1
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management's discussion and analysis of financial condition and results of
operations
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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, fumed silica, plastics, performance
materials, microelectronics materials, inkjet colorants, and specialty fluids.
The Energy Group consists of Cabot LNG Corporation, a wholly owned subsidiary,
and its subsidiaries.
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.
Operating profit for 1998, 1997 and 1996 was $156 million, $187 million and
$284 million, respectively. Operating profit for each of the three years
included special items. Special items in 1998 included charges of $60 million
for an asset impairment related to an Indonesian carbon black plant and $25
million related to a tantalum ore recovery project. Special items for 1997
included $18 million of charges related to asset impairment and severance costs
in the Company's Specialty Chemicals and Materials Group. Special items for 1996
included $6 million of gains related to the Company's LNG business. Operating
profit before special items for 1998, 1997 and 1996 was $241 million, $205
million and $278 million, respectively. Operating margins as a percentage of
sales, before special items, during 1998, 1997 and 1996 were 15%, 13% and 15%,
respectively. Unless indicated otherwise, the following discussion excludes the
special items noted above to form a comparative basis.
Overview
The Company reported increased operating profit for the year, despite the
negative effects of weakened Asian economies and a strengthened U.S. dollar.
Certain key fundamentals in the Company's operating environment, which had
negatively impacted the financial results of the Company in 1997, gradually
improved during 1998. For example, the Company's carbon black business
experienced higher feedstock costs throughout 1997. During 1998, carbon black
feedstock costs retreated. Lower carbon black feedstock costs and higher volumes
offset the negative effects of lower selling prices and weak Asian market
conditions, sustaining carbon black's operating profit for 1998. Also, the
recovery of the U.S. electronics industry contributed to improved operating
results in the Company's performance materials business, compared with 1997. The
Company's fastest growing business, Microelectronics Materials Division ("MMD"),
reported a significant increase in operating profit for the year. MMD is
expected to continue to experience significant growth in 1999* (see page 29).
The fumed silica business reported improved results year over year. Finally, the
Company's liquefied natural gas ("LNG") business more than doubled its operating
profit in 1998, primarily due to greater firm sales commitments of LNG.
Outlook
Looking forward, however, the LNG business is expected to have a negative
operating comparison in 1999 due to lower year-to-year gas selling prices.
Earnings in the Company's carbon black business are expected to improve very
modestly. Given positive volume trends in the performance materials,
microelectronics materials and fumed silica businesses, the Company expects some
earnings growth in 1999* (see page 29).
Financial Information By Industry Segment
--------------------------------------------
Years ended September 30 1998 1997 1996
================================================================================
Dollars in millions
Net Sales and Other
Operating Revenues
Specialty Chemicals and Materials $1,437 $1,430 $1,434
Energy 211 200 422
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TOTAL NET SALES AND OTHER
OPERATING REVENUES $1,648 $1,630 $1,856
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Operating Profit--Before
Special Items
Specialty Chemicals and Materials $ 226 $ 199 $ 261
Energy 15 6 17
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TOTAL OPERATING PROFIT--
BEFORE SPECIAL ITEMS 241 205 278
Special Items (85) (18) 6
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TOTAL OPERATING PROFIT $ 156 $ 187 $ 284
Interest Expense $ (42) $ (43) $ (42)
General Corporate/
Other Expenses (31) (27) (29)
Costs Related to Divested
Business (5) -- --
Gains on Sales of Equity Securities 90 -- 28
Gain on Sale of Business -- -- 39
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INCOME BEFORE
INCOME TAXES $ 168 $ 117 $ 280
================================================================================
Net Sales and Other Operating Revenues
Net sales and other operating revenues for 1998, 1997 and 1996 were $1,648
million, $1,630 million and $1,856 million, respectively. Revenues increased $18
million in 1998 compared to 1997 due to a 6% increase in volume in the Specialty
Chemicals and Materials Group, which more than offset the effects of lower
carbon black selling prices, and as a result of greater firm sales commitments
in the Company's LNG business.
Net sales and other operating revenues for 1996 included $278 million from
the operations of TUCO, the Company's
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management's discussion and analysis of financial condition and results of
operations (continued)
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former coal-handling subsidiary. Excluding TUCO results from 1996, the Company
experienced an increase in revenue during 1997 of $52 million. The increase was
attributable to greater revenues in the Company's LNG business. LNG reported an
increase of $56 million, or 39%, in revenue due to 36% greater volumes and
better pricing.
[GRAPHIC OMITTED]
The Company's gross margin as a percentage of net sales for 1998, 1997 and
1996 was 32%, 30% and 29%, respectively. In 1998, profit improved in all of the
Company's businesses. Profit improvement in the Specialty Chemicals and
Materials Group was primarily the result of higher volumes and improved
operating efficiencies in the Company's fumed silica, microelectronics and
performance materials businesses. In the carbon black business, higher volumes
and lower feedstock costs offset the effect of lower year-to-year carbon black
selling prices. Higher gross margin in the Company's LNG business was primarily
due to greater availability of liquefied natural gas entering into 1998,
allowing the Company to take advantage of higher year-to-year gas prices and to
increase firm sales commitments during the first half of the year.
Gross margin for 1996 included 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 the effect of 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 than in 1996.
Expenses
The Company's selling, research, technical and administrative expenses for 1998,
1997 and 1996 were $313 million, $300 million and $286 million, respectively. In
1998, selling and administrative costs included $5 million of costs related to a
divested business. Exclusive of these costs, the increase in administrative
expenses in 1998 was due to increased selling expenses related to new product
initiatives and higher corporate expenses, which primarily related to the
reorganization of certain corporate functions.
The increase in selling, research, technical and administrative expenses in
1997 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
continues to invest in research and marketing for the development of high-value,
differentiated new products and new businesses.
Asia
Weakened economies in parts of Asia have somewhat altered the risks and
opportunities of the Company's activities in affected economies. The primary
impact has been on the performance of the Company's Indonesian carbon black
business. Weakened Asian conditions negatively impacted the operating results of
the Company by approximately $17 million in 1998. Exposures continue to exist
from, among other things, continued lower operating results due to decreases, or
delays in, sales and orders and increased receivables delinquencies and
potential bad debts in the region. While this situation continues to receive
close monitoring and increased management attention, it is not expected to have
a material adverse effect on the financial position, results of operations or
liquidity of the Company in 1999* (see page 29).
Special Items
The financial and economic circumstances in Indonesia resulted in a significant
decline in carbon black demand in the local market there. As a result,
management decided to temporarily halt production at one of the Company's two
Indonesian carbon black plants during 1998. The Company recognized an impairment
loss of $60 million in 1998 for the difference between the carrying value of the
plant's long-lived assets and the estimated fair value. The charge to the
Specialty Chemicals and Materials Group consisted of $34 million for property,
plant and equipment and other assets, and $26 million for goodwill and other
intangible assets. The Company will continue to maintain the facility and assess
the demand for carbon black in the region as a basis for future decisions to
restart production.
During 1997, the Company entered into an agreement to process tantalum ore
residues accumulated from the Company's past production of tantalum. The Company
expected that the process would produce economic recoveries of tantalum and
capitalized prepaid expenses of approximately $25 million associated with the
agreement. However, the tantalum recovery rate was
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management's discussion and analysis of financial condition and results of
operations (continued)
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substantially lower than expected. Therefore, management discontinued the
project which resulted in a charge of $25 million to the operations of the
Specialty Chemicals and Materials Group in 1998.
The $18 million charge for special items in fiscal year 1997 related to the
Specialty Chemicals and Materials Group. These special charges were various
one-time charges of $10 million for asset impairment costs (primarily canceled
capital projects and the write-off of unproductive assets) and $8 million of
employee severance costs (primarily early retirement programs) mostly undertaken
as part of a continuing effort to reduce costs. The Company substantially
completed these initiatives during 1998. Given the effects of evolving to a
market-focused structure, it is not possible to quantify the savings generated
from these efforts.
During 1996, the Company recognized a gain of $3 million related to the
settlement of a contractual matter and a $3 million gain from a reduction in the
Company's ownership position in the Trinidad natural gas liquefaction project.
[GRAPHIC OMITTED]
Other Expenses
Interest expense for 1998, 1997 and 1996 was $42 million, $43 million and $42
million, respectively. The decrease in interest expense in 1998 was largely due
to lower interest rates. The increase in interest expense in 1997 was primarily
due to higher levels of debt resulting from the Company's stock repurchase
program and capital expenditures.
General corporate/other expenses for 1998, 1997 and 1996 were $31 million,
$27 million and $29 million, respectively. The increase in 1998 was primarily
the result of changes in the Company's organizational structure (see page 20).
During the year, the Company reorganized into 20 strategic business units. As a
result, the Company's manufacturing, human resources, information services,
safety, health and environment and finance functions are in the process of being
coordinated more centrally to support the business units efficiently. The
decrease in unallocated corporate expenses during 1997 was primarily due to
lower environmental expenses.
Provision for Income Taxes
The effective tax rate on income from operations was 36% in 1998 and 1997, and
35% in 1996. The tax rate in 1996 reflected 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. A more
detailed analysis of income taxes is presented in Note L to the Consolidated
Financial Statements.
Net Income
Net income in 1998 was $122 million ($1.61 per diluted common share) compared
with $93 million ($1.19 per diluted common share) in 1997 and $194 million
($2.42 per diluted common share) in 1996. Net income in 1998 included a $90
million ($0.77 per diluted common share) gain from the sale of 2.3 million
shares of the Company's investment in K N Energy, Inc. common stock, a $60
million ($0.51 per diluted common share) asset impairment charge related to an
Indonesian carbon black plant, and a $25 million ($0.21 per diluted common
share) charge related to a tantalum ore recovery project. Net income in 1997
included special charges for asset impairments and severance costs totaling $18
million ($0.15 per diluted common share). Net income for 1996 included several
special items. These items were $5 million ($0.06 per diluted common share) of
tax benefits from research and experimentation tax credits, a $28 million ($0.22
per diluted common share) gain from the sale of 1.85 million shares of the
Company's investment in K N Energy, Inc., a $39 million ($0.31 per diluted
common share) gain from the sale of the Company's coal handling and distribution
business, and other gains totaling $6 million ($0.05 per diluted common share)
in the Company's LNG business. Excluding special items, net income would have
been $118 million ($1.56 per diluted common share) in 1998, $104 million ($1.34
per diluted common share) in 1997, and $143 million ($1.78 per diluted common
share) in 1996.
