1
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
Cabot Corporation is comprised of a Specialty Chemicals and Materials Group
and an Energy Group. The Specialty Chemicals and Materials Group consists of the
following businesses: carbon black (the largest), fumed silica, plastics,
capacitor materials, microelectronics materials, inkjet colorants, and specialty
fluids. In 1995, the Company restructured the ownership of its safety and
specialty composites business, Cabot Safety Corporation. Cabot now owns
approximately 42.5% of the new corporation (now named Aearo Corporation) which
is accounted for under the equity method. The Energy Group consists of Cabot LNG
Corporation, a wholly owned subsidiary, and its subsidiaries. In 1996, the
Company sold TUCO INC. ("TUCO"), a coal fuel services business.
The financial results of the Company in 1997 fell short of management's
expectations. Key fundamentals in the Company's specialty chemicals businesses
that began to deteriorate in the latter part of 1996 continued to have a
negative impact in 1997. As the year progressed, however, the Company's
operating environment gradually improved. For example, early in the fiscal year,
the Company's carbon black business experienced higher feedstock costs; those
costs retreated and remained stable during the second half of the year. In
addition, European carbon black demand improved during the year and European
carbon black prices, which declined during the first part of the year,
stabilized in the third and fourth quarters. There is some prospect of price
increases in Europe in 1998* (see page 28). Also, the U.S. electronics industry
recovered during the second half of the year. Cabot serves this industry through
its capacitor materials and microelectronics materials businesses. Finally,
positive year-to-year volume comparisons that developed in the Company's
chemical businesses during the third quarter continued during the fourth quarter
of 1997.
The following analysis of financial condition and operating results should
be read in conjunction with the Company's Consolidated Financial Statements and
accompanying Notes. Unless a calendar year is specified, all references in this
discussion to years are to the Company's fiscal year ended September 30.
RESULTS OF OPERATIONS
REVENUES
Net sales and other operating revenues for 1997, 1996 and 1995 were $1.6
billion, $1.9 billion and $1.8 billion, respectively. Revenues for 1996 included
$278.2 million from the operations of TUCO. Excluding TUCO results from 1996,
the Company experienced an increase in revenue during 1997 of $51.9 million, or
3%. The increase is attributable to greater revenues in the Company's LNG
business. In 1997, the LNG business reported an increase of $55.9 million, or
39%, in revenue due to higher liquefied natural gas volumes and better pricing.
[ Revenues Specialty Chemicals & Materials vs. Energy graph]
The Company's gross margins as a percentage of net sales for 1997, 1996 and
1995 were 30%, 29% and 31%, respectively. Gross margins for 1996 include the
operating results of TUCO, which were 5% of TUCO's net sales. Exclusive of TUCO,
the gross margin percentage for 1996 was 34%. The decrease in gross margin
during 1997 was primarily the result of lower year-to-year selling prices
combined with higher feedstock costs in the Company's carbon black
business. Overall carbon black selling prices were down 3% during 1997. In
addition, feedstock costs during 1997 were on average 4% higher.
The Company's selling, research, technical and administrative expenses for
1997, 1996 and 1995 were $299.2 million, $286.5 million and $293.9 million,
respectively. The increase during 1997 of $12.7 million, or 4%, 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 resources over the past few years in research and marketing for the
development of high-value, differentiated new products and entirely new
businesses. These investments were largely in the Company's Specialty Chemicals
and Materials Group. During 1997, the Company continued to
21
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see evidence that several new product and new business initiatives likely 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 28).
In 1996, selling, research, technical and administrative expenses decreased
$7.4 million, or 3%. The 1995 total included expenses associated with Cabot
Safety Corporation, which totaled $46.7 million. Excluding that amount from the
1995 figure, selling, research, technical and administrative spending increased
$39.3 million, or 16%, during 1996. That increase also resulted from continued
investments dedicated to developing new, higher value products and processes. In
addition, 1996 figures include selling, research, technical and administrative
expenses of the Company's Czech Republic and Indian carbon black operations,
which were consolidated at the beginning of 1996.
OPERATING PROFIT
Operating profit for 1997, 1996 and 1995 was $186.9 million, $283.5 million
and $299.5 million, respectively. Operating profit before special items for
1997, 1996 and 1995 was $205.1 million, $277.7 million, and $299.5 million,
respectively. The Company's operating margins as a percentage of sales, before
special items during 1997, 1996 and 1995 were 13%, 15% and 16%, respectively.
Special items during 1997 included $18.2 million of severance and asset
impairment charges in the Company's Specialty Chemicals and Materials Group.
Special items during 1996 included $5.8 million of gains relating to the
Company's Energy Group.
[Operating Margins Specialty Chemicals & Materials graph]
Operating profit (excluding special items) decreased $72.6 million during
1997. Operating profit for 1996 included $13.8 million of operating results
from TUCO. Excluding the results of TUCO, operating profit in 1997 decreased
$58.8 million, or 22%. The effects of lower specialty chemicals selling prices,
higher raw material and manufacturing costs, the strengthening of the U.S.
dollar, and increased spending on research and development were partially offset
by the effect of greater volumes.
OTHER EXPENSES
Interest expense for 1997, 1996 and 1995 was $43.2 million, $41.7 million
and $35.6 million, respectively. The increase in interest expense during 1997
was primarily due to higher levels of debt relating to repurchases of Cabot
common stock under the Company's stock repurchase program and capital
expenditures. The increase in interest expense during 1996 was due to higher
levels of short-term debt resulting from the Company's stock repurchase program,
increased capital spending and the consolidation of the Company's Czech Republic
and Indian carbon black businesses.
Unallocated corporate expenses for 1997, 1996 and 1995 were $26.6 million,
$29.2 million and $28.0 million, respectively. The decrease during 1997 was
primarily due to lower environmental expenses. The increase during 1996 was
largely due to lower interest and dividend income as compared with 1995.
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Selected Financial Data by Industry Segment
YEARS ENDED SEPTEMBER 30 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Net Sales and Other Operating Revenues
Specialty Chemicals and Materials $1,430.3 $1,434.3 $1,487.8 $1,241.1 $1,191.8
Energy 199.7 422.0 342.6 438.7 422.5
Net sales and other operating revenues $1,630.0 $1,856.3 $1,830.4 $1,679.8 $1,614.3
- ------------------------------------------------------------------------------------------------------------------------------
Operating Profit
Specialty Chemicals and Materials(a) $ 180.3 $ 260.5 $ 286.8 $ 165.9 $ 101.7
Energy(b) 6.6 23.0 12.7 18.4 16.7
Total operating profit 186.9 283.5 299.5 184.3 118.4
Interest expense 43.2 41.7 35.6 41.7 44.0
Unallocated corporate expenses, net(c) 26.6 29.2 28.0 23.4 20.7
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 $ 117.1 $ 279.8 $ 256.0 $ 118.4 $ 67.9
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization
Specialty Chemicals and Materials $ 107.6 $ 93.8 $ 91.2 $ 83.3 $ 81.5
Energy 2.0 2.9 2.8 2.8 2.8
General corporate 0.3 0.3 0.2 0.2 0.2
Total $ 109.9 $ 97.0 $ 94.2 $ 86.3 $ 84.5
- ------------------------------------------------------------------------------------------------------------------------------
Fixed Asset Additions
Specialty Chemicals and Materials $ 157.4 $ 207.7 $ 130.4 $ 70.7 $ 63.9
Energy 5.4 0.5 0.8 2.9 0.7
General corporate -- 0.9 -- -- 0.4
Total $ 162.8 $ 209.1 $ 131.2 $ 73.6 $ 65.0
- ------------------------------------------------------------------------------------------------------------------------------
Identifiable Assets
Specialty Chemicals and Materials $1,442.3 $1,427.7 $1,167.9 $1,172.2 $1,117.4
Energy 88.4 79.7 133.8 127.4 116.1
General corporate(d) 206.8 270.8 253.7 231.0 89.3
Equity in affiliates-Specialty Chemicals and Materials 86.1 79.4 98.9 86.2 103.1
Equity in affiliates-Energy -- -- -- -- 63.6
Total $1,823.6 $1,857.6 $1,654.3 $1,616.8 $1,489.5
- ------------------------------------------------------------------------------------------------------------------------------
(a) Included in fiscal year 1997 are charges relating to a cost reduction program undertaken in the Specialty Chemicals and
Materials Group. These charges are for asset impairments of $10.3 million and severance of $7.9 million. Fiscal year 1993
includes a $47.4 million restructuring charge.
