October 1, 1992, the cumulative effect of adopting this
change was a $43,200,000 after-tax charge. In addition to the one-time charge
upon adoption, the effect of the change in accounting increased 1993
pre-tax expense by $800,000, resulting in a pre-tax net periodic postretirement
benefit cost of $5,500,000.
Net periodic postretirement benefit cost was comprised of the following
components:
Years Ended September 30
- ----------------------------------------------------------------------
Dollars in thousands 1994 1993
- ----------------------------------------------------------------------
Current year service cost. . . . . . . . $ 709 $ 580
Interest accrued on postretirement
benefit obligations. . . . . . . . . 4,776 4,920
Net amortization . . . . . . . . . . . . 221 --
----------------------
Net periodic postretirement benefit
cost . . . . . . . . . . . . . . . . $5,706 $5,500
- ----------------------------------------------------------------------
The following table sets forth the funded status of the postretirement
benefit plans:
Years ended September 30
- --------------------------------------------------------------------------------
Dollars in thousands 1994 1993
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligations:
Retirees . . . . . . . . . . . . . . . . . . $ 51,489 $ 59,196
Fully eligible active plan participants. . . 4,716 5,122
Other active plan participants . . . . . . . 10,712 11,836
------------------------
66,917 76,154
Plan assets at fair value. . . . . . . . . . . . -- --
------------------------
Excess of accumulated postretirement
benefit obligations over plan assets . . . . (66,917) (76,154)
Unrecognized net (gain) loss . . . . . . . . . . (81) 9,942
Unrecognized prior service cost. . . . . . . . . (85) --
------------------------
Accrued postretirement benefit cost. . . . . $(67,083) $(66,212)
- --------------------------------------------------------------------------------
Health care cost trend rate assumptions have a significant effect on the
amounts reported. For example, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of September 30, 1994 and 1993 by
approximately $5,400,000 and $5,900,000, respectively, and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for the years then ended by approximately $500,000 and $400,000, respectively.
The following rates were used in the calculations:
Years Ended September 30
- ------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------
Discount rate . . . . . . . . . . . . . . . 8.3% 6.5%
Assumed rate of increase in
compensation. . . . . . . . . . . . . . 6.0% 5.0%
Assumed annual rate of increase
in health care benefits . . . . . . . . 11.5% 12.5%
Annual decrease in assumed rate of
increase in health care benefits. . . . 1.0% 1.0%
Assumed ultimate trend rate . . . . . . . . 6.3% 4.5%
Assumed ultimate trend rate to be
reached in year . . . . . . . . . . . . 2001 2002
- ------------------------------------------------------------------
The cost of retiree health care and life insurance benefits paid as
claims or insurance premiums was $3,965,000 in 1992.
J. PROFIT SHARING & INCENTIVE
COMPENSATION PLANS
- --------------------------------------------------------------------------------
The Company has a Profit Sharing and Savings Plan (PSSP) which covers salaried
employees of most U.S. operations. Accrued contributions of the Company, which
are based upon an annual return on stockholders' equity, were $5,707,000,
$1,178,000, and $2,269,000 in 1994, 1993 and 1992, respectively. During 1994,
the Company amended its PSSP effective October 1, 1994. Under the amended plan,
now called the Cabot Retirement Incentive Savings Plan (CRISP), the Company will
make matching contributions of at least 75% of a participant's
contribution, of up to 7.5% of the participant's eligible compensation.
The Company has an Equity Incentive Plan for key management employees.
Under this plan, participants may be granted various types of stock and
stock-based awards. During 1988-1991, the awards granted consisted of stock
options, performance appreciation rights (PARs) and tandem units which may be
exercised as stock options or PARs. These awards were granted at fair market
value of Cabot's stock at date of grant, and vest ratably on each of the next
four anniversaries of the award. In 1992 through 1994, awards consisted of
common stock of the Company which employees could elect to receive in the form
of restricted stock purchased at a price equal to 50% of the fair market value
on the date of the award, nonqualified stock options at fair market value of
Cabot's stock on the date of the award, or a combination of one-half of each.