Specialty Chemicals and Materials
Specialty Chemicals and Materials Group sales increased to $1,437 million in
1998 from $1,430 million in 1997. The increase in sales reflects 6% greater
chemical volumes, partially offset by lower year-to-year carbon black selling
prices and the effects of a stronger U.S. dollar.
In 1997, Specialty Chemicals and Materials Group sales were flat compared
with 1996, despite significantly lower year-to-year carbon black selling prices.
The effect of a 6% global increase in specialty chemicals volumes was more than
offset by lower selling prices, primarily in the Company's European and Asia
Pacific
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management's discussion and analysis of financial condition and results of
operations (continued)
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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.
The Company has been developing and commercializing new high-value,
differentiated products in its specialty chemicals businesses. Five-year new
products (defined as products that were first sold in commercial quantities
within the last five years) accounted for approximately 11% of specialty
chemical revenues in 1998, compared with 9% in 1997, and 8% in 1996. The Company
continues to vigorously pursue a number of new product and new business
opportunities.
Operating profit for the Specialty Chemicals and Materials Group totaled
$226 million, $199 million and $261 million in 1998, 1997 and 1996,
respectively. Operating profit, before special items, increased 14% in 1998 on
6% greater volumes. The Company's carbon black business reported a modest
increase in operating profit as a result of increased volumes, primarily in
North America and Europe. The effect of lower year-to-year carbon black selling
prices more than offset the effect of lower feedstock costs. The Company's fumed
silica, microelectronics materials, performance materials and plastics
businesses all experienced improved operating results for the year.
[GRAPHIC OMITTED]
In 1997, the Company's carbon black operations accounted for most of the
year-to-year decline in operating profit. Lower European and Asia Pacific
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 CARBON BLACK business reported a modest increase in operating profit
before special items in 1998 despite the negative effects of weak Asia Pacific
demand and a strengthened U.S. dollar. Overall volumes increased 3% year over
year, however, the carbon black business continued to experience lower
year-to-year margins, as the effect of lower selling prices more than offset
lower feedstock costs. Overall selling prices were down 4% during 1998. In
addition, feedstock costs during 1998 were on average 9% lower.
The carbon black business's operating profit decreased 23% in 1997 from
1996. Lower selling prices, coupled 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.
The Company's FUMED SILICA business reported increased sales in 1998 and
1997 of 4% and 15%, respectively. The increases in 1998 and 1997 were primarily
the result of higher volumes coupled with higher prices and increased sales of
new products. Operating profit increased 20% and 8% in 1998 and 1997,
respectively, due to higher gross margins, partially offset by increased
spending to support a new market segmentation strategy. The Company's purchase
of its former partner's 50% interest in the Rheinfelden, Germany, fumed silica
plant contributed significantly to improved operating results in 1998.
In the PLASTICS business, sales were flat and operating profit increased
20% in 1998. Improved product mix and cost reduction efforts contributed to the
earnings improvement in this business in 1998. Sales and operating profit in
1997 were down 6% and 15%, respectively from 1996. Higher volumes in 1997 were
more than offset by lower selling prices. Severe pricing pressure that began in
1996 continued throughout 1997.
Sales and operating profit of the PERFORMANCE MATERIALS business, which
primarily manufactures tantalum products for the electronic capacitors industry,
increased 15% and 56%, respectively, in 1998. Volumes increased 19% during 1998,
reflecting strengthened demand for capacitors from the U.S. electronics
industry. The effects of increased volumes were partially offset by increased
new product development spending.
Sales increased 4% and operating profit decreased 23% in 1997. Lower
volumes and higher material costs were partially offset by higher overall
selling prices. During the second half of 1996 and the first half of 1997,
volumes were weak due to a slowdown in the U.S. electronics market and inventory
surpluses downstream in the tantalum supply chain.
The Company's MICROELECTRONICS MATERIALS business reported a significant
growth in sales and operating profit. In 1998, this business experienced a 61%
increase in volumes. Operating profit improved significantly in 1998 due to
increased volumes and improved plant utilization, offset somewhat by higher
spending on research and development, and market development initiatives.
Positive operating profit was reported for the first time in this business in
1996. The Company expects continued significant sales growth in this business
during 1999* (see page 29).
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management's discussion and analysis of financial condition and results of
operations (continued)
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The Company's SPECIALTY FLUIDS business unit is developing cesium-based
drilling and completion fluids, and markets those fluids to the oil well
drilling and services industry. The Company's cesium processing plant located at
a mine owned by a Cabot subsidiary in Manitoba, Canada, has been producing
commercial quantities of brine fluids that are now available for tests expected
to be conducted during the first quarter of calendar 1999. Commercial sales of
the product are expected to begin in the latter part of 1999* (see page 29).
Energy
The LNG business conducts liquefied natural gas importing, storing, transporting
and marketing operations. In prior years, the LNG business, together with the
Company's TUCO coal services business, formed the Company's Energy Group. The
Company sold TUCO, effective September 30, 1996. During 1996, TUCO earned $14
million of operating profit.
The LNG business reported sales and operating profit of $211 million and
$15 million, respectively in 1998, compared with $200 million and $6 million,
respectively, in 1997. The increase in earnings in 1998 is primarily due to a
more ample and assured supply of LNG than in previous years, which enabled
management to contract firm sales commitments for a greater amount of LNG during
the winter season. Customers pay a premium over the commodity natural gas prices
in order to secure firm commitments for delivery. In the second half of the
year, operating results were negatively affected by lower than usual summer gas
prices and a weak summer liquid refill market due to an unusually warm winter.
The LNG business supplied the New England gas market with 17 cargoes in 1998
versus 18 cargoes in 1997.
In 1997, revenue increased to $200 million from $144 million in 1996. The
increase in revenue was due to significantly greater volumes and higher gas
prices. 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 million during 1997, from $3 million during 1996. In 1996, operating profit
excluded $6 million of special items. The positive earnings effect of higher
volumes and prices was partially offset by higher gas costs.
The profitability of the LNG business during the next year, until its
Trinidad LNG supply becomes available during the second half of fiscal 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* (see page 29).
Risk Management
The Company's objective in managing its exposure to interest rate changes,
foreign currency rate changes and commodity price changes is to limit the impact
of the changes on cash flows and earnings. To achieve its objectives, the
Company identifies these risks and manages them through its regular operating
and financing activities and, when deemed appropriate, through the use of
derivative financial instruments. The Company enters into contracts with
customers and suppliers that are designed to limit the risk of certain foreign
currency rate and commodity price changes. The Company enters into certain
contracts in the carbon black business in which the price of the product is
adjusted based on certain movements in feedstock. The LNG business enters into
certain supply contracts where the purchase price of the LNG is adjusted based
on the final selling price. Certain contracts in the Company's foreign
subsidiaries are denominated in the U.S. dollar or a currency other than the
functional currency of the subsidiary. Additionally, the Company attempts to
limit its net monetary exposure in currencies of hyperinflationary countries,
primarily in South America and Asia.
The Company determines the net worldwide exposures to interest rate
changes, foreign currency rate changes, and commodity price changes and limits
the impact of rate and price changes through the use of derivative financial
instruments. When entered into, these financial instruments are generally
designated as hedges of underlying exposures associated with specific assets,
liabilities, or firm commitments and are monitored to determine if they remain
effective hedges. Market risk exposure to other financial instruments of the
Company are not material to earnings, cash flow or fair values.
Foreign Currency
The Company's international operations are subject to certain opportunities and
risks, including currency fluctuations and government actions. The Company
closely monitors its operations in each country so it can effectively respond to
changing economic and political environments and to fluctuations in foreign
currencies. The primary currencies to which the Company is exposed, and that it
primarily hedges, include the German deutschemark and other European currencies
and, to a lesser extent, South American and Asian currencies. Accordingly, the
Company utilizes foreign currency option contracts and forward contracts to
hedge its exposure primarily on receivables and payables denominated in
currencies other than the entities' functional currencies and on anticipated
transactions and firm com-
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management's discussion and analysis of financial condition and results of
operations (continued)
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mitments. The Company monitors its foreign exchange exposures to ensure the
overall effectiveness of its foreign currency hedge positions.
Interest Rates
The Company's objective in managing its exposure to interest rate changes is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. To achieve its objectives, the Company uses
interest rate swaps to hedge and/or lower financing costs and to adjust fixed
and variable rate debt positions. The Company maintains the percentage of fixed
and variable rate debt within defined parameters.
Commodity
The Company has price risk exposure due to changes in its natural gas sales
prices and supply costs. The Company enters into commodity futures contracts to
hedge its gross margin exposure. The Company utilizes commodity futures
contracts for hedging firmly committed and anticipated transactions and monitors
its exposure daily to ensure overall effectiveness of its hedge positions.
Value At Risk
The Company utilizes a Value-at-Risk ("VAR") model to determine the maximum
potential loss in the fair value of its interest rate, commodity and foreign
exchange sensitive derivative financial instruments. (see Note O to the
Consolidated Financial Statements regarding the Company's financial instruments
as of September 30, 1998). The Company's computations for each type of exposure
were based on the interrelationships between movements in various currencies,
commodities and interest rates. These interrelationships were determined by
observing interest rate, commodity and foreign currency market changes over
corresponding periods. The firm and anticipated transactions, assets and
liabilities, denominated in foreign currencies, which are hedged by the
derivative financial instruments, were excluded from the model. The VAR model
estimates were made assuming normal market conditions and a 95% confidence
level. There are various modeling techniques which can be used in the VAR
computation. The Company's computations are based on the Monte Carlo simulation.
The VAR model is a risk analysis tool and does not purport to represent actual
losses in fair value that will be incurred by the Company, nor does it consider
the potential effect of favorable changes in market factors. The Company's VAR
models estimate a maximum loss in market value for each type of derivative
instrument held as of September 30, 1998. The results of the VAR models are as
follows:
Maximum Loss Period
============================================================================
Foreign currency $0.4 million two weeks
Interest Rate $ 12 million six months
Commodity $ 1 million one month
============================================================================
At no time during the year did the change in market value of these
instruments exceed the VAR measure stated above.
Management does not foresee or expect any significant changes in the
management of hedging instruments relating to foreign currency, commodity or
interest rate exposures or in the strategies it employs to manage such exposures
in the near future* (see page 29).
Since the Company utilizes currency, interest rate and commodity sensitive
derivative instruments for hedging, a loss in fair value for those instruments
is generally offset by increases in the value of the underlying transaction.