(b) Included in fiscal year 1996 is a gain on settlement of a contractual matter of $2.5 million, and a gain from a reduction in
the Company's ownership position in the Trinidad natural gas liquefaction project of $3.3 million.
(c) Unallocated corporate expenses, net, include corporate management costs reduced by investment income.
(d) General corporate assets include cash, short-term investments, investments other than equity basis, income taxes receivable,
deferred taxes and headquarters' assets.
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PROVISION FOR INCOME TAXES
The effective tax rate on income from operations for 1997, 1996 and 1995,
was 36%, 35% and 39%, respectively. The tax rate in 1996 reflects the impact of
research and experimentation tax credits taken in 1996 relating to prior years.
The effective tax rate in 1996 would have been 37% without the impact of those
credits. The decrease in the tax rate in 1996 versus 1995 reflects the
absorption of the gain on the sale of Cabot Safety Corporation in 1995. A more
detailed analysis of income taxes is presented in Note K to the Consolidated
Financial Statements.
NET INCOME
Reported net income was $92.7 million ($1.19 per fully diluted common
share) in 1997 compared with $194.1 million ($2.42 per fully diluted common
share) in 1996 and $171.9 million ($2.02 per fully diluted common share) in
1995. Net income in 1997 includes special charges for asset impairments and
severance costs totaling $18.2 million ($0.15 per fully diluted common share).
Net income for 1996 included several special items. These items were $5.3
million ($0.06 per fully diluted common share) from 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 fuel services business, TUCO, 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 an
adjustment in environmental reserves. Excluding special items, net income would
have been $104.4 million ($1.34 per fully diluted common share) in 1997, $142.9
million ($1.78 per fully diluted common share) in 1996, and $165.3 million
($1.94 per fully diluted common share) in 1995.
SPECIALTY CHEMICALS AND MATERIALS
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 reinforcing, thickening, thixotropic, suspending or
anti-caking agent in many 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 and
defense markets; polishing slurries used in chemical mechanical planarization
of integrated circuit devices; colorants for the inkjet printing industry; and
cesium-based drilling and completion fluids for the oil industry.
In 1997, sales from the Specialty Chemicals and Materials Group were flat
with the prior year despite significantly lower year-to-year carbon black
selling prices. The effects of a 6% global increase in specialty chemical
volumes were more than offset by lower selling prices, primarily in the
Company's European and Pacific Asian carbon black markets. Sales growth in the
fumed silica and microelectronics materials businesses was partially offset by a
decline in sales of plastics and tantalum capacitor materials.
[Specialty Chemicals & Materials Revenues by Geographic Region pie chart]
Excluding sales of the divested safety and specialty composite products
business from the 1995 results to form a comparative basis, 1996 sales for the
Specialty Chemicals and Materials Group increased 7% from 1995. Improved pricing
and the effects of consolidating the operating results of the Czech Republic and
Indian carbon black businesses in 1996 were partially offset by 2% lower overall
volumes.
[Carbon Black Sales Volumes by Geographic Region pie chart]
The Company has been developing and commercializing new, differentiated
products in its chemical businesses. Five-year new products (defined as products
that were first sold in commercial quantities within the last five years)
accounted for approximately 9% of chemical revenues in 1997, compared with 8% in
1996, and 6% in 1995. The Company continues to vigorously pursue a number of new
product and new business opportunities.
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Operating profit before special items for the Specialty Chemicals and
Materials Group in 1997, 1996 and 1995, totaled $198.5 million, $260.5 million
and $286.8 million, respectively. The Company's carbon black operations
accounted for most of the year-to-year earnings declines.
In 1997, lower European and Pacific Asian selling prices, higher raw
material costs, increased plant start-up costs, and a stronger U.S. dollar more
than offset the benefits of greater volumes. The Company's fumed silica and
microelectronics materials businesses each produced improved operating profits
for 1997 versus 1996. The slowdown in the U.S. electronics industry, which began
in 1996, continued to have an impact on the Company's tantalum capacitor
materials business. The Company's tantalum business reported lower operating
profits in 1997 because improved volumes in the second half of the year did not
fully offset depressed first half volumes. The Company spent greater amounts on
research and development and marketing costs related to new product, new
business and market development initiatives in 1997, which further penalized
earnings.
Lower operating profit in the Specialty Chemicals and Materials Group in
1996 was due to increased spending for new business development, the absence of
Cabot Safety earnings during 1996 and lower volumes, partially offset by the
effect of higher year-to-year prices.
The carbon black business's operating profit before restructuring charges
decreased 23% in 1997 from 1996. Lower selling prices, along with higher raw
material costs and increased plant start-up costs, more than offset volume
gains, and reductions in spending on research and development and market
development initiatives.
Certain market conditions affecting the carbon black business that began to
have a negative effect on earnings in the latter part of 1996 continued to have
a detrimental impact on earnings in 1997. For example, European carbon black
selling prices decreased and feedstock costs rose during the first half of the
year. Competitive price pressures caused the Company to meet price decreases in
the European market. The combination of higher feedstock costs (in local
currency terms) and lower prices caused a substantial decrease in the
profitability of the Company's European carbon black business. On average,
carbon black prices were down 3% and feedstock costs were up 4% in 1997 from
1996 levels. We have begun to see a positive change in these fundamentals:
feedstock costs have remained stable during the second half of the year and
European carbon black prices stabilized in the third and fourth quarters of
1997.
The carbon black business's operating profit increased 4% in 1996 from
1995. The operating profit increase came from the consolidation of the operating
results of the Czech Republic 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.
During 1995, the Company entered into long-term carbon black supply
contracts of more than six years with several of its tire customers in North
America. The contracts were designed to provide customers with a secure supply
of carbon black and reduce the volatility in the Company's carbon black volumes
and margins caused, in part, by automobile industry cycles. 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 to economic cycles. The Company's experience in the
North American carbon black market during 1997 indicates that the contracts are
achieving their purpose.
The Company's fumed silica business reported increased revenue in 1997 and
1996 of 15% and 3%, respectively. The increase in 1997 was primarily due to
higher volumes along with higher prices and increased sales of new products.
Operating profits increased 8% and 9% in 1997 and 1996, respectively, due to
higher gross margins, partially offset by increased spending to support 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.
The Company's microelectronics materials business reported revenues of $34
million in 1997, compared with approximately $20 million in 1996. In 1997, this
business reported positive operating profits for the first time. In 1996, gross
margin derived from these revenues was more than offset by spending on research
and development and market development initiatives in this business. The Company
expects continued significant revenue growth in this business during 1998* (see
page 28).
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In the plastics business, revenues and operating profits in 1997 were down
6% and 15%, respectively, from 1996. Higher volumes were more than offset by
lower selling prices. Severe pricing pressure that began in 1996 continued
throughout 1997. Revenues and operating profit in 1996 were down from 1995 by
10% and 42%, respectively. Lower volumes and lower prices caused the decrease in
operating profit in 1996 compared with 1995. The Company remains optimistic that
business conditions will improve in 1998 and that benefits will be realized from
margin improvement and cost savings efforts initiated during the latter part of
1997* (see page 28).
Revenues from the tantalum business increased 4% in 1997 and operating
profit decreased 23% from the prior year. Sales volumes, which began to decline
during the second half of 1996, continued to decrease significantly during the
first part of 1997 due to continued effects of the slowdown in the U.S.
electronics market. Volumes increased during the latter part of 1997. Overall
volumes for the year, however, decreased 3%, offset by higher overall selling
prices. Gross margin was also affected by higher raw material costs. Revenues 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. During the second half of 1996, sales
volumes decreased significantly due to the slowdown in the U.S. electronics
industry and high customer inventory levels.
During 1996, the Company launched a new specialty fluids business unit. The
unit develops and markets cesium-based drilling and completion fluids 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 completed during
the year and brine fluids are now being produced for the first commercial-scale
tests to be conducted in early 1998. Commercial sales of the product are
expected to begin in the latter part of 1998* (see page 28).