The awards vest on the third anniversary of the award.
During 1992, the Company purchased previously awarded PARs from
employees electing to accept a repurchase offer. The purchase price for the PARs
was determined using a valuation method
34
19
that established the value of each PAR considering, among other factors, the
date awarded, the time normally taken to exercise, the market price of
Cabot's common stock and the level of the Standard & Poor's Industrials index at
the date of issue of the PAR. The Company repurchased 547,316 PARs at a cost of
approximately $3,800,000. The following table summarizes the plan's activity
from September 30, 1991 through September 30, 1994:
- ---------------------------------------------------------------------------------
Stock Options
Tandem Options
and Restricted Stock PARs Price Range
- ---------------------------------------------------------------------------------
September 30, 1991. . . 1,865,472 604,494 $ 12.63 to $20.94
Granted . . . . . . 408,712 -- $ 15.44 to $23.38
Exercised . . . . . (182,452) (548,416) $ 14.00 to $20.94
Cancelled . . . . . (119,810) (50,804) $ 15.19 to $20.94
- ---------------------------------------------------------------------------------
September 30, 1992. . . 1,971,922 5,274 $ 12.63 to $23.38
Granted . . . . . . 431,870 -- $ 21.94 to $22.82
Exercised . . . . . (100,086) (1,120) $ 14.63 to $20.94
Cancelled . . . . . (75,428) -- $ 14.00 to $23.38
- ---------------------------------------------------------------------------------
September 30, 1993. . . 2,228,278 4,154 $ 12.63 to $23.38
Granted . . . . . . 484,090 -- $ 24.56 to $27.94
Exercised . . . . . (110,202) (950) $ 12.63 to $20.94
Cancelled . . . . . (139,420) -- $ 15.19 to $24.56
- ---------------------------------------------------------------------------------
September 30, 1994. . . 2,462,746 3,204 $ 12.63 to $27.94
- ---------------------------------------------------------------------------------
The options in the table above expire at various dates through September
2002. Options for 1,108,978 shares were exercisable at prices ranging from
$12.63 to $23.38 at September 30, 1994. The Company had reserved 3,635,336
shares of common stock for issuance under the plan at September 30, 1994. There
were 790,594 shares available for future grants at September 30, 1994.
The Company has an Incentive Stock Plan for certain key management
employees under which 114,000 shares of Cabot common stock have been authorized
to be issued, and have been awarded, to plan participants. At September 30,
1994, all shares were vested under this plan. No awards were made in 1992, 1993
or 1994.
K. INCOME TAXES
- --------------------------------------------------------------------------------
In the fourth quarter of 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
retroactive to October 1, 1992. The Company recognized the cumulative effect of
adoption in its restated first quarter, resulting in an increase to net income
for the year ended September 30, 1993 of approximately $17.1 million.