Euro
On January 1, 1999, eleven of fifteen member countries of the European Union are
scheduled to establish fixed conversion rates between their existing currencies
("legacy currencies") and one common currency, the euro. The euro will then
trade on currency exchanges and may be used in business transactions. The
conversion to the euro will eliminate currency exchange rate risk among the
eleven member countries. Beginning in January 2002, new euro-denominated bills
and coins will be issued. The Company's business units affected by the euro
conversion have established plans to address the issues raised by the euro
currency conversion. These issues include, among others, the need to adapt
computer and financial systems, business processes and equipment, and the need
to accommodate euro-denominated transactions and the impact of one common
currency on product pricing, taxation and governmental and legal regulations.
The Company does not expect the system and equipment conversion costs to be
material to its financial condition, results of operations or cash flows. Due to
numerous uncertainties, the Company cannot reasonably estimate the effects one
common currency will have on pricing and the resulting impact, if any, on its
financial condition, results of operations or cash flows* (see page 29).
Cash Flow and Liquidity
Cash generated in 1998 from the Company's operating activities increased to $236
million from $144 million in 1997. Cash gener-
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management's discussion and analysis of financial condition and results of
operations (continued)
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ated from operations was used substantially to fund capital spending and
repurchases of the Company's common stock.
Research and technical service spending for 1998, 1997 and 1996 was $83
million, $83 million and $80 million, respectively. Spending, as a percentage of
the Specialty Chemicals and Materials Group revenues, was approximately 6% in
1998, 1997 and 1996. The Company is committed to the development of new,
differentiated products for its specialty chemicals businesses. The Company
anticipates research and development spending to remain near $80 million in 1999
for these and other initiatives* (see page 29).
Capital spending on property, plant and equipment, and investments and
acquisitions for 1998, 1997 and 1996 was $247 million, $181 million and $269
million, respectively. The major components of the 1998 capital program included
new business expansion spending, the Company's share of a natural gas
liquefaction project in Trinidad, refurbishment of the Company's LNG tanker,
capacity expansion in the Company's fumed silica business and normal plant
operating capital projects.
[GRAPHIC OMITTED]
Although the Company expects to continue to invest in new business
opportunities, it expects to decrease the rate of capital spending in 1999 from
1998. These expenditures are expected to include portions of the projects
mentioned in the preceding paragraph and several new business initiatives. In
addition to normal plant operating projects, the Company expects 1999
expenditures to include environmental compliance costs in North America* (see
page 29).
Over the next several years, the Company also expects to spend a
significant portion of its $36 million environmental reserve in connection with
remediation at various environmental sites. These sites are primarily associated
with divested businesses* (see page 29).
In 1998, the Company sold 2.3 million shares of K N Energy, Inc. ("KNE")
and recognized a $90 million gain from the sale of those securities. Proceeds
from the sale were used to repay debt. The Company continues to own
approximately 650,000 shares of KNE common stock.
In October 1997, the Company issued $50 million of notes maturing as
follows: $25 million mature in 30 years and $25 million mature in 30 years with
a one-time put option 7 years from issuance. Proceeds from the issuance were
used to reduce short-term debt.
[GRAPHIC OMITTED]
On September 29, 1998, the Company filed a shelf registration statement
with the Securities and Exchange Commission ("SEC") for up to $500 million of
debt securities which the Company may issue from time to time. The SEC declared
the registration statement effective on October 13, 1998.
On September 11, 1998, the Company's Board of Directors authorized the
repurchase of 4 million shares of its common stock. As of September 30, 1998,
approximately 3.3 million shares remained available for purchase under the Board
authorization.
During 1998, the Company repurchased 3.8 million shares of its common stock
for a total of $101 million. During 1997, 3.5 million shares were repurchased
for a total of $85 million. During 1996, 3 million shares were repurchased for a
total of approximately $122 million. The Company's common stock repurchase
activity is expected to continue in 1999* (see page 29).
During 1998, the Company paid cash dividends of $0.42 per share. In
November 1998, the Board of Directors approved an $0.11 per share dividend
payable in the first quarter of fiscal year 1999.
The ratio of total debt (including short-term debt net of cash) to capital
was 43% at the end of 1998 and 1997.
The Company maintains a credit agreement under which the Company may borrow
up to $300 million at floating rates. This facility is available through January
3, 2002. The Company had no borrowings outstanding under this line at September
30, 1998.
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management's discussion and analysis of financial condition and results of
operations (continued)
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Management expects cash from operations and present financing arrangements,
including the Company's unused line of credit and shelf registration, to be
sufficient to meet the Company's cash requirements for the foreseeable future*
(see page 29).
Year 2000 Readiness Disclosure
As the millennium approaches, there is growing public attention concerning the
impact that the Year 2000 date change could have on all organizations that rely,
directly or indirectly, on computerized systems to help run their operations.
This issue may have a direct impact on computer systems that affect safety at a
company's plants, systems that enable key suppliers to provide raw material and
parts, and systems that assist a company to make and ship product and account
for revenue and costs.
In evaluating its Year 2000 readiness, the Company has developed a program
to inventory, assess, remediate and test its core business systems, information
technology infrastructure (IT) and embedded plant systems. Core business systems
are those software and hardware systems that record relevant data for business
operations and summarize revenue, cost, cash flow, capital and other
information. Information technology infrastructure refers primarily to computer
hardware and software used in the desktop environment. Embedded plant systems
are all computer based controls and equipment which are embedded within a
plant's manufacturing equipment and systems.
The Company carried out an inventory of its core business systems in order
to assess such systems' Year 2000 readiness. The Company's assessment indicated
that, as a result of investments in significant systems renewals during the past
several years, many of the Company's core business systems are Year 2000 ready.
Although some of the Company's older core business systems required replacement
or remedial action, such replacement or remedial action is continuing under the
Company's Year 2000 program, to be completed in 1999. The Company is now
performing concurrent inventory, assessment and remediation for its information
technology infrastructure and embedded systems. Testing of these systems in
concert will occur as the remediation process progresses. The Company expects to
complete all phases of its Year 2000 program before the millennium.
The Company does not believe that the cost of implementing system and
program changes specifically necessary to address Year 2000 issues will have a
material effect on the Company's results of operations or financial condition.
During fiscal year 1998, the Company recognized costs of approximately $1
million that it would not have spent but for the Year 2000 issue. The Company
expects to spend approximately $2 million during fiscal year 1999. There can be
no assurance that there will not be increased costs associated with the
implementation of such program changes.
The Company cannot predict reliably the source, nature or extent of any
Year 2000 disruptions that may be experienced in the U.S. or other countries
where it operates and, therefore, cannot predict reliably the effect any such
disruptions may have on the Company, its operations or financial condition. The
Company does not know what is the most likely "worse case scenario" as a result
of Year 2000 disruptions, but believes that the effects on the Company are not
substantially different from those facing industry generally. The Company
believes that the most likely causes of disruption are one or more of the
following: disruptions in the banking system, disruptions in the supply of
electricity to the Company's plants that could delay production of the Company's
products and disruptions in transportation services that could delay shipments
from the Company's suppliers or to the Company's customers. In addition, the
Company does not know whether any of its customers will experience Year 2000
disruptions either directly or as a result of disruptions in their customers'
businesses or in the economy generally, but any such disruptions might reduce
demand for the Company's products and adversely affect the Company. At this
time, however, the Company believes that if none of the third parties with which
it deals, directly or indirectly, experience disruptions or delays related to
the Year 2000 problem, it will be able to continue to operate with little or no
disruption or delay.
The Company has made appropriate inquiries of all of its critical
information technology vendors (hardware and software) and is in the process of
making inquiries concerning the Year 2000 readiness of certain suppliers. Even
in cases where the Company has received assurances that delays or disruption
will not be encountered by third parties, the Company is not in a position to
determine with certainty whether the assurances will prove accurate, given the
uncertainties associated with the Year 2000.
The Company is identifying those areas where it will develop contingency
plans. Because such plans necessarily depend on the Company's then state of
readiness with respect to the Year 2000 issues and the information it then has
with respect to third parties and other external factors, those plans will
likely continue to evolve until even after December 31, 1999. In addition, many
of the Company's contingency plans will of necessity depend on the continued
operation of various third parties, in which case such contingency plans may be
hindered by Year 2000 disruptions affecting such third parties.
28
9
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("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 way that 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 of implementing
SFAS 131.
In February 1998, FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"), which revises employers' disclosures about pension and
other postretirement benefit plans. It significantly changes current financial
statement disclosure requirements under SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
SFAS No. 132 standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer useful. It does not change the measurement or recognition of those
plans. The Statement is effective for fiscal years beginning after December 15,
1997.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. This Statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company is
currently evaluating the effect of implementing SFAS 133.
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). The SOP is applicable to
the Company beginning in fiscal 2000. The Company engages in ongoing update,
enhancement and replacement of its computer systems. Currently, the Company
capitalizes external costs associated with services and software incurred in
connection with these activities which are significant. To date, internal
resources associated with these activities have not been significant. The
Company is currently evaluating the effect of implementing SOP 98-1.
In April 1998, AcSEC issued Statement of Position 98-5, "Accounting for the
Costs of Start-Up Activities" ("SOP 98-5"), which requires all costs of start-up
activities to be expensed as incurred. SOP 98-5 is effective for years beginning
after December 15, 1998. The adoption of this SOP by the Company will be
reflected as a cumulative effect of a change in accounting principle. The
Company is currently evaluating the effect of implementing SOP 98-5.
*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, management's expectations for the Company's product development
program, Year 2000 risks and the impact of the euro conversion. 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,
patent rights of others, Year 2000 disruptions, demand for our 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. The risk management discussion and the estimated amounts
generated from the analyses are forward-looking statements of market risk
assuming certain adverse market conditions occur. Actual results in the future
may differ materially from these projected results due to actual developments in
the global financial markets. The methods used by the Company to assess and
mitigate risks should not be considered projections of future events or losses.
29
10
- --------------------------------------------------------------------------------
consolidated balance sheets
- --------------------------------------------------------------------------------
-----------------------------
September 30 1998 1997
===================================================================================================================================
Dollars in millions
ASSETS
Current assets:
Cash and cash equivalents $ 39.6 $ 39.2
Accounts and notes receivable (net of reserve for doubtful accounts of $4.6 and $5.6) 284.3 288.6
Inventories (Note C) 251.1 246.9
Prepaid expenses 26.1 23.4
Deferred income taxes (Note L) 17.8 15.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 618.9 613.3
- -----------------------------------------------------------------------------------------------------------------------------------
Investments:
Equity (Notes B and D) 91.1 86.1
Other (Notes D and N) 72.5 146.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total investments 163.6 232.7
- -----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment (Note E) 1,914.3 1,759.8
Accumulated depreciation and amortization (936.3) (837.5)
- -----------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 978.0 922.3
Other assets:
Intangible assets (net of accumulated amortization of $16.0 and $12.4) (Note B) 24.2 39.1
Deferred income taxes (Note L) 3.9 4.2
Other assets 16.6 14.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total other assets 44.7 57.4
Total assets $1,805.2 $1,825.7
===================================================================================================================================
The accompanying notes are an integral part of these financial statements.
