1
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 1996, Cabot achieved strong operating results, though operating profit fell
marginally short of 1995 operating profit. Cabot reported net income of $194.1
million ($2.42 per fully diluted common share) for 1996, compared to $171.9
million ($2.02 per fully diluted common share) for 1995. Net income for both
years included several special items. Net income in 1996 included gains on the
sale of the Company's TUCO subsidiary and a portion of the Company's investment
in K N Energy, Inc.; two nonrecurring gains in the Company's LNG business; and
the recognition of tax credits related to prior years. Net income in 1995
included a gain from the ownership restructuring of the Company's Cabot Safety
Corporation subsidiary and a charge for remediation of environmental sites
related to divested businesses. Excluding these special items from both years,
fully diluted earnings per share were $1.78 and $1.94 for 1996 and 1995,
respectively.
Increased spending on research and development and marketing costs
associated with new product and new business initiatives primarily accounted for
the year-to-year earnings decrease. The Company's strategy for long-term
earnings growth involves the development of new, differentiated products and
entirely new businesses. During 1996, the Company spent significantly greater
amounts in pursuit of several new product and new business initiatives than it
had spent in 1995. Most notably, the Company incurred expenses of $12.6 million
in connection with the construction of a semi-works plant in Malaysia to develop
a new proprietary dispersion technology for the Carbon Black Division's tire
business.
The following analysis of operating results and financial condition should
be read in conjunction with the Company's Consolidated Financial Statements and
accompanying Notes.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
REVENUES
Net sales and other operating revenues increased 1% in 1996 over 1995, compared
with a gain of 9% in 1995 over 1994. In the Specialty Chemicals and Materials
Group, the absence in 1996 of Cabot Safety Corporation revenues due to a 1995
ownership restructuring of that subsidiary, and 2% lower volumes during the
year, were partially offset by higher pricing and the effect of consolidating
the operating results of two carbon black businesses located in the Czech
Republic and India, previously accounted for as affiliates. Energy Group sales
increased in 1996 by $79.4 million due to better pricing and higher liquefied
natural gas (LNG) volumes.
The 9% increase in the Company's net sales and other operating revenues in
1995 versus 1994 came from the Specialty Chemicals and Materials Group. That
Group's sales benefited from strong global economies and strength in the
automotive and tire markets. The most significant improvement over 1994 occurred
in Europe. The chemical business as a whole experienced improved volumes and
pricing from 1994 levels. In the Energy Group, the Company's LNG business
experienced sales declines as a result of a low level of supplies of LNG due to
the refurbishment of the liquefaction facilities of the Company's Algerian
supplier.
REVENUES
[CHART: SPECIALTY CHEMICALS & MATERIALS VS. ENERGY ($ millions)]
92 93 94 95 96
- --------------------------------------------------------------------------------
Specialty Chemicals & Materials $1,181 $1,192 $1,241 $1,488 $1,434
- --------------------------------------------------------------------------------
Energy $ 376 $ 423 $ 439 $ 343 $ 422
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$1,500
- --------------------------------------------------------------------------------
$1,000
- --------------------------------------------------------------------------------
$500
- --------------------------------------------------------------------------------
92 93 94 95 96
Gross margins as a percentage of net sales were 29% in 1996, compared with
31% in 1995, and 27% in 1994. More than half of the decrease in the gross margin
percentage was caused by the effect of higher LNG sales during 1996. The
Company's LNG gross margins are substantially lower than its specialty chemicals
margins. Also, the absence of Cabot Safety Corporation's operating results
during 1996 contributed to the decrease in the gross margin percentage from 1995
to 1996. Cabot Safety Corporation's gross margin was 44% of net sales in 1995.
Cabot Plastics experienced lower gross margins during 1996 due to both lower
year-to-year prices and higher raw material costs. Gross margins of the carbon
black and tantalum operations were roughly flat with 1995. The Company's fumed
silica business experienced an increase in gross margin during 1996, primarily
due to higher sales of differentiated products compared to 1995. The increase in
gross margin as a percentage of net sales in 1995 from 1994 was partly a result
of higher capacity utilization and better pricing in many of the Company's
specialty chemicals and materials businesses, partially offset by higher raw
material costs.
Selling, research, technical and administrative expenses decreased 3%, or
$7.4 million, in 1996. Excluding Cabot Safety Corporation from the 1995 figures,
1996 selling, research, technical and administrative spending represented a 16%,
or $39.3 million, increase from 1995. The
17
2
increase was largely due to the Company's continued focus on developing new
products. As part of its long-term strategy for earnings growth, the Company has
invested an increasing amount of its resources over the past few years in
research and marketing for the development of high value, differentiated new
products and whole new businesses. During 1996, the Company continued to see
evidence that several new product and new business initiatives will develop over
the next several years into commercial enterprises which, as a group, should
contribute significantly to the Company's earnings over time* (see page 24).
Also, 1996 operating results included the selling, research, technical and
administrative expenses of Cabot's Czech and Indian carbon black affiliates,
which were consolidated at the beginning of the fiscal year.
Selling, research, technical and administrative expenses increased 9%, or
$23.1 million, in 1995 from 1994 levels. This increase also was a result of
long-term strategic investments dedicated to developing new, higher value
products and processes for the Company's customers.
OPERATING PROFIT
Operating profit was $283.5 million in 1996, $299.5 million in 1995, and $184.3
million in 1994. Operating margins as a percentage of sales were 15% in 1996,
16% in 1995, and 11% in 1994.
Although operating profit decreased $16.0 million in 1996 from the 1995
amount, Cabot Safety Corporation had contributed $16.7 million to operating
profit in 1995. Excluding Cabot Safety from the 1995 results, operating profit
was flat in 1996. The effects of higher specialty chemical selling prices and
consolidating the Czech and Indian carbon black businesses during 1996 were
offset by increased spending on development activities as discussed previously,
higher raw material costs, and slightly lower volumes. In the Energy Group,
operating profit increased $10.3 million as a result of two special items
totalling $5.8 million, higher prices and greater LNG volumes.
OPERATING MARGINS
[CHART: SPECIALTY CHEMICALS AND MATERIALS]
92 93* 94 95 96
- --------------------------------------------------------------------------------
Operating Margins 13.1% 8.5% 13.4% 19.3% 18.2%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
20%
- --------------------------------------------------------------------------------
15%
- --------------------------------------------------------------------------------
10%
- --------------------------------------------------------------------------------
92 93 94 95 96
* Includes $47.4 million restructuring charge.
Operating profit increased 63% in 1995 over 1994 as a result of significant
improvement in the Specialty Chemicals and Materials Group, slightly dampened by
declines in the Energy Group. The most significant increases in operating profit
were seen in the Company's European specialty chemicals businesses, as the full
effect of economic recovery in that region was realized. In addition, better
pricing conditions, improved product mix and higher capacity utilization
significantly improved margins in all specialty chemicals businesses. In the
Energy Group, operating profits declined primarily due to reduced supplies of
LNG in the Company's LNG business.
Included in 1994 operating profit was a $4.0 million reversal of the 1993
Specialty Chemicals and Materials Group restructuring charge based on lower
actual costs incurred during the closing of a carbon black plant in Europe. 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 that were expected to continue.
OTHER EXPENSES
Interest expense was $41.7 million, $35.6 million and $41.7 million for 1996,
1995 and 1994, respectively. The 1996 increase was due to higher short-term debt
resulting from the Company's stock repurchase program, increased capital
spending and the consolidation of the Company's Czech and Indian carbon black
businesses. The decrease in 1995 was primarily due to lower average total debt
and the results of refinancing fixed-rate, high-coupon debt, with short-term
floating-rate debt at lower interest rates during the year.
Unallocated corporate expenses were $29.2 million in 1996 as compared with
$27.7 million in 1995 and $23.4 million in 1994. The 1996 increase was largely
due to lower interest and dividend income in 1996 versus 1995. The 1995 increase
resulted from higher incentive compensation and environmental expenses partially
offset by higher interest and dividend income.
"Adjustments of reserves related to divested businesses" includes charges
related to environmental matters of $12.5 million in 1995 and $11.0 million in
1994. These adjustments were based on the Company's estimates of additional
costs likely to be incurred at various environmental sites. In 1994, the Company
also reversed $10.2 million of energy reserves based on the settlement of a
significant claim during the year.
PROVISION FOR INCOME TAXES
The effective tax rate on income from operations was 35% in 1996, 39% in 1995,
and 38% in 1994. The decrease in 1996 reflects research and experimentation tax
credits relating to prior years which the Company now expects to recover. The
effective tax rate would have been 37% without the impact of those credits. The
tax rate increase in 1995 was the result of a one-time taxable gain from the
ownership restructuring of Cabot Safety Corporation. A more detailed analysis of
income taxes is presented in Note K to the Consolidated Financial Statements.