Income before income taxes and the cumulative effect of accounting
changes was as follows:
Years ended September 30
- ---------------------------------------------------------------------
Dollars in thousands 1994 1993 1992
- ---------------------------------------------------------------------
Domestic. . . . . . . $ 30,388 $32,780 $ 56,964
Foreign . . . . . . . 87,937 35,120 59,635
-------------------------------------
Total . . . . . . $118,325 $67,900 $116,599
- ---------------------------------------------------------------------
A summary of taxes on income is as follows:
Years ended September 30
- -----------------------------------------------------------------------
Dollars in thousands 1994 1993 1992
- -----------------------------------------------------------------------
U.S. federal and state:
Current . . . . . . . . . $(3,131) $16,798 $10,865
Deferred. . . . . . . . . 15,644 (5,305) 14,720
---------------------------------------
Total . . . . . . . . $12,513 $11,493 $25,585
- -----------------------------------------------------------------------
Foreign:
Current . . . . . . . . . $21,010 $26,077 $20,002
Deferred. . . . . . . . . 11,440 (6,871) 8,962
---------------------------------------
Total . . . . . . . . $32,450 $19,206 $28,964
- -----------------------------------------------------------------------
Total . . . . . . . $44,963 $30,699 $54,549
- -----------------------------------------------------------------------
The provision for income taxes at the Company's effective tax rate
differed from the provision for income taxes at the statutory rate as follows:
Years ended September 30
- ----------------------------------------------------------------------------
Dollars in thousands 1994 1993 1992
- ----------------------------------------------------------------------------
Computed tax expense at
the expected statutory
rate . . . . . . . . . . . . . $41,414 $23,596 $39,644
Foreign income:
Impact of taxation at
different rates, repatri-
ation and other. . . . . . . (257) 2,412 3,423
Impact of foreign losses for
which a current tax
benefit is not available . . 701 2,158 4,023
State taxes, net of federal
effect . . . . . . . . . . . . 2,655 407 2,105
Amortization of assets not
deductible . . . . . . . . . . -- (19) 592
Foreign sales corporation. . . . . (1,158) (1,000) (650)
Increase in U.S. tax rate. . . . . -- (812) --
Other, net . . . . . . . . . . . . 1,608 3,957 5,412
------------------------------------
Provision for income
taxes. . . . . . . . . . . . $44,963 $30,699 $54,549
- ----------------------------------------------------------------------------
35
20
Significant components of deferred income taxes were as follows:
September 30
- ----------------------------------------------------------------
Dollars in thousands 1994 1993
- ----------------------------------------------------------------
Deferred tax assets:
Property, plant and equipment . . . . $ 23,257 $ 24,698
Pension and other benefits. . . . . . 43,572 40,199
Environmental issues. . . . . . . . . 14,761 13,207
Restructuring charges . . . . . . . . 10,337 13,964
Deferred revenue and accrued gas
contracts costs . . . . . . . . . . 2,738 16,899
State and local taxes . . . . . . . . 1,804 6,097
Net operating loss and other tax
carryforwards . . . . . . . . . . . 14,568 13,073
Other . . . . . . . . . . . . . . . . 25,166 20,943
------------------------
Subtotal. . . . . . . . . . . . . . 136,203 149,080
------------------------
Valuation allowances. . . . . . . . . (14,915) (10,516)
------------------------
Total deferred tax assets . . . . $121,288 $138,564
- ----------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment . . . . $ 72,379 $ 68,560
Pension and other benefits. . . . . . 10,967 7,412
Restructuring charges . . . . . . . . 1,960 2,381
Marketable securities . . . . . . . . 17,644 --
Other . . . . . . . . . . . . . . . . 117,336 100,327
------------------------
Total deferred tax liabilities. . $220,286 $178,680
- ----------------------------------------------------------------
The valuation allowance for deferred tax assets increased $4,399,000 in
1994. The increase relates primarily to the consolidation of a previously
unconsolidated subsidiary during the current year. The major component of the
valuation allowance at September 30, 1994 relates to the uncertainty of
realizing certain foreign deferred tax assets.
