1
FORM 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
MARCH 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 1-5667
CABOT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2271897
(State of Incorporation) (I.R.S. Employer Identification No.)
75 STATE STREET 02109-1806
BOSTON, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 345-0100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
AS OF MAY 07, 1999, THE COMPANY HAD 66,509,978 SHARES OF COMMON
STOCK, PAR VALUE $1 PER SHARE, OUTSTANDING.
2
CABOT CORPORATION
INDEX
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Income
Six Months Ended March 31, 1999 and 1998 4
Consolidated Balance Sheets
March 31, 1999 and September 30, 1998 5
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1999 and 1998 7
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended March 31, 1999 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Part II. Other Information
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
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PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31
(Dollars in millions, except per share amounts)
UNAUDITED
1999 1998
-------- --------
Revenues:
Net sales and other operating revenues $ 435.8 $ 457.0
Interest and dividend income 0.9 1.7
-------- --------
Total revenues 436.7 458.7
-------- --------
Costs and expenses:
Cost of sales 304.6 312.5
Selling and administrative expenses 56.7 56.5
Research and technical service 18.8 20.4
Interest expense 12.1 11.1
Gain on sale of equity securities (Note G) (4.6) -
Other charges, net 1.8 4.6
-------- --------
Total costs and expenses 389.4 405.1
-------- --------
Income before income taxes 47.3 53.6
Provision for income taxes (17.0) (19.3)
Equity in net income of affiliated companies 3.5 4.0
Minority interest in income (0.6) (0.8)
-------- --------
Net income 33.2 37.5
Dividends on preferred stock, net of tax benefit of $0.5 and $0.5 (0.7) (0.8)
-------- --------
Income applicable to common shares $ 32.5 $ 36.7
======== ========
Weighted average common shares outstanding (Note I):
Basic 64.0 65.6
======== ========
Diluted 72.8 74.6
======== ========
Income per common share (Note I):
Basic $ 0.51 $ 0.56
======== ========
Diluted $ 0.45 $ 0.50
======== ========
Dividends per common share $ 0.11 $ 0.10
======== ========
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended March 31
(Dollars in millions, except per share amounts)
UNAUDITED
1999 1998
------- -------
Revenues:
Net sales and other operating revenues $ 844.8 $ 892.4
Interest and dividend income 2.2 3.3
Total revenues 847.0 895.7
------- -------
Costs and expenses:
Cost of sales 577.4 614.7
Selling and administrative expenses 115.1 112.4
Research and technical service 38.3 39.2
Interest expense 23.0 22.5
Gain on sale of equity securities (Note G) (4.6) -
Other charges, net 2.5 8.0
------- -------
Total costs and expenses 751.7 796.8
------- -------
Income before income taxes 95.3 98.9
Provision for income taxes (34.3) (35.6)
Equity in net income of affiliated companies 5.5 7.0
Minority interest in income (1.5) (1.4)
------- -------
Net income 65.0 68.9
Dividends on preferred stock, net of tax benefit of $1.0 and $1.0 (1.5) (1.6)
------- -------
Income applicable to common shares $ 63.5 $ 67.3
======= =======
Weighted average common shares outstanding (Note I):
Basic 64.3 65.9
======= =======
Diluted 73.1 74.9
======= =======
Income per common share (Note I):
Basic $ 0.99 $ 1.02
======= =======
Diluted $ 0.88 $ 0.91
======= =======
Dividends per common share $ 0.22 $ 0.20
======= =======
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and September 30, 1998
(Dollars in millions, except share amounts)
ASSETS
March 31 September 30
1999 1998
----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 13.0 $ 39.6
Accounts and notes receivable (net of reserve for doubtful
accounts of $4.6 and $4.6) 324.4 284.3
Inventories:
Raw materials 85.5 68.2
Work in process 61.4 62.9
Finished goods 87.9 76.1
Other 49.1 43.9
-------- --------
Total inventories 283.9 251.1
Prepaid expenses 23.1 26.1
Deferred income taxes 15.5 17.8
-------- --------
Total current assets 659.9 618.9
-------- --------
Investments:
Equity (Note B) 81.2 91.1
Other (Note G) 56.0 72.5
-------- --------
Total investments 137.2 163.6
-------- --------
Property, plant and equipment 1,970.0 1,914.3
Accumulated depreciation and amortization (965.9) (936.3)
-------- --------
Net property, plant and equipment 1,004.1 978.0
-------- --------
Other assets:
Intangible assets, net of amortization 23.3 24.2
Deferred income taxes 3.9 3.9
Other assets 18.5 16.6
-------- --------
Total other assets 45.7 44.7
-------- --------
Total assets $1,846.9 $1,805.2
======== ========
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and September 30, 1998
(Dollars in millions, except share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY
March 31 September 30
1999 1998
-------- ------------
(Unaudited)
Current liabilities:
Notes payable to banks $ 235.4 $ 253.3
Current portion of long-term debt 11.3 11.4
Accounts payable and accrued liabilities 218.2 268.2