18
3
SELECTED FINANCIAL DATA BY INDUSTRY SEGMENT
Years ended September 30
-------- -------- -------- -------- --------
Dollars in millions 1996 1995 1994 1993 1992
- --------------------------------------------------------- -------- -------- -------- --------
NET SALES AND OTHER OPERATING REVENUES
Specialty Chemicals and Materials ........... $1,434.3 $1,487.8 $1,241.1 $1,191.8 $1,181.0
Energy ...................................... 422.0 342.6 438.7 422.5 376.0
-------- -------- -------- -------- --------
Net sales and other operating revenues ... $1,856.3 $1,830.4 $1,679.8 $1,614.3 $1,557.0
======== ======== ======== ======== ========
OPERATING PROFIT
Specialty Chemicals and Materials(a) ....... $ 260.5 $ 286.8 $ 165.9 $ 101.7 $ 155.0
Energy ...................................... 23.0 12.7 18.4 16.7 18.2
-------- -------- -------- -------- --------
Total operating profit ................... 283.5 299.5 184.3 118.4 173.2
Interest Expense ............................ 41.7 35.6 41.7 44.0 41.7
Unallocated corporate expenses, net(b) ...... 29.2 27.7 23.4 20.7 14.9
Gain on sales of businesses ................. (38.9) (32.6) -- -- --
Gain on sale of equity securities ........... (28.3) -- -- -- --
Adjustment of reserves related to
divested businesses ...................... -- 12.5 0.8 (14.2) --
-------- -------- -------- -------- --------
Income from continuing
operations before income taxes ........... $ 279.8 $ 256.3 $ 118.4 $ 67.9 $ 116.6
======== ======== ======== ======== ========
DEPRECIATION AND AMORTIZATION
Specialty Chemicals and Materials ........... $ 93.8 $ 91.2 $ 83.3 $ 81.5 $ 80.5
Energy ...................................... 2.9 2.8 2.8 2.8 2.7
General corporate ........................... 0.3 0.2 0.2 0.2 0.9
-------- -------- -------- -------- --------
Total .................................... $ 97.0 $ 94.2 $ 86.3 $ 84.5 $ 84.1
======== ======== ======== ======== ========
FIXED ASSET ADDITIONS
Specialty Chemicals and Materials ........... $ 207.7 $ 130.4 $ 70.7 $ 63.9 $ 76.5
Energy ...................................... 0.5 0.8 2.9 0.7 1.3
General corporate ........................... 0.9 -- -- 0.4 0.3
-------- -------- -------- -------- --------
Total .................................... $ 209.1 $ 131.2 $ 73.6 $ 65.0 $ 78.1
======== ======== ======== ======== ========
IDENTIFIABLE ASSETS
Specialty Chemicals and Materials ........... $1,427.7 $1,167.9 $1,172.2 $1,117.4 $1,191.2
Energy ...................................... 79.7 133.8 127.4 116.1 132.6
General corporate(c) ........................ 270.8 253.7 231.0 89.3 79.9
Equity in affiliates -- Specialty
Chemicals and Materials .................. 79.4 98.9 86.2 103.1 91.0
Equity in affiliates -- Energy .............. -- -- -- 63.6 59.8
-------- -------- -------- -------- --------
Total .................................... $1,857.6 $1,654.3 $1,616.8 $1,489.5 $1,554.5
======== ======== ======== ======== ========
<FN>
(a) Includes a $47.4 restructuring charge in 1993.
(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.
19
4
NET INCOME
Reported income in 1996 was $194.1 million ($2.42 per fully diluted common
share) compared with $171.9 million ($2.02 per fully diluted common share) in
1995, and $78.7 million ($0.92 per fully diluted common share) in 1994. For
1996, net income included several special items. These items were the previously
mentioned $5.3 million ($0.06 per fully diluted common share) research and
experimentation tax credits, a $28.3 million ($0.22 per fully diluted common
share) gain from the sale of 1.85 million shares of the Company's investment in
K N Energy, Inc., a $38.9 million ($0.31 per fully diluted common share) gain
from the sale of the Company's coal handling and distribution business, TUCO
INC., and one time adjustments totaling $5.8 million ($0.05 per fully diluted
common share) in the LNG business. Net income in 1995 included a gain of $32.6
million ($0.17 per fully diluted common share) associated with the ownership
restructuring of Cabot Safety Corporation, and a $12.5 million ($0.09 per fully
diluted common share) expense due to the additional adjustment in environmental
reserves. Income in 1994 included a $10.2 million ($0.07 per fully diluted
common share) gain due to the reversal of energy reserves and an $11.0 million
($0.08 per fully diluted common share) expense due to an increase in
environmental reserves. Without these adjustments, net income would have been
$142.9 million ($1.78 per fully diluted common share) in 1996, $165.3 million
($1.94 per fully diluted common share) in 1995, and $79.2 million ($0.93 per
fully diluted common share) in 1994.
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 industrial
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 semiconductor, aerospace, defense and medical markets; polishing
slurries used in chemical mechanical planarization of integrated circuit
devices; and colorants for the ink jet printing industry. In July 1995, the
Company restructured the ownership of its safety business into a new corporation
owned by the Company, Vestar Equity Partners and Cabot Safety management.
[CHART: SPECIALTY CHEMICALS AND MATERIALS REVENUES]
BY GEOGRAPHIC REGION (percent)
1995
- --------------------------------------------------------------------------------
- -- Pacific Asia 19%
- --------------------------------------------------------------------------------
- -- North America 36%
- --------------------------------------------------------------------------------
- -- Europe 37%
- --------------------------------------------------------------------------------
- -- South America 8%
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
- -- Pacific Asia 21%
- --------------------------------------------------------------------------------
- -- North America 33%
- --------------------------------------------------------------------------------
- -- Europe 38%
- --------------------------------------------------------------------------------
- -- South America 8%
- --------------------------------------------------------------------------------
Revenues include 100% of equity affiliate sales. Region reflects sales
destination point.
[CHART: CARBON BLACK SALES VOLUMES]
BY GEOGRAPHIC REGION (percent)
1995
- --------------------------------------------------------------------------------
- -- Pacific Asia 21%
- --------------------------------------------------------------------------------
- -- North America 34%
- --------------------------------------------------------------------------------
- -- Europe 32%
- --------------------------------------------------------------------------------
- -- South America 13%
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
- -- Pacific Asia 22%
- --------------------------------------------------------------------------------
- -- North America 35%
- --------------------------------------------------------------------------------
- -- Europe 31%
- --------------------------------------------------------------------------------
- -- South America 12%
- --------------------------------------------------------------------------------
Revenues include 100% of equity affiliate volumes. Region reflects sales
destination point.
Excluding Cabot Safety Corporation's sales from the 1995 results to form a
comparative basis, 1996 sales for the Specialty Chemicals and Materials Group
were up 7% from the 1995 level. Sales growth in the carbon black,
microelectronics materials, fumed silica and performance materials businesses
was partially offset by a decline in the sales of the plastics business.
Improved pricing and the effects of consolidating the operating results of the
Czech and Indian carbon black businesses were partially offset by 2% lower
overall volumes. Sales for the Specialty Chemicals and Materials Group were up
20% in 1995 from the 1994 level. All businesses reported double-digit revenue
growth in 1995 versus 1994. Each of the four geographic regions had increased
sales; most significant was a 41% increase in European revenues. Sales growth
for the Group was driven by an overall 10% increase in volumes, most of which
occurred during the first half of the year, and much improved pricing in many
businesses.
For several years, the Company has been striving to develop and
commercialize new high-value, differentiated products in its specialty chemicals
businesses. The Company defines a five-year new product as a product which was
first sold in commercial quantities within the last five years. Five-year new
products accounted for approximately 8% of specialty chemical revenues in 1996,
compared with 6% in 1995, and 5% in 1994. The Company continues to vigorously
pursue a number of new product and new business opportunities.
20
5
In 1996, 67% of Specialty Chemicals and Materials sales made by the Company
and its affiliates were to customers outside North America, compared with 64% in
1995, and 61% in 1994.
Operating profit for the Specialty Chemicals and Materials Group was $260.5
million in 1996, $286.8 million in 1995, and $165.9 million in 1994. Lower
operating profit in 1996 was due to increased spending for research and
development and marketing costs related to new product, new business and market
development initiatives, the absence of Cabot Safety Corporation earnings during
1996 and lower volumes, partially offset by the effect of higher year-to-year
prices. In 1995, stronger pricing, volume growth, higher capacity utilization
and an improved product mix all contributed to the substantial gross margin
improvement. During 1995 the Company also received a significant benefit from
favorable currency translations, especially versus European currencies, due to
the relative weakness of the dollar.
Financial results from affiliates are reported in the income statement as
"Equity in net income of affiliated companies." Equity in net income of
affiliates was $18.5 million in 1996, and was $16.7 million and $5.3 million in
1995 and 1994, respectively. The operating results of the Company's affiliates
in the Czech Republic and India were consolidated at the beginning of 1996, and
therefore were excluded from equity in net income of affiliated companies in
1996. Excluding the results of the Czech and Indian operations from the 1995
equity in net income of affiliates amount, the 1996 equity in net income of
affiliates increased by approximately $6.0 million from the prior year. Improved
earnings in the Company's Mexican carbon black joint venture and the Japanese
tantalum joint venture accounted for most of this increase. The significant
improvement in 1995 from the 1994 level was due to contributions from the carbon
black business in the Czech Republic that began operation in late 1994, improved
earnings in the Company's Mexican carbon black affiliate, and the absence of
losses from the Company's Japanese carbon black affiliate, which was written off
in the third quarter of 1994.
The Company is the world's only global manufacturer of carbon black. In
1996, 65% of carbon black volumes sold by the Company and its affiliates was
sold to customers outside North America, compared with 66% in 1995 and 65% in
1994. Cabot manufactures carbon black on five continents in 26 plants in 19
countries. Many carbon black facilities are wholly owned by the Company, while
others are affiliates managed by the Company or with local partners. The carbon
black business serves 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 volumes. This sector is
dependent on both the replacement tire market and, to a lesser extent, new
automobile tire sales. 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, plastics and other specialty applications that
use very high grade carbon blacks.
The carbon black business's operating profit increased by 4% in 1996 from
1995. The operating profit increase came from the consolidation of the operating
results of the Czech and Indian carbon black businesses during 1996. The
positive earnings effect of higher prices was essentially offset by increased
spending on research and development and marketing costs related to new product,
new business and market development initiatives, the effect of 1% lower overall
volumes, and higher feedstock costs.