30
11
- --------------------------------------------------------------------------------
consolidated balance sheets
- --------------------------------------------------------------------------------
---------------------------
September 30 1998 1997
===========================================================================================================
Dollars in millions
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 253.3 $ 200.8
Current portion of long-term debt (Note G) 11.4 115.0
Accounts payable and accrued liabilities (Notes F and H) 268.2 223.9
U.S. and foreign income taxes 0.4 2.8
Deferred income taxes (Note L) 3.0 1.0
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 536.3 543.5
- -----------------------------------------------------------------------------------------------------------
Long-term debt (Note G) 316.3 285.5
Deferred income taxes (Note L) 82.4 99.2
Other liabilities (Notes H, K and N) 139.6 146.9
Commitments and contingencies (Note N)
Minority interest 25.1 22.8
Stockholders' equity (Notes D, G, I and K):
Preferred stock:
Authorized: 2,000,000 shares of $1 par value
Series A Junior Participating Preferred Stock
Issued and outstanding: none
Series B ESOP Convertible Preferred Stock 7.75% Cumulative
Issued: 75,336 shares (aggregate redemption value of $67.4 and $69.4) 75.3 75.3
Less cost of shares of preferred treasury stock (13.6) (9.4)
Common stock:
Authorized: 200,000,000 shares of $1 par value
Issued: 67,241,624 and 135,549,936 shares 67.2 135.5
Additional paid-in capital 4.9 39.3
Retained earnings 671.7 1,238.2
Less cost of common treasury stock -- (705.4)
Unearned compensation (26.2) (18.3)
Deferred employee benefits (60.6) (62.5)
Unrealized gain on marketable securities 16.7 53.9
Foreign currency translation adjustments (29.9) (18.8)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 705.5 727.8
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,805.2 $ 1,825.7
===========================================================================================================
The accompanying notes are an integral part of these financial statements.
31
12
- --------------------------------------------------------------------------------
consolidated statements of income
- --------------------------------------------------------------------------------
-----------------------------------------------
Years ended September 30 1998 1997 1996
============================================================================================================================
Dollars in millions, except per share amounts
Revenues:
Net sales and other operating revenues $ 1,647.8 $ 1,630.0 $ 1,856.3
Interest and dividend income (Notes D and O) 5.0 6.7 8.9
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues 1,652.8 1,636.7 1,865.2
============================================================================================================================
Costs and expenses:
Cost of sales 1,120.9 1,144.4 1,310.0
Selling and administrative expenses 229.7 216.5 206.9
Research and technical service 82.7 82.7 79.6
Interest expense (Notes G and O) 42.0 43.2 41.7
Special items (Note B) 85.0 18.2 --
Gain on sale of equity securities (Note D) (90.3) -- (28.3)
Gain on sale of business (Note B) -- -- (38.9)
Other charges, net 14.8 14.6 14.4
- ----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,484.8 1,519.6 1,585.4
============================================================================================================================
Income before income taxes 168.0 117.1 279.8
Provision for income taxes (Note L) (60.5) (42.1) (98.2)
Equity in net income of affiliated companies (Note D) 17.0 19.5 18.5
Minority interest (2.9) (1.7) (6.0)
- ----------------------------------------------------------------------------------------------------------------------------
Net income 121.6 92.8 194.1
============================================================================================================================
Dividends on preferred stock, net of tax benefit of $2.0, $2.1 and $2.1 (3.2) (3.3) (3.3)
- ----------------------------------------------------------------------------------------------------------------------------
Income applicable to common shares $ 118.4 $ 89.5 $ 190.8
============================================================================================================================
Weighted average common shares outstanding, in millions (Notes I and J):
Basic 65.6 67.5 69.6
Diluted 74.6 76.7 79.3
Income per common share (Note J):
Basic $ 1.80 $ 1.33 $ 2.74
Diluted $ 1.61 $ 1.19 $ 2.42
============================================================================================================================
The accompanying notes are an integral part of these financial statements.
32
13
- --------------------------------------------------------------------------------
consolidated statements of cash flows
- --------------------------------------------------------------------------------
-----------------------------------------
Years ended September 30 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Dollars in millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $121.6 $ 92.8 $ 194.1
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 115.4 109.9 97.0
Deferred tax expense (benefit) 12.0 (13.2) 3.7
Equity in income of affiliated companies, net of dividends received (9.5) (9.1) (5.6)
Special items 60.0 18.2 --
Gain on sale of equity securities (90.3) -- (28.3)
Gain on sale of business -- -- (38.9)
Other, net 11.7 8.2 8.8
Changes in assets and liabilities, net of the effect of the consolidation of
equity affiliates and excluding assets and liabilities of businesses sold:
Decrease (Increase) in accounts and notes receivable 7.6 (28.9) 0.1
Decrease (Increase) in inventories (3.2) 2.7 (39.0)
Increase (Decrease) in accounts payable and accrued liabilities 30.8 (22.6) (3.4)
Other, net (19.7) (13.8) (36.6)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 236.4 144.2 151.9
===========================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (187.4) (162.8) (209.1)
Proceeds from sales of property, plant and equipment 6.3 1.1 2.8
Purchases of equity securities (20.2) (11.3) --
Proceeds from sales of equity securities 129.5 -- 57.6
Investments and acquisitions, excluding cash acquired (39.2) (7.3) (59.5)
Proceeds from sale of business -- 35.0 --
Cash from consolidation of equity affiliates and other 1.9 -- 11.2
- ---------------------------------------------------------------------------------------------------------------------------
Cash used by investing activities (109.1) (145.3) (197.0)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 63.1 90.0 9.8
Repayments of long-term debt (133.5) (21.5) (40.2)
Net increase in short-term debt 52.5 16.7 168.6
Purchases of treasury stock (105.2) (85.8) (123.5)
Sales and issuances of treasury stock 24.4 16.7 28.6
Cash dividends paid to stockholders (31.7) (31.3) (30.5)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities (130.4) (15.2) 12.8
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 3.5 (2.6) (0.4)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and cash equivalents 0.4 (18.9) (32.7)
Cash and cash equivalents at beginning of year 39.2 58.1 90.8
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 39.6 $ 39.2 $ 58.1
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
33
14
- --------------------------------------------------------------------------------
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
Cabot Corporation (the "Company") are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company 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 Equivalents
Cash equivalents include all highly liquid investments with a maturity of three
months or less at date of acquisition.
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. (Note C)
Investments
Investments include investments in equity affiliates, investments in equity
securities, and investments accounted for under the cost method. Investments in
equity securities are classified as available-for-sale and are recorded at their
fair market values. Accordingly, any unrealized holding gains and losses, net of
taxes, are excluded from income and recognized as a separate component of
stockholders' equity. The fair value of equity securities is determined based on
market prices at the balance sheet dates. The cost of equity securities sold is
determined by the specific identification method. (Notes D and I)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property,
plant and equipment is generally calculated on the straight-line method for
financial reporting purposes. The depreciable lives for buildings, machinery and
equipment, and other fixed assets are 20 to 25 years, 10 to 20 years and 3 to 20
years, respectively. (Note E)
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 the shorter of the estimated useful life or 40 years.
Other intangibles are amortized over their estimated useful lives. Included in
other charges is amortization expense for 1998, 1997 and 1996, of $5.3 million,
$5.0 million and $4.8 million, respectively. (Note B)
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may
not be fully recoverable. Each impairment test is based on comparison of
undiscounted cash flows to the recorded value of the asset. If an impairment is
indicated, the asset is written down to its fair value. (Note B)
Foreign Currency Translation
Substantially all assets and liabilities of foreign operations are translated
into U.S. dollars at exchange rates in effect at the balance sheet dates.
Unrealized currency translation adjustments are accumulated in a separate
component of stockholders' equity. 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 1998, 1997 and 1996 are foreign exchange losses of $6.6 million, $6.1
million and $2.6 million, respectively. The financial statements of foreign
operations that operate in hyperinflationary economies are translated at either
current or historical exchange rates, as appropriate. These currency adjustments
are included in net income. (Note I)
34
15
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
Financial Instruments
Derivative financial instruments are used by the Company to manage its interest
rate and foreign currency exposures, and to a lesser extent, commodity prices.
Interest rate swaps are employed to achieve the Company's interest rate
objectives. The interest differential to be paid or received under the related
interest rate swap agreements is recognized over the life of the related debt
and is included in interest expense or income. Realized gains and losses on
foreign currency instruments, that are effective as hedges of net cash flows in
foreign operations, are recognized in income as the instruments mature. Realized
and unrealized gains and losses on forward currency contracts, that are
effective as hedges of assets and liabilities, are recognized in income.
Realized gains and losses on foreign currency instruments, that are hedges of
committed transactions, are recognized at the time the underlying transaction is
completed. Commodity futures and forward contracts are used by the Company, on
occasion, to hedge the procurement of raw materials, primarily feedstock, and to
hedge the sale of liquefied natural gas. Realized gains and losses on commodity
futures and forward contracts on qualifying hedges are included as a component
of raw materials or sales revenues, as appropriate, and are recognized when the
related materials are purchased or sold. (Note O)
Fair Values of Financial Instruments
The recorded amounts of cash and cash equivalents, receivables, investments in
securities, accounts payable, and short-term debt approximate their fair values.
The fair value of long-term debt and derivatives is based upon third party
sources. Fair values received from third party sources are estimated by
appropriate valuation techniques based on information available. The fair-value
estimates do not necessarily reflect the values the Company could realize in the
current market. (Notes G and O)
Revenue Recognition
Revenues are recognized when finished products are shipped to unaffiliated
customers or services have been rendered, with appropriate provision for
uncollectible accounts.
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 L)
Stock-Based Compensation
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company
has elected to account for stock-based compensation plans consistent with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related Interpretations in accounting, and
accordingly, does not recognize compensation cost. The Company discloses the
summary of pro forma effects to reported net income and earnings per share for
1998, 1997 and 1996 as if the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123. (Note K)
Year 2000 Costs
Costs of modifying computer software for Year 2000 compliance are expensed as
they are incurred.