For 1992, the deferred tax provision, computed in accordance with
Accounting Principles Board Opinion No. 11, represents the effects of timing
differences between financial and income tax reporting. The significant
components giving rise to the timing differences for the year ended
September 30, 1992 were:
- ------------------------------------------------------------------------
Dollars in thousands
- ------------------------------------------------------------------------
Depreciation and amortization . . . . . . . . . . . . . $ 5,832
Sale of investments . . . . . . . . . . . . . . . . . . 2,455
Undistributed earnings from affiliates. . . . . . . . . 2,247
Accrued reorganization. . . . . . . . . . . . . . . . . 2,166
Inventory items . . . . . . . . . . . . . . . . . . . . 374
Deferred revenue and accrued gas
contracts costs . . . . . . . . . . . . . . . . . . 342
Pension and other benefits. . . . . . . . . . . . . . . (308)
Environmental issues. . . . . . . . . . . . . . . . . . (530)
Other, net. . . . . . . . . . . . . . . . . . . . . . . 11,104
-------
Total deferred provision. . . . . . . . . . . . . . $23,682
- ------------------------------------------------------------------------
Approximately $43,889,000 of net operating losses and other tax
carryforwards remained at September 30, 1994, $27,517,000 of which expire in the
years 1995 through 1999, and $16,372,000 of which can be carried forward
indefinitely. The benefits of these carryforwards are dependent on taxable
income during the carryforward period in those foreign jurisdictions wherein
they arose, and accordingly, a valuation allowance has been provided where the
Company has determined that it is more likely than not that the carryforwards
will not be utilized.
United States income tax returns for fiscal years 1990 and 1991 are
currently under examination by the Internal Revenue Service. Assessments, if
any, are not expected to have a material adverse effect on the financial
statements.
Provision has not been made for U.S. income taxes or foreign withholding
taxes on approximately $130,000,000 of undistributed earnings of foreign
subsidiaries as these earnings are considered indefinitely reinvested. These
earnings could become subject to U.S. income taxes and foreign withholding taxes
(subject to a reduction for foreign tax credits) if they were remitted as
dividends, if foreign earnings were loaned to the Company or a U.S. subsidiary,
or if the Company should sell its stock in the subsidiaries. However, the
Company believes that U.S. foreign tax credits would largely eliminate any U.S.
income tax and offset any foreign withholding tax that might otherwise be due.
Cash paid for income taxes during 1994, 1993 and 1992 totalled
$23,855,000, $25,934,000 and $28,518,000, respectively.
36
21
L. COMMITMENTS & CONTINGENCIES
- --------------------------------------------------------------------------------
LEASE COMMITMENTS The Company leases certain transportation vehicles, warehouse
facilities, office space, machinery and equipment under cancelable and
non-cancelable leases, most of which expire within 10 years and may be renewed
by the Company. Rent expense under such arrangements totalled $17,638,000,
$14,514,000 and $14,798,000 in 1994, 1993 and 1992, respectively. Future minimum
rental commitments under non-cancelable leases are as follows:
- --------------------------------------------------------
Dollars in thousands
- --------------------------------------------------------
1995 . . . . . . . . . . . . . . . . . . . $ 16,044
1996 . . . . . . . . . . . . . . . . . . . 13,390
1997 . . . . . . . . . . . . . . . . . . . 11,905
1998 . . . . . . . . . . . . . . . . . . . 10,242
1999 . . . . . . . . . . . . . . . . . . . 10,025
2000 and thereafter. . . . . . . . . . . . 46,822
--------
$108,428
- --------------------------------------------------------
CONTINGENCIES The Company is a defendant in various lawsuits and
environmental proceedings wherein substantial amounts are claimed.
Fumed silica supplied by Cabot was used by others in the manufacture of
silicone breast implant envelopes. There are currently pending more than 10,000
lawsuits in state and federal courts alleging injuries arising from the use of
silicone breast implants. The federal cases have been consolidated in the
Multi-District Litigation pending in the United States District Court for the
Northern District of Alabama. Generally, the various state cases have been
similarly consolidated in each jurisdiction. In addition, arrangements have been
made for consolidated discovery in all actions.
A so-called "global settlement" between certain classes of plaintiffs
who have not "opted out" and certain defendants (not including the Company) has
been approved by the United States District Court for the Northern District of
Alabama. Plaintiffs who have opted out of the settlement are now free to proceed
with their own claims.