Generally, year-to-year price improvements were greater early in 1996
because price increases had gone into effect at different times during 1995. As
1996 progressed, and the anniversary dates of the 1995 price increases occurred,
the year-to-year pricing comparisons became neutral. Pricing pressures occurred
during 1996 in some carbon black markets, most notably in Europe. In the fourth
quarter of 1996, the European carbon black business had an unfavorable price
comparison to the 1995 fourth quarter. Feed stock costs increased during the
latter part of 1996. The Company was not able to pass all of the feedstock cost
increases on to its customers during the fourth quarter. The increased spending
during 1996 in pursuit of new product, new business and market development
initiatives was expected, and progress was made across the various initiatives
in developing the new technologies and markets. A similar level of spending is
anticipated to occur in 1997 on those initiatives and other new ones* (see page
24). These new product and new business initiatives are integral to the
Company's long-term earnings growth strategy. Although the Company is very
encouraged by the progress made during 1996 on those initiatives as a group,
they are not expected to contribute significantly to the Company's 1997
revenues.
The carbon black business's total sales for 1995 increased significantly
compared to 1994. Each of the four geographic regions had revenue increases of
more than 15%. The increase resulted from strength in the North American and
South American tire and automotive industries, a full year's effect of economic
recovery in Europe, and growing economies in the Pacific region. During most of
1995, worldwide carbon black manufacturing capacity was extremely tight. Prices,
most notably in North America, and gross margins increased during the year.
Operating profit reflected the improved prices that more than offset higher raw
material costs.
During 1995, the Company entered into long-term carbon black supply
agreements of more than six years with several of its tire customers in North
America. The contracts were designed to share the Company's investment risks of
capacity expansion with customers, which, in turn, will allow Cabot to provide a
secure carbon black supply to its contract customers, and reduce the volatility
of the Company's carbon black gross margins and earnings. These contracts,
coupled with the Company's long-term strategy of product differentiation, are
aimed at building a less cyclical carbon black business and reducing the
Company's susceptibility
21
6
to economic cycles. As a result of these contracts, the Company has proceeded
with its plans to add manufacturing capacity to its North American tire black
business in order to meet the increasing supply obligations reflected by the
contracts.
The Cab-O-Sil fumed silica business reported a 3% revenue increase in 1996
compared with 1995, and a 19% revenue gain in 1995 compared with 1994. The 1996
revenue increase was primarily due to higher treated grade volumes. Operating
profit increased 9% in 1996 compared with 1995 due to higher gross margins,
partially offset by increased spending supporting a new market segmentation
strategy. Operating profit increased in 1995, reflecting modest volume growth,
improved product mix and favorable gross margins from better pricing and higher
capacity utilization.
During 1995, the Company purchased certain assets of the Rippey Corporation
related to the sale and distribution of high-purity polishing compounds in an
effort to further expand the rapidly developing semiconductor segment of the
fumed silica business. During 1996, the semiconductor segment was organized as a
separate business unit. It is now known as the Microelectronics Materials
Division (MMD). During 1996, this business reported revenues in excess of $20
million. Gross margin derived from MMD's revenues was more than offset by its
spending on research and development and market development initiatives. The
Company expects continued significant revenue growth in this business during
1997* (see page 24).
In the plastics business, revenues and operating profit in 1996 were down
from 1995 by 10% and 42%, respectively. Market demand softness resulted in lower
volumes and caused severe pricing pressure during 1996. Also, raw material
prices were higher in 1996 than in 1995. The lower volumes, lower prices and
higher raw material costs caused the decrease in operating profit in 1996
compared with 1995. The plastics business's revenues and operating profit
increased significantly in 1995 compared to 1994. Market conditions that began
to improve in late 1994 continued improving into 1995, enabling the business to
improve gross margins through higher pricing and an improved product mix.
Overall volumes for the business were down slightly year-over-year, reflecting
some softening in Europe late in 1995.
Revenues of the Cabot Performance Materials (CPM) business in 1996
increased 6% from the prior year, and operating profit decreased 19% from 1995.
Over the first half of 1996, volumes and prices were significantly higher than
in the first six months of 1995. By mid-1996, it became apparent that the U.S.
electronics market's growth rate had slowed. CPM's customers at that time had
excessive inventory levels for the lower market growth rate. During the second
half of the year, CPM's sales volumes decreased very significantly as its
customers worked their inventory levels down. During the fourth quarter, CPM
began taking steps to reduce its cost structure and refocus the business. The
Company expects the business's operating results for the first two quarters of
1997 to compare unfavorably to the very strong first two quarters of 1996* (see
page 24). The Division's 1997 operating results will be driven in large part by
the timing of Cabot's customers working through their inventory surplus and the
timing and extent of an electronics industry recovery as a whole. CPM reported a
15% increase in revenues and an even greater increase in profits in 1995 versus
1994. The improved results reflected strong performance of the tantalum
capacitor business, partially offset by plant operating problems, primarily
yield and throughput issues.
During 1996, the Company launched a new business unit, Cabot Specialty
Fluids (CSF), to develop and market cesium brines to the oil well drilling and
services industry. Construction of a cesium processing plant at a mine owned by
a Cabot subsidiary in Manitoba, Canada, was commenced during the year.
In 1995, the Company restructured the ownership of its safety and specialty
composite materials business into a new corporation owned by the Company, Vestar
Equity Partners and the management of the newly formed Cabot Safety Corporation.
The transaction yielded approximately $128 million in after-tax proceeds to the
Company. Cabot has a 42.5% ownership position in the new corporation. During
1996, Cabot Safety Corporation's name was changed to Aearo Corporation. The
performance of the business prior to the sale of the majority interest was
included as part of the Specialty Chemicals and Materials Group. The Company now
accounts for this affiliate using the equity method. Aearo had no effect on
Cabot's 1996 earnings. During the first three quarters of fiscal 1995, Cabot
Safety Corporation reported a 26% increase in operating profit over the first
three quarters of 1994, due primarily to higher volumes. The Company's safety
business recorded approximately $155 million of sales and $17 million of
operating profit in fiscal 1995 prior to the transaction.
THE ENERGY GROUP
The Energy Group included two operating businesses during 1996: Cabot LNG
Corporation and its affiliates, a liquefied natural gas importing, storing,
transporting and marketing operation; and TUCO INC., a coal fuel services
business.
Effective September 30, 1996, the Company sold TUCO for $77 million ($27
million in cash plus the repayment of $50 million of TUCO debt by the buyer),
plus $8 million of working capital adjustments. During 1996, TUCO earned $13.8
million of operating profit, compared with $10.5 million in 1995.
Until July 1994, the Company owned a 34.4% interest in American Oil and Gas
Corporation (AOG), which was reflected in "equity in net income of affiliated
companies." At that time, AOG was merged into a subsidiary of K N Energy, Inc.
(KNE), and Cabot became a 17% beneficial owner, including warrants, of KNE. The
Company's investment in KNE is accounted for on a cost basis. In July 1996, the
Company sold 1.85 million shares of its investment in KNE, and received cash
proceeds of $57.6 million. The Company currently holds a 9.7% ownership interest
in KNE.
The LNG business reported revenues of $143.8 million in 1996, compared with
$91.4 million in 1995. The revenue increase was due to significantly greater
volumes and higher gas prices compared with 1995. The business received nine LNG
cargoes from its Algerian supplier in
22
7
[BAR CHART: SOURCES AND USES OF CASH]
Fiscal years 1995, 1996 ($ millions)
SOURCES OF CASH 95 96
- --------------------------------------------------------------------------------
- -- Operations $182 $162
- --------------------------------------------------------------------------------
- -- Borrowings, net -- $138
- --------------------------------------------------------------------------------
- -- Sales of Assets $170 $ 60
- --------------------------------------------------------------------------------
- -- Other -- $ 11
- --------------------------------------------------------------------------------
USES OF CASH 95 96
- --------------------------------------------------------------------------------
- -- Capital Expenditures and Investments $145 $269
- --------------------------------------------------------------------------------
- -- Share Repurchase, net $ 57 $ 95
- --------------------------------------------------------------------------------
- -- Debt Repayments, net $114 --
- --------------------------------------------------------------------------------
- -- Dividends $ 26 $ 30
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$450
- --------------------------------------------------------------------------------
$300
- --------------------------------------------------------------------------------
$150
- --------------------------------------------------------------------------------
95 96
1996, and one cargo from a United Arab Emirates source. The business received
three cargoes during 1995. Operating profit increased to $9.1 million during
1996, from $2.1 million during 1995. The 1996 operating profit increase included
$5.8 million of special items. The positive earnings effect of higher volumes
and prices was about offset by higher gas costs. In 1995, the LNG business's
revenue and profit were negatively affected by reduced supplies of LNG caused by
the refurbishment of the liquefaction facilities of the Company's Algerian
supplier. The negative effect of the supply curtailments was reduced by the
purchase of available domestic gas supplies at competitive prices and the effect
of an unseasonably warm winter in the northeastern United States during 1995.
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
CASH FLOW AND LIQUIDITY
Cash generated in 1996 from the Company's operating activities decreased 16.5%
to $151.9 million from $182.0 million in 1995. The decrease primarily resulted
from the timing of tax payments, partially offset by less of an increase in
working capital in 1996 compared with 1995.
Capital spending on property, plant and equipment was $209 million in 1996,
$131 million in 1995, and $74 million in 1994. The increased spending in 1996
included costs associated with capacity expansions at the Company's Indonesian
carbon black businesses, capacity expansions and environmental compliance in the
Company's North American carbon black operations and capital expenditures
associated with the performance materials business and the newly formed
microelectronics materials and specialty fluids businesses.
The Company expects the elevated rate of capital spending to continue
through 1997 as it continues to invest in new business opportunities. These
expenditures include portions of the projects mentioned previously, the
Company's share of the Trinidad LNG project, completion of a cesium processing
plant, additional environmental compliance costs in North America and amounts to
further develop the special blacks business. Over the next several years, as the
remediation of various environmental sites continues, the Company also expects
to spend a significant portion of its $44.5 million reserve for costs associated
with such remediation. These sites are primarily associated with divested
businesses.