Earnings Per Share
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and requires the presentation of both basic and diluted EPS. As a
result, primary and fully diluted EPS have been replaced by basic and diluted
EPS. Prior years' EPS have been restated to conform with the standards
established by SFAS No. 128. (Notes J and Q)
Environmental Cleanup Matters
The Company expenses environmental costs related to existing conditions
resulting from past or current operations and from which no current or future
benefit is discernible. The Company determines its liability on a site by site
basis and records a liability at the time when it is probable and can be
reasonably estimated. The Company's estimated liability is reduced to reflect
the anticipated participation of other potentially responsible parties in those
instances where it is probable that such parties are legally responsible and
financially capable of paying their respective shares of the relevant costs. The
estimated liability of the Company is not discounted or reduced for possible
recoveries from insurance carriers. (Note N)
35
16
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
Use of Estimates
The preparation of consolidated 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 consolidated 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 1997 and 1996 have been reclassified to conform to the 1998
presentation.
Note B Business Developments and Special Items
On December 18, 1997, the Company signed an agreement, effective October 1,
1997, to acquire the remaining 50% interest in its fumed silica joint venture in
Rheinfelden, Germany, for approximately $20.0 million. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the net assets acquired based on their estimated fair
values. The excess of purchase price over fair value of net assets acquired,
approximately $11.0 million, was recorded as goodwill and is being amortized
over 15 years.
The Company acquired an 80% ownership interest in P.T. Continental Carbon
Indonesia ("PTCCI"), an Indonesian carbon black plant located in Merak,
Indonesia, during 1996. The recent financial and economic circumstances in
Indonesia have resulted in a significant decline in demand for carbon black in
the region. As a result, management decided to halt production at this plant
during 1998. In accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets" ("SFAS No. 121"), the
Company recognized an impairment loss of $60.0 million for the difference
between the carrying value of PTCCI's long-lived assets of $77.0 million and the
estimated fair value. The charge to the Specialty Chemicals and Materials Group
consisted of $34.0 million for property, plant and equipment and other assets
and $26.0 million for goodwill and other intangible assets. The Company will
continue to maintain the facility and assess the demand for carbon black in the
region as a basis for future decisions to restart production.
During 1997, the Company entered into an agreement to process tantalum ore
residues accumulated from the Company's past production of tantalum. The Company
expected the process would produce economic recoveries of tantalum and
capitalized prepaid expenses of approximately $25.0 million associated with the
agreement. However, the tantalum recovery rate was substantially lower than
expected. Therefore, in the third quarter of 1998, management discontinued the
project, resulting in a charge of $25.0 million to operations of the Specialty
Chemicals and Materials Group.
During 1997, earnings were reduced by the recognition of special charges
totaling $18.2 million for asset impairments of $10.3 million and employee
severance costs of $7.9 million in the Specialty Chemicals and Materials Group.
During 1996, the Company sold its coal transportation business, TUCO, for $85.0
million and recorded a gain of $38.9 million related to the sale. Cash proceeds
of $35.0 million from the sale were received on October 4, 1996.
During 1996, the Company recognized gains of $2.5 million on the settlement of a
contractual matter and $3.3 million from a reduction in its ownership position
in the Trinidad natural gas liquefaction project.
On November 14, 1995, the Company modified its existing joint venture agreement
for its carbon black venture in Shanghai, China. This amendment provided for the
expansion of the facility and the increase of the Company's ownership interest
to 70%, which is to take effect as the expansion is funded. As a result, the
Company will account for this venture on a consolidated basis as of October 1,
1998.
Note C Inventories
Inventories were as follows:
-----------------------
September 30 1998 1997
===========================================================================
Dollars in millions
Raw materials $ 68.2 $ 81.1
Work in process 62.9 59.8
Finished goods 76.1 64.1
Other 43.9 41.9
- ---------------------------------------------------------------------------
Total $251.1 $246.9
===========================================================================
36
17
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
Inventories valued under the LIFO method comprised approximately 32% and
35% of 1998 and 1997 total inventory, respectively. At September 30, 1998 and
1997, the estimated current cost of these inventories exceeded their stated
valuation determined on the LIFO basis by approximately $32.0 million and $31.0
million, respectively.
Note D Investments
At September 30, 1998 and 1997, investments in common stock accounted for under
the equity method, amounted to $91.1 million and $86.1 million, respectively.
Dividends received from equity affiliates were $7.5 million in 1998, $10.4
million in 1997 and $12.9 million in 1996.
The combined results of operations and financial position of the Company's
equity-basis affiliates are summarized below:
-----------------------
September 30 1998 1997
============================================================================
Dollars in millions
Condensed Income Statement Information:
Net sales $617.5 $632.1
Gross profit 237.5 234.7
Net income 26.1 40.7
Condensed Balance Sheet Information:
Current assets $280.5 $296.6
Non-current assets 419.1 419.5
Current liabilities 221.9 260.1
Non-current liabilities 306.6 287.3
Net assets 171.1 168.7
============================================================================
Other investments include available-for-sale equity securities. The fair
market value of available-for-sale equity securities was $53.9 million and
$136.8 million as of September 30, 1998 and 1997, respectively. Gains related to
sales of available-for-sale securities were $90.3 million and $28.3 million in
1998 and 1996, respectively. Sales of available-for-sale securities were not
significant for the year ended September 30, 1997.
Note E Property, Plant & Equipment
Property, plant and equipment is summarized as follows:
-----------------------
September 30 1998 1997
===========================================================================
Dollars in millions
Land and improvements $ 73.6 $ 50.2
Buildings 290.6 294.2
Machinery and equipment 1,277.2 1,218.0
Other 74.7 55.2
Construction in progress 198.2 142.2
- ----------------------------------------------------------------------------
Total property, plant and equipment $1,914.3 $1,759.8
Less: accumulated depreciation 936.3 837.5
- ----------------------------------------------------------------------------
Net property, plant and equipment $ 978.0 $ 922.3
============================================================================
Depreciation expense was $110.1 million, $104.9 million and $92.2 million
for the years ended September 30, 1998, 1997 and 1996, respectively.
Note F Accounts Payable & Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following:
-----------------------
September 30 1998 1997
- ----------------------------------------------------------------------------
Dollars in millions
Accounts payable $147.8 $116.6
Accrued employee compensation 22.4 21.2
Other accrued liabilities 98.0 86.1
- ----------------------------------------------------------------------------
Total $268.2 $223.9
============================================================================
Note G Debt
Unsecured long-term debt consisted of the following:
-----------------------------
September 30 1998 1997
- --------------------------------------------------------------------------------
Dollars in millions
Fixed Rate Notes (stated rate):
Notes due 1997, 10.25% $ -- $ 100.0
Notes due 2002-2022, 8.07% 105.0 105.0
Notes due 2004-2011, 7.17% 90.0 90.0
Note due 2027, 7.28% 25.0 --
Note due 2027, put option 2004, 6.57% 25.0 --
Guarantee of ESOP notes, due 2013, 8.29% 60.6 62.5
Foreign term loan, due 2000, 8.7% 6.7 10.1
Other, due beginning in 1999 with various
rates from 3.0% to 18.5% 7.1 12.7
Variable Rate Notes (end of year rate):
Foreign term loan, due 2001, floating
rate 5.4% 8.3 10.8
Overseas Private Investment Corporation
term loan, due 2002, floating rate 7.5% -- 9.4
- --------------------------------------------------------------------------------
$327.7 $ 400.5
Less: current portion of long-term debt (11.4) (115.0)
- --------------------------------------------------------------------------------
Total $316.3 $ 285.5
- --------------------------------------------------------------------------------
37
18
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
In June 1992, the Company filed a $300.0 million shelf registration
statement with the Securities and Exchange Commission. Subsequently, $105.0
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 $90.0 million of medium term notes.
The notes have a weighted average maturity of 11 years and a weighted average
interest rate of 7.17%.
In October 1997, the Company issued a total of $50.0 million in medium term
notes. These notes included a $25.0 million note, with an interest rate of 7.28%
due in 2027, and a $25.0 million note, with an interest rate of 6.57% due in
2027 and a put option in 2004.
On September 29, 1998, the Company filed a $500.0 million shelf
registration statement with the Securities and Exchange Commission which was
effective as of October 13, 1998. This registration includes the remaining $55.0
million not yet issued under the 1992 registration. As of September 30, 1998, no
notes have been issued under the new registration.
During fiscal 1989, the Company's Employee Stock Ownership Plan ("ESOP")
borrowed $75.0 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 $60.6 million and $62.5 million as a
liability on the Company's consolidated balance sheet at September 30, 1998 and
1997, respectively. An equal amount, representing deferred employee benefits,
has been recorded as a reduction of stockholders' equity.
The Company may borrow up to $300.0 million at floating rates under the
terms of a revolving credit and term loan facility. The agreement contains
specific covenants, including certain maximum indebtedness limitations and
minimum cash flow requirements, 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, 1998 or 1997.
The aggregate principal amounts of long-term debt due in each of the five
fiscal years 1999 through 2003 and thereafter are $11.4 million, $10.3 million,
$4.1 million, $25.8 million, $3.0 million and $273.1 million, respectively.
At September 30, 1998 and 1997, the fair value of long-term borrowings was
approximately $333.5 million and $313.0 million, respectively.
The weighted average interest rate on short-term borrowing was
approximately 6% and 7% as of September 30, 1998 and 1997, respectively.
Note H Pension Plans & Postretirement Benefits
Pension Plans
The Company has trusteed, non-contributory pension plans covering most employees
in the United States and various foreign plans covering employees of 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 $75.0 million borrowed by the ESOP.
At September 30, 1998 and 1997, the projected benefit obligations included
accumulated benefit obligations of $204.1 million and $175.6 million,
respectively, of which $197.2 million and $167.7 million were vested in 1998 and
1997, respectively.
Net periodic pension cost was comprised of the following elements:
-------------------------------------------
Years ended September 30 1998 1997 1996
================================================================================
Dollars in millions
Service cost $ 7.9 $ 7.7 $ 7.8
Interest cost 11.2 14.0 13.4
Actual return on plan assets (20.7) (28.3) (18.8)
Net amortization 5.5 10.3 2.9
- --------------------------------------------------------------------------------
Net periodic pension cost $ 3.9 $ 3.7 $ 5.3
================================================================================
38
19
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
The following table sets forth the funded status of pension plans:
------------------------
September 30 1998 1997
============================================================================
Dollars in millions
Actuarial present value of projected
benefit obligation $220.2 $195.0
Plan assets at fair value (primarily
fixed-income and equity securities) 237.8 222.4
- ----------------------------------------------------------------------------
Excess of plan assets over projected
benefit obligation 17.6 27.4
Unrecognized net gain (33.9) (48.9)
Unrecognized prior service cost being
amortized over 6-12 years 1.3 6.1
Unrecognized net transition asset being
amortized over 6 years (3.5) (4.9)
- ----------------------------------------------------------------------------
Net deferred pension credit (included
in other liabilities) $ (18.5) $ (20.3)
============================================================================
The following weighted average rates were used in the calculations:
------------------------
Years ended September 30 1998 1997
============================================================================
Discount rate 6.3% 7.4%
Expected rate of return on plan assets 8.1% 8.9%
Assumed rate of increase in compensation 4.6% 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 they have met certain age and
service requirements at retirement. The Company funds the plans as claims or
insurance premiums are incurred.