The Company has been named as a defendant in fewer than 100 breast
implant lawsuits. The Company has also been dismissed as a defendant from a
number of those suits, without any settlement payments, and has won summary
judgment (subject to appeal) in others. The Company believes that it has
adequate defenses in each of the lawsuits in which it is a defendant. However,
the scientific, legal and societal issues raised by these cases are complex and
the outcome is uncertain. The Company, therefore, cannot predict with any
assurance the course this litigation will take, the number of cases to which the
Company will be added as a defendant, the amount of damages, if any, that may be
assessed against the Company or the defense costs that will be incurred by the
Company.
The Company has been named as one of many defendants in a lawsuit, now
pending in Federal District Court in Oklahoma, brought by a large group of
plaintiffs alleging personal injury due to exposure to and contact with certain
chemicals and materials allegedly manufactured by the defendants. Plaintiffs
seek actual and punitive damages against all defendants, jointly and severally,
in the aggregate amount of $1.25 billion. The Company is currently investigating
this matter to ascertain what, if any, products it manufactured of any relevance
to this litigation.
As of September 30, 1994, approximately $44,000,000 was accrued for
environmental proceedings, primarily relating to divested businesses. The amount
represents the Company's current best estimate of costs likely to be incurred
based on its analysis of the extent of cleanup required, the methods available,
abilities of other responsible parties to contribute and its interpretation of
applicable laws and regulations at each site. Included in Other Charges are
environmental expenses of $15,000,000, $1,000,000 and $4,400,000 in 1994, 1993
and 1992, respectively.
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 will not, in the aggregate, have a material adverse effect on the
Company's financial position.
M. FINANCIAL INSTRUMENTS &
CONCENTRATIONS OF CREDIT RISK
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS The Company enters into forward foreign currency exchange
contracts to hedge foreign currency transactions on a continuing basis for
periods consistent with its global contractual exposures. The effect of this
practice is to minimize variability in the Company's operating results arising
from foreign exchange rate movements. The Company does not engage in foreign
currency speculation. The Company's foreign exchange contracts do not subject
the Company to risk due to exchange rate movements because gains and losses on
these contracts offset losses and gains on the assets, liabilities, and
transactions being hedged. The Company had $10,453,000 of foreign exchange
contracts outstanding at September 30, 1994. The fair value of these contracts,
which was the replacement value, represented a net unrealized loss of
approximately $171,000 as of September 30, 1994, based on dealer quotes. The
forward exchange contracts generally have maturities which do not exceed six
months. See Note A for information on the Company's accounting policy on
forward exchange contract gains and losses.
37
22
CONCENTRATIONS OF CREDIT RISK Financial instruments which subject the Company
to concentrations of credit risk consist principally of trade receivables.
International tire manufacturers comprise a significant portion of the Company's
carbon black customer base. The Company had trade receivables of approximately
$52,641,000 and $46,233,000 from international tire manufacturers at September
30, 1994 and 1993, respectively. Although the Company's exposure to credit risk
associated with nonpayment by tire manufacturers is affected by conditions or
occurrences within the tire industry, trade receivables from the international
tire manufacturers were current at September 30, 1994, and no manufacturer
exceeded 7% of the Company's receivables at that date.
N. FINANCIAL INFORMATION BY INDUSTRY
SEGMENT & GEOGRAPHIC AREA
- --------------------------------------------------------------------------------
Financial information by industry segment for 1990 through 1994, as set forth on
page 19, is an integral part of these financial statements. Energy segment sales
include sales to a major customer in the amount of $272,245,000,
$265,800,000 and $242,600,000, in 1994, 1993 and 1992, respectively. Transfers
between geographic areas are recorded at cost plus mark-up or at market.