U.S. and foreign income taxes payable 7.3 0.4
Deferred income taxes 3.0 3.0
-------- --------
Total current liabilities 475.2 536.3
-------- --------
Long-term debt 423.7 316.3
Deferred income taxes 71.4 82.4
Other liabilities 150.8 139.6
Commitments and contingencies (Notes F and H) - -
Minority interest 30.7 25.1
Stockholders' Equity (Note J):
Preferred Stock:
Authorized: 2,000,000 shares of $1 par value
Series A Junior Participating Preferred Stock
Issued and outstanding: none
Series B ESOP Convertible Preferred Stock 7.75% Cumulative 75.3 75.3
Issued: 75,336 shares (aggregate redemption value
of $66.1 and $67.4)
Less cost of preferred treasury stock (15.4) (13.6)
Common stock:
Authorized: 200,000,000 shares of $1 par value
Issued: 66,400,811 and 67,241,624 shares 66.4 67.2
Additional paid-in capital - 4.9
Retained earnings 701.1 671.7
Unearned compensation (19.9) (26.2)
Deferred employee benefits (59.6) (60.6)
Accumulated other comprehensive loss (Note C) (52.8) (13.2)
-------- --------
Total stockholders' equity 695.1 705.5
-------- --------
Total liabilities and stockholders' equity $1,846.9 $1,805.2
======== ========
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 1999 and 1998
(Dollars in millions)
UNAUDITED
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 65.0 $ 68.9
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 61.5 57.6
Deferred tax benefit (3.1) (0.6)
Equity in income of affiliated companies,
net of dividends received (4.4) (4.2)
Gain on sale of equity securities (4.6) -
Other, net 6.4 7.6
Changes in assets and liabilities, net of the effect of acquisitions and
the consolidation of equity affiliates:
Increase in accounts receivable (38.4) (50.3)
Decrease (increase) in inventory (33.0) 7.9
Increase in prepayments and intangible assets (0.7) (22.8)
Increase (decrease) in accounts payable and accruals (48.1) 4.7
Increase in income taxes payable 7.7 10.5
Increase (decrease) in other liabilities 10.6 (0.3)
Other, net (0.8) (1.0)
------- -------
Cash provided by operating activities 18.1 78.0
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (80.3) (70.6)
Investments and acquisitions (5.2) (27.3)
Proceeds from sale of equity securities 9.4 -
Cash from consolidation of equity affiliates and other 7.9 2.4
------- -------
Cash used in investing activities (68.2) (95.5)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 102.5 63.1
Repayments of long-term debt (7.9) (121.8)
Increase (decrease) in short-term debt (25.9) 137.7
Purchases of preferred and common stock (30.3) (50.1)
Sales and issuances of preferred and common stock 3.5 3.6
Cash dividends paid to stockholders (16.2) (15.1)
------- -------
Cash provided by financing activities 25.7 17.4
------- -------
Effect of exchange rate changes on cash (2.2) -
------- -------
Decrease in cash and cash equivalents (26.6) (0.1)
Cash and cash equivalents at beginning of period 39.6 39.2
------- -------
Cash and cash equivalents at end of period $ 13.0 $ 39.1
======= =======
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended March 31, 1999
(Dollars in millions)
Preferred Additional
Preferred Treasury Common Paid-in
Stock Stock Stock Capital
---------- --------- ------ ----------
Balance at September 30, 1998: $ 75.3 $ (13.6) $67.2 $ 4.9
Net income
Common dividends paid
Issuance of stock under employee
compensation plans 0.1 2.0
Issuance of common stock to Cabot
Retirement Incentive Savings Plan 0.1 1.2
Purchase and retirement of common stock (1.0) (8.1)
Purchase of treasury stock - preferred (1.8)
Preferred dividends paid to Employee
Stock Ownership Plan, net of tax
Principal payment by Employee Stock
Ownership Plan under guaranteed loan
Amortization of unearned compensation
Change in unrealized loss on available-for-sale
securities, net of deferred tax of $5.0
Foreign currency translation adjustments
------- -------- ----- -------
Balance at March 31, 1999 $ 75.3 $ (15.4) $66.4 $ 0.0
======= ======== ===== =======
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Unearned Deferred Accumulated Other Comprehensive
Earnings Compensation Employee Benefits Comprehensive Loss Income (Note C)
-------- ------------ ----------------- ------------------ ---------------
Balance at September 30, 1998: $671.7 $ (26.2) $ (60.6) $ (13.2)
Net income 65.0 $ 65.0
Common dividends paid (14.7)
Issuance of stock under employee
compensation plans 0.1
Issuance of common stock to Cabot
Retirement Incentive Savings Plan
Purchase and retirement of common stock (19.4)
Purchase of treasury stock - preferred
Preferred dividends paid to Employee
Stock Ownership Plan, net of tax (1.5)
Principal payment by Employee Stock
Ownership Plan under guaranteed loan 1.0
Amortization of unearned compensation 6.2
Change in unrealized loss on available-for-sale
securities, net of deferred tax of $5.0 (10.4) (10.4)
Foreign currency translation adjustments
(29.2) (29.2)
------ ----------- ---------- --------------- -----------
Balance at March 31, 1999 $701.1 $ (19.9) $ (59.6) $ (52.8) $ 25.4
====== =========== ========== =============== ===========
The accompanying notes are an integral part of these financial statements.