ENERGY
The Energy Group conducts liquefied natural gas importing, storing,
transporting and marketing operations. In prior years, the Energy Group included
TUCO INC., a coal fuel services business. The Company sold TUCO, effective
September 30, 1996. During 1996, TUCO earned $13.8 million of operating profit,
compared with $10.5 million in 1995.
The LNG business reported revenues of $199.7 million in 1997 compared with
$143.8 million in 1996. The increase in revenue was due to significantly greater
volumes and higher gas prices compared with 1996. The business received 18 LNG
cargoes in 1997 compared with 10 cargoes in 1996. Gas volumes sold increased 36%
year-to-year. Operating profit increased to $6.6 million during 1997, from $3.3
million during 1996, excluding $5.8 million of special items from 1996. The
positive earnings effect of higher volumes and prices was partially offset by
higher gas costs.
[Sources and Uses of Cash graph]
In 1996, operating profit, exclusive of special items, increased to $3.3
million from $2.1 million in 1995 due to increased supply of LNG and higher gas
prices. The business received 3 cargoes in 1995.
The profitability of the LNG business during the next two years, until its
Trinidad LNG supply comes on stream in 1999, depends in large part on its LNG
supply from Algeria. To date, the political instability in Algeria has not
interrupted the operations of the Company's Algerian LNG supplier.
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FINANCIAL CONDITION
CASH FLOW AND LIQUIDITY
Cash generated in 1997 from the Company's operating activities decreased 5%
to $144.2 million from $151.9 million in 1996.
Research and technical service spending for 1997, 1996 and 1995 was $82.7
million, $79.6 million, and $59.2 million, respectively. Spending as a
percentage of the Specialty Chemicals and Materials Group revenues exceeded 5%
in 1997 and 1996, and was 4% in 1995. 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 $85 million in 1998* (see page 28).
Capital spending on investments, acquisitions, equity securities and
property, plant and equipment for 1997, 1996 and 1995 was $181 million, $269
million, and $145 million, respectively. The major components of the 1997
capital program included expenditures on new carbon black capacity to support
the contracts with U.S. tire manufacturers, Clean Air Act compliance,
differentiated product manufacturing capabilities, new business expansion and
normal plant maintenance. In light of softened demand in certain markets, the
Company deferred several capital projects during the year.
The Company expects to increase the rate of capital spending in 1998 from
1997 as it continues to invest in new business opportunities. These expenditures
are expected to include portions of the projects mentioned in the preceding
paragraph, the Company's share of the Trinidad LNG project, refurbishment of the
Company's LNG tanker, capacity expansion in the Company's fumed silica business,
additional environmental compliance costs in North America, and further
development in the special blacks business and several new business initiatives.
Over the next several years the Company also expects to spend a significant
portion of its $39.7 million reserve in connection with remediation of various
environmental sites* (see page 28). These sites are primarily associated with
divested businesses.
[Total Debt to Capital graph]
Effective September 30, 1996, the Company sold its TUCO subsidiary for $77
million. Accordingly, during the first quarter of fiscal year 1997, the Company
received $35 million in cash, which included $8 million of working capital
adjustments, and $50 million in the form of a debt repayment on the Company's
behalf from the buyer.
During 1997, the Company exercised its rights to purchase 642,232 shares of
common stock of K N Energy, Inc. for a total cost of $11.3 million. As of
September 30, 1997, the Company owned approximately 3 million shares of K N
Energy representing approximately 9.5% of K N Energy's outstanding common
shares.
On February 6, 1997, the Company issued $90 million of medium-term notes
maturing from 2004 to 2011 with a weighted average interest rate of
approximately 7.17%. The proceeds from the issuance were used to repay
short-term debt. During 1997, the Company increased its borrowings by $85.2
million, including the principal amount of medium-term notes referred to above,
and decreased its cash balance by $18.9 million.
During 1997, approximately 3.5 million shares of Cabot common stock were
repurchased at a total cost of approximately $84.7 million and are held as
treasury stock. During 1996, approximately 3.0 million shares were repurchased
for a total cost of approximately $122 million and are held as treasury stock.
The Company's common stock repurchase activity, described below under "Common
Stock," is expected to continue in 1998* (see page 28).
Primarily due to increased capital spending, share repurchases, higher
spending on research and development, and marketing costs for new products, new
business and market development initiatives and asset value adjustments due to
currency changes during 1997, the ratio of total debt (including short-term debt
net of cash) to capital increased to 43% at the end of 1997 from 40% at the end
of 1996.
In January 1997, the Company renegotiated its line of credit agreement. The
facility was increased to $300 million from $250 million and was extended to
January 3, 2002. Management expects cash from operations and present financing
arrangements, including the Company's unused line of credit, to be sufficient to
meet the Company's cash requirements for the foreseeable future.
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COMMON STOCK
On May 9, 1997, the Company's Board of Directors authorized the repurchase
of 4 million shares of its common stock. As of September 30, 1997, approximately
3.4 million shares remained available for repurchase under the Board
authorization.
During 1997, the Company paid cash dividends of $0.40 per share reflecting
a quarterly dividend of $0.10 per share. In November 1997, the Board of
Directors approved a $0.10 per share dividend payable in the first quarter of
fiscal year 1998.
As of September 30, 1997, the book value per share of Cabot stock increased
to $10.47 from $10.41 at September 30, 1996.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128), which is required to be adopted in fiscal 1998. SFAS 128 simplifies the
computation of earnings per share by replacing the presentation of primary
earnings per share with a presentation of basic earnings per share. Management
does not expect the impact of the new standard to be material.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130). The Statement, which must
be adopted for periods beginning after December 15, 1997, establishes standards
for reporting and display of comprehensive income and its components in
consolidated financial statements. The effect of adopting SFAS 130 is not
expected to be material to the Company's financial position or results of
operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), which must be adopted for periods beginning after December 15, 1997.
Under the new standard, companies will be required to report certain information
about operating segments in consolidated financial statements. Operating
segments will be determined based on the method by which management organizes
its business for making operating decisions and assessing performance. The
standard also requires that companies report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. The Company is currently evaluating the effect, if any, of
implementing SFAS 131.
*FORWARD LOOKING INFORMATION
Included herein are statements relating to management's projections of
future profits, the possible achievement of the Company's financial goals and
objectives, 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, fluctuations in currency exchange rates, cost of
raw materials, demand for customers' products and competitors' reactions to
market conditions. Timely commercialization of products under development by the
Company may be disrupted or delayed by technical difficulties, market
acceptance, competitors' new products, as well as difficulties in moving from
the experimental stage to the production stage.