Financial information by geographic area is as follows:
Years ended September 30
- --------------------------------------------------------------------------------
Dollars in millions 1994 1993 1992
- --------------------------------------------------------------------------------
SALES
United States:
Sales, excluding export sales
Specialty Chemicals and
Materials. . . . . . . . . $ 563.2 $ 521.4 $ 487.9
Energy . . . . . . . . . . . . 438.7 422.5 376.0
Export sales . . . . . . . . . . 85.0 73.9 65.5
----------------------------------------
1,086.9 1,017.8 929.4
Europe . . . . . . . . . . . . . . . 503.8 512.3 562.8
Other areas. . . . . . . . . . . . . 177.1 156.9 154.3
----------------------------------------
Total. . . . . . . . . . . . . 1,767.8 1,687.0 1,646.5
Less: Eliminations . . . . . . . . . 88.0 72.7 89.5
----------------------------------------
Net sales. . . . . . . . . . . $1,679.8 $1,614.3 $1,557.0
- --------------------------------------------------------------------------------
OPERATING PROFIT
United States:
Specialty Chemicals and
Materials (a). . . . . . . . . $ 108.5 $ 105.8 $ 99.9
Energy . . . . . . . . . . . . . 18.4 16.7 18.2
Europe (a) . . . . . . . . . . . . . 49.0 (21.4) 46.5
Other areas (a). . . . . . . . . . . 8.4 17.3 8.6
----------------------------------------
Total operating profit . . . . 184.3 118.4 173.2
Interest expense . . . . . . . . . . 41.7 44.0 41.7
Unallocated corporate
expenses, net (b). . . . . . . . . . 23.4 20.7 14.9
Adjustment of reserves related
to divested businesses . . . . . 0.8 (14.2) --
----------------------------------------
Income before
income taxes . . . . . . . $ 118.4 $ 67.9 $ 116.6
- --------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
United States:
Specialty Chemicals and
Materials. . . . . . . . . . . $ 482.7 $ 480.9 $ 464.5
Energy . . . . . . . . . . . . . 127.4 116.1 132.6
Europe . . . . . . . . . . . . . . . 444.3 437.2 533.3
Other areas. . . . . . . . . . . . . 245.2 199.3 193.4
General corporate (c). . . . . . . . 231.0 89.3 79.9
Equity in affiliates -
United States. . . . . . . . . . -- 63.6 59.8
Equity in affiliates -
Europe . . . . . . . . . . . . . 22.3 21.8 16.9
Equity in affiliates -
other areas. . . . . . . . . . . 63.9 81.3 74.1
----------------------------------------
Total. . . . . . . . . . . . . $1,616.8 $1,489.5 $1,554.5
- --------------------------------------------------------------------------------
<FN>
(a) Operating profit in 1993 included losses from restructuring of the
Specialty Chemicals and Materials Group of $2.9 in the United States, $43.8
in Europe and $0.7 in other areas.
(b) Unallocated corporate expenses, net, include corporate management costs
reduced by investment income.
(c) General corporate assets include cash, temporary cash investments,
investments other than equity basis, income taxes receivable, deferred taxes
and headquarters' assets.
38
23
O. UNAUDITED QUARTERLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
Unaudited financial results by quarter for the fiscal years ended September 30,
1994 and 1993 are summarized below and should be read in conjunction with
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
- ----------------------------------------------------------------------------------
Dollars in millions,
except per share amounts Dec March June Sept Year
- ----------------------------------------------------------------------------------
FISCAL 1994
Net sales. . . . . . . . $398.5 $434.9 $428.8 $417.7 $1,679.8
Cost of sales. . . . . . $296.8 $319.3 $312.3 $305.9 $1,234.3
Net income . . . . . . . $ 16.0 $ 22.3 $ 22.0 $ 18.4(a) $ 78.7
Income applicable to
common shares. . . . . $ 15.1 $ 21.4 $ 21.1 $ 17.5 $ 75.1
--------------------------------------------------
Income per common
share (primary) . . . $ 0.39 $ 0.56 $ 0.55 $ 0.45 $ 1.96
- ----------------------------------------------------------------------------------
FISCAL 1993
Net sales. . . . . . . . $396.1 $407.6 $418.8 $391.9 $1,614.3
Cost of sales. . . . . . $300.3 $306.0 $311.6 $293.8 $1,211.7
Income (loss):
Income (loss) before
cumulative effect of
accounting changes . $ 11.9 $ 14.0 $ 18.4 $ (6.9)(b) $ 37.4
Cumulative effect of
accounting changes . $(26.1)(c) -- -- -- $ (26.1)
--------------------------------------------------
Net income (loss). . . . $(14.2) $ 14.0 $ 18.4 $ (6.9) $ 11.3
Income (loss) applicable
to common shares . . . $(15.1) $ 13.1 $ 17.5 $ (7.8) $ 7.7
--------------------------------------------------
Income (loss) per common
share (primary):
Operations . . . . . . $ 0.30 $ 0.35 $ 0.47 $(0.21) $ 0.90
Cumulative effect of
accounting changes . $(0.70) -- -- -- $ (0.70)
--------------------------------------------------
Income (loss) per common
share (primary). . . . $(0.40) $ 0.35 $ 0.47 $(0.21) $ 0.20
- ----------------------------------------------------------------------------------
<FN>
(a) Includes $6.8 after-tax charge for environmental reserves and $6.3
after-tax gain on resolution of matters from divested energy businesses.