The Company acquired an 80% ownership interest in P.T. Continental Carbon
Indonesia, an Indonesian carbon black plant, for approximately $50 million plus
the assumption of $9 million of debt during 1996.
[CHART: TOTAL DEBT TO CAPTIAL]
(percent)
92 93 94 95 96
- --------------------------------------------------------------------------------
Total Debt to Capital 51.5% 50.4% 42.1% 29.1% 39.9%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
60%
- --------------------------------------------------------------------------------
40%
- --------------------------------------------------------------------------------
20%
- --------------------------------------------------------------------------------
92 93 94 95 96
Research and technical service spending was $79.6 million, $59.2 million,
and $48.7 million in 1996, 1995 and 1994, respectively. Spending as a percentage
of Specialty Chemicals and Materials sales exceeded 5% in 1996 and was 4% in
each of the two previous years. The Company has been increasing the amount of
spending to develop new, differentiated products for its specialty chemicals
businesses. The Company anticipates research and development spending to remain
near $80 million in 1997 for these and other initiatives.
Cabot sold 1.85 million shares of K N Energy, Inc. during 1996, and
received cash proceeds of $57.6 million.
Cabot increased its borrowings by $138.2 million and decreased cash by
$32.6 million in 1996.
During 1996, $123.5 million of common stock was purchased and is held as
treasury stock. The Company's common stock repurchase activity is described
below under "Common Stock," and is expected to continue in 1997.
Primarily due to the increased capital spending, share repurchase and
higher spending on research and development and marketing costs for new product,
new business and market development initiatives during 1996, the ratio of total
debt (including short-term debt net of cash) to capital increased to 40% at the
end of 1996 from 29% at the end of 1995. The Company does not anticipate a
substantial increase in the ratio of total debt to capital in 1997.
Management expects cash from operations, proceeds from the TUCO sale, 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.
23
8
COMMON STOCK
In September 1995, the Company announced that it had begun a new share
repurchase program for up to 3 million of its common shares in order to reduce
the total number of shares outstanding. During the first two quarters of 1996,
the Company repurchased approximately 1,870,000 shares in open market
transactions. The Company effected a two-for-one stock split in the form of a
stock dividend during March 1996. During the third quarter, the Company's Board
of Directors revoked the repurchase authorization with respect to shares not
already repurchased under the September 1995 share repurchase authorization, and
approved a share repurchase authorization for up to 4 million shares of the
Company's common stock. During the remainder of 1996, the Company repurchased
approximately 736,000 shares in open market transactions.
During 1996, the Company paid cash dividends of $0.54 per share reflecting
a quarterly dividend of $0.18 per share for the first two quarters of the year,
and $0.09 per share for each of the two quarters following the two-for-one stock
split. The book value per share of Cabot stock increased 14% to $10.41 at
September 30, 1996. In November 1996, the Board of Directors approved a $0.10
per share dividend for the first quarter of fiscal year 1997.
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 $46.4 million.
The gain was recorded as a separate component of stockholders' equity, net of a
deferred tax liability of $17.6 million.
The Company considers the impairment of long-lived assets, in accordance
with the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets", based on the assets' ability to contribute to the Company's
profitability. No earnings charges have resulted from the Company's adoption of
SFAS No. 121.
The Company has not adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which is required to be adopted by fiscal 1997. The Company
intends to continue to record compensation based on the provisions of Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees" as
allowed by SFAS No. 123. Although the Company has not determined the ultimate
impact of adopting SFAS No. 123, it does not believe, based on the number of
stock options previously granted, that the adoption will have a material effect
on the Company's current financial position or results of operations.
* FORWARD LOOKING INFORMATION
- --------------------------------------------------------------------------------
Cabot Corporation believes that its shareholders benefit from the views of the
Company's management about the future of the Company's business. Included herein
are statements relating to management's projections of future profits, the
Company's financial goals, and management's expectations for the Company's
product development program. Actual results may differ materially from the
results anticipated in the statements included herein due to a variety of
factors including market supply and demand conditions, cost of raw materials,
demand for our customers' products and our competitors' reactions to market
conditions. Timely commercialization of products under development by the
Company may be disrupted or delayed by technical difficulties, market
acceptance, competitors' new products, as well as difficulties in moving from
the experimental stage to the production stage. The Company's process
improvement program may not achieve its intended results in the time frame
anticipated in its projections due to technological difficulties, disruption of
operating efficiency and the stress production demands place on implementing the
process improvement program.
24
9
CABOT CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30
---------- ---------- ----------
Dollars in thousands, except per share amounts 1996 1995 1994
- ------------------------------------------------------------------------------------------- ---------- ----------
Revenues:
Net sales and other operating revenues ................................... $1,856,269 $1,830,393 $1,679,819
Interest and dividend income ............................................. 8,933 10,492 6,742
---------- ---------- ----------
Total revenues ...................................................... 1,865,202 1,840,885 1,686,561
========== ========== ==========
Costs and expenses:
Cost of sales ............................................................ 1,309,992 1,258,964 1,234,272
Selling and administrative expenses ...................................... 206,861 234,693 222,069
Research and technical service ........................................... 79,640 59,184 48,701
Interest expense (Note G) ................................................ 41,718 35,639 41,668
Gain on resolution of matters from divested energy businesses (Note B) ... -- -- (10,210)
Gain on sale of equity securities (Note D) ............................... (28,323) -- --
Gain on sales of businesses (Note B) ..................................... (38,941) (32,625) --
Other charges, net ....................................................... 14,421 29,001 31,736
---------- ---------- ----------
Total costs and expenses ............................................ 1,585,368 1,584,856 1,568,236
========== ========== ==========
Income before income taxes ................................................... 279,834 256,029 118,325
Provision for income taxes (Note K) .......................................... (98,216) (101,080) (44,963)
Equity in net income of affiliated companies (Note D) ........................ 18,519 16,670 5,329
Minority interest ............................................................ (6,080) 313 --
---------- ---------- ----------
Net income .......................................................... 194,057 171,932 78,691
========== ========== ==========
Dividends on preferred stock, net of tax
benefit of $2,111, $1,911 and $1,929 ..................................... (3,301) (3,551) (3,583)
---------- ---------- ----------
Income applicable to common shares .................................. $ 190,756 $ 168,381 $ 75,108
========== ========== ==========
Weighted average common shares outstanding, in thousands (Notes A and I):
Primary .................................................................. 73,237 77,452 76,498
Fully diluted ............................................................ 79,345 83,880 82,724
Income per common share (Notes A and I):
Primary .................................................................. $ 2.60 $ 2.17 $ 0.98
========== ========== ==========
Fully diluted ............................................................ $ 2.42 $ 2.02 $ 0.92
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
25
10
CABOT CORPORATION CONSOLIDATED BALANCE SHEETS
September 30
----------------------------
Dollars in thousands 1996 1995
- ------------------------------------------------------------------------ -----------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 58,148 $ 90,792
Accounts and notes receivable (net of reserve for
doubtful accounts of $5,267 and $5,207) ............ 363,763 292,777
Inventories (Note C) ................................. 260,430 253,110
Prepaid expenses ..................................... 17,408 13,499
Deferred income taxes (Note K) ....................... 10,034 27,681
---------- ----------
Total current assets ............................... 709,783 677,859
---------- ----------
Investments:
Equity (Notes B and D) ............................... 79,372 98,866
Other (Notes D and L) ................................ 95,680 119,866
---------- ----------
Total investments .................................. 175,052 218,732
---------- ----------
Property, plant and equipment (Note E) ................... 1,712,045 1,447,653
Accumulated depreciation and amortization ................ (809,053) (741,132)
---------- ----------
Net property, plant and equipment .................. 902,992 706,521
---------- ----------
Other assets:
Intangible assets (net of accumulated amortization
of $6,157 and $3,396) (Note B) ..................... 42,735 13,922
Deferred income taxes (Note K) ....................... 2,402 6,949
Other assets ......................................... 24,617 30,350
---------- ----------
Total other assets ................................. 69,754 51,221
---------- ----------
Total assets ............................................. $1,857,581 $1,654,333
========== ==========
The accompanying notes are an integral part of these financial statements.
26
11
CABOT CORPORATION CONSOLIDATED BALANCE SHEETS
September 30
------------------------------
Dollars in thousands 1996 1995
- ------------------------------------------------------------------------------------------------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks ............................................................ $ 233,779 $ 52,437
Current portion of long-term debt (Note G) ........................................ 16,175 15,709
Accounts payable and accrued liabilities (Note F) ................................. 250,749 260,879
U.S. and foreign income taxes ..................................................... 26,083 69,286
Deferred income taxes (Note K) .................................................... 918 4,068
---------- ----------
Total current liabilities ....................................................... 527,704 402,379
---------- ----------
Long-term debt (Note G) ............................................................... 321,497 306,443
Deferred income taxes (Note K) ........................................................ 88,320 100,353
Other liabilities (Notes J and L) ..................................................... 147,991 152,747
Commitments and contingencies (Note L)
Minority interest ..................................................................... 27,138 7,411
Stockholders' equity (Notes D, G, 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 $71,193 and $72,479) ... 75,336 75,336
Less cost of shares of preferred treasury stock ....................................... (6,565) (4,836)
Common stock:
Authorized: 200,000,000 and 80,000,000 shares of $1 par value
Issued: 135,549,936 and 67,774,968 shares ......................................... 135,550 67,775
Additional paid-in capital ............................................................ 23,618 17,799
Retained earnings ..................................................................... 1,176,708 1,062,482
Less cost of common treasury stock
(including unearned compensation amounts of $16,611 and $10,834) .................. (650,981) (539,585)
Deferred employee benefits ............................................................ (64,283) (65,907)
Unrealized gain on marketable securities .............................................. 29,874 32,023
Foreign currency translation adjustments .............................................. 25,674 39,913
---------- ----------
Total stockholders' equity ........................................................ 744,931 685,000
---------- ----------
Total liabilities and stockholders' equity ............................................ $1,857,581 $1,654,333
========== ==========
The accompanying notes are an integral part of these financial statements.