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CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30 1997 1996 1995
==========================================================================================================
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Revenues:
Net sales and other operating revenues $1,629,989 $1,856,269 $1,830,393
Interest and dividend income 6,722 8,933 10,492
- ----------------------------------------------------------------------------------------------------------
Total revenues 1,636,711 1,865,202 1,840,885
==========================================================================================================
Costs and expenses:
Cost of sales 1,144,383 1,309,992 1,258,964
Selling and administrative expenses 216,514 206,861 234,693
Research and technical service 82,720 79,640 59,184
Interest expense (Note G) 43,222 41,718 35,639
Specialty Chemicals and Materials Group Restructuring
(Note B) 18,200 -- --
Gain on sale of equity securities (Note D) -- (28,323) --
Gain on sales of businesses (Note B) -- (38,941) (32,625)
Other charges, net 14,641 14,421 29,001
- ----------------------------------------------------------------------------------------------------------
Total costs and expenses 1,519,680 1,585,368 1,584,856
==========================================================================================================
Income before income taxes 117,031 279,834 256,029
Provision for income taxes (Note K) (42,131) (98,216) (101,080)
Equity in net income of affiliated companies (Note D) 19,524 18,519 16,670
Minority interest (1,679) (6,080) 313
- ----------------------------------------------------------------------------------------------------------
Net income 92,745 194,057 171,932
==========================================================================================================
Dividends on preferred stock, net of tax
benefit of $2,083, $2,111 and $1,911 (3,258) (3,301) (3,551)
- ----------------------------------------------------------------------------------------------------------
Income applicable to common shares $ 89,487 $ 190,756 $ 168,381
==========================================================================================================
Weighted average common shares outstanding, in thousands
(Notes A and I):
Primary 70,730 73,237 77,452
Fully diluted 76,736 79,345 83,880
Income per common share (Notes A and I):
Primary $ 1.27 $ 2.60 $ 2.17
==========================================================================================================
Fully diluted $ 1.19 $ 2.42 $ 2.02
==========================================================================================================
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 1997 1996
==================================================================================================
DOLLARS IN THOUSANDS
ASSETS
Current assets:
Cash and cash equivalents $ 39,236 $ 58,148
Accounts and notes receivable (net of reserve for
doubtful accounts of $5,613 and $5,267) 288,604 363,763
Inventories (Note C) 246,886 260,430
Prepaid expenses 21,268 17,408
Deferred income taxes (Note K) 15,183 10,034
- --------------------------------------------------------------------------------------------------
Total current assets 611,177 709,783
- --------------------------------------------------------------------------------------------------
Investments:
Equity (Notes B and D) 86,111 79,372
Other (Notes D and L) 146,562 95,680
- --------------------------------------------------------------------------------------------------
Total investments 232,673 175,052
- --------------------------------------------------------------------------------------------------
Property, plant and equipment (Note E) 1,759,835 1,712,045
Accumulated depreciation and amortization (837,526) (809,053)
- --------------------------------------------------------------------------------------------------
Net property, plant and equipment 922,309 902,992
- --------------------------------------------------------------------------------------------------
Other assets:
Intangible assets (net of accumulated amortization
of $12,354 and $6,157) (Note B) 39,063 42,735
Deferred income taxes (Note K) 4,257 2,402
Other assets 14,110 24,617
- --------------------------------------------------------------------------------------------------
Total other assets 57,430 69,754
- --------------------------------------------------------------------------------------------------
Total assets $1,823,589 $1,857,581
==================================================================================================
The accompanying notes are an integral part of these financial statements.
30
11
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 1997 1996
=============================================================================================
DOLLARS IN THOUSANDS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 200,834 $ 233,779
Current portion of long-term debt (Note G) 114,978 16,175
Accounts payable and accrued liabilities (Note F) 223,954 250,749
U.S. and foreign income taxes 664 26,083
Deferred income taxes (Note K) 953 918
- ---------------------------------------------------------------------------------------------
Total current liabilities 541,383 527,704
- ---------------------------------------------------------------------------------------------
Long-term debt (Note G) 285,544 321,497
Deferred income taxes (Note K) 99,210 88,320
Other liabilities (Notes H, J and L) 146,879 147,991
Commitments and contingencies (Note L)
Minority interest 22,780 27,138
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 $69,440 and $71,193) 75,336 75,336
Less cost of shares of preferred treasury stock (9,388) (6,565)
Common stock:
Authorized: 200,000,000 shares of $1 par value
Issued: 135,549,936 shares 135,550 135,550
Additional paid-in capital 39,259 23,618
Retained earnings 1,238,202 1,176,708
Less cost of common treasury stock
(including unearned compensation amounts
of $18,346 and $16,611) (723,757) (650,981)
Deferred employee benefits (62,520) (64,283)
Unrealized gain on marketable securities 53,936 29,874
Foreign currency translation adjustments (18,825) 25,674
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 727,793 744,931
- ---------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,823,589 $1,857,581
=============================================================================================
The accompanying notes are an integral part of these financial statements.
31
12
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30 1997 1996 1995
======================================================================================================
DOLLARS IN THOUSANDS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 92,745 $ 194,057 $ 171,932
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 109,931 97,044 94,184
Deferred tax expense (benefit) (13,202) 3,785 (24,163)
Specialty Chemicals and
Materials Group restructuring 18,200 -- --
Gain on sales of equity securities -- (28,323) --
Gains on sales of businesses -- (38,941) (32,625)
Equity in income of affiliated companies,
net of dividends received (9,131) (5,619) (6,292)
Other, net 8,218 8,950 6,694
Changes in assets and liabilities, excluding assets
and liabilities of businesses sold:
Decrease (Increase) in accounts receivable (28,852) 88 (37,354)
Decrease (Increase) in inventories 2,653 (38,995) (57,987)
Decrease in accounts payable and accruals (22,597) (3,415) (6,905)
Other, net (13,777) (36,693) 74,477
- ------------------------------------------------------------------------------------------------------
Cash provided by operating activities 144,188 151,938 181,961
======================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (162,813) (209,061) (131,214)
Proceeds on sales of businesses 35,000 -- 169,178
Sales of property, plant and equipment, and investments 1,071 60,449 373
Investments and acquisitions, excluding cash acquired (7,275) (59,542) (13,874)
Purchases of available-for-sale securities (11,271) -- --
Cash from consolidation of equity affiliates and other -- 11,229 --
- ------------------------------------------------------------------------------------------------------
Cash provided (used) by investing activities (145,288) (196,925) 24,463
======================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 90,000 9,786 17,385
Repayments of long-term debt (21,539) (40,153) (157,609)
Net increase in short-term debt 16,739 168,587 25,980
Purchases of treasury stock (85,845) (123,544) (76,251)
Sales and issuances of treasury stock 16,649 28,580 19,658
Cash dividends paid to stockholders (31,251) (30,478) (26,392)
- ------------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities (15,247) 12,778 (197,229)
======================================================================================================
Effect of exchange rate changes on cash (2,565) (435) 680
- ------------------------------------------------------------------------------------------------------
(Decrease) Increase in cash and cash equivalents (18,912) (32,644) 9,875
Cash and cash equivalents at beginning of year 58,148 90,792 80,917
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 39,236 $ 58,148 $ 90,792
======================================================================================================
The accompanying notes are an integral part of these financial statements.
32
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 U.S. and non-U.S. 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 AND CASH EQUIVALENTS
Cash equivalents include time deposits and short-term investments with original
maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of most U.S.
inventories is determined using the last-in, first-out (LIFO) method. The cost
of other U.S. and all non-U.S. inventories is determined using the average cost
method or the first-in, first- out (FIFO) method.
INVESTMENTS IN EQUITY SECURITIES
Certain of the Company's other investments are classified as available-for-sale.
Accordingly, any unrealized holding gains and losses, net of taxes, are excluded
from income and recognized as a separate component of stockholders' equity until
realized. Fair value of the securities is determined based on market prices at
the balance sheet dates (Notes D and I).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is generally
calculated on the straight-line method for financial reporting purposes and
generally on accelerated methods for tax reporting purposes.
INTANGIBLE ASSETS
Intangible assets are comprised of the cost of business acquisitions in excess
of the fair value assigned to the net tangible assets acquired and the costs of
technology, licenses and patents purchased in business acquisitions. The excess
of cost over the fair value of net assets acquired is amortized on the
straight-line basis over either 40 years or an estimated useful life, whichever
is shorter. Other intangibles are amortized over their estimated useful lives.
Included in other charges is amortization expense for 1997, 1996 and 1995, of
$5.0 million, $4.8 million and $6.6 million, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
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
and for Long-Lived Assets to Be Disposed Of." Consideration of impairment is
based on assessment of an asset's ability to contribute to the profitability of
the Company (see Note B).
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign operations are translated into U.S.
dollars at year-end exchange rates. Income and expense items are translated at
average exchange rates during the year. Foreign currency gains and losses
arising from transactions are reflected in net income. Included in other charges
for 1997, 1996 and 1995 are foreign exchange gains (losses) of $(6.1) million,
$(2.6) million and $1.4 million, respectively. Balance sheet translation gains
and losses are reflected as a separate component of stockholders' equity.
REVENUE RECOGNITION
Revenues are recognized when finished products are shipped to unaffiliated
customers or services have been rendered, with appropriate provision for
uncollectable accounts.
33
14
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, except gains or losses
on contracts designated to hedge a net investment, and currency options, which
are designated to hedge future cash flows. These exceptions are recorded as
translation adjustments.
Financial instruments, primarily interest rate swaps, are used to manage
interest rate risks. The interest differentials from these swaps are recorded as
interest expense.