(b) Includes $31.1 after-tax restructuring charge and $8.7 after-tax gain on
resolution of matters from divested energy businesses.
(c) During the fourth quarter of 1993, the Company adopted two new accounting
standards related to postretirement benefits and income taxes. Both of these
standards were adopted effective October 1, 1992, and as a result, the first
quarter was restated.
39
24
MANAGEMENT RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements were prepared by Cabot Corporation in
conformity with generally accepted accounting principles. The Company's
management is responsible for the integrity of these statements and of the data,
estimates and judgments that underlie them.
Cabot Corporation maintains a system of internal accounting
controls designed to provide reasonable assurance that the Company's assets
are safeguarded from loss or unauthorized use, that transactions are
properly authorized and recorded, and that financial records are reliable
and adequate for public reporting. The standard of reasonable
assurance is based on management's judgment that the cost of such controls
should not exceed their associated benefits. The system is monitored and
evaluated on an ongoing basis by management in conjunction with the Company's
internal audit staff, independent accountants, and the Audit Committee of the
Board of Directors.
Coopers & Lybrand L. L. P., independent accountants, were engaged by
the Company to audit these financial statements. Their audit was
conducted in accordance with generally accepted auditing standards and
included a study and evaluation of the Company's system of internal
accounting controls, selected tests of that system, and related audit
procedures as they consider necessary to render their opinion.
The Audit Committee of the Board of Directors provides general
oversight responsibility for the financial statements. Composed
entirely of Directors who are not employees of the Company, the Committee
meets periodically with Company management, internal auditors and the
independent accountants to review the quality of the financial reporting and
internal controls as well as the results of the auditing efforts. The
internal auditors and independent accountants have full and direct access to
the Audit Committee, with and without management present.
/s/ SAMUEL W. BODMAN
Samuel W. Bodman
Chief Executive Officer
/s/ JOHN G.L. CABOT
John G.L. Cabot
Chief Financial Officer
/s/ WILLIAM R. THOMPSON
William R. Thompson
Chief Accounting Officer
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE DIRECTORS AND STOCKHOLDERS OF CABOT CORPORATION We have audited the
accompanying consolidated balance sheets of Cabot Corporation as of
September 30, 1994 and 1993 and the related consolidated statements of income
and cash flows for each of the three fiscal years in the period ended
September 30, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cabot
Corporation as of September 30, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three fiscal years in the
period ended September 30, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note D to the Consolidated Financial Statements, in
fiscal 1994 the Company changed its method of accounting for certain debt and
equity securities. As discussed in Notes I and K to the Consolidated Financial
Statements, the Company changed its methods of accounting for postretirement
benefits other than pensions and for income taxes, respectively, in fiscal 1993.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
November 1, 1994