Net periodic postretirement benefit cost was comprised of the following
elements:
--------------------------------------
Years ended September 30 1998 1997 1996
============================================================================
Dollars in millions
Service cost $0.8 $0.9 $0.8
Interest cost 5.6 5.6 5.3
Net amortization 0.2 0.2 0.2
- ----------------------------------------------------------------------------
Net periodic postretirement
benefit cost $6.6 $6.7 $6.3
============================================================================
The following table sets forth the funded status of the postretirement
benefit plans:
------------------------------
Years ended September 30 1998 1997
============================================================================
Dollars in millions
Accumulated postretirement benefit
obligations:
Retirees $ 66.3 $ 61.9
Fully eligible active plan participants 8.0 6.3
Other active plan participants 15.9 12.1
- ----------------------------------------------------------------------------
90.2 80.3
Plan assets at fair value -- --
Excess of accumulated postretirement
benefit obligations over plan assets (90.2) (80.3)
Unrecognized net loss 20.0 10.8
Unrecognized prior service cost (1.4) (1.1)
- ----------------------------------------------------------------------------
Accrued postretirement benefit cost $(71.6) $(70.6)
============================================================================
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 for each future year would increase the
accumulated postretirement benefit obligation by approximately $8.4 million as
of September 30, 1998 and 1997, and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the years then
ended by approximately $0.8 million.
The following weighted average rates were used in the calculations:
-------------------------
Years ended September 30 1998 1997
============================================================================
Discount rate 6.3% 7.3%
Assumed rate of increase in compensation 5.3% 5.3%
Assumed annual rate of increase in health
care benefits 5.5% 5.5%
============================================================================
39
20
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
Note I Stockholders' Equity
The following table summarizes the changes in stockholders' equity.
-------------------------------------------
Years ended September 30 1998 1997 1996
=============================================================================================================================
Dollars in millions (except per share amounts)
Preferred Stock
Beginning of year $ 75.3 $ 75.3 $ 75.3
- -----------------------------------------------------------------------------------------------------------------------------
End of year $ 75.3 $ 75.3 $ 75.3
=============================================================================================================================
Preferred Treasury Stock
Beginning of year $ (9.4) $ (6.6) $ (4.9)
Purchase of treasury stock (4.2) (2.8) (1.7)
- -----------------------------------------------------------------------------------------------------------------------------
End of year $ (13.6) $ (9.4) $ (6.6)
=============================================================================================================================
Common Stock
Beginning of year $ 135.5 $ 135.5 $ 67.8
Retirement of treasury stock (68.3) -- --
Two-for-one stock split -- -- 67.7
- -----------------------------------------------------------------------------------------------------------------------------
End of year $ 67.2 $ 135.5 $ 135.5
=============================================================================================================================
Additional Paid-In Capital
Beginning of year $ 39.3 $ 23.6 $ 17.8
Sale of common treasury stock to the Company's savings plans 2.7 2.2 2.4
Issuance of common treasury stock under employee compensation plans,
including tax benefit of $4.7, $3.6 and $9.4 26.8 13.5 21.8
Retirement of common treasury stock (63.9) -- --
Two-for-one stock split -- -- (18.4)
- -----------------------------------------------------------------------------------------------------------------------------
End of year $ 4.9 $ 39.3 $ 23.6
=============================================================================================================================
Retained Earnings
Beginning of year $ 1,238.2 $ 1,176.7 $ 1,062.5
Net income 121.6 92.8 194.1
Common dividends paid ($0.42, $0.40 and $0.36 per share), net of tax benefit
of $0.2, $0.2 and $0.6 (28.5) (28.0) (25.3)
Preferred dividends paid to ESOP, net of tax benefit (3.2) (3.3) (3.3)
Retirement of common treasury stock (656.4) -- --
Redemption of preferred stock purchase rights -- -- (1.9)
Two-for-one stock split -- -- (49.4)
- -----------------------------------------------------------------------------------------------------------------------------
End of year $ 671.7 $ 1,238.2 $ 1,176.7
=============================================================================================================================
Common Treasury Stock
Beginning of year $ (705.4) $ (634.4) $ (528.8)
Purchase of treasury stock (101.0) (84.7) (122.4)
Sale of treasury stock to the Company's savings plans 1.7 1.5 1.4
Issuance of treasury stock under employee compensation plans 16.1 12.2 15.4
Retirement of treasury stock 788.6 -- --
- -----------------------------------------------------------------------------------------------------------------------------
End of year $ 0.0 $ (705.4) $ (634.4)
=============================================================================================================================
Unearned Compensation
Beginning of year $ (18.3) $ (16.6) $ (10.8)
Issuance of treasury stock under employee compensation plans (18.0) (10.9) (11.9)
Amortization 10.1 9.2 6.1
- -----------------------------------------------------------------------------------------------------------------------------
End of year $ (26.2) $ (18.3) $ (16.6)
=============================================================================================================================
Deferred Employee Benefits
Beginning of year $ (62.5) $ (64.3) $ (65.9)
Principal payment by ESOP under guaranteed loan 1.9 1.8 1.6
- -----------------------------------------------------------------------------------------------------------------------------
End of year $ (60.6) $ (62.5) $ (64.3)
=============================================================================================================================
Unrealized Gain on Marketable Equity Securities
Beginning of year $ 53.9 $ 29.9 $ 32.0
Net change in unrealized gain (37.2) 24.0 (2.1)
- -----------------------------------------------------------------------------------------------------------------------------
End of year $ 16.7 $ 53.9 $ 29.9
=============================================================================================================================
Foreign Currency Translation Adjustments
Beginning of year $ (18.8) $ 25.8 $ 39.9
Foreign currency translation adjustments, including tax charge (benefit) of
$0.0, $0.1 and $(4.3) (11.1) (44.6) (14.1)
- -----------------------------------------------------------------------------------------------------------------------------
End of year $ (29.9) $ (18.8) $ 25.8
=============================================================================================================================
Total stockholders' equity, end of year $ 705.5 $ 727.8 $ 744.9
=============================================================================================================================
40
21
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
Shares of Stock
----------------------------------------
September 30 1998 1997 1996
================================================================================
Preferred shares in thousands
Common shares in millions
PREFERRED STOCK
Beginning of year 75.3 75.3 75.3
- --------------------------------------------------------------------------------
End of year 75.3 75.3 75.3
- --------------------------------------------------------------------------------
PREFERRED TREASURY STOCK
Beginning of year 7.0 5.7 5.0
Purchased 1.5 1.3 0.7
- --------------------------------------------------------------------------------
End of year 8.5 7.0 5.7
- --------------------------------------------------------------------------------
COMMON STOCK
Beginning of year 135.5 135.5 67.8
Retirement of treasury stock (68.3) -- --
Two-for-one stock split -- -- 67.7
- --------------------------------------------------------------------------------
End of year 67.2 135.5 135.5
- --------------------------------------------------------------------------------
COMMON TREASURY STOCK
Beginning of year 66.1 64.0 30.4
Purchased 3.8 3.5 3.0
Issued (1.6) (1.4) (1.5)
Retirement of treasury stock (68.3) -- --
Two-for-one stock split -- -- 32.1
- --------------------------------------------------------------------------------
End of year 0.0 66.1 64.0
================================================================================
On September 11, 1998, the Board of Directors adopted a resolution to
retire the entire balance of shares of common stock held in the Corporate
Treasury and all subsequent acquisitions/purchases effective September 30,
1998. For the year ended September 30, 1998, a total of 68.3 million shares of
the Company's common stock had been retired.
In November 1995, the Company declared a dividend of one Preferred Stock
Purchase Right ("Right") for each outstanding share of the Company's common
stock. The Rights are not presently exercisable. Each Right entitles the holder,
upon the occurrence of certain specified events, to purchase from the Company
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 the Company its 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 the Company was merged or
which acquired 50% or more of the Company'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 the Company at a price of $0.01
per Right. The Rights expire on November 10, 2005.
During fiscal 1989, the Company placed 75,336 shares of its Series B ESOP
Convertible Preferred Stock with the Company's Employee Stock Ownership Plan
("ESOP") for cash at a price of $1,000 per share. Each share of the Series B
ESOP Convertible Preferred Stock is convertible into 87.5 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 $1,008. 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, 1998, 5.85 million shares of
the Company's common stock were reserved for conversion of the Series B ESOP
Convertible Preferred Stock.
In September 1998, the Board of Directors authorized the Company to
purchase up to 4.0 million shares of the Company's common stock, superseding the
previous authorization issued in May, 1997. As of September 30, 1998, the
Company had purchased approximately 0.7 million 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,
reclassified to common stock was $18.4 million from additional paid-in capital
and $49.3 million from retained earnings. All common share and per share amounts
in these financial statements have been restated to reflect the split where
appropriate.
41
22
- -------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- -------------------------------------------------------------------------------
Note J Earnings per Share
Basic and diluted earnings per share ("EPS") were calculated as follows:
-------------------------------------------
Years ended September 30 1998 1997 1996
================================================================================
Dollars in millions
(except per share amounts)
Basic EPS:
Income available to common
shares (numerator) $ 118.4 $ 89.5 $ 190.8
Weighted-average common
shares outstanding 68.1 69.9 72.0
Less: Contingently issuable
shares (2.5) (2.4) (2.4)
- ------------------------------------------------------------------------
Adjusted weighted-average
shares (denominator) 65.6 67.5 69.6
========================================================================
Basic EPS $ 1.80 $ 1.33 $ 2.74
========================================================================
Diluted EPS:
Income available to common
shares $ 118.4 $ 89.5 $ 190.8
Dividends on preferred stock 3.2 3.3 3.3
Less: Income impact of
assumed conversion of
preferred stock (1.7) (1.8) (2.1)
- ------------------------------------------------------------------------
Income available to common
shares plus assumed
conversions (numerator) $ 119.9 $ 91.0 $ 192.0
Weighted-average common
shares outstanding 68.1 69.9 72.0
Effect of dilutive securities:
Stock-based compensation 6.5 6.8 7.3
- ------------------------------------------------------------------------
Adjusted weighted-average
shares (denominator) 74.6 76.7 79.3
========================================================================
Diluted EPS $ 1.61 $ 1.19 $ 2.42
========================================================================
Note K Savings Plan & Incentive Compensation Plans
The Plans
The Company sponsors a profit sharing and savings plan called the Cabot
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 1998, 1997 and 1996 were $4.4 million, $4.0 million and $3.5 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 the fair
market value of the Company's common 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 the Company's
common stock on the date of the award, or a combination of one-half of each.