INCOME TAXES
Deferred income taxes are determined 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 non-U.S. taxes on the undistributed earnings of
non-U.S. subsidiaries, except for amounts the Company has designated to be
permanently reinvested (Note K).
EARNINGS PER SHARE
Primary net income per share is calculated based on the weighted average number
of shares of common stock and common stock equivalents outstanding during the
year. Common stock equivalents consist of stock options. Fully diluted net
income per share further assumes the conversion of the Company's Series B ESOP
Convertible Preferred Stock held by the Company's Employee Stock Ownership Plan
(Note I).
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 the
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 1996 and 1995 have been reclassified to conform to the 1997
presentation.
NOTE B ACQUISITIONS, DIVESTITURES & RESTRUCTURING
SPECIALTY CHEMICALS AND MATERIALS
During 1997, earnings were reduced by the recognition of special charges
totaling $18.2 million primarily related to a cost reduction program in the
Specialty Chemicals and Materials Group. These charges are for asset impairments
of $10.3 million and severance of $7.9 million. The Company expects the plan to
be completed during fiscal 1998.
On February 16, 1996, the Company acquired an 80% controlling interest in
an Indonesian carbon black company for approximately $50 million plus the
assumption of $9 million of debt. Since the date of acquisition, the results of
operations have been included in the Company's Consolidated Statement of Income.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to the net assets
acquired based on their estimated fair values. The balance of the purchase
price, $29 million, was recorded as excess of purchase price over fair value of
net assets acquired (goodwill), and is being amortized over 30 years on a
straight-line basis.
During 1997, 1996 and 1995, the Company paid $8.8 million, $4.3 million and
$6.1 million, respectively, of costs accrued in 1993 for employee separation and
a facility closing. The Company expects to pay its remaining reserve of $0.4
million during fiscal year 1998.
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 $169.2 million in cash, 42,500 common shares of Aearo Corporation,
representing 42.5% of Aearo's outstanding common stock, and $22.5 million of
Aearo's non-voting 12.5% preferred stock. In addition, Aearo Corporation and its
subsidiaries assumed approximately $22.2 million of the third party current
liabilities relating to the safety business and approximately $4.8 million in
debt. The Company recorded a gain on the sale of $32.6 million. 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.
On December 18, 1997, the Company signed an agreement to acquire the
remaining interest in its fumed silica joint venture in Rheinfelden, Germany.
The purchase price is approximately $20 million, and the acquisition is
effective October 1, 1997.
34
15
ENERGY
The Company sold TUCO for $85 million, including working capital adjustments.
The Company recorded a gain related to the sale of $38.9 million. Cash proceeds
from the sale were received October 4, 1996.
NOTE C INVENTORIES
Inventories were as follows:
SEPTEMBER 30 1997 1996
================================================================================
DOLLARS IN THOUSANDS
Raw materials $ 81,142 $ 71,061
Work in process 59,747 72,914
Finished goods 64,114 72,163
Other 41,883 44,292
- --------------------------------------------------------------------------------
Total $246,886 $260,430
================================================================================
Inventories valued under the LIFO method comprised approximately 35% and
33% of 1997 and 1996 total inventory, respectively. At September 30, 1997 and
1996, the estimated current cost of these inventories exceeded their stated
valuation determined on the LIFO basis by approximately $32 million and $30
million, respectively.
NOTE D INVESTMENTS
At September 30, 1997 and 1996, investments in net assets of affiliated
companies accounted for under the equity method amounted to $86.1 million and
$79.4 million, respectively.
The combined results of operations and financial position of the Company's
equity-basis affiliates are summarized below:
SEPTEMBER 30 1997 1996
================================================================================
DOLLARS IN THOUSANDS
CONDENSED INCOME STATEMENT INFORMATION
Net sales $632,061 $586,951
Gross margin 234,717 221,060
Net income 35,144 39,685
CONDENSED BALANCE SHEET INFORMATION
Current assets $296,610 $282,945
Non-current assets 419,468 432,738
Current liabilities 260,051 255,344
Non-current liabilities 307,814 315,564
Net worth 148,213 144,775
================================================================================
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 $57.6 million and
recorded a gain of $28.3 million related to the sale.
Equity securities classified as available-for-sale have been reflected on
the balance sheet at their fair values. During 1997, the Comp any exercised its
rights to purchase 642,232 shares of common stock of K N Energy, Inc. for a
total cost of $11.3 million. At September 30, 1997 and 1996, unrealized gains of
$53.9 million and $29.9 million, which are net of deferred tax liabilities of
$33.4 million and $19.1 million, respectively, have been reflected as a separate
component of stockholders' equity (Note I).
NOTE E PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment is summarized as follows:
SEPTEMBER 30 1997 1996
================================================================================
DOLLARS IN THOUSANDS
Land and improvements $ 50,246 $ 52,442
Buildings 294,201 267,579
Machinery and equipment 1,218,006 1,105,326
Other 55,207 47,089
Construction in progress 142,175 239,609
- --------------------------------------------------------------------------------
Total property, plant and
equipment $1,759,835 $1,712,045
Less: accumulated depreciation 837,526 809,053
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 922,309 $ 902,992
================================================================================
NOTE F ACCOUNTS PAYABLE & ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
SEPTEMBER 30 1997 1996
================================================================================
DOLLARS IN THOUSANDS
Accounts payable $116,620 $121,274
Accrued employee compensation 21,168 23,263
Other accrued liabilities 86,166 106,212
- --------------------------------------------------------------------------------
Total $223,954 $250,749
================================================================================
35
16
NOTE G DEBT
Long-term debt consisted of the following:
SEPTEMBER 30 1997 1996
================================================================================
DOLLARS IN THOUSANDS
Notes due 1997, 10.25% $100,000 $100,000
Notes due 2002-2022, 8.07% 105,000 105,000
Notes due 2004-2011, 7.17% 90,000 --
Guarantee of ESOP notes, due 2013, 8.29% 62,520 64,283
Term loan, due 2000, 8.7% 10,101 13,127
Term loan, due 2001, 8.4% -- 12,540
Foreign term loan, due 2001, 5.4% 10,785 15,768
Overseas Private Investment Corporation
term loan, due 2002, floating rate 7.5%
and 7.5% at September 30, 1997
and 1996, respectively 9,400 11,200
Industrial Revenue Bonds due
1997-2014, 7.75%-14% 1,000 4,000
Other, including foreign term loans 11,716 11,754
- --------------------------------------------------------------------------------
$400,522 $337,672
- --------------------------------------------------------------------------------
Less: current portion of long-term debt (114,978) (16,175)
- --------------------------------------------------------------------------------
Total $285,544 $321,497
================================================================================
In June 1992, the Company filed a $300 million shelf registration statement
with the Securities and Exchange Commission. Subsequently, $105 million of notes
payable were refinanced with notes of a weighted average maturity of 19 years
and a weighted average interest rate of 8.07%. The notes were issued at par and
provide for principal to be repaid at maturity.
In February 1997, the Company issued $90 million of medium term notes. The
notes have a weighted average maturity of 11 years and a weighted average
interest rate of 7.17%.
During fiscal 1989, the Company's Employee Stock Ownership Plan (ESOP)
borrowed $75 million 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 $62.5 million as a liability on the
Company's consolidated balance sheet at September 30, 1997. An equal amount,
representing deferred employee benefits, has been recorded as a reduction of
stockholders' equity (Note I).
During 1997, the Company replaced its revolving credit and term loan
facility. Under the new credit agreement, the Company may borrow up to $300
million at floating rates. The agreement contains provisions regarding certain
indebtedness limitations that 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 3, 2002. No amounts were
outstanding under this credit agreement at September 30, 1997.
The aggregate principal amounts of long-term debt due in each of the five
fiscal years 1998 through 2002 are $115 million, $13.4 million, $11.9 million,
$7.6 million and $27.9 million, respectively.
Based primarily on dealer quotes at September 30, 1997 and 1996, the fair
value of long-term borrowings was approximately $428 million and $355 million,
respectively.
The weighted average interest rate on short-term borrowing was
approximately 7% and 8% as of September 30, 1997 and 1996, respectively.