27
12
CABOT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30
-----------------------------------------
Dollars in thousands 1996 1995 1994
- ----------------------------------------------------------------------------------------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................ $ 194,057 $ 171,932 $ 78,691
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization ....................................... 97,044 94,184 87,357
Deferred tax expense (benefit) ...................................... 3,785 (24,163) 27,084
Gain on sales of equity securities .................................. (28,323) -- --
Gain on sales of businesses ......................................... (38,941) (32,625) --
Equity in income of affiliated companies, net
of dividends received ........................................... (5,619) (6,292) 309
Other, net .......................................................... 8,950 6,694 5,750
Changes in assets and liabilities, excluding assets and liabilities of
businesses sold:
Decrease (increase) in accounts receivable ...................... 88 (37,354) (3,042)
Increase in inventories ......................................... (38,995) (57,987) (13,688)
Decrease in accounts payable and accruals ....................... (3,415) (6,905) (27,862)
Other, net ...................................................... (36,693) 74,477 (10,832)
--------- --------- --------
Cash provided by operating activities ................................. 151,938 181,961 143,767
========= ========= ========
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment ................................ (209,061) (131,214) (73,555)
Proceeds on sales of businesses ........................................... -- 169,178 --
Sales of property, plant and equipment, and investments ................... 60,449 373 545
Investments and acquisitions, excluding cash acquired ..................... (59,542) (13,874) (371)
Cash from consolidation of equity affiliates and other .................... 11,229 -- --
--------- --------- --------
Cash provided (used) by investing activities .......................... (196,925) 24,463 (73,381)
========= ========= ========
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt .............................................. 9,786 17,385 1,189
Repayments of long-term debt .............................................. (40,153) (157,609) (41,584)
Net increase in short-term debt ........................................... 168,587 25,980 24,979
Purchases of treasury stock ............................................... (123,544) (76,251) (1,000)
Sales and issuances of treasury stock ..................................... 28,580 19,658 8,703
Cash dividends paid to stockholders ....................................... (30,478) (26,392) (23,552)
--------- --------- --------
Cash provided (used) by financing activities .......................... 12,778 (197,229) (31,265)
========= ========= ========
Effect of exchange rate changes on cash ................................... (435) 680 1,529
--------- --------- --------
(Decrease) increase in cash and cash equivalents .......................... (32,644) 9,875 40,650
Cash and cash equivalents at beginning of year ............................ 90,792 80,917 40,267
--------- --------- --------
Cash and cash equivalents at end of year .............................. $ 58,148 $ 90,792 $ 80,917
========= ========= ========
The accompanying notes are an integral part of these financial statements.
28
13
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 rates 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
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 (Note K).
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.
The Company considers the impairment of long-lived assets, in accordance with
the provisions of SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets," based on an assessment of the asset's ability to contribute to the
profitability of the Company. Included in other charges is amortization expense
of $4,765,000, $6,638,000 and $7,661,000, in 1996, 1995 and 1994, respectively.
FINANCIAL INSTRUMENTS
Forward foreign currency exchange contracts and currency options are used to
manage foreign currency exposures. 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, and currency options, which are designated
to hedge future cash flows. Included in other charges are foreign exchange gains
(losses) of $(2,578,000), $1,354,000 and $(1,713,000) in 1996, 1995 and 1994,
respectively.
Financial instruments, primarily interest rate swaps, are used to manage
interest rate risks. The interest differentials from these swaps are recorded as
interest expense.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts in 1995 and 1994 have been reclassified to conform to the 1996
presentation.
29
14
B. ACQUISITIONS, DIVESTITURES & RESTRUCTURING
- --------------------------------------------------------------------------------
SPECIALTY CHEMICALS AND MATERIALS
On February 16, 1996, the Company acquired an 80% controlling interest in an
Indonesian carbon black company which is accounted for as a purchase. The
acquisition cost was approximately $50 million plus the assumption of $9 million
of debt and is subject to final adjustments. Although the purchase accounting
for this acquisition is not final, assets and liabilities have been recorded at
estimated fair values. The excess of the purchase price over the estimated fair
values is being amortized over 30 years. Results of operations, subsequent to
the acquisition date, have been included in the Consolidated Statement of Income
as of September 30, 1996.
During 1996, 1995 and 1994, the Company paid $4,270,000, $6,079,000 and
$17,890,000, respectively, of costs accrued for in 1993 for employee separation
and a facility closing. During 1994, the Company revised its restructuring
reserve based on the actual costs incurred during the closing of a carbon black
plant in Europe. A $4,000,000 benefit from the revision of the reserve was
recorded in other charges in 1994. The Company will continue to evaluate its
remaining reserve of $9,125,000 as new data become available, primarily relating
to the final disposition of the closed plant's assets and environmental cleanup
costs.
On July 11, 1995, the Company sold substantially all of the assets of its
safety products and specialty composites business to Cabot Safety Holdings
Corporation (now known as Aearo Corporation) and its subsidiaries. The
transaction was accounted for as a sale, with an aggregate selling price
consisting of $169,178,000 in cash, 42,500 common shares of Aearo Corporation,
representing 42.5% of Aearo's outstanding common stock, and $22,500,000 of
Aearo's non-voting 12.5% preferred stock. In addition, Aearo Corporation and
its subsidiaries assumed approximately $22,176,000 of the third party current
liabilities relating to the safety business and approximately $4,822,000 in
debt. The Company recorded an after-tax gain on the sale of approximately
$14,500,000. The Company's book value in Aearo's common and preferred stock
after the transaction was zero dollars. The Company accounts for its investment
in Aearo using the equity method.
During 1994, the Company recorded a $6,150,000 charge to write off its
investment in its Japanese carbon black equity affiliate due to significant
ongoing losses which were expected to continue.
ENERGY
Effective September 30, 1996, the Company sold its TUCO subsidiary for
$77,000,000 ($27,000,000 in cash plus the repayment of $50,000,000 of TUCO debt
by the buyer), plus working capital adjustments of $8,000,000. The Company
recorded a gain related to the sale of $38,941,000. The cash receipt and debt
repayment occurred on October 4, 1996.
During 1994, the Company recognized gains of $10,210,000, respectively,
on the favorable resolution of certain matters related to divested energy
businesses, which included settlement of the Company's last significant
take-or-pay case in 1994.
C. INVENTORIES
- --------------------------------------------------------------------------------
Inventories were as follows:
September 30
--------------------------
Dollars in thousands 1996 1995
- ------------------------------------------------------ ---------
Raw materials ........................... $ 71,061 $ 64,830
Work in process ......................... 72,914 47,058
Finished goods .......................... 72,163 97,597
Other ................................... 44,292 43,625
-------- --------
Total ............................... $260,430 $253,110
======== ========
Inventories valued under the LIFO method comprised approximately 33 percent
and 37 percent of 1996 and 1995 total inventory, respectively. The estimated
current cost of these inventories exceeded their stated valuation determined on
the LIFO basis by $29,754,000 and $27,393,000 at September 30, 1996 and 1995,
respectively.
D. INVESTMENTS
- --------------------------------------------------------------------------------
Investments in net assets of affiliated companies accounted for under the equity
method amounted to $79,372,000 and $98,866,000 at September 30, 1996 and 1995,
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 1996 1995
- --------------------------------------------------------------- --------
CONDENSED INCOME STATEMENT INFORMATION
Net sales .......................................... $586,951 $435,806
Gross margin ....................................... 221,060 120,130
Net income ......................................... 39,685 32,462
CONDENSED BALANCE SHEET INFORMATION
Current assets ..................................... $282,945 $257,941
Non-current assets ................................. 432,738 454,877
Current liabilities ................................ 255,344 269,852
Non-current liabilities ............................ 315,564 247,150
Net worth .......................................... 144,775 195,816
-------- --------
On July 31, 1996, the Company sold 1.85 million shares of its investment in K N
Energy, Inc. The Company received cash proceeds of $57,646,000 and recorded a
gain of $28,323,000 related to the sale.
On October 1, 1995, the Company changed the method of accounting for its
Czech and Indian carbon black affiliates from the equity method to the
consolidated method upon achieving effective control.
30
15
After July 11, 1995, the condensed income statement and balance sheet
information of Aearo Corporation (Note B) are included in the amounts above.
In accordance with SFAS No. 115, equity securities with readily
determinable fair values have been reflected on the balance sheet at their fair
values. Unrealized gains of $29,874,000 and $32,023,000, which are net of
deferred tax liabilities of $19,100,000 and $18,807,000, have been reflected as
a separate component of stockholders' equity (Note I) at September 30, 1996 and
1995, respectively.