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
A. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cabot
Corporation and majority-owned and controlled U.S. and non-U.S.
subsidiaries (the "Company"). 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.
The financial statements have been prepared in accordance with the
requirements of Form 10-Q and consequently do not include all disclosures
required by Form 10-K. Additional information may be obtained by
referring to the Company's Form 10-K for the year ended September 30,
1998.
The financial information submitted herewith is unaudited and reflects
all adjustments which are, in the opinion of management, necessary to
provide a fair statement of the results for the interim periods ended
March 31, 1999 and 1998. All such adjustments are of a normal recurring
nature. The results for interim periods are not necessarily indicative of
the results to be expected for the fiscal year.
B. BUSINESS DEVELOPMENTS
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%, to take effect as the expansion is
funded. As of October 1, 1998 the Company began accounting for this
venture on a consolidated basis.
C. COMPREHENSIVE INCOME
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). The adoption of this Statement had no impact on net income or
stockholders' equity. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components.
Accumulated Other Comprehensive Income (Loss), which is disclosed in the
stockholders' equity section of the consolidated balance sheet, includes
unrealized gains or losses on available-for-sale securities and
translation adjustments on investments in foreign subsidiaries. Prior to
the adoption of SFAS No. 130, the Company reported such unrealized gains
or losses and translation adjustments separately in the stockholders'
equity section of the consolidated balance sheet. Amounts in the prior
year financial statements have been reclassified to conform to SFAS No.
130.
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
D. SEGMENTS OF AN ENTERPRISE
In June 1997, the Financial Accounting Standards Board ("FASB") issued
a new Statement, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes new requirements
for the reporting of segment information by public companies. It
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, and is effective for the annual financial statements of
fiscal years beginning after December 15, 1997. The new framework for
segment reporting is referred to as the management approach. It is
intended to give analysts and other financial-statement users a view of
the company "through the eyes of management", by looking to a company's
internal management reporting structure as the basis for determining the
company's external segments, as well as the basis for determining the
information that is to be disclosed for those segments. The Company is
currently assessing the impact this Statement will have on the
consolidated financial statements.
E. RECLASSIFICATION
Certain amounts were reclassified in fiscal year 1998 to reflect changes
in the Company's organization during the year.
F. CONTINGENCIES
The Company is a defendant, or potentially responsible party, in various
lawsuits and environmental proceedings wherein substantial amounts are
claimed or at issue. In the opinion of the Company, although final
disposition of all of its suits and claims may impact the Company's
financial statements in a particular period, they should not, in the
aggregate, have a material adverse effect on the Company's financial
position.
G. INVESTMENTS
During the second quarter the Company sold .5 million shares of its
investment in K N Energy, Inc. The Company received cash proceeds of $9.4
million and recorded a gain of $4.6 million related to the sale.
H. LEASE COMMITMENTS
During the second quarter the Company entered into a non-cancelable lease
agreement for its corporate offices in Boston, Massachusetts expiring in
September, 2015. This contract results in additional future minimum
rental commitments under the non-cancelable lease as follows: (dollars in
millions)
2000 $ 0.4
2001 5.0
2002 5.2
2003 5.2
2004 and thereafter 64.4
----
$80.2
----
The Company is currently evaluating opportunities for the existing
facility lease that expires in 2001.
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
UNAUDITED
I. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") were calculated for the
three months ended March 31, 1999 and 1998 as follows (dollars in
millions, except per share amounts):
1999 1998
------ ------
BASIC EPS
Income available to common shares (numerator) $ 32.5 $ 36.7
======== =========
Weighted-average common shares outstanding 66.5 67.8
Less: Contingently issuable shares (2.5) (2.2)
-------- ---------
Adjusted weighted-average shares (denominator) 64.0 65.6
======== =========
Basic EPS $ 0.51 $ 0.56
======== =========
DILUTED EPS
Income available to common shares $ 32.5 $ 36.7
Dividends on preferred stock 0.7 0.8
Less: Income effect of assumed conversion of
preferred stock (0.4) (0.5)
-------- ---------
Income available to common shares plus
assumed conversions (numerator) $ 32.8 $ 37.0
======== =========
Weighted-average common shares outstanding
66.5 67.8
Effect of dilutive securities: Stock-based
compensation (1) 6.3 6.8
-------- ---------
Adjusted weighted-average shares (denominator) 72.8 74.6
======== =========
Diluted EPS $ 0.45 $ 0.50
======== =========
(1) Options to purchase 0.3 million shares of common stock were
outstanding at March 31, 1999, but were not included in the
computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares.