Cash paid for interest during 1997, 1996 and 1995 totaled $38.8 million,
$39.1 million and $38 million, respectively.
On October 20, 1997, the Company issued $50 million of long-term notes. The
notes have a weighted average maturity of 30 years and a weighted average
interest rate of 7.1%.
NOTE H PENSION PLANS & POSTRETIREMENT BENEFITS
PENSION PLANS
Net periodic pension cost was comprised of the following elements:
YEARS ENDED SEPTEMBER 30 1997 1996 1995
================================================================================
DOLLARS IN THOUSANDS
Current year service cost $ 7,683 $ 7,841 $ 7,629
Interest accrued on pension
obligations 13,986 13,431 12,493
Actual return on plan assets (28,256) (18,821) (25,320)
Net amortization 10,299 2,903 10,606
- --------------------------------------------------------------------------------
Net periodic pension cost $ 3,712 $ 5,354 $ 5,408
================================================================================
The following table sets forth the funded status of pension plans:
SEPTEMBER 30 1997 1996
================================================================================
DOLLARS IN THOUSANDS
Actuarial present value of projected
benefit obligations $195,031 $188,092
Plan assets at fair value (primarily
fixed-income and equity securities) 222,381 202,526
- --------------------------------------------------------------------------------
Excess of plan assets over projected
benefit obligations 27,350 14,434
Unrecognized net gain (48,851) (33,207)
Unrecognized prior service cost 6,053 7,656
Unrecognized net asset being amortized
over 16 years (4,896) (5,612)
- --------------------------------------------------------------------------------
Net deferred pension credit (included
in other liabilities) $(20,344) $(16,729)
================================================================================
36
17
The Company has trusteed, non-contributory pension plans covering most
employees in the United States and certain non-U.S. 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 million borrowed by the ESOP (Notes G and I).
At September 30, 1997 and 1996, the projected benefit obligations included
accumulated benefit obligations of $175.6 million and $164.1 million,
respectively, of which $167.7 million and $154.6 million were vested in 1997 and
1996, respectively.
The following weighted average rates were used in the calculations:
YEARS ENDED SEPTEMBER 30 1997 1996
================================================================================
Discount rate 7.4% 7.4%
Expected rate of return on plan assets 8.9% 8.9%
Assumed rate of increase in compensation 5.0% 5.0%
================================================================================
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 the y 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 1997 1996 1995
================================================================================
DOLLARS IN THOUSANDS
Current year service cost $ 880 $ 848 $ 672
Interest accrued on postretirement
benefit obligations 5,584 5,261 5,301
Net amortization 221 185 --
Net periodic postretirement
benefit cost $6,685 $6,294 $5,973
================================================================================
The following table sets forth the funded status of the postretirement benefit
plans:
YEARS ENDED SEPTEMBER 30 1997 1996
================================================================================
DOLLARS IN THOUSANDS
Accumulated postretirement benefit obligations:
Retirees $ 61,861 $ 58,303
Fully eligible active plan participants 6,324 6,660
Other active plan participants 12,060 14,302
- --------------------------------------------------------------------------------
80,245 79,265
Plan assets at fair value -- --
Excess of accumulated postretirement
benefit obligations over plan assets (80,245) (79,265)
Unrecognized net loss (gain) 10,834 10,875
Unrecognized prior service cost (1,146) 82
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost $(70,557) $(68,308)
================================================================================
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, 1997 and 1996 by
approximately $8.4 million and $6.9 million, respectively, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for the years then ended by approximately $775 thousand and $700 thousand,
respectively.
The following rates were used in the calculations:
YEARS ENDED SEPTEMBER 30 1997 1996
================================================================================
Discount rate 7.3% 7.3%
Assumed rate of increase in compensation 5.3% 5.3%
Assumed annual rate of increase in health
care benefits 5.5% 9.5%
Annual decrease in assumed rate of increase
in health care benefits -- 1.0%
Assumed ultimate trend rate 5.5% 5.3%
Assumed ultimate trend rate to be
reached in year 1997 2001
================================================================================
37
18
NOTE I STOCKHOLDERS' EQUITY
The following table summarizes the changes in stockholders' equity for each of
the three years in the period.
YEARS ENDED SEPTEMBER 30 1997 1996 1995
=================================================================================================================
DOLLARS IN THOUSANDS (except per share amounts)
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 $ (6,565) $ (4,836) $ (4,003)
Purchase of treasury stock (2,823) (1,729) (833)
- -----------------------------------------------------------------------------------------------------------------
End of year $ (9,388) $ (6,565) $ (4,836)
=================================================================================================================
COMMON STOCK
Beginning of year $ 135,550 $ 67,775 $ 67,775
Two-for-one stock split -- 67,775 --
- -----------------------------------------------------------------------------------------------------------------
End of year $ 135,550 $ 135,550 $ 67,775
=================================================================================================================
ADDITIONAL PAID-IN CAPITAL
Beginning of year $ 23,618 $ 17,799 $ 3,783
Sale of treasury stock to the Company's savings plans 2,161 2,456 3,576
Issuance of treasury stock under employee compensation
plans, including tax benefits of $3,616 and $9,416 in
1997 and 1996, respectively 13,480 21,795 10,440
Two-for-one stock split -- (18,432) --
- -----------------------------------------------------------------------------------------------------------------
End of year $ 39,259 $ 23,618 $ 17,799
=================================================================================================================
RETAINED EARNINGS
Beginning of year $1,176,708 $1,062,482 $ 916,942
Net income 92,745 194,057 171,932
Common dividends paid ($0.40, $0.36, $0.30 per share),
net of tax benefits of $213 and $549 in 1997 and 1996 (27,993) (25,347) (22,841)
Preferred dividends paid to ESOP, net of tax benefits (3,258) (3,301) (3,551)
Redemption of preferred stock purchase rights -- (1,840) --
Two-for-one stock split -- (49,343) --
- -----------------------------------------------------------------------------------------------------------------
End of year $1,238,202 $1,176,708 $1,062,482
=================================================================================================================
COMMON TREASURY STOCK
Beginning of year $ (634,370) $ (528,751) $ (467,171)
Purchase of treasury stock (84,704) (122,390) (75,857)
Sale of treasury stock to the Company's savings plans 1,490 1,372 4,348
Issuance of treasury stock under employee compensation plans 12,173 15,399 9,929
- -----------------------------------------------------------------------------------------------------------------
End of year $ (705,411) $ (634,370) $ (528,751)
=================================================================================================================
UNEARNED COMPENSATION
Beginning of year $ (16,611) $ (10,834) $ (7,884)
Issuance of treasury stock under employee compensation plans (10,973) (11,857) (8,196)
Amortization 9,238 6,080 5,246
- -----------------------------------------------------------------------------------------------------------------
End of year $ (18,346) $ (16,611) $ (10,834)
=================================================================================================================
DEFERRED EMPLOYEE BENEFITS
Beginning of year $ (64,283) $ (65,907) $ (67,403)
Principal payment by ESOP under guaranteed loan 1,763 1,624 1,496
- -----------------------------------------------------------------------------------------------------------------
End of year $ (62,520) $ (64,283) $ (65,907)
=================================================================================================================
UNREALIZED GAIN ON MARKETABLE SECURITIES (NOTE D)
Beginning of year $ 29,874 $ 32,023 $ 28,787
Net change in unrealized gain 24,062 (2,149) 3,236
- -----------------------------------------------------------------------------------------------------------------
End of year $ 53,936 $ 29,874 $ 32,023
=================================================================================================================
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Beginning of year $ 25,674 $ 39,913 $ 16,327
Foreign currency translation adjustments, including tax
charge of $123 in 1997 and a tax benefit of $4,325 in 1996 (44,499) (14,239) 23,586
- -----------------------------------------------------------------------------------------------------------------
End of year $ (18,825) $ 25,674 $ 39,913
- -----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY, END OF YEAR $ 727,793 $ 744,931 $ 685,000
=================================================================================================================
38
19
SHARES OF STOCK
SEPTEMBER 30 1997 1996 1995
================================================================================
DOLLARS IN THOUSANDS
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 5,744 5,036 4,504
Purchased 1,212 708 532
- --------------------------------------------------------------------------------
End of year 6,956 5,744 5,036
================================================================================
COMMON STOCK
Beginning of year 135,550 67,775 67,775
Two-for-one stock split -- 67,775 --
- --------------------------------------------------------------------------------
End of year 135,550 135,550 67,775
================================================================================
COMMON TREASURY STOCK
Beginning of year 63,961 30,393 29,784
Purchased 3,506 2,998 1,549
Issued (1,399) (1,489) (940)
Two-for-one stock split -- 32,059 --
- --------------------------------------------------------------------------------
End of year 66,068 63,961 30,393
================================================================================
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, 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 Seri es 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 87.5 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 $1,016. The
redemption price declines annually until it becomes $1,000 per share 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, 1997, 5.98 million shares of
the Company's common stock were reserved for conversion of the Series B ESOP
Convertible Preferred Stock.