E. PROPERTY, PLANT & EQUIPMENT
- --------------------------------------------------------------------------------
Property, plant and equipment is summarized as follows:
September 30
----------------------------
Dollars in thousands 1996 1995
- -------------------------------------------------------------- ----------
Land and improvements ........................... $ 52,442 $ 49,435
Buildings ....................................... 267,579 242,374
Machinery and equipment ......................... 1,105,326 990,521
Other ........................................... 47,089 70,019
Construction in progress ........................ 239,609 95,304
---------- ----------
Total property, plant and equipment ............. $1,712,045 $1,447,653
Less: accumulated depreciation .................. 809,053 741,132
---------- ----------
Net property, plant and equipment ............... $ 902,992 $ 706,521
========== ==========
F. ACCOUNTS PAYABLE & ACCRUED LIABILITIES
- --------------------------------------------------------------------------------
Accounts payable and accrued liabilities consisted of the following:
September 30
------------------------
Dollars in thousands 1996 1995
- --------------------------------------------------------------- --------
Accounts payable ................................ $121,274 $107,003
Accrued employee compensation ................... 23,263 25,984
Other accrued liabilities ....................... 106,212 127,892
-------- --------
Total ....................................... $250,749 $260,879
======== ========
G. DEBT
- --------------------------------------------------------------------------------
Long-term debt consisted of the following:
September 30
------------------------
Dollars in thousands 1996 1995
- --------------------------------------------------------------- --------
Notes due December 1997, 10.25% .................... $100,000 $100,000
Notes due 2002-2022, 8.07% ......................... 105,000 105,000
Guarantee of ESOP notes
due 2013, 8.29% ................................ 64,283 65,907
Term loan due 2000, 8.7% ........................... 13,127 16,385
Term loan due 2001, 8.4% ........................... 12,540 --
Foreign term loan, due 2001, 5.4% .................. 15,768 --
Overseas Private Investment Corporation
term loan due 2002, floating rate, 8.0%
and 6.5% at September 30, 1996 and
1995, respectively ............................. 16,182 13,100
Industrial Revenue Bonds due
1997-2014, 9.35%-14.00% ........................ 4,000 4,000
Other, including foreign term loans ................ 6,772 17,760
-------- --------
$337,672 $322,152
Less: current portion of
long-term debt ................................. (16,175) (15,709)
-------- --------
Total ........................................ $321,497 306,443
======== ========
In June 1992, the Company filed a $300,000,000 debt shelf registration
statement with the Securities and Exchange Commission. Subsequently,
$105,000,000 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 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 $64,283,000 as a liability on the Company's
consolidated balance sheet at September 30, 1996. An equal amount, representing
deferred employee benefits, has been recorded as a reduction of stockholders'
equity (Note I).
The Company may borrow up to $250,000,000 at floating rates under the terms
of a revolving credit and term loan facility. The agreement contains provisions
regarding minimum net worth requirements and certain indebtedness limitations
which would 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, 2000. No amounts were outstanding under this
credit agreement at September 30, 1996 or 1995.
31
16
The aggregate principal amounts of long-term debt due in each of the five fiscal
years 1997 through 2001 are $16,175,000, $112,338,000, $12,727,000, $10,704,000
and $7,119,000, respectively.
Based primarily on dealer quotes, the fair value of long-term borrowings
was approximately $355,000,000 and $353,000,000 at September 30, 1996 and 1995,
respectively.
The weighted average interest rate on short-term borrowing was
approximately 8% and 7% as of September 30, 1996 and 1995, respectively.
Cash paid for interest during 1996, 1995 and 1994 totalled $39,103,000,
$37,912,000 and $41,663,000, respectively.
H. PENSION PLANS & POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------
PENSION PLANS
Net periodic pension cost was comprised of the following elements:
Years ended September 30
--------------------------------------
Dollars in thousands 1996 1995 1994
- ----------------------------------------------------------------------------- -------- --------
Current year service cost ........................................ $ 7,841 $ 7,629 $ 8,090
Interest accrued on pension obligations .......................... 13,431 12,493 11,675
Actual return on plan assets ..................................... (18,821) (25,320) (11,431)
Net amortization ................................................. 2,903 10,606 (2,062)
-------- -------- --------
Net periodic pension cost ................................ $ 5,354 $ 5,408 $ 6,272
======== ======== ========
The following table sets forth the funded status of pension plans:
September 30
-----------------------
Dollars in thousands 1996 1995
- -------------------------------------------------------------------------------------------- --------
Actuarial present value of projected benefit obligations ......................... $188,092 $182,771
Plan assets at fair value (primarily fixed-income and equity securities) ......... 202,526 187,339
-------- --------
Excess of plan assets over projected benefit obligations ......................... 14,434 4,568
Unrecognized net gain ............................................................ (33,207) (19,012)
Unrecognized prior service cost .................................................. 7,656 3,512
Unrecognized net asset being amortized over 16 years ............................. (5,612) (6,013)
-------- --------
Net deferred pension credit (included in other liabilities) .............. $(16,729) $(16,945)
======== ========
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 I).
At September 30, 1996 and 1995, the projected benefit obligations included
accumulated benefit obligations of $164,067,000 and $152,422,000, respectively,
of which $154,553,000 and $142,296,000 were vested in 1996 and 1995,
respectively.
Effective June 30, 1996, the Company changed its measurement date from
September 30 to June 30. The cumulative impact of this change was determined to
be immaterial. Therefore, no cumulative adjustment has been made as of September
30, 1996.
The following weighted average rates were used in the calculations:
Years ended September 30
------------------------
1996 1995
- -------------------------------------------------------------- ----
Discount rate ......................................... 7.4% 7.3%
Expected rate of return on plan
assets ............................................ 8.9% 8.9%
Assumed rate of increase in
compensation ...................................... 5.0% 5.1%
---- ----
32
17
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.
Net periodic postretirement benefit cost was comprised of the following
elements:
Years ended September 30
-------------------------
Dollars in thousands 1996 1995 1994
- ------------------------------------------------------------ ------ ------
Current year service cost ........................... $ 848 $ 672 $ 709
Interest accrued on
postretirement benefit obligations .............. 5,261 5,301 4,776
Net amortization .................................... 185 -- 221
----- ------ ------
Net periodic post-retirement benefit
cost ............................................ $6,294 $5,973 $5,706
The following table sets forth the funded status of the postretirement
benefit plans:
September 30
-------------------
Dollars in thousands 1996 1995
- -------------------------------------------------------------------- --------
Accumulated postretirement benefit obligations:
Retirees ............................................. $ 58,303 $ 58,526
Fully eligible active plan participants .............. 6,660 6,262
Other active plan participants ....................... 14,302 13,221
-------- --------
79,265 78,009
Plan assets at fair value ................................ -- --
-------- --------
Excess of accumulated postretirement
benefit obligations over plan assets ................. (79,265) (78,009)
Unrecognized net loss .................................... 10,875 10,749
Unrecognized prior service cost .......................... 82 95
-------- --------
Accrued postretirement benefit cost
(included in other liabilities) .................... $(68,308) $(67,165)
======== ========
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, 1996 and 1995 by
approximately $6,900,000 and $6,700,000, respectively, and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for the years then ended by approximately $700,000 and $600,000, respectively.
The following rates were used in the calculations:
Years ended September 30
------------------------
1996 1995
- ---------------------------------------------------------------- -----
Discount rate ............................................ 7.3% 7.0%
Assumed rate of increase in
compensation ......................................... 5.3% 5.3%
Assumed annual rate of increase
in health care benefits .............................. 9.5% 10.5%
Annual decrease in assumed rate of
increase in health care benefits ..................... 1.0% 1.0%
Assumed ultimate trend rate .............................. 5.3% 5.0%
Assumed ultimate trend rate to be
reached in year ...................................... 2001 2003
---- ----
33
18
I. STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
The following table summarizes the changes in stockholders' equity for each of
the three years in the period ended September 30, 1996:
Years ended September 30
---------------------------------------
Dollars in thousands 1996 1995 1994
- ---------------------------------------------------------------------------------------------------- ---------- ---------
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.............................................................. $ (4,836) $ (4,003) $ (3,003)
Purchase of treasury stock..................................................... (1,729) (833) (1,000)
---------- ---------- ---------
End of year.................................................................. $ (6,565) $ (4,836) $ (4,003)
---------- ---------- ---------
COMMON STOCK
Beginning of year.............................................................. $ 67,775 $ 67,775 $ 33,887
Two-for-one stock split........................................................ 67,775 -- 33,888
---------- ---------- ---------
End of year.................................................................. $ 135,550 $ 67,775 $ 67,775
---------- ---------- ---------
ADDITIONAL PAID-IN CAPITAL
Beginning of year.............................................................. $ 17,799 $ 3,783 $ 33,621
Sale of treasury stock to the Company's savings plans.......................... 2,456 3,576 633
Issuance of treasury stock under employee compensation plans, including
tax benefits of $9,416 in 1996............................................... 21,795 10,440 3,417
Two-for-one stock split........................................................ (18,432) -- (33,888)
---------- ---------- ---------
End of year.................................................................. $ 23,618 $ 17,799 $ 3,783
---------- ---------- ---------
RETAINED EARNINGS
Beginning of year.............................................................. $1,062,482 $ 916,942 $ 861,803
Net income..................................................................... 194,057 171,932 78,691
Common dividends paid ($0.36, $0.30, $0.27 per share), net of tax
benefit $549 in 1996......................................................... (25,347) (22,841) (19,969)
Preferred dividends paid to ESOP, net of tax benefit........................... (3,301) (3,551) (3,583)
Redemption of preferred stock purchase rights.................................. (1,840) -- --
Two-for-one stock split........................................................ (49,343) -- --
---------- ---------- ---------
End of year.................................................................. $1,176,708 $1,062,482 $ 916,942
---------- ---------- ---------
COMMON TREASURY STOCK
Beginning of year.............................................................. $ (528,751) $ (467,171) $(475,863)
Purchase of treasury stock..................................................... (121,815) (75,418) --
Sale of treasury stock to the Company's savings plans.......................... 1,372 4,348 625
Issuance of treasury stock under employee compensation plans................... 14,824 9,490 8,067
---------- ---------- ---------
End of year.................................................................. $ (634,370) $ (528,751) $(467,171)
---------- ---------- ---------
UNEARNED COMPENSATION
Beginning of year.............................................................. $ (10,834) $ (7,884) $ (7,321)
Issuance of treasury stock under employee compensation plans................... (11,857) (8,196) (4,039)
Amortization................................................................... 6,080 5,246 3,476
---------- ---------- ---------
End of year.................................................................. $(16,611) $ (10,834) $ (7,884)
---------- ---------- ---------
DEFERRED EMPLOYEE BENEFITS
Beginning of year.............................................................. $ (65,907) $ (67,403) $ (68,781)
Principal payment by ESOP under guaranteed loan................................ 1,624 1,496 1,378
---------- ---------- ---------
End of year.................................................................. $ (64,283) $ (65,907) $ (67,403)
---------- ---------- ---------
UNREALIZED GAIN ON MARKETABLE SECURITIES (NOTE D)
Beginning of year.............................................................. $ 32,023 $ 28,787 $ --
Net change in unrealized gain.................................................. (2,149) 3,236 28,787
---------- ---------- ---------
End of year.................................................................. $ 29,874 $ 32,023 $ 28,787
---------- ---------- ---------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Beginning of year.............................................................. $ 39,913 $ 16,327 $ (7,406)
Foreign currency translation adjustments, including tax benefits
of $4,325 in 1996............................................................ (14,239) 23,586 23,733
---------- ---------- ---------
End of year.................................................................. $ 25,674 $ 39,913 $ 16,327
---------- ---------- ---------
TOTAL STOCKHOLDERS' EQUITY, END OF YEAR............................................ $ 744,931 $ 685,000 $ 562,489
========== ========== =========
34
19
SHARES OF STOCK Years ended September 30
----------- ---------- ----------
1996 1995 1994
- --------------------------------------------------- ---------- ----------
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 .................... 5,036 4,504 3,686
Purchased ............................ 708 532 818
----------- ---------- ----------
End of year ...................... 5,744 5,036 4,504
=========== ========== ==========
COMMON STOCK
Beginning of year .................... 67,774,968 67,774,968 33,887,484
Two-for-one stock split .............. 67,774,968 -- 33,887,484
----------- ---------- ----------
End of year ...................... 135,549,936 67,774,968 67,774,968
=========== ========== ==========
COMMON TREASURY STOCK
Beginning of year .................... 30,392,967 29,783,722 15,161,103
Purchased ............................ 2,949,140 1,525,036
Issued ............................... (1,440,458) (915,791) (278,550)
Two-for-one stock split .............. 32,059,076 -- 14,901,169
----------- ---------- ----------
End of year ...................... 63,960,725 30,392,967 29,783,722
=========== ========== ==========
In November 1995, the Company declared a dividend of one Preferred Stock
Purchase Right (Right) for each outstanding share of Cabot common stock. The
Rights are not presently exercisable. Each Right entitles the holder, upon the
occurrence of certain specified events, to purchase from Cabot one one-hundredth
of a share of Series A Junior Participating Preferred Stock at a purchase price
of $200 per share. The Rights further provide that each Right will entitle the
holder, upon the occurrence of certain other specified events, to purchase from
Cabot, common stock having a value of twice the exercise price of the Right and,
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 $0.01 per Right. The Rights expire on November 10, 2005.