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
UNAUDITED
I. EARNINGS PER SHARE ( CONTINUED )
Basic and diluted earnings per share ("EPS") were calculated for the six
months ended March 31, 1999 and 1998 as follows (dollars in millions,
except per share amounts):
1999 1998
------ ------
BASIC EPS
Income available to common shares (numerator) $ 63.5 $ 67.3
======= ========
Weighted-average common shares outstanding 66.8 68.1
Less: Contingently issuable shares (2.5) (2.2)
------- --------
Adjusted weighted-average shares (denominator) 64.3 65.9
======= ========
Basic EPS $ 0.99 $ 1.02
======= ========
DILUTED EPS
Income available to common shares $ 63.5 $ 67.3
Dividends on preferred stock 1.5 1.6
Less: Income effect of assumed conversion of
preferred stock (0.8) (0.8)
------- --------
Income available to common shares plus
assumed conversions (numerator) $ 64.2 $ 68.1
======= ========
Weighted-average common shares outstanding 66.8 68.1
Effect of dilutive securities: Stock-based
compensation (1) 6.3 6.8
------- --------
Adjusted weighted-average shares (denominator) 73.1 74.9
======= ========
Diluted EPS $ 0.88 $ 0.91
======= ========
(1) Options to purchase 0.3 million shares of common stock were
outstanding at March 31, 1999, but were not included in the
computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares.
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
UNAUDITED
J. SHARES OF STOCK
The following table summarizes the changes in shares of stock for the
three months ended March 31, 1999 (preferred shares in thousands and
common shares in millions):
1999
-------------
PREFERRED STOCK
Balance at December 31, 1998 75.3
----
Balance at March 31, 1999 75.3
====
PREFERRED TREASURY STOCK
Balance at December 31, 1998 8.8
Purchased preferred treasury stock 0.5
----
Balance at March 31, 1999 9.3
====
COMMON STOCK
Balance at December 31, 1998 66.4
Issued common stock 0.1
Purchased and retired common stock (0.1)
----
Balance at March 31, 1999 66.4
====
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CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
UNAUDITED
J. SHARES OF STOCK (CONTINUED)
The following table summarizes the changes in shares of stock for the six
months ended March 31, 1999 (preferred shares in thousands and common
shares in millions):
1999
-------------
PREFERRED STOCK
Balance at September 30, 1998 75.3
----
Balance at March 31, 1999 75.3
----
PREFERRED TREASURY STOCK
Balance at September 30, 1998 8.5
Purchased preferred treasury stock 0.8
----
Balance at March 31, 1999 9.3
====
COMMON STOCK
Balance at September 30, 1998 67.2
Issued common stock 0.2
Purchased and retired common stock (1.0)
----
Balance at March 31, 1999 66.4
====
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CABOT CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Sales and operating profit by industry segment are shown in the accompanying
table on page 20.
THREE MONTHS ENDED MARCH 31, 1999 VERSUS
THREE MONTHS ENDED MARCH 31, 1998
Unless indicated otherwise, financial comparisons in the following text are for
the quarter ended March 31, 1999 versus the quarter ended March 31, 1998.
Net income for the second quarter of fiscal year 1999 was $33.2 million ($0.45
per diluted common share), compared with $37.5 million ($0.50 per diluted common
share) in the same quarter a year ago. The quarter just ended included a $0.04
per diluted share gain from the sale of investments in equity securities. Net
sales and other operating revenues decreased 5% to $435.8 million from last
year's $457.0 million. Operating profit was $61.7 million for the quarter
compared to $73.4 million in the same quarter a year ago. Significantly lower
natural gas prices and the effect of Brazil's economic turmoil largely drove the
decrease in earnings. To a lesser extent, earnings were affected by volume
declines and continued price pressure in several of the Company's traditional
chemical markets.
In the Specialty Chemicals and Materials Group, sales for the second quarter of
fiscal 1999 decreased 7% to $347.9 million from $372.5 million. Overall volumes
in the Company's chemical businesses decreased 4% for the quarter. The reduction
in revenue also reflects lower year-to-year carbon black selling prices.
Operating profit for the Specialty Chemicals and Materials Group decreased 12%
to $54.4 million from $62.0 million. The decrease was primarily the result of
lower earnings in the Company's carbon black business. The Company's fumed
silica, plastics, and performance materials businesses also reported lower
operating profit for the quarter. The performance of the Company's new chemical
businesses (microelectronics materials ("MMD"), inkjet colorants and specialty
fluids), however, contributed favorably to earnings compared to the second
quarter of 1998.