In May 1997, the Board of Directors authorized the Company to purchase up
to 4 million shares of the Company's common stock, superseding the previous
authorization issued in May 1996. As of September 30, 1997, the Company had
purchased approximately 600,000 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 67.8 million shares were issued in connection with the split. Also,
$18.4 million was reclassified from additional paid-in-capital and $49.3 million
from retained earnings to common stock. All common share and per share amounts
in these financial statements have been restated to reflect the split where
appropriate.
NOTE J SAVINGS PLAN & INCENTIVE
COMPENSATION PLANS
The Company sponsors a profit sharing and savings plan called the Cabo t
Retirement Incentive Savings Plan (CRISP). Under the plan, 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 for
1997, 1996 and 1995 were $4.0 million, $3.5 million and $3.9 million,
respectively.
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 that may
be exercised as stock options or PARs. These awards were granted at fair market
value of Cabot's stock at date of grant, vested ratably on each of the next four
anniversaries of the award and generally expire ten years from the date of
grant. 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 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.
39
20
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 consist of Restricted Stock, which could be purchased at a price
equal to 40% of the fair market value on the date of the award or nonqualified
stock options at fair market value of Cabot's stock on the date of the award.
Variations of 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 and the options expire five years from the date of grant.
As of September 30, 1997, the Company has reserved 2.8 million shares of
common stock for issuance under the 1996 plan. There were approximately 1.1
million shares available for future grants at September 30, 1997. Compensation
expense recognized during 1997, 1996 and 1995 for restricted stock grants was
$9.2 million, $6.1 million and $5.2 million, respectively.
The following table summarizes the plan's restricted stock activity for the
last three fiscal years:
Weighted
Average
Restricted Exercise
Stock Price
================================================================================
Outstanding at September 30, 1994 2,337,708 $11.70
Granted 854,100 10.00
Vested (623,212) 11.10
Canceled (490,792) 11.80
Outstanding at September 30, 1995 2,077,804 11.15
Granted 829,450 10.68
Vested (571,204) 11.39
Canceled (49,033) 10.92
Outstanding at September 30, 1996 2,287,017 10.93
Granted 864,879 14.33
Vested (695,862) 10.84
Canceled (203,034) 10.57
Outstanding at September 30, 1997 2,253,000 $11.87
================================================================================
STOCK-BASED COMPENSATION
During fiscal 1997, the Company was required to adopt SFAS 123 "Accounting for
Stock Based Compensation" ("SFAS 123"). SFAS 123 allows companies to measure
compensation cost in connection with stock option plans using a fair value-based
method, or to continue to use an intrinsic value-based method, which generally
does not result in a compensation cost. The Company has decided to continue to
use the intrinsic value-based method and accordingly no compensation cost has
been recorded for options granted to employees. Had the fair value-based method
been adopted consistent with the provisions of SFAS 123, the Company's pro forma
net income and pro forma net income per share for the years ended September 30,
1997 and 1996 would not have been materially different.
The following table summarizes the plans' stock option activity from
September 30, 1994 through September 30, 1997:
Weighted
Average
Stock Exercise
Options Price
================================================================================
Outstanding at September 30, 1994 2,651,766 $ 8.69
Granted 90,300 10.00
Exercised (355,148) 8.95
Canceled (37,166) 8.69
Outstanding at September 30, 1995 2,349,752 9.12
Granted 59,700 26.70
Exercised (680,462) 8.78
Canceled (28,896) 10.53
Outstanding at September 30, 1996 1,700,094 9.77
Granted 90,600 23.88
Exercised (299,848) 8.99
Canceled (33,992) 15.79
Outstanding at September 30, 1997 1,456,854 $10.67
================================================================================
Of the 1,456,854 stock options outstanding as of September 30, 1997,
1,232,337 were exercisable at a weighted average exercise price of $8.39.
================================================================================
Options Outstanding at September 30, 1997
Weighted Average
Remaining
Range of Number Exercise Contractual
Exercise Price Outstanding Price Life Years
================================================================================
$7.59-$7.94 828,195 $ 7.77 3.67
$8.00-$9.97 224,356 $ 8.73 1.27
$10.47-$12.28 179,823 $10.85 3.22
$20.00-$26.70 224,480 $23.15 4.04
================================================================================
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995
and additional awards in the future are anticipated.
NOTE K INCOME TAXES
Income before income taxes was as follows:
YEARS ENDED SEPTEMBER 30 1997 1996 1995
================================================================================
DOLLARS IN THOUSANDS
Domestic $ 30,192 $134,289 $102,980
Foreign 86,839 145,545 153,049
- --------------------------------------------------------------------------------
Total $117,031 $279,834 $256,029
================================================================================
40
21
A summary of taxes on income is as follows:
YEARS ENDED SEPTEMBER 30 1997 1996 1995
================================================================================
DOLLARS IN THOUSANDS
U.S. federal and state:
Current $ 8,610 $33,247 $ 64,204
Deferred (9,379) 1,031 (25,794)
- --------------------------------------------------------------------------------
Total $ (769) $34,278 $ 38,410
================================================================================
Foreign:
Current $46,723 $61,184 $ 61,039
Deferred (3,823) 2,754 1,631
- --------------------------------------------------------------------------------
Total $42,900 $63,938 $ 62,670
================================================================================
Total U.S. and Foreign $42,131 $98,216 $101,080
================================================================================
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 1997 1996 1995
================================================================================
DOLLARS IN THOUSANDS
Computed tax expense at the
expected statutory rate $40,961 $97,942 $ 89,720
Foreign income:
Impact of taxation at different
rates, repatriation and other 967 5,817 5,407
Impact of foreign losses for
which a current tax benefit
is not available 4,196 2,432 529
State taxes, net of federal effect 991 2,718 5,560
Foreign sales corporation (1,211) (2,968) (1,500)
U.S. and State benefits from
research and experimentation
activities (1,290) (5,981) (350)
Other, net (2,483) (1,744) 1,714
- --------------------------------------------------------------------------------
Provision for income taxes $42,131 $98,216 $101,080
================================================================================
Significant components of deferred income taxes were as follows:
YEARS ENDED SEPTEMBER 30 1997 1996
================================================================================
DOLLARS IN THOUSANDS
Deferred tax assets:
Depreciation and amortization $ 26,015 $ 24,929
Pension and other benefits 54,057 48,945
Environmental matters 12,604 14,928
Restructuring charges 7,061 4,396
Investments 10,850 10,850
State and local taxes 4,672 5,620
Net operating loss and other tax carryforwards 17,309 13,512
Other 26,425 26,573
- --------------------------------------------------------------------------------
Subtotal 158,993 149,753
- --------------------------------------------------------------------------------
Valuation allowances (16,128) (15,724)
- --------------------------------------------------------------------------------
Total deferred tax assets $142,865 $134,029
================================================================================
Deferred tax liabilities:
Depreciation and amortization $ 65,746 $ 64,272
Pension and other benefits 12,977 10,888
Investments 42,776 28,208
Other 102,089 107,463
- --------------------------------------------------------------------------------
Total deferred tax liabilities $223,588 $210,831
================================================================================
The Company increased the valuation allowance in 1997 by $404,000 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 $56.3 million of net operating losses and other tax
carryforwards remain at September 30, 1997, $42.7 million of which expire in the
years 1998 through 2004, and $13.6 million 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 million 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, 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 1997, 1996 and 1995 totaled $65.5
million, $109.1 million and $60.3 million, respectively.