Effective in March of 1996, no new awards were permitted under this plan.
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. 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 the fair market value of the Company's
common 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 generally expire five
years from the date of grant.
The Company has reserved 2.8 million shares of common stock for issuance
under the 1996 plan. There were approximately 1.3 million shares available for
future grants at September 30, 1998. Compensation expense recognized during
1998, 1997 and 1996 for restricted stock grants was $10.1 million, $9.2 million
and $6.1 million, respectively.
The following table summarizes the plan's restricted stock activity for the
last three fiscal years:
------------------------------
Weighted
Average
Restricted Exercise
Stock Price
============================================================================
Shares in thousands
Outstanding at September 30, 1995 2,078 $11.15
Granted 829 10.68
Vested (571) 11.39
Canceled (49) 10.92
- -----------------------------------------------------------
Outstanding at September 30, 1996 2,287 10.93
Granted 865 14.33
Vested (696) 10.84
Canceled (203) 10.57
- -----------------------------------------------------------
Outstanding at September 30, 1997 2,253 11.87
Granted 1,026 21.47
Vested (670) 10.15
Canceled (108) 11.96
- -----------------------------------------------------------
Outstanding at September 30, 1998 2,501 $16.27
============================================================================
42
23
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
Stock-Based Compensation
Had the fair value based method been adopted, the Company's proforma net income
and proforma net income per common share for fiscal 1998, 1997 and 1996 would
have been as follows:
------------------------------------
Years ended September 30 1998 1997 1996
============================================================================
Net income-proforma
(in millions) $121.4 $92.7 $194.0
Net income per common
share-proforma:
Basic $ 1.80 $1.32 $ 2.74
Diluted $ 1.60 $1.18 $ 2.42
============================================================================
The estimated weighted average fair value of the options granted during
fiscal 1998, 1997 and 1996 were $11.00, $6.37 and $6.82, respectively on the
date of grant using the Black-Scholes option-pricing model and the following
weighted average assumptions:
--------------------------------------
Years ended September 30 1998 1997 1996
============================================================================
Expected stock price volatility 34% 26% 24%
Risk free interest rate 5.63% 6.54% 6.53%
Expected life of options 4 years 4 years 4 years
Expected annual dividends $ 0.44 $ 0.40 $ 0.40
============================================================================
The effects of applying the fair value based method in this proforma
disclosure are not indicative of future amounts. The fair value based method
does not apply to awards prior to 1995 and additional awards in future years are
anticipated.
The following table summarizes the plans' stock option activity from
September 30, 1995 through September 30, 1998:
------------------------------
Weighted
Average
Stock Exercise
Options Price
============================================================================
Options in thousands
Outstanding at September 30, 1995 2,350 $ 9.12
Granted 60 26.70
Exercised (681) 8.78
Canceled (29) 10.53
- --------------------------------------------------------------
Outstanding at September 30, 1996 1,700 9.77
Granted 91 23.88
Exercised (300) 8.99
Canceled (34) 15.79
- --------------------------------------------------------------
Outstanding at September 30, 1997 1,457 10.67
Granted 281 35.31
Exercised (393) 9.21
Canceled (23) 18.98
- --------------------------------------------------------------
Outstanding at September 30, 1998 1,322 $16.26
============================================================================
Of the 1.3 million stock options outstanding as of September 30, 1998, 0.9
million were exercisable at a weighted average exercise price of $9.05.
Options outstanding at September 30, 1998:
- -------------------------------------------------------------------------
Weighted Average
- -------------------------------------------------------------------------
Thousands Remaining
Range of of Options Exercise Contractual
Exercise Price Outstanding Price Life Years
=========================================================================
$ 7.59- 7.94 683 $ 7.77 2.66
8.00- 8.72 23 8.35 1.41
10.47-12.28 139 10.79 1.89
20.00-23.88 148 22.32 3.20
26.70-35.31 329 34.01 4.70
=========================================================================
Note L Income Taxes
Income before income taxes was as follows:
------------------------------------
Years ended September 30 1998 1997 1996
============================================================================
Dollars in millions
Domestic $ 46.1 $ 30.2 $134.3
Foreign 121.9 86.9 145.5
- ----------------------------------------------------------------------------
Total $168.0 $117.1 $279.8
============================================================================
Taxes on income consisted of the following:
------------------------------------
Years ended September 30 1998 1997 1996
============================================================================
Dollars in millions
U.S. federal and state:
Current $ (1.4) $ 8.6 $33.3
Deferred 6.4 (9.4) 1.0
- ----------------------------------------------------------------------------
Total $ 5.0 $ (0.8) $34.3
============================================================================
Foreign:
Current $49.9 $46.7 $61.2
Deferred 5.6 (3.8) 2.7
- ----------------------------------------------------------------------------
Total $55.5 $42.9 $63.9
============================================================================
Total U.S. and Foreign $60.5 $42.1 $98.2
============================================================================
43
24
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
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 1998 1997 1996
============================================================================
Dollars in millions
Computed tax expense at the
Federal statutory rate $58.8 $41.0 $97.9
Foreign income:
Impact of taxation at different
rates, repatriation and other 2.6 0.9 5.8
Impact of foreign losses for
which a current tax benefit
is not available 4.1 4.2 2.5
State taxes, net of federal effect 1.3 1.0 2.7
Foreign sales corporation (1.6) (1.2) (3.0)
U.S. and state benefits from
research and experimentation
activities (4.3) (1.3) (6.0)
Other, net (0.4) (2.5) (1.7)
- ----------------------------------------------------------------------------
Provision for income taxes $60.5 $42.1 $98.2
============================================================================
Significant components of deferred income taxes were as follows:
------------------------
Years ended September 30 1998 1997
============================================================================
Dollars in millions
Deferred tax assets:
Depreciation and amortization $ 30.3 $ 26.0
Pension and other benefits 56.5 54.1
Environmental matters 12.6 12.6
Special charges 5.4 7.1
Investments 10.9 10.8
State and local taxes 4.0 4.7
Net operating loss and other tax carryforwards 12.1 17.3
Other 31.5 26.4
- ----------------------------------------------------------------------------
Subtotal 163.3 159.0
- ----------------------------------------------------------------------------
Valuation allowances (10.7) (16.1)
- ----------------------------------------------------------------------------
Total deferred tax assets $152.6 $142.9
============================================================================
Deferred tax liabilities:
Depreciation and amortization $ 79.1 $ 65.7
Pension and other benefits 13.8 13.0
Investments 11.6 42.8
Other 111.8 102.2
- ----------------------------------------------------------------------------
Total deferred tax liabilities $216.3 $223.7
============================================================================
The valuation allowance at September 30, 1998 and 1997 represents
management's best estimate of the ultimate realization of the net deferred tax
amounts. The deferred tax valuation allowance decreased in 1998 by $5.4 million
due primarily to decreases in the U.S. dollar value of certain foreign net
operating loss carryforwards reflected as deferred tax assets.
Approximately $39.7 million of net operating losses and other tax
carryforwards remain at September 30, 1998, $26.4 million of which expire in the
years 1999 through 2005, and $13.3 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 1994, 1995 and 1996 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.
Provisions have not been made for U.S. income taxes or foreign withholding
taxes on approximately $130.0 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.
Note M Supplemental Cash Flow Information
Cash paid in 1998, 1997 and 1996 for income taxes and interest was as follows:
------------------------------------
Dollars in millions 1998 1997 1996
============================================================================
Income taxes $40.5 $65.5 $109.1
Interest $40.0 $38.8 $ 39.1
============================================================================
Note N 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 ten years and may be renewed by the Company. Rent expense
under such arrangements for 1998, 1997 and 1996, totaled $15.4 million, $14.8
million and $14.5 million, respectively. Future minimum rental commitments under
non-cancelable leases are as follows:
Dollars in millions
==========================================================================
1999 $13.1
2000 11.8
2001 6.4
2002 2.4
2003 2.1
2004 and thereafter 9.2
- --------------------------------------------------------------------------
$45.0
==========================================================================
44
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- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
Other Long-Term Commitments
The Company has entered into long-term purchase agreements for various key raw
materials. The purchase commitments covered by these agreements aggregate
approximately $135.0 million for the periods 1999 to 2003.
The Company has also entered into purchase agreements for liquefied natural
gas that expire in 2003. The purchase commitments covered by this agreement have
a firm take provision of nine cargoes per winter season at current prices
subject to the supplier's shipping capacity.
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
liquefaction plant in Trinidad, and to purchase approximately 60% of the natural
gas produced by the plant. At September 30, 1998, the Company's investment in
this project was approximately $17.6 million and is included in other
investments. Liquefied natural gas from the project is not expected to be
available until the second half of 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.
During 1998, a charge to environmental expenses was made for costs incurred
for remediation of environmental issues related to a business divested in 1989.
As of September 30, 1998, the Company has approximately $35.6 million reserved
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 at those sites where costs are reasonably estimable based on its
analysis of the extent of cleanup required, alternative cleanup methods
available, abilities of other responsible parties to contribute, and its
interpretation of applicable laws and regulations applicable to each site. The
Company reviews the adequacy of this reserve as circumstances change at
individual sites. The Company is unable to estimate the amount of reasonably
possible loss in excess of the accrued amount. Included in other charges for
1998 and 1996 are environmental expenses of $3.5 million and $3.0 million,
respectively. There were no charges for 1997.
In July 1998, the Environmental Protection Agency ("EPA") informed Cabot
that it will be undertaking corrective action under the Resource Conservation
and Recovery Act at Cabot's facility in Boyertown, Pennsylvania. A site visit by
the Army Corps of Engineers to initiate this action occurred in late September,
1998. It is unclear at this time what corrective action, if any, will be
required at the site and what costs Cabot will incur as a result.
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.
The Company is contingently liable under a limited guarantee of its
proportionate share for the project financing of the liquefaction plant in
Trinidad. The Company's guarantee will expire when the plant begins commercial
production, which is expected to occur in the second half of fiscal year 1999.
At September 30, 1998, approximately $457.8 million was outstanding under the
joint venture's debt agreement. Cabot's 10% share amounted to $45.8 million.