The Company's CARBON BLACK business reported a decrease in operating profit of
approximately $6 million. The shortfall was caused primarily by the economic
difficulty within the Brazilian market. The dramatic depreciation of the
Brazilian Real and reduced volumes in the South American region negatively
impacted results for the quarter. In addition, the effects of significantly
lower feedstock costs were offset by lower year-to-year carbon black selling
prices. Overall volumes in the Company's carbon black business were 1% lower
than the second quarter of 1998. Volumes in the tire and special blacks markets
were about flat. However, volumes decreased 8% in the industrial products
business as the Company sacrificed some volumes by retaining pricing discipline
in a price competitive environment.
The FUMED SILICA business reported a decrease in operating profit of
approximately $3 million caused primarily by lower demand in the Company's base
business volumes. A softening of the silicone rubber markets largely caused the
reduction. Volumes in the second quarter were down 10%.
The PERFORMANCE MATERIALS business reported a decrease in operating profit of
approximately $1 million. Inventory adjustments at the Company's capacitor
manufacturing customers caused a 50% decrease in tantalum powder volumes in the
quarter. The effects of decreased powder volumes were somewhat mitigated by
improved pricing for the business's intermediate products. Powder volumes
rebounded somewhat during April. Cost reduction efforts, improved volumes and
margins in the business's intermediate products and greater powder volumes are
expected to cause a strong second half of the fiscal year in this business.
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CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company's PLASTICS business reported a $2 million shortfall in operating
profit in the quarter on flat volumes, compared with last year's second quarter.
The decline is primarily due to product mix changes and year-to-year selling
price erosion. Overcapacity has caused severe pricing pressure in the European
plastics market in which the Company does business.
The Company's new chemical businesses contributed over $4 million of increased
operating profit in the second quarter. A large portion of the increase was
driven by the Company's MMD business, which reported a 55% increase in revenue.
This business reported higher average prices and margins mainly due to improved
product mix and increased capacity utilization. The INKJET COLORANTS and
SPECIALTY FLUIDS businesses contributed incrementally to earnings by reducing
operating losses.
Research and technical expenses were $18.8 million for the second quarter of
1999 versus $20.4 million for the second quarter of 1998. The decrease reflects
a reduction in spending in the Company's carbon black business, offset somewhat
by an increase in spending in MMD and fumed silica new product development
programs. The Company continues to pursue and is encouraged by progress made in
several of its new product and new business initiatives, although progress to
date on some of the Company's initiatives has been slower than expected. The
Company's objective of developing higher value, differentiated products and
creating new businesses is central to its strategy for generating earnings
growth.
In the ENERGY GROUP, which is comprised of the liquefied natural gas importation
and distribution operations, sales for the second quarter increased to $87.9
million from $84.5 million for the same quarter a year ago. The Group's
operating profit was $7.3 million, compared with $11.4 million in the second
quarter of 1998. The decrease in operating profit was attributable to
significantly lower year-to-year natural gas prices, partially offset by 30%
greater volumes in the quarter.
The Company's effective tax rate was 36% for the quarters ended March 31, 1999
and 1998.
SIX MONTHS ENDED MARCH 31, 1999 VERSUS
SIX MONTHS ENDED MARCH 31, 1998
Unless indicated otherwise, financial comparisons in the following text are for
the six-month period ended March 31, 1999 versus the six month period ended
March 31, 1998.
Net income for the first six months of fiscal 1999 was $65.0 million compared
with $68.9 million for the first half of fiscal 1998. Operating profit decreased
5% to $130.1 million from $136.3 million.
In the Specialty Chemicals and Materials Group, revenues decreased 4% to $702.8
million from $735.1 million. The reduction in revenue reflects softened demand
and increased competitive pricing in several of the Company's market segments.
Operating profits increased 5% to $119.5 million from $113.5 million. The
improvement in operating profit was driven primarily by significantly lower
year-to-year carbon black feedstock costs. However, competitive price pressure,
particularly in the Company's carbon black business, drove average selling
prices down as the year progressed. In the second quarter, lower year-to-year
carbon black selling prices offset the benefit of lower feedstock costs. Profit
improvement in the Company's new businesses contributed incrementally to
earnings, particularly the Company's MMD business, which continues to perform
well within the high growth chemical mechanical planarization (CMP) market.
Other charges, net, decreased from $8.0 million to $2.5 million for the six
months ended March 31, 1998 and 1999, respectively. The decrease was primarily a
reduction in foreign currency exchange losses. Results in fiscal 1998 included
the effects of a strengthened U.S. dollar and significant devaluation of the
Indonesian rupiah.