NOTE 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 for 1997, 1996 and 1995, totaled $14.8 million, $14.5
million and $16.5 million, respectively. Future minimum rental commitments under
non-cancelable leases are as follows:
DOLLARS IN THOUSANDS
================================================================================
1998 $12,012
1999 11,633
2000 10,238
2001 9,296
2002 5,722
2003 and thereafter 17,550
- --------------------------------------------------------------------------------
$66,451
================================================================================
41
22
OTHER LONG-TERM COMMITMENTS
During 1997, the Company entered into a contractual arrangement in an effort to
recover valuable tantalum ore. The Company is committed to pay approximately $20
million with respect to this project, and expects to pay the majority of this in
the first half of 1998.
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 liquefaction plant in Trinidad, and to purchase approximately 60
percent of the natural gas produced by the plant. Once the plant is operational,
it is estimated that it will produce 3.3 trillion cubic feet of natural gas
over a period of 20 years. At September 30, 1997, the Company's investment in
this project was approximately $7.8 million and is included in other investments
on the balance sheet. Natural 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.
As of September 30, 1997, approximately $39.7 million 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 applicable to each
site. The Company reviews the adequacy of this reserve as circumstances change
at individual sites. Included in other charges for 1996 and 1995 are
environmental expenses of $3 million and $17 million, respectively. There were
no charges for 1997.
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.
NOTE 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 $63.4 million of foreign exchange
forward contracts outstanding at September 30, 1997. The fair value of such
contracts, which was the replacement value, represented a net unrealized loss of
approximately $0.9 million as of September 30, 1997. Forward exchange and option
contracts generally have maturities that do not exceed twelve months. See Note A
for information on the Company's policy on forward exchange contract and
currency option gains and losses.
INTEREST RATE
During 1997, the Company entered into an interest rate swap agreement. Pursuant
to the agreement, beginning on August 29, 1997, the Company will pay a floating
rate based on a basket of London Interbank Offered Rates ("LIBOR") of various
countries on a notional $50 million and receive a floating rate based on the
U.S. LIBOR rate as determined at three month intervals through August 29, 2004.
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 7.4% on a notional $100 million 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 that 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. At
September 30, 1997 and 1996, the Company had trade receivables of approximately
$62.6 million and $66.2 million, respectively, from international tire
manufacturers. 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, 1997, and no manufacturer exceeded 5% of the
Company's receivables at that date.
42
23
NOTE N FINANCIAL INFORMATION BY INDUSTRY SEGMENT & GEOGRAPHIC AREA
Financial information by industry segment for 1993 through 1997, as set forth on
page 23, is an integral part of these financial statements. Energy segment sales
for 1996 and 1995 include sales to a major customer in the amount of $278
million and $250 million, respectively. Transfers between geographic areas are
recorded at cost plus mark-up or at market.
Financial information by geographic area is as follows:
YEARS ENDED SEPTEMBER 30 1997 1996 1995
================================================================================
DOLLARS IN MILLIONS
SALES
United States:
Sales, excluding export sales
Specialty Chemicals and
Materials $ 566.9 $ 526.6 $ 605.7
Energy 199.7 422.0 342.6
Export sales 93.9 109.7 93.7
- --------------------------------------------------------------------------------
Total 860.5 1,058.3 1,042.0
Europe 603.8 638.6 642.9
Other areas 302.1 281.5 249.5
- --------------------------------------------------------------------------------
Total 1,766.4 1,978.4 1,934.4
Less: Eliminations 136.4 122.1 104.0
- --------------------------------------------------------------------------------
Net sales $1,630.0 $1,856.3 $1,830.4
================================================================================
OPERATING PROFIT
United States:
Specialty Chemicals and
Materials $ 107.3 $ 142.3 $ 155.9
Energy 6.6 23.0 12.7
Europe 67.0 99.2 103.0
Other areas 6.0 19.0 27.9
- --------------------------------------------------------------------------------
Total operating profit 186.9 283.5 299.5
Interest expense 43.2 41.7 35.6
Unallocated corporate expenses, net(a) 26.6 29.2 28.0
Gains 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
- --------------------------------------------------------------------------------
Income before income taxes $ 117.1 $ 279.8 $ 256.0
================================================================================
IDENTIFIABLE ASSETS
United States:
Specialty Chemicals and
Materials $ 602.6 $ 529.2 $ 426.9
Energy 88.4 79.7 133.8
Europe 434.1 494.8 465.3
Other areas 405.6 403.7 275.7
General corporate(b) 206.8 270.8 253.7
Equity in affiliates--Europe 6.8 9.3 26.9
Equity in affiliates--Other areas 79.3 70.1 72.0
- --------------------------------------------------------------------------------
Total $1,823.6 $1,857.6 $1,654.3
================================================================================
(a) Unallocated corporate expenses, net, include corporate management costs
reduced by investment income.
(b) General corporate assets include cash, short-term investments, investments
other than equity basis, income taxes receivable, deferred taxes and
headquarters' assets.
NOTE O UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited financial results by quarter for the fiscal years ended September 30,
1997 and 1996 are summarized below and should be read in conjunction with
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
DOLLARS IN MILLIONS,
EXCEPT PER
SHARE AMOUNTS DEC MARCH JUNE SEPT YEAR
================================================================================
FISCAL 1997
Net sales $398.8 $432.0 $398.6 $400.6 $1,630.0
Cost of sales $279.7 $305.6 $274.2 $284.9 $1,144.4
Net income $ 25.1 $ 29.4 $ 28.7 $ 9.5(a) $ 92.7
Income applicable to
common shares $ 24.3 $ 28.6 $ 27.9 $ 8.7 $ 89.5
- --------------------------------------------------------------------------------
Income per common
share (primary)(c) $ 0.34 $ 0.40 $ 0.40 $ 0.12 $ 1.27
================================================================================
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(b) $ 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
================================================================================
(a) Includes asset impairments and severance charges of $18.2 million.
(b) Includes a $38.9 million gain on the sale of coal transportation business,
TUCO, and a $28.3 million gain on the sale of equity securities of K N
Energy, Inc.
(c) The November 10, 1995 two-for-one stock split has been reflected in all per
share amounts.
43
24
MANAGEMENT RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements were prepared by Cabot Corporation in
conformity with generally accepted accounting principles. The Company's
management is responsible for the integrity of these statements and of the data,
estimates and judgments that underlie them.
Cabot Corporation maintains a system of internal accounting controls
designed to provide reasonable assurance that the Company's assets are
safeguarded from loss or unauthorized use, that transactions are properly
authorized and recorded, and that financial records are reliable and adequate
for public reporting. The standard of reasonable assurance is based on
management's judgment that the cost of such controls should not exceed their
associated benefits. The system is monitored and evaluated on an ongoing basis
by management in conjunction with the Company's internal audit staff,
independent accountants, and the Audit Committee of the Board of Directors.
Coopers & Lybrand L.L.P., independent accountants, were engaged by the
Company to audit these financial statements. Their audit was conducted in
accordance with generally accepted auditing standards and included a study and
evaluation of the Company's system of internal accounting controls, selected
tests of that system, and related audit procedures as they consider necessary to
render their opinion.
The Audit Committee of the Board of Directors provides general oversight
responsibility for the financial statements. Composed entirely of Directors who
are not employees of the Company, the Committee meets periodically with Company
management, internal auditors and the independent accountants to review the
quality of the financial reporting and internal controls as well as the results
of the auditing efforts. The internal auditors and independent accountants have
full and direct access to the Audit Committee, with and without management
present.
/s/ Samuel W. Bodman
- -----------------------------------
Samuel W. Bodman
Chief Executive Officer
/s/ Robert L. Culver
- -----------------------------------
Robert L. Culver
Chief Financial Officer
/s/ William T. Anderson
- -----------------------------------
William T. Anderson
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, 1997 and 1996 and the related consolidated
statements of income and cash flows for each of the three fiscal years in the
period ended September 30, 1997. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three fiscal years in the
period ended September 30, 1997, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
- ------------------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
October 23, 1997, except for
the information in Note B,
for which the date is
December 18, 1997.
44