Note O Risk Management
Cabot Corporation is a global company divided into two distinct segments, the
Specialty Chemicals and Materials Group and Energy Group. Cabot manufactures,
markets, and distributes specialty chemicals and materials through seven
businesses: carbon black, fumed silica, plastics, performance materials
(principally tantalum), microelectronics materials, inkjet colorants and
specialty fluids. These products span several markets including automotive,
electronics, transportation, aerospace, defense, pharmaceuticals, silicone
rubber, packaging, agriculture, construction, inkjet printing and oil and gas
drilling services. In addition, the Company's Energy Group operates a liquefied
natural gas importing, storing and distribution company serving markets which
include gas and electric utilities and independent power producers. In total,
Cabot operates 45 plants in 23 countries.
Market Risk
The Company uses derivative financial instruments primarily to reduce exposure
to fluctuations in interest rates and foreign exchange rates, and to a lesser
extent, to reduce exposure to fluctuations in commodity prices and other market
risks. When entered into, these financial instruments are generally designated
as hedges of underlying exposures associated with specific assets, liabilities
or firm commitments, and are monitored to determine if they remain effective
hedges. The notional amounts of derivatives do not represent actual amounts
exchanged by the parties and thus, are not a measure of the exposure of the
Company through its use of derivatives. The amounts exchanged are calculated by
reference to the notional amounts and by other
45
26
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
terms of the derivatives, such as interest rates, exchange rates, or other
financial indices.
The Company is exposed to credit loss in the event of nonperformance by
counterparties to the swap agreements. However, the Company has established
strict counter-party credit guidelines and only enters into transactions with
financial institutions of investment grade or better. The Company considers the
risk of counter-party default to be minimal.
Because of the correlation between the hedging instrument and the
underlying exposure being hedged, fluctuations in the value of the instruments
are generally offset by changes in the value of the underlying exposures.
Interest Rate
The Company maintains a percentage of fixed and variable rate debt within
defined parameters. The Company uses interest rate swaps to hedge its exposure
on fixed and variable rate debt positions. Variable rates are predominantly
linked to the London Interbank Offered Rate ("LIBOR") as determined at either
three or six month intervals. The interest rate provided by the swap on variable
rate debt is 7.4%.
At September 30, 1998 and 1997, the notional principal amounts of the
interest rate swap agreements were $150.0 million, expiring in 2004 and 2007.
The notional amount is the amount used for the calculation of interest payments
which are exchanged over the life of the swap transaction and equal to the
amount of principal exchanged at maturity. For 1998, 1997 and 1996, the gains or
losses in interest income or expense associated with these agreements were
immaterial. The fair value of the swaps were $(17.7) million and $(6.3) million
as of September 30, 1998 and 1997, respectively.
Foreign Currency
The Company's international operations are subject to certain opportunities and
risks, including currency fluctuations and government actions. The Company
closely monitors its operations in each country so that it can respond to
changing economic and political environments and to fluctuations in foreign
currencies. Accordingly, the Company utilizes foreign currency option contracts
and forward contracts to hedge its exposure on anticipated transactions and firm
commitments, primarily for receivables and payables denominated in currencies
other than the entities' functional currencies. The Company also monitors its
foreign exchange exposures to ensure the overall effectiveness of its foreign
currency hedge positions. Foreign currency instruments generally have maturities
that do not exceed twelve months.
The Company has foreign currency instruments, primarily denominated in the
German deutschemark, Japanese yen, British pound sterling, Swedish krona,
Canadian dollar, and Australian dollar. At September 30, 1998 and 1997, the
Company had $20.0 million and $63.4 million in foreign currency instruments
outstanding, respectively. For 1998, 1997 and 1996, the net realized gains or
(losses) associated with these types of instruments were $1.6 million, $4.6
million and $(0.5) million, respectively. The net unrealized gain as of
September 30, 1998 and net unrealized loss as of September 30, 1997, based on
the fair market value of the instruments, were not material to each respective
period.
Commodities
The Company has price risk exposure, due to changes, in its natural gas sales
revenue and supply costs. The Company has entered into commodity futures
contracts and commodity price swaps to hedge its gross margin exposure. The
Company utilizes commodity futures contracts and commodity price swaps for
hedging firmly committed sales transactions and monitors its exposure daily to
ensure overall effectiveness of its hedge positions.
At September 30, 1998, the notional principal amounts of the futures
contracts were $6.3 million, maturing through February, 1999. As the contracts
were executed on September 30, 1998, no gain or loss, realized or unrealized,
has been recorded. The Company committed to a commodity price swap at September
30, 1997 for natural gas volumes during the winter season with a notional
principal amount of $2.3 million, maturing through February, 1998. For 1998, the
realized gain associated with this swap was $0.4 million.
Concentration of Credit
Financial instruments that subject the Company to concentrations of credit risk
consist principally of trade receivables. Tire manufacturers comprise a
significant portion of the Company's trade receivable balance. At September 30,
1998 and 1997, the Company had trade receivables of approximately $48.5 million
and $62.6 million, respectively, from 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 tire manufacturers were current at September 30, 1998, and
no such manufacturer exceeded 5% of the Company's receivables at that date.
Note P Financial Information by Industry Segment & Geographic Area
The Company's business consists of two segments, the Specialty Chemicals and
Materials Group and Energy Group. A description of the Company's two business
segments and their products,
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27
- --------------------------------------------------------------------------------
notes to consolidated financial statements (continued)
- --------------------------------------------------------------------------------
services, and markets served is included in Note O. The Energy Group is located
exclusively in the United States and has no export sales. Energy Group sales for
1996 include sales to a major customer in the amount of $278.0 million.
Financial information by geographic area was as follows:
--------------------------------------
Years ended September 30 1998 1997 1996
================================================================================
Dollars in millions
Sales
United States:
Sales, excluding export sales
Specialty Chemicals
and Materials $ 563.7 $ 566.9 $ 526.6
Energy 210.9 199.7 422.0
Export sales 119.6 93.9 109.7
- --------------------------------------------------------------------------------
Total 894.2 860.5 1,058.3
Europe 598.6 603.8 638.6
Other areas 284.2 302.1 281.5
- --------------------------------------------------------------------------------
Total 1,777.0 1,766.4 1,978.4
Less: Eliminations 129.2 136.4 122.1
- --------------------------------------------------------------------------------
Net sales $1,647.8 $1,630.0 $1,856.3
================================================================================
Operating Profit
United States:
Specialty Chemicals
and Materials $ 90.1 $ 107.3 $ 142.3
Energy 15.1 6.6 23.0
Europe 82.0 67.0 99.2
Other areas(a) (31.0) 6.0 19.0
- --------------------------------------------------------------------------------
Total operating profit 156.2 186.9 283.5
- --------------------------------------------------------------------------------
Interest expense 42.0 43.2 41.7
General corporate/other
expenses, net(b) 31.4 26.6 29.2
Costs related to divested business 5.1 -- --
Gain on sale of business -- -- (38.9)
Gain on sale of equity securities (90.3) -- (28.3)
- --------------------------------------------------------------------------------
Income before income
taxes $ 168.0 $ 117.1 $ 279.8
================================================================================
Depreciation and Amortization
Specialty Chemicals and
Materials $ 113.5 $ 107.6 $ 93.8
Energy 1.7 2.0 2.9
General corporate 0.2 0.3 0.3
- --------------------------------------------------------------------------------
Total $ 115.4 $ 109.9 $ 97.0
================================================================================
Fixed Asset Additions
Specialty Chemicals
and Materials $ 151.3 $ 157.4 $ 207.7
Energy 34.2 5.4 0.5
General corporate 1.9 -- 0.9
- --------------------------------------------------------------------------------
Total $ 187.4 $ 162.8 $ 209.1
================================================================================
Identifiable Assets
United States:
Specialty Chemicals
and Materials $ 629.2 $ 602.6 $ 529.2
Energy 121.3 88.4 79.7
Europe 506.1 434.1 494.8
Other areas 321.5 405.6 403.7
General corporate(c) 136.0 208.9 270.8
Equity in affiliates-Europe -- 6.8 9.3
Equity in affiliates-Other areas 91.1 79.3 70.1
- --------------------------------------------------------------------------------
Total $1,805.2 $1,825.7 $1,857.6
================================================================================
(a) Results for 1998 include a $60.0 million pretax asset impairment charge
related to an Indonesian carbon black facility.
(b) General corporate/other expenses, net, include corporate management costs
reduced by investment income.
(c) General corporate assets include cash, short-term investments, investments
other than equity basis, income taxes receivable, deferred taxes and
headquarters' assets.
Note Q Unaudited Quarterly Financial Information
Unaudited financial results, by quarter for the fiscal years ended September 30,
1998 and 1997, are summarized below and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Certain 1998 items have been reclassified to reflect changes in the
Company's organization during the year.
Dollars in millions, ------------------------------------------------------
except per share amounts December March June September Year
================================================================================
Fiscal 1998
Net sales $435.4 $457.0 $376.3 $379.1 $1,647.8
Cost of sales 302.2 312.5 247.3 258.9 1,120.9
Net income 31.5 37.5 33.2(a) 19.4 121.6
Income applicable
to common shares $ 30.6 $ 36.7 $ 32.5 $ 18.6 $ 118.4
- --------------------------------------------------------------------------------
Income per
common share
(diluted)(c) $ 0.41 $ 0.50 $ 0.44 $ 0.26 $ 1.61
================================================================================
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 25.2 29.4 28.7 9.5(b) 92.8
Income applicable
to common shares $ 24.3 $ 28.6 $ 27.9 $ 8.7 $ 89.5
- --------------------------------------------------------------------------------
Income per
common share
(diluted)(c) $ 0.32 $ 0.38 $ 0.37 $ 0.12 $ 1.19
================================================================================
(a) Includes a $60.0 million pretax asset impairment charge related to an
Indonesian carbon black facility and a $25.0 million pretax charge related
to a tantalum ore recovery project. Also includes a $90.3 million pretax
gain from the sale of K N Energy, Inc. common stock.
(b) Includes asset impairments and severance pretax charges of $18.2 million.
(c) During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). As a
result, fully diluted earnings per share have been replaced by diluted
earnings per share. The 1997 amounts have been restated to reflect SFAS No.
128.
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management responsibility
- --------------------------------------------------------------------------------
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.
PricewaterhouseCoopers LLP, 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 In our opinion, the
accompanying consolidated balance sheets and the related consolidated statements
of income and of cash flows present fairly, in all material respects, the
financial position of Cabot Corporation and its subsidiaries at September 30,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
October 26, 1998
48