In the Company's Energy Group, revenues decreased 10% to $142.0 million from
$157.3 million and operating profits decreased 54% to $10.6 million from $22.8
million in the same period a year ago. The decrease in operating profit was
attributable to the combination of warmer than normal weather and weak natural
gas prices. Average gas selling prices decreased approximately 19%
year-over-year. Offsetting weak prices was an increase in volumes equivalent to
two additional cargos for the first six months of the year. Additionally, the
first quarter earnings in 1998 included a $3.2 million contract revenue payment
from the signing of a long-term gas supply contract.
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17
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Certain conditions that negatively impacted the Company's earnings in the
first six months of the year improved toward the end of March. The Brazilian
Real and South American carbon black market have shown some recent recovery. In
addition, natural gas futures prices indicate that next year, given a greater
and more predictable supply, the LNG business should contribute significantly to
earnings. In contrast, recent increases in carbon black feedstock prices will
present near term challenges given the current pricing environment in several of
the Company's carbon black markets. Continuing cost reduction efforts are
expected to mitigate a portion of any margin squeeze.
The Company's chemical industry customers are consolidating and shifting
production to lower cost locations. In turn, the Company is beginning the
process of evaluating production capacity, including the current deployment of
productive assets across some of the chemical businesses, and other cost
reduction initiatives. Various courses of action are currently being identified.
CASH FLOWS AND LIQUIDITY
During the first six months of the year, the Company's operations provided $18.1
million of cash compared to $78.0 million last year. The change year-to-year is
primarily due to increased working capital needs.
Capital spending for the first six months of the year was $85.5 million. The
Company plans to make approximately $200 million of capital expenditures during
the fiscal year. The major components of the 1999 capital program include new
business expansion and normal plant operating capital projects, the Company's
equity share of a natural gas liquefaction project in Trinidad, refurbishment of
the Company's LNG tanker, and capacity expansion in the Company's fumed silica
and MMD businesses.
On September 11, 1998, the Company's Board of Directors authorized the
repurchase of 4.0 million shares of the Company's common stock, superseding
prior authorizations. During the first six months of the year, the Company
purchased approximately 1.0 million shares of common stock. At March 31, 1999,
approximately 2.3 million shares remained under the September 1998 repurchase
authorization.
The Company's ratio of total debt (including short-term debt net of cash) to
capital increased from 43% at September 30, 1998 to 48% at the end of the second
quarter of fiscal year 1999.
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 that the Company may issue from time to time. The SEC declared the
registration statement effective on October 13, 1998.
In December 1998, the Company issued $100 million of medium-term notes. The
notes mature as follows: $40 million in 2 years, $30 million in 7 years and $30
million in 20 years. The notes have a weighted average interest rate of 6.6%.
Proceeds from the issuance were used to reduce short-term debt.
The Company maintains a credit agreement under which it may borrow up to $300
million at floating rates. The facility is available through January 3, 2002.
The Company had no borrowings outstanding under this agreement at March 31,
1999. 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.
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18
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION and RESULTS OF
OPERATIONS (CONTINUED)
YEAR 2000 READINESS DISCLOSURE
The Company's Year 2000 plan has three key areas of focus and is overseen by an
Executive Steering Committee. A Program Management Office has been established
to coordinate the Year 2000 efforts with regional teams in Asia Pacific, Europe,
North America and South America. These teams have been in place and working for
more than a year. The Company's Year 2000 efforts are proceeding on schedule.
1. The first key area of focus is the Company's core business systems
software, PC hardware and desktop software, and manufacturing plant devices
and software. The Company's plan with respect to this area includes the
inventory of all core business systems software, PC hardware and desktop
software, and plant devices and software that have clocking devices or
computer codes that will be impacted by the change of date to Year 2000;
assessment for priority as to mission critical systems; upgrading or
replacing such hardware and software as required; testing and placing into
an operational state; and developing contingency plans. The current status
and plans for each component of this area are as follows:
- Core Business Systems: This component includes all software and
hardware systems that record relevant data for business operations and
summarize revenue, cost, cash flows, capital, and other information.
The Company has completed the inventory and assessment of core
business systems. The Company's assessment indicates that as a result
of investments in significant global business system renewals during
the past several years, as well as ongoing efforts, the Company's core
business systems are expected to be Year 2000 ready. Current global
business system renewal projects are progressing as expected. These
projects include the rollout of AspenTech's manufacturing production
support systems, the migration of the Company's Asia Pacific and
plastics manufacturing facilities to JDEdwards software, and the
migration of the Company's European facilities to the JDEdwards and
Marcam suites of business software. The upgrade to PeopleSoft Human
Resources/Payroll in North America is now complete. Testing of all
core business systems is expected to occur during the third quarter of
fiscal year 1999.
- PC Hardware and Desktop Software: The Company has completed the
inventory, assessment, and testing phases for its PC hardware.