The Company redeemed the rights issued under the 1986 shareholder rights
plan for a redemption payment equal to $.05 per share, to shareholders of record
on November 24, 1995.
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 87.47 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 $1,023. 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, 1996, 6,087,000 shares of the
Company's common stock were reserved for conversion of the Series B ESOP
Convertible Preferred Stock.
In April 1996, the Board of Directors authorized the Company to purchase up
to 4,000,000 shares of the Company's common stock, superseding the previous
authorization issued in September 1995. As of September 30, 1996, the Company
had purchased 736,000 shares under the new authorization.
On November 10, 1995, a two-for-one stock split in the form of a stock
dividend was authorized, payable to stockholders of record on March 15, 1996. A
total of 67,774,968 shares were issued in connection with the split. Also,
$18,432,000 was reclassified from additional paid-in-capital and $49,343,000
from retained earnings to common 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.
J. SAVINGS PLAN & INCENTIVE COMPENSATION PLANS
- --------------------------------------------------------------------------------
During 1994, the Company amended its Profit Sharing and Savings Plan (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, subject to limitations required by
governmental laws or regulations. Company contributions to the CRISP were
$3,505,000 in 1996 and $3,886,000 in 1995.
The accrued contribution of the Company under the PSSP, based upon an
annual return on stockholders' equity, was $5,707,000 in 1994.
The Company has an Equity Incentive Plan for key employees. Under the plan
adopted in 1988, participants may be granted various types of stock and
stock-based awards. During 1988 through 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 vested ratably on each of the next
four anniversaries of the award. In 1992 through 1995, 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
35
20
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.
In December 1995, the Board of Directors adopted the 1996 Equity Incentive Plan.
The 1996 Plan was approved by the stockholders of the Company in March 1996. No
new awards will be made under the plan adopted in 1988. Awards under the 1996
Plan could be purchased at a price equal to 40% of the fair market value on the
date of the award. Variations on these awards were made to international
employees in order to try to provide results comparable to U.S. employees. The
awards generally vest on the third anniversary date of the award for employees
then employed by the Company or a subsidiary. The Company had reserved 2,800,000
shares of common stock for issuance under the 1996 Plan at September 30, 1996.
There were 1,993,360 shares available for future grants at September 30, 1996.
The following table summarizes the plans' activity from September 30, 1993
through September 30, 1996:
-------------------- ---- -----------
Stock Options
and Restricted Stock PARs Price Range
- ---------------------------------------------- ---- -----------
September 30, 1993 ....... 4,456,556 8,308 $ 6.31 to $11.69
Granted .............. 968,180 -- $12.28 to $13.97
Exercised ............ (220,404) (1,500) $ 6.31 to $10.47
Cancelled ............ (278,840) -- $ 7.59 to $12.28
--------- ------ ----------------
September 30, 1994 ....... 4,925,492 6,808 $ 6.31 to $13.97
Granted .............. 944,400 -- $20.00
Exercised ............ (355,148) -- $ 6.31 to $11.69
Vested ............... (623,212) -- $ 7.00 to $12.28
Cancelled ............ (463,976) -- $ 7.59 to $11.69
--------- ------ ----------------
September 30, 1995 ....... 4,427,556 6,808 $ 7.16 to $20.00
Granted .............. 889,150 -- $10.68 to $26.70
Exercised ............ (680,462) (636) $ 7.16 to $12.28
Vested ............... (571,204) -- $10.00 to $12.28
Cancelled ............ (77,929) (136) $ 7.59 to $20.00
--------- ------ ----------------
September 30, 1996 ....... 3,987,111 6,036 $ 7.59 to $26.70
========= ====== ================
The stock options in the table above expire at various dates through
September 2002. At September 30, 1996, the total outstanding awards of 3,987,111
consisted of 1,700,094 of stock options and 2,287,017 of unvested restricted
shares. Of the stock options outstanding 1,511,694 were exercisable at prices
ranging from $7.59 to $11.69.
The Company has not adopted SFAS No. 123, "Accounting for Stock-based
Compensation," which is required to be adopted by fiscal 1997. The Company
intends to continue to record compensation based on the provisions of Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees," as
allowed by SFAS No. 123. Although the Company has not determined the ultimate
impact of adopting SFAS No. 123, it does not believe, based on the number of
stock options previously granted, that the adoption will have a material effect
on the Company's current financial position or results of operations.
K. INCOME TAXES
- --------------------------------------------------------------------------------
Income before income taxes was as follows:
Years ended September 30
-------- -------- --------
Dollars in thousands 1996 1995 1994
- -------------------------------------------- -------- --------
Domestic ................. $134,289 $102,980 $ 30,388
Foreign .................. 145,545 153,049 87,937
-------- -------- --------
Total ................ $279,834 $256,029 $118,325
======== ======== ========
A summary of taxes on income is as follows:
Years ended September 30
------- -------- --------
Dollars in thousands 1996 1995 1994
- ----------------------------------------------- -------- --------
U.S. federal and state:
Current ......................... $33,247 $ 64,204 $(3,131)
Deferred ........................ 1,031 (25,794) 15,644
------- -------- -------
Total ....................... $34,278 $ 38,410 $12,513
======= ======== =======
Foreign:
Current ......................... $61,184 $ 61,039 $21,010
Deferred ........................ 2,754 1,631 11,440
------- -------- -------
Total ....................... $63,938 $ 62,670 $32,450
------- -------- -------
Total U.S. and
Foreign ................... $98,216 $101,080 $44,963
======= ======== =======
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 1996 1995 1994
- -------------------------------------------------- -------- -------
Computed tax expense at
the expected statutory
rate ............................ $97,942 $ 89,720 $41,414
Foreign income:
Impact of taxation at
different rates, repatri-
ation and other ............... 5,817 5,407 (257)
Impact of foreign losses for
which a current tax
benefit is not available ...... 2,432 529 701
State taxes, net of federal
effect .......................... 2,718 5,560 2,655
Foreign sales corporation ........... (2,968) (1,500) (1,158)
U.S. and State benefits from
research and exper-
imentation activities ........... (5,981) -- --
Other, net .......................... (1,744) 1,364 1,608
------- -------- -------
Provision for income
taxes ......................... $98,216 $101,080 $44,963
======= ======== =======
36
21
Significant components of deferred income taxes were as follows:
September 30
-------- --------
Dollars in thousands 1996 1995
- -------------------------------------------------------------------- --------
Deferred tax assets:
Depreciation and amortization ......................... $ 24,929 $ 28,467
Pension and other benefits ............................ 48,945 44,640
Environmental matters ................................. 14,928 18,008
Restructuring charges ................................. 4,396 5,633
Investments ........................................... 10,850 10,850
State and local taxes ................................. 5,620 5,449
Net operating loss and other tax
carryforwards ..................................... 13,512 12,132
Other ................................................. 26,573 33,373
-------- --------
Subtotal .......................................... 149,753 158,552
-------- --------
Valuation allowances .................................. (15,724) (9,318)
-------- --------
Total deferred tax assets ....................... $134,029 $149,234
-------- --------
Deferred tax liabilities:
Depreciation and amortization ......................... $ 64,272 $ 71,629
Pension and other benefits ............................ 10,888 10,235
Investments ........................................... 28,208 36,629
Other ................................................. 107,463 100,532
-------- --------
Total deferred tax liabilities .................. $210,831 $219,025
======== ========
The Company increased the valuation allowance in 1996 by $6,405,000 with
respect to certain foreign future tax benefits and net operating losses
reflected as deferred tax assets due to the uncertainty of their ultimate
realization.