Replacement or repair of desktop hardware and mission critical
software is ongoing and expected to be completed in the third quarter
of fiscal year 1999.
- Manufacturing Plant Devices and Software: The Company completed the
inventory and assessments of plant embedded devices and software
during the second quarter of fiscal year 1999. Replacement or repair
of plant devices and software is ongoing and expected to be completed
in the third quarter of fiscal year 1999. Final testing in all
manufacturing facilities is expected to be completed during normal
plant shutdowns by the end of the fourth quarter of fiscal year 1999.
2. The second key area of focus is the Company's suppliers. This includes
identifying key suppliers whose supply disruption could have an adverse
impact on the Company's ability to produce and ship product, working with
these suppliers to decrease the chances supply will be disrupted,
identifying alternative sources or contingency plans as needed, and
attempting to obtain written assurances that purchased products and
services are Year 2000 compliant. 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
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19
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
certainty whether the assurances will prove accurate, given the
uncertainties associated with the Year 2000. The current status and plans
for this area are as follows:
- Key suppliers are being identified. Letters and questionnaires are
being sent to those suppliers and review of their responses is
expected to be completed in the third quarter of fiscal year 1999. The
development of contingency plans is expected to be completed in the
fourth quarter of fiscal year 1999.
3. The final area of key focus is internal and external communications, and
includes ongoing status reporting to the Company's management, coordinated
responses to external customer requests for information on the Company's
Year 2000 status, and timely delivery of information on Year 2000 to
Company employees worldwide. The current status and plans for this area are
as follows:
- An internal status reporting mechanism is in place. Coordinated
responses are being delivered to key customers. An employee awareness
program will continue throughout 1999.
Overall, the Company has established a goal to complete most activities related
to mission critical core business systems, PC hardware and desktop software, and
plant devices and software by June 30, 1999. Testing at some manufacturing
facilities will occur during plant shutdowns in the fourth quarter of fiscal
year 1999. Work with suppliers, contingency planning and ongoing communications
will continue throughout fiscal year 1999, with periodic reviews to be scheduled
through the millennium date change.
The Company does not believe that the cost of implementing system and program
changes necessary to address Year 2000 issues will have a material effect on the
Company's results of operations or financial condition. The Company has
identified Year 2000 expenses as costs incurred specifically to modify hardware
or software to be Year 2000 compliant where such modifications do not add any
other functionality. The vast majority of the Company's projects currently in
progress are considered to be part of the Company's ongoing global business
system renewal initiatives. The Company recognizes that a benefit of these
initiatives will be Year 2000 compliance. However, these initiatives were not
undertaken primarily for Year 2000 compliance and therefore are not treated as
Year 2000 costs. The Year 2000 compliance effort is being supported by a
reallocation of existing information technology and human resources. The Company
does not specifically track all costs associated with employees working on Year
2000 projects. The Company expects to spend approximately $2 million during
fiscal year 1999 on direct Year 2000 remediation efforts in addition to the
global business system renewal efforts. There can be no assurance that there
will not be increased costs associated with the implementation of such changes.
The above plans and status represent the Company's expectations based on current
Year 2000 plans and work progress. However, there is no assurance that such
expectations will be realized. While the Company believes that prudent steps
have been taken to assure that there is an effective program, the Company cannot
guarantee that the plans and funds expended will correct all Year 2000 errors or
that the information systems will not generate Year 2000 errors when operating
with third party computer systems or data.
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
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20
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
(Dollars in millions, except per share amounts)
UNAUDITED
THREE MONTHS ENDED MARCH 31 SIX MONTHS ENDED MARCH 31
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
INDUSTRY SEGMENT DATA
- ---------------------
Net Sales:
Specialty chemicals and materials $ 347.9 $ 372.5 $ 702.8 $ 735.1
Energy 87.9 84.5 142.0 157.3
---------- -------- --------- ---------
Net sales $ 435.8 $ 457.0 $ 844.8 $ 892.4
========== ======== ========= =========
Operating profit:
Specialty chemicals and materials $ 54.4 $ 62.0 $ 119.5 $ 113.5
Energy 7.3 11.4 10.6 22.8
---------- -------- --------- --------
Total operating profit $ 61.7 $ 73.4 $ 130.1 $ 136.3
---------- -------- --------- ---------
Interest expense (12.1) (11.1) (23.0) (22.5)
Gain on sale of equity securities 4.6 - 4.6 -
General corporate/other expenses (6.9) (8.7) (16.4) (14.9)
---------- -------- --------- ---------
Income before income taxes 47.3 53.6 95.3 98.9
Provision for income taxes (17.0) (19.3) (34.3) (35.6)
Equity in net income of affiliated companies 3.5 4.0 5.5 7.0
Minority interest in income (0.6) (0.8) (1.5) (1.4)
---------- -------- --------- ---------
Net income 33.2 37.5 65.0 68.9
Dividends on preferred stock (0.7) (0.8) (1.5) (1.6)
---------- -------- --------- ---------
Income applicable to common shares $ 32.5 $ 36.7 $ 63.5 $ 67.3
========== ======== ========= =========
Income per common share:
Basic $ 0.51 $ 0.56 $ 0.99 $ 1.02
========== ======== ========= =========
Diluted $ 0.45 $ 0.50 $ 0.88 $ 0.91
========== ======== ========= =========
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, and Year 2000 risks. 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 the Company's 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 or competitors' new products, as well
as difficulties in moving from the experimental stage to the production stage.
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21
PART II. OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS.
Environmental Proceedings
In January 1999, the Direction Regionale de L'Industrie, de la Recherche et de
L'Environment (the "DRIRE") notified Cabot France, S.A., a French subsidiary of
Cabot Corporation, that the DRIRE was investigating groundwater pollution in the
Montee des Pins area where Cabot France S.A.'s carbon black plant in Berre
l'Etang, France is located. The DRIRE convened meetings of various industries in
the area and asked them to work together on a study of groundwater conditions in
the area. Ten companies, including Cabot France, S.A., are working together to
fund and undertake the initial study requested by the DRIRE. Cabot estimates
that its share of this initial study will cost less than $10,000. It is not
possible at this point to predict whether groundwater remediation will be
required, how much it will cost or what Cabot France S.A.'s share of such
groundwater remediation will be.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of Cabot Corporation (the "Annual Meeting")
was held on March 11, 1999. An election of Directors was held for which Ms. Jane
C. Bradley and Mr. Charles P. Siess, Jr. were nominated and elected to the class
of Directors whose terms expire in 2000, and Messrs. Samuel W. Bodman, Arthur L.
Goldstein, Gautam S. Kaji and John H. McArthur were nominated and elected to the
class of Directors whose terms expire in 2002. The following votes were cast for
or withheld with respect to each of the nominees:
Director In Favor Of Withheld
-------- ----------- --------
Jane C. Bradley 66,850,345 667,477
Charles P. Siess, Jr. 66,781,305 736,517
Samuel W. Bodman 66,831,878 685,944
Arthur L. Goldstein 66,892,449 625,373
Gautam S. Kaji 66,766,454 751,368
John H. McArthur 66,800,208 717,614
Other Directors whose terms of office as Directors continued after the meeting
are:
Director Term Of Office Expires
-------- ----------------------
Kennett F. Burnes 2001
John G.L. Cabot 2001
John S. Clarkeson 2001
Robert P. Henderson 2001
Arnold S. Hiatt 2000
Roderick C.G. MacLeod 2001
John F. O'Brien 2001
David V. Ragone 2000
Lydia W. Thomas 2000
Mark S. Wrighton 2000
The second proposal before the Annual Meeting was the adoption of Cabot's 1999
Equity Incentive Plan (the "Plan"). This proposal was approved by the
stockholders. The following votes were cast for or against, or abstained from
voting on, the Plan:
FOR AGAINST ABSTAINED
48,186,413 18,959,355 372,054
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22
The third proposal before the Annual Meeting was the approval of Cabot's
Short-Term Incentive Compensation Plan (the "STIC"). This proposal was approved
by the stockholders. The following votes were cast for or against, or abstained
from voting on, the STIC:
FOR AGAINST ABSTAINED
63,031,505 4,171,836 314,481
Effective March 11, 1999, Morris Tanenbaum retired as a member of the Board of
Directors, in accordance with the Company's Director Retirement Policy.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The exhibit numbers in the following list correspond to the
number assigned to such exhibits in the Exhibit Table of Item 601
of Regulation S-K:
Exhibit
Number Description
------ -----------
10.1 Cabot Corporation 1999 Equity
Incentive Plan, approved by Cabot's
Board of Directors on November 13,
1998, and by Cabot's stockholders
on March 11, 1999.
10.2 Cabot Corporation Short-Term Equity
Incentive Compensation Plan,
approved by the Compensation
Committee of Cabot's Board of
Directors on November 12, 1998, and
by Cabot's stockholders on March
11, 1999.
12 Statement Regarding Computation of
Ratio of Earnings to Fixed Charges,
filed herewith.
27.1 Financial Data Schedule for the
period ended March 31, 1999, filed
herewith. (Not included with
printed copy of the Form 10-Q.)
27.2 Restated Financial Data Schedule
for the period ended March 31,
1998, filed herewith. (Not
included with printed copy of the
Form 10-Q.)
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the three
months ended March 31, 1999.
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23
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABOT CORPORATION
Date: May 17, 1999 /s/ Robert L. Culver
----------------------------
Robert L. Culver
Executive Vice President and
Chief Financial Officer
Date: May 17, 1999 /s/ William T. Anderson
----------------------------
William T. Anderson
Controller
(Chief Accounting Officer)
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