Approximately $47,059,000 of net operating losses and other tax
carryforwards remain at September 30, 1996, $33,012,000 of which expire in the
years 1997 through 2003, and $14,047,000 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
management has determined that it is more likely than not that the carryforwards
will not be utilized.
United States income tax returns for fiscal years 1992 and 1993 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 1996, 1995 and 1994 totalled
$109,072,000, $60,340,000 and $23,855,000, respectively.
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 $14,511,000, $16,545,000 and $17,638,000 in
1996, 1995 and 1994, respectively. Future minimum rental commitments under
non-cancelable leases are as follows:
Dollars in thousands
- --------------------------------------------------------------------------------
1997 .................................................................. $12,380
1998 .................................................................. 10,557
1999 .................................................................. 9,585
2000 .................................................................. 8,890
2001 .................................................................. 8,617
2002 and thereafter ................................................... 15,720
-------
$65,749
=======
OTHER LONG-TERM COMMITMENTS
During 1995, the Company entered into long-term supply agreements of more than
six years with certain North American tire customers. The contracts are designed
to provide such customers with agreed-upon amounts of carbon black at prices
based on an agreed-upon formula.
Also during 1995, the Company agreed to participate as a 10% owner in a
proposed liquefied natural gas plant in Trinidad, and to purchase approximately
60 percent of the gas produced by the plant. Once the plant is operational, it
is estimated that it will produce 3.3 trillion cubic feet of gas over a period
of 20 years. Gas from the project is not expected to be available until fiscal
year 1999.
CONTINGENCIES
The Company is a defendant or potentially responsible party in various lawsuits
and environmental proceedings wherein substantial amounts are claimed or at
issue.
37
22
As of September 30, 1996, approximately $44,500,000, was accrued for
environmental matters, primarily related to divested businesses. The amount
represents the Company's current best estimate of its share of costs likely to
be incurred based on its analysis of the extent of cleanup required, alternative
cleanup methods available, abilities of other responsible parties to contribute
and its interpretation of applicable laws and regulations at each site. The
Company reviews the adequacy of this reserve as circumstances change at
individual sites. Included in other charges are environmental expenses of
$3,000,000, $17,000,000 and $15,000,000 in 1996, 1995 and 1994, respectively.
In the opinion of the Company, although final settlement of these 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 uses financial instruments, primarily forward contracts, options and
swaps in its management of foreign currency and interest rate exposures. These
financial instruments hedge transactions and balances consistent with the
Company's currency and interest rate exposures. The Company does not purchase or
issue financial instruments for trading purposes.
FOREIGN EXCHANGE
The Company's foreign exchange forward contracts and options 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, transactions and
cash flows being hedged. The Company had $26,907,000 of foreign exchange forward
contracts outstanding at September 30, 1996. The fair value of such contracts,
which was the replacement value, represented a net unrealized gain of
approximately $2,538,000 as of September 30, 1996. In September 1996, the
Company both purchased and sold foreign exchange options to reduce the impact of
changes in foreign exchange rates on the Company's European cash flow. The cost
of these options purchased was approximately $750,000 and the premium on the
options sold was approximately $450,000. The U.S. dollar equivalent of the
notional amounts under option contracts are $100,000,000 for put options
purchased and $65,000,000 for call options sold. The contracts expire in equal
quarterly installments during fiscal 1997. The net cost of these options will be
recognized as cost of sales, along with any gains or losses, over the option
period. The fair value of these option contracts was $474,000 at September 30,
1996. Forward exchange and option contracts generally have maturities which do
not exceed twelve months. See Note A for information on the Company's policy on
forward exchange contracts and currency option gains and losses.
INTEREST RATE
During 1995, the Company entered into an interest rate swap agreement to fix the
interest rate on certain borrowings expected to be refinanced in 1997. Pursuant
to the agreement, beginning on June 17, 1997, the Company will pay a fixed rate
of 7.375% on a notional $100,000,000 and receive a floating rate based on London
Interbank Offered Rates ("LIBOR") as determined at six month intervals through
December 17, 2007.
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 $66,213,000 and $68,105,000 from
international tire manufacturers at September 30, 1996 and 1995, 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, 1996, and no manufacturer exceeded 5% of the Company's
receivables at that date.
N. FINANCIAL INFORMATION BY INDUSTRY SEGMENT & GEOGRAPHIC AREA
- --------------------------------------------------------------------------------
Financial information by industry segment for 1992 through 1996, 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 $277,679,000, $250,439,000
and $272,245,000 in 1996, 1995 and 1994, respectively. Transfers between
geographic areas are recorded at cost plus mark-up or at market.
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Financial information by geographic area is as follows:
Years ended September 30
-------- -------- --------
Dollars in millions 1996 1995 1994
- ------------------------------------------------------ -------- --------
SALES
United States:
Sales, excluding export sales
Specialty Chemicals and
Materials ................... $ 526.6 $ 605.7 $ 563.2
Energy .......................... 422.0 342.6 438.7
Export sales ...................... 109.7 93.7 85.0
-------- -------- --------
Total ....................... 1,058.3 1,042.0 1,086.9
Europe ................................ 638.6 642.9 503.8
Other areas ........................... 281.5 249.5 177.1
-------- -------- --------
Total ........................... 1,978.4 1,934.4 1,767.8
Less: Eliminations .................... 122.1 104.0 88.0
-------- -------- --------
Net sales ....................... $1,856.3 $1,830.4 $1,679.8
======== ======== ========
OPERATING PROFIT
United States:
Specialty Chemicals and
Materials ....................... $ 142.3 $ 155.9 $ 108.5
Energy ............................ 23.0 12.7 18.4
Europe ................................ 99.2 103.0 49.0
Other areas ........................... 19.0 27.9 8.4
Total operating profit .......... 283.5 299.5 184.3
Interest expense ...................... 41.7 35.6 41.7
Unallocated corporate
expenses, net(a) .................. 29.2 28.0 23.4
Gain on sale of businesses ............ (38.9) (32.6) --
Gain on sale of equity
securities ........................ (28.3) -- --
Adjustment of reserves related
to divested businesses ............ -- 12.5 0.8
-------- -------- --------
Income before
income taxes ................ $ 279.8 $ 256.0 $ 118.4
======== ======== ========
IDENTIFIABLE ASSETS
United States:
Specialty Chemicals and
Materials ....................... $ 529.2 $ 426.9 $ 482.7
Energy ............................ 79.7 133.8 127.4
Europe ................................ 494.8 465.3 444.3
Other areas ........................... 403.7 275.7 245.2
General corporate(b) .................. 270.8 253.7 231.0
Equity in affiliates -
Europe ............................ 9.3 26.9 22.3
Equity in affiliates -
Other areas ....................... 70.1 72.0 63.9
-------- -------- --------
Total ........................... $1,857.6 $1,654.3 $1,616.8
======== ======== ========
<FN>
(a) Unallocated corporate expenses, net, include corporate management costs
reduced by investment income.
(b) General corporate assets include cash, temporary cash investments,
investments other than equity basis, income taxes receivable, deferred taxes
and headquarters' assets.
O. UNAUDITED QUARTERLY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Unaudited financial results by quarter for the fiscal years ended September 30,
1996 and 1995 are summarized below and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Dollars in millions, ------ ------ ------ ------ --------
except per share amounts Dec March June Sept Year
- ------------------------------------ ------ ------ ------ --------
FISCAL 1996
Net sales ............. $443.0 $491.3 $457.3 $464.6 $1,856.3
Cost of sales ......... $305.1 $345.3 $318.5 $341.0 $1,310.0
Net income ............ $ 43.4 $ 42.9 $ 35.7 $ 72.0(a) $ 194.1
Income applicable to
common shares ....... $ 42.5 $ 42.0 $ 35.0 $ 71.2 $ 190.8
--------------------------------------- --------
Income per common
share (primary)(c) . $ 0.57 $ 0.58 $ 0.48 $ 0.98 $ 2.60
======================================= ========
FISCAL 1995
Net sales ............. $428.0 $481.3 $494.8 $426.3 $1,830.4
Cost of sales ......... $296.8 $329.4 $336.1 $296.7 $1,259.0
Net income ............ $ 33.9 $ 46.4 $ 47.0 $ 44.6(b) $ 171.9
Income applicable to
common shares ....... $ 33.0 $ 45.5 $ 46.1 $ 43.7 $ 168.4
--------------------------------------- --------
Income per common
share (primary)(c) . $ 0.43 $ 0.59 $ 0.59 $ 0.57 $ 2.17
======================================= ========
<FN>
(a) Includes a $38.9 gain on the sale of coal transportation business, TUCO and
a $28.3 gain on the sale of equity securities of K N Energy, Inc.
(b) Includes $32.6 gain on sale of safety business and $12.5 charge for
environmental reserves.
(c) The Company declared a two-for-one stock split during the year. As a result,
share and per share amounts have been restated.
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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/ Kenyon C. Gilson
Kenyon C. Gilson
Chief Financial Officer
/s/ Paul J. Gormisky
Paul J. Gormisky
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, 1996 and 1995 and the related consolidated
statements of income and cash flows for each of the three fiscal years in the
period ended September 30, 1996. 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, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three fiscal years in the
period ended September 30, 1996, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
October 25, 